Quo Vadis? Evidence on New Firm-Bank Matching and Firm Performance Following Bad Bank Closures

This study investigates the effects of bank closure policy on firms and banks. Following an extended period of regulatory forbearance on bank misreporting, the Central Bank of Russia (CBR) adopted in 2013 a regime of tight bank supervision and intolerance to weak, non-transparent and fraudulent banks, which resulted in license revocation of the two-thirds of operating banks over the period between 2013-2020. We analyze unique loan-level data from the Russian credit register and show that, following bad bank closures, bad firms go to another (still operating) bad banks and good firms go to good banks. The matching of bad firms and bad banks is fueled through common ownership structure and weakens when concentration at local credit markets rise. We show that neither bad nor good firms possessed information on the CBR’s actions (no anticipation of bad bank closures). We reveal that the policy had cleansing effect on the structure of the economy: after bad banks closure and before finding new banks, good firms improve their performance (default rates drop, employment and income rise), whereas bad firms further deteriorate. Finally, we find that the policy was pro-active: still operating bad banks turned to reducing their corporate and retail lending, creating more loan loss reserves and disclosing more non-performing loans.