Disentangling the Effects of a Banking Crisis: Evidence from German Firms and Counties

Abstract

Lending cuts by banks directly affect the firms borrowing from them, but also indirectly depress economic activity in the regions in which they operate. This paper moves beyond firm-level studies by estimating the effects of an exogenous lending cut by a large German bank on firms and counties. I construct an instrument for regional exposure to the lending cut based on a historic, postwar breakup of the bank. I present evidence that the lending cut affected firms independently of their banking relationships, through lower aggregate demand and agglomeration spillovers in counties exposed to the lending cut. Output and employment remained persistently low even after bank lending had normalized. Innovation and productivity fell, consistent with the persistent effects. (JEL E32, E44, G01, G21, G32, R11, R23)

External Financing Constraints and Firm Innovation

“…Huber [2018] also estimates a large impact of the crisis for his sample. He finds a 55% reduction in the number of patents during the financial crisis for a firm which is fully related to the Commerzbank and has already patented in the years 1990 to 2004.11 See e.g.,Hangoma et al [2017] andYamamura [2016] for recent papers applying a similar approach.© 2019 The Editorial Board of The Journal of Industrial Economics and John Wiley & Sons Ltd…”

The Real Effects of Credit Supply: Review, Synthesis, and Future Directions

“…Indeed, the authors find a positive and significant link between the contraction in credit supply by Japanese banks and unemployment in U.S. firms, expanding the scope of the results presented by Peek and Rosengren (2000). In addition, Huber (2018) examines the effect of credit contraction on employment by constructing county-level data. Specifically, the author utilizes information about bank-firm relationships in Germany during the Great Recession, and exploits counties' Commerzbank dependence since Commerzbank cut lending mainly because of its exposure to the U.S. subprime mortgage crisis.…”

“…A large set of papers in the literature has sought to quantify the impact on the number of workers along with the heterogeneous effects across firms characteristics (e.g., Chodorow-Reich, 2013;Bentolila et al, 2017;Berton et al, 2018;Popov and Rocholl, 2018;Huber, 2018). Moreover, a growing body of the literature analyses the resulting changes in the composition of the labour force (e.g., Barbosa et al, 2019;Bentolila et al, 2017;Berton et al, 2018) as well as in wages (e.g., Hochfellner et al, 2015;Popov and Rocholl, 2018).…”

“…Some papers in this strand of the literature do not have loan-level data but they are able to match borrowers to their lenders using information about the existence of credit relationships (Popov and Rocholl, 2018;Huber, 2018). For example, by carrying the identification strategy of Hochfellner et al (2015) one step further, Popov and Rocholl (2018) identify credit constrained firms based on their credit relationships with German savings banks whose Landesbanken were exposed to the mortgage-backed securities (i.e.…”

Perceived vs Actual Financial Crisis and Bank Credit Standards: Is There Any Indication of Self-Fulfilling Prophecy?

“…al., 2011;Popov and Udell, 2012;Buera et. al., 2015;Richter and Karidis, 2016;Tomczak, 2017;Kosmidou, 2017;Bell, 2018;Huber, 2018). One of the main consequences of the crisis was the abrupt decrease of the general credit availability and the sudden tightening of both banks' loan terms and conditions and credit standards.…”