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

Abstract

This paper reviews the rapidly growing literature on the real effects of bank credit supply fluctuations and identifies several worthwhile avenues for future research. In terms of the transmission of credit supply shocks into real effects, we suggest to further investigate the roles of (i) private borrower information, (ii) employment protection legislation, (iii) corporate governance, (iv) bank specialization, and (v) alternative financing sources. We also call for additional analyses of how these shocks affect (vi) investment efficiency, (vii) market structure, and (viii) the allocation of human capital, and emphasize the need for more evidence on (ix) the persistency, (x) asymmetry, and (xi) heterogeneity of their effects.JEL classification: E22, E24, E50, G21

Global Credit Shocks and Real Economies

“…Examining loan data, Amiti and Weinstein (2013) present firm-level evidence for the high relevance of bank loan supply on investment spending. An extensive review that focuses on the link between credit supply and firm performance is given in Guler et al (2019). Cesa-Bianchi et al (2015) and Cesa-Bianchi et al (2018) point out that (expansionary) global liquidity shocks boost domestic consumption and house prices.…”

Measuring the Impact of a Bank Failure on the Real Economy. An EU-wide Analytical Framework

“…Puri et al (2011) use granular data on loan applications and approvals for German savings banks to distinguish between demand and supply effects during the financial crisis, finding that the banks more affected by the US financial crisis reject substantially more loan applications than unaffected banks. Guler et al (2019) offer a comprehensive overview on the literature that assesses the real effects of bank credit supply use data on lenderborrower relationships, either on granular firm level or on a more aggregated level. Amiti and Weinstein (2018) use Japanese bank-firm level data to separate firm borrowing shocks from bank supply shocks and show that supply-side financial shocks have a large impact on firms' investment.…”

Measuring the Impact of a Bank Failure on the Real Economy: An EU-Wide Analytical Framework

“…Puri et al (2011) use granular data on loan applications and approvals for German savings banks to distinguish between demand and supply effects during the financial crisis, finding that the banks more affected by the US financial crisis reject substantially more loan applications than unaffected banks. Guler et al (2019) offer a comprehensive overview on the literature that assesses the real effects of bank credit supply use data on lenderborrower relationships, either on granular firm level or on a more aggregated level. Amiti and Weinstein (2018) use Japanese bank-firm level data to separate firm borrowing shocks from bank supply shocks and show that supply-side financial shocks have a large impact on firms' investment.…”