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Publications
  • March 2014
  • Article
  • Journal of Monetary Economics

Cyclicality of Credit Supply: Firm Level Evidence

By: Bo Becker and Victoria Ivashina
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Abstract

Theory predicts that there is a close link between bank credit supply and the evolution of the business cycle. Yet fluctuations in bank-loan supply have been hard to quantify in the time series. While loan issuance falls in recessions, it is not clear if this is due to demand or supply. We address this question by studying firms' substitution between bank debt and non-bank debt (public bonds) using firm-level data. Any firm that raises new debt must have a positive demand for external funds. Conditional on issuance of new debt, we interpret firm's switching from loans to bonds as a contraction in bank credit supply. We find strong evidence of substitution from loans to bonds at times characterized by tight lending standards, high levels of non-performing loans and loan allowances, low bank share prices, and tight monetary policy. The bank-to-bond substitution can only be measured for firms with access to bond markets. However, we show that this substitution behavior has strong predictive power for bank borrowing and investments by small, out-of-sample firms. We consider and reject several alternative explanations of our findings.

Keywords

Business Cycles; Borrowing and Debt; Credit; Banks and Banking; Bonds; Financial Markets; Financing and Loans; Banking Industry

Citation

Becker, Bo, and Victoria Ivashina. "Cyclicality of Credit Supply: Firm Level Evidence." Journal of Monetary Economics 62 (March 2014): 76–93.
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About The Author

Victoria Ivashina

Finance
→More Publications

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More from the Authors
  • PE Secondaries: Blackstone Strategic Partners By: Victoria Ivashina and Luis M. Viceira
  • PFA Pensions: The Climate Plus Product By: Daniel Green, Victoria Ivashina and Alys Ferragamo
  • Grupo Big Exit: Options for Advent and Walmart By: Victoria Ivashina, Ruth Costas and Pedro Levindo
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