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AbstractWe use the recent financial crisis period to analyse the effect of bank credit tightening on real firm investment. We derive a new set of credit tightening indexes from the ECB Bank Lending Survey. Combining these with annual balance sheet data from Germany, France, Italy, Spain, Belgium and Portugal, we exploit the heterogeneity in the dependence on bank finance of different industries to identify real effects of credit tightening. We show that in response to tightening, investment falls substantially more in bank-dependent industries. Banks had to be rescued and aggregate output and investment dropped significantly.There exists substantial evidence that banks reduced their willingness to extend credit to firms during this period. For instance, in the Bank Lending Survey of the European Central Bank, where senior loan officers of a representative sample of euro area banks are asked questions on developments regarding their lending policies, one can observe a significant tightening of credit around the time of the crisis. The question this paper tries to answer is whether the bank credit supply reductions reported by loan officers in the euro area led to reduced investment of firms. A reduction in lending by banks could ultimately lead firms to adapt their investment plans, as they need financing to exercise these. Our question is an important one, as it is conceivable that firms substitute other credit for bank credit when they are faced with a loan supply reduction of banks. For instance, firms could issue more bonds. However, in a bank-based economy as the euro area, this is less likely than in a more market-based economy as the US.To answer our question, we use a panel dataset of aggregated balance sheet data for different manufacturing industries from six euro area countries (Germany, France, Italy, Spain, Belgium, Portugal). For each manufacturing industry, in each country, we are able to track aggregate investment and aggregate indebtedness for three segments: small, medium and large firms. In addition, the dataset contains information on how much these industry segments are financed with bank debt and non-bank debt. The degree to which different industries use bank debt differs substantially both across industries and across countries. Some industries are more bank-dependent then others. In this paper, we use this difference in dependence on bank loans to identify whether the tightening reported by ...
