Corporate investment and bank-dependent borrowers during the recent financial crisis

This paper provides empirical evidence on the causal role of bank credit in explaining the collapse in corporate investment during the recent financial crisis. Using annual balance sheet data over the period 2000-2009 for Germany, France, Italy, Spain, Belgium and Portugal we compare the role of bank credit versus other types of credit for corporate investment during different episodes. We distinguish between investment boom years, investment downturn years and the investment collapse of 2009. We show that firm investment became highly sensitive to bank debt during the investment collapse of 2009. During the crisis, higher bank debt leverage of firms is associated with reduced investment. The effects we find are quite sizeable. This contrasts with an absence of bank credit effects before the crisis and contrasts further with the absence of effects of other credit during the crisis. The effects of bank debt are largest for small and medium sized firms. We also find evidence that the effects are restricted to the South of Europe (Italy, Portugal, Spain). Our finding lends support to the view that banks credit supply was restricted during the recent financial crisis leading to real effects.