Intermediated Credit and Local Resilience

Abstract

This paper demonstrates the importance of bank capital in improving local resilience and the complementarity of bank capital and government aid programs. We show that following the COVID-19 pandemic and shutdown, areas with more jobs supported by subsidized bank loans during normal times had more job losses and business closures, and more so if the local banking sector is less capitalized. Such losses were heavily borne by low-income workers. We also find that areas with a less capitalized banking sector received disproportionately less Paycheck Protection Program funding. Using a dynamic model of firm entry and exit with bank borrowing, we formulate the mechanism of how bank capital can mitigate the impact of adverse aggregate shocks on employment and firm exit. We calibrate the model to quantify effects of bank capital on resilience and the amount of government funding necessary for full resilience in various simulated scenarios of adverse shocks and bank capitalization.