When Credit Dries Up: Job Losses in the Great Recession

Abstract

This paper studies whether the solvency problems of Spain’s weakest Banks during the Great Recession had real effects. Data from the official credit register of the Bank of Spain indicate that those banks curtailed lending well in advance of their bailout. We show the existence of a credit supply shock, controling for firm fixed effects, and assess its impact by comparing the change in employment between 2006 and 2010 at firms that were clients of weak banks to those at comparable non-client firms. Our estimates imply that around 24% of job losses at firms attached to weak banks in our sample are due to this exposure. This accounts for one-half of downsizing at attached surviving firms and one-fifth of losses due to exposed-firm exits.