From financial to real economic crisis: evidence from individual firm–bank relationships in Germany

What began as a financial crisis in the United States in 2007–2008 quickly evolved into a massive crisis of the global real economy. This research investigates the importance of the bank lending and firm borrowing channel in the international transmission of bank distress to the real economy – in particular, to real investment and labour employment by non-financial firms. We analyse whether, and to what extent, firms are able to compensate for the shortage in loan supply by switching banks and by using other types of financing. The analysis is based on a unique matched data set for Germany that contains firmlevel financial statements for 2004–2010 together with the financial statements of each firm’s relationship banks. The results show that banks that suffered losses due to proprietary trading activities at the onset of the financial crisis reduced their lending more strongly than other banks. We then find that firms whose relationship banks reduced credit supply significantly reduced their real investment and labour employment. This effect was larger for firms that were unable to provide much collateral. However, firms partially offset reduced credit supply by establishing new bank
relationships, using internal funds, and issuing new equity.

Nadja Dwenger, Frank M Fossen and Martin Simmler. CBT Working Paper 15/16