The impact of bank lending standards on credit to firms

Lorenzo Ricci; Giovanni Soggia; Lorenzo Trimarchi

doi:10.1016/j.jbankfin.2023.106880

The impact of bank lending standards on credit to firms

Lorenzo Ricci, Giovanni Soggia, Lorenzo Trimarchi

Research output: Contribution to journal › Article › peer-review

Abstract

This paper investigates the impact of idiosyncratic shocks in bank lending standards on firm credit in Italy, using survey data from the Regional Bank Lending Survey to identify bank supply conditions. From 2009 to 2019, we document that a one-standard-deviation tightening in lending standards reduces firm credit growth by 0.26 percentage points and explains 4.7% of the total variation. This effect is quantitatively more important for credit lines than other financial instruments. Examining the extensive margin of the bank-firm relationship, we find that a negative shock significantly impacts the probability of accepting new loan applications and the likelihood of the bank-firm relationship breaking up. We also show firms cannot smooth individual bank shocks by borrowing more from other lenders. Changes to lending standards have sizable and persistent effects on aggregate credit and production, especially at times of high economic uncertainty.

Original language	English
Article number	106880
Journal	Journal of Banking and Finance
Volume	152
DOIs	https://doi.org/10.1016/j.jbankfin.2023.106880
Publication status	Published - Jul 2023

Funding

Lorenzo Trimarchi gratefully acknowledges financial support by the Excellence of Science (EOS) Research project of FNRS O020918F. The authors are very grateful to Oliver De Jonghe, Glenn Magerman, Francesco Manaresi, Andrea Nobili, Steven Ongena, Marco Pagano, Marco Pelosi, Daniel Paravisini, Andrea Passalacqua, Enrico Sette, Fernando Stipanicic Mrquez, Ludwig Straub, Jeffrey Wooldridge, and Andrei Zlate for their comments and suggestions. The authors also wish to thank the participants at the Bank of Italy Banking Research Network Conference 2017 in Rome, the ENTER Jamboree Conference in Toulouse, the 22nd International Conference on Macroeconomic Analysis and Finance in Crete, the ERMAS Conference 2018 in Iaşi, and the seminar audience at the European Stability Mechanism and Tilburg University.

Funders	Funder number
Excellence of Science
Fonds de la Recherche Scientifique F.R.S.-FNRS	O020918F
Fonds de la Recherche Scientifique F.R.S.-FNRS
Universiteit van Tilburg

Keywords

Bank lending standards
Credit growth
Credit lines

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10.1016/j.jbankfin.2023.106880

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title = "The impact of bank lending standards on credit to firms",

abstract = "This paper investigates the impact of idiosyncratic shocks in bank lending standards on firm credit in Italy, using survey data from the Regional Bank Lending Survey to identify bank supply conditions. From 2009 to 2019, we document that a one-standard-deviation tightening in lending standards reduces firm credit growth by 0.26 percentage points and explains 4.7% of the total variation. This effect is quantitatively more important for credit lines than other financial instruments. Examining the extensive margin of the bank-firm relationship, we find that a negative shock significantly impacts the probability of accepting new loan applications and the likelihood of the bank-firm relationship breaking up. We also show firms cannot smooth individual bank shocks by borrowing more from other lenders. Changes to lending standards have sizable and persistent effects on aggregate credit and production, especially at times of high economic uncertainty.",

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The impact of bank lending standards on credit to firms

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