The Real Side of the Financial Crisis: Banks' Exposure, Flight to Quality and Firms' Investment Rate

Brancati Emanuele
CEIS Research Paper
The paper takes advantage of the Italian experience in the Lehman crisis to test the effects of banking shocks on the real decisions of client firms. The analysis exploits plant-level data and models the magnitude of the shock with banks' pre-crisis holding of Dollar-denominated assets and liabilities. After controlling for demand conditions I document the existence of a bank-lending channel affecting the investment rate, the amount of borrowing, and the probability of financial constraints of client firms. This transmission mechanism is characterized by a flight to quality away from risky borrowers, with stronger effects for undercapitalized and illiquid banks or financial institutions that depend more upon bank-based sources of finance.
Number: 302
Keywords: Financial crises, banks, lending, investment, flight to quality, financial constraints
JEL codes: E22, G01, G21
Volume: 12
Issue: 01
Date: Wednesday 18 December 2013
Revision Date: Thursday 20 March 2014