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Sorting out the effect of credit supply

Author

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  • Chang, Briana
  • Gomez, Matthieu
  • Hong, Harrison

Abstract

We document that banks that cut lending more during the Great Recession were lending to riskier firms ex-ante. To understand the aggregate implications of this sorting pattern, we build an assignment model in which banks have heterogeneous costs to take on risky loans and firms have different credit risks. In the model, aggregate loan volume depends on the entire distribution of bank holding costs and firm credit risks. We then use our model to recover the change in the distribution of bank holding costs during the Great Recession and show that it explains two-thirds of the decline of aggregate loan volume during this period.

Suggested Citation

  • Chang, Briana & Gomez, Matthieu & Hong, Harrison, 2023. "Sorting out the effect of credit supply," Journal of Financial Economics, Elsevier, vol. 150(3).
    • Handle: RePEc:eee:jfinec:v:150:y:2023:i:3:s0304405x23001599
    DOI: 10.1016/j.jfineco.2023.103719
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    More about this item

    Keywords

    Banking; Sorting; Great recession;
    All these keywords.

    JEL classification:

    • G0 - Financial Economics - - General
    • G2 - Financial Economics - - Financial Institutions and Services
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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