The Anatomy of a Credit Supply Shock: Evidence from an Internal Credit Market

Abstract

We examine how lending channel effects are transmitted by tracing the anatomy of a credit supply shock in a single multinational bank for small and medium sized business-lending in emerging markets. Using cross-country loan-level data, we find that borrowers with stronger banking relationships and borrowers that yield higher non-lending revenues experience lower cuts in lending. Less risky borrowers and borrowers that pledge non-specific collateral such as cash and property also experience smaller cuts in borrowing. Our analysis highlights the value of relationships and suggests that relationship banking is a channel through which borrowers can mitigate bank-specific lending channel effects.