Abstract
This paper estimates the effects of changes in bank credit supply on the real economy. We use UK firm-level data around the global financial crisis and information on pre-existing bank lending relationships to isolate exogenous credit supply shocks. We find some evidence that contractions in credit supply substantially reduce labour productivity, wages, and capital per worker within firms, and increase the chance firms will fail. Our results have implications for the welfare costs of financial crises, and for the costs of policy measures affecting credit supply at other times.
Highlights
The financial crisis of 2008 was associated with falls in the growth of corporate lending, business investment, labour productivity and real wages in many major industrialised countries
Average pay fell further in firms more exposed to the credit shock, and in similar proportion to labour productivity, even though these firms were hiring labour in the same markets as less exposed firms
This paper examines the relationship between credit supply and corporate outcomes in the UK over the financial crisis
Summary
The financial crisis of 2008 was associated with falls in the growth of corporate lending, business investment, labour productivity and real wages in many major industrialised countries. Journal of Financial Services Research (2020) 57:149–179 These questions are important for central banks in understanding the implications of financial crises for bank lending and how this affects the macroeconomy.The answers are important for assessing the costs and benefits of banking reforms intended to reduce the risk of financial crises. Our aim is to identify the impact of the reduction in credit supply following the 2007/8 financial crisis on labour productivity, investment behaviour and average pay, as a guide to the potential costs of changes in credit supply in other circumstances. We employ a new identification strategy that exploits information on pre-crisis lending relationships within a large firm-level dataset of non-financial companies. We use the UK - a large, bank-dependent industrialised economy that suffered a very serious banking crisis in 2008-9 - as a lens through which we can examine a question that is generic to any modern economy
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