Credit supply, uncertainty and trust: the role of social capital

Despite social capital being widely acknowledged as a key factor in the functioning of financial markets, the evidence on the channels through which it operates is still scant. In this paper we isolate one possible channel and investigate whether social capital plays a role in mitigating the impact of uncertainty shocks on bank credit supply. We exploit both the huge rise in the level of uncertainty that followed the Lehman Brothers default and a very granular and rich loan-level dataset from the Italian Credit register that allows us to clearly disentangle demand and supply factors. We find that social capital makes credit markets more resilient to uncertainty shocks, especially when informational asymmetries between banks and borrowers are more severe.