Credit Shock Propagation in Firm Networks: Evidence from Government Bank Credit Expansions (joint with Bernardus van Doornik and Thiago C. Silva)

Abstract:

We study how bank credit shocks propagate through supplier–customer firm networks. We do so using administrative data that covers the near-universe of firm-to-firm transactions in Brazil around the debacle of Lehman Brothers. Using the counter-cyclical reaction of government owned banks in Brazil after Lehman’s failure as a policy experiment, we show that credit shocks originated in bank–firm relationships are transmitted throughout the network of suppliers and customers, with measurable consequences for firms’ real outcomes and survival probability. A firm with direct and indirect access to government credit (through its customers or suppliers) observed a 12.5% greater survival probability, vis-à-vis 4% when the firm has only direct access. Critically, we uncover drawbacks of these interventions, including a persistent increased concentration in the market power of firms that benefited from government liquidity.