Cyclicality of credit supply
Subtitle: firm level evidence
By: Bo Becker, Victoria Ivashina
Contributors: Ivashina, Victoria; Harvard Business School
Series: Working paper / Harvard Business School -- 10-107; Working paper (Harvard Business School) -- 10-107.
Publisher: Harvard Business School
Published: 2010
Place of publication: [Boston]
Language: eng
Number of pages: 35
Description: We study the effect of bank loan supply through the business cycle using firm level data from 1990 to 2009. The contribution of our paper is to address two of the main empirical challenges in identifying the effects of bank credit supply. First, we focus on firms' choice between two close forms of external financing: bank debt and public bonds. By conditioning the sample of firms raising new debt, we can rule out a demand explanation for the drop in bank borrowing. Second, by doing the analysis at the firm level, we can directly address how the composition of firms raising finance varies through time. We find strong evidence of substitution from bank loans to bonds at times characterized by tight lending standards, high levels of non-performing loans to bank equity, low bank share prices and tight monetary policy. To illustrate our point, in the last half of 2007, 36% of all debt issues were bank loans. However, relative loan issuance fell to 8% by the first half of 2009, the lowest level in the period from 1990 to 2009. Although the bank-to-bond substitution can only be measured for larger firms (which have access to bond markets), we confirm that this substitution has strong predictive power for lending volume by small and unrated firms.
Notes: "June 2010"--Publisher's website.

"This draft: May 19, 2010"--added t.p.

Includes bibliographical references.