1. The author examines how shocks to bank health during the 2007-2009 financial crisis affected bank lending and economic activity in the U.S. using loan-level data. 2. The results show that banks with higher levels of core deposits, a stable source of funding, reduced lending by less than banks with lower core deposit levels after the crisis, indicating that liquidity shocks to banks negatively impacted bank lending. 3. Further analysis finds that shocks to bank liquidity and reductions in bank lending were both associated with worse financial and economic outcomes for borrower firms, such as higher leverage, less investment, and lower profits, providing evidence that liquidity problems in the banking sector can transmit stress to the

1. Bank lending, liquidity shocks and economic
activity: Evidence from the syndicated loan market
in the U.S.
Tamara Kochubey
CERGE-EI, Prague
March 5, 2013
Brown Bag Seminar

2. Motivation
• Importance of banks as liquidity providers
• Liquidity crisis of 2007-2009
• Lending collapse following the crisis
Figure: New loan originations to U.S. borrowers from 2000 – 2011
(Dealscan).

3. Research questions
Do problems in banking sector can be transmitted to the real
economy through bank lending?
1. Does shock to bank health affect bank lending?
2. Does shock to bank health or change in bank lending
affect the real economy?

4. Related Literature
Impact of deterioration of banks’ financial health on the real
economy:
• Gan (2007), Khwaja and Mian (2008): bank lending and firm
performance in Japan and Pakistan
• Gozzi and Goetz (2010): bank lending and performance in
U.S. metropolitan areas during the recent crisis
• Wardlaw (2010): changes in a bank’s health significantly affect
investment of U.S. firms during 1988-2007
• Driscoll (2004), Ashcraft (2006), Jimenez et al (2010): bank
health has no effect on the real economy
Bank lending behavior during the recent crisis in the U.S.:
• Ivashina and Scharfstein (2010), Cornett et al (2011)
Research Gap: relationship between shocks to bank health and
firm performance in U.S. after the recent financial crisis

5. Contribution to the Literature
• Examine bank lending in the U.S. following the recent financial
crisis using a dataset of new loan originations
• Control for selection bias arising when firms with single lending
relationships are excluded from the analysis
• Study the effect of shocks to bank health and change in bank
lending on firms’ performance in U.S. following the recent
financial crisis
• Provide evidence on how valuable are banking relationships for
medium and large firms

6. Methodology
• Financial crisis of 2007-2009 as a shock to banks’ liquidity
• Collapse of ABCP market and dry-up of the interbank market
• Deposits and core deposits as stable sources of funding
(Ivashina and Scharfstein, 2010; Cornett et al, 2011)
Timeline of the crisis in the TED spread:
Crisis period: 2007 q3 - 2009 q2

7. Methodology
1. Does shock to bank health affect bank lending?
[based on Gan, 2007; Khwaja and Mian, 2008]
Lendingij (t) = β1 + β2 Liq. Exposurei (t − 1) + β3 Bank Controlsi (t − 1)+
+β4 Relationshipij (t − 1) + β5 Firm FEj + eij
Pre-crisis period (t − 1): 2005 q3 - 2007 q2
Post-crisis period (t): 2009 q3 - 2011 q2
• Lendingij : change in log of total credit provided by bank i to firm
j between the post-crisis and the pre-crisis periods
• Liquidity Exposurei : is the share of core deposits to banks’ total
assets measured in the pre-crisis period
• Bank Controlsi : bank size, liquid assets, equity to assets ratio,
non-performing loan ratio, return on assets
• Relationshipij : is the number of years when firm j had a positive
loan amount from bank i in past 10 years (1995-2004)

8. Methodology
Heckman two-stage model
First stage (selection equation):
• Probit (being a firm with multiple lending relationships
(t − 1)) =f (firm and bank controls in (t − 2))
• Bank Controls : size, liquidity, capital ratio, return on assets,
nonperforming loan ratio
• Firm Controls : size, leverage, cash, tangibility,
market-to-book, return on assets, sales
Second stage:
Lendingij (t) = β1 + β2 Liq. Exposurei (t − 1) + β3 Bank Controlsi (t − 1)+
+β4 Relationshipij (t − 1) + β5 Firm FEj + IMR + eij

9. Methodology
2a. Does shock to bank health affect the real economy?
[based on Gan, 2007; Khwaja and Mian, 2008]
Yj (t) = α1 + α2 Liq. Exposurej (t − 1) + α3 Firms Controlsj (t − 1) + ej
• Yj (t): change in firms’ financial and performance measures
between two periods
• Yj : leverage, net debt and equity issuance, cash holdings,
investment rate, profit and employment
• Liquidity Exposurej : is, for each firm j, the weighted average level of
exposure of the banks that are lending to the firm in the pre-crisis
period; bank liquidity exposure is measured by a share of core
deposits to bank’s total assets
• Firms Controlsj : industry and state dummies, firm size, collateral,
interest coverage, market-to-book ratio, return on assets, cash
holdings, cash flow, leverage, sales, net worth

10. Methodology
2b. Does change in bank lending affect the real economy?
Yj (t) = γ1 Lendingj (t) + γ2 Firms Controlsj (t) + ej (t),
ˆ ˆ
Lendingj (t) = i (β1 + β2 Liquidity Exposurei (t − 1)+
ˆ ˆ
+β3 Bank Controlsi (t − 1) + β4 Relationshipij (t − 1)).
• Yj : change in firms’ leverage, net debt issuance, net equity
issuance, cash holdings, investment rate, profit and employment
• Lendingj : is the predicted change in lending of all banks financing
firm j
• Firms Controlsj : firm size, collateral, market-to-book ratio, return
on assets, cash flow, sales, net worth

11. Data Description
Data sources: U.S. based
1. Thomson Reuters Dealscan - loan transactions
2. FDIC Call Reports – financial statement data for U.S. banks
3. Compustat – balance sheet data for U.S. firms
Sample:
• Pre-crisis period: 2005 q3 - 2007 q2
• Post-crisis period: 2009 q3 - 2011 q2
• Loan-level: 7,074 bank-firm pairs, 110 banks and 3,357 firms
• Firm-level: 1,109 distinct firms

12. Descriptive Statistics
N Mean St. Dev.
Loan Level
∆Log(Total Lending) 7,585 -5.331 14.644
Core Deposits (t-1) 7,585 0.236 0.101
Liquid Assets (t-1) 7,585 0.153 0.122
Bank Size (t-1) 7,585 18.807 2.169
Capital Ratio (t-1) 7,585 0.124 0.117
ROA (t-1) 7,585 0.004 0.005
NPL (t-1) 7,585 0.008 0.005
Firm Level
∆Leverage 1,310 0.041 0.649
∆Net Debt Issuance 1,226 -0.067 0.272
∆Net Equity Issuance 1,226 -0.014 0.234
∆Cash 1,312 0.014 0.084
∆Investment 1,214 -0.112 0.321
∆Profit 1,295 -0.007 0.059
∆Log Employment 1,245 0.004 0.343
Core Deposits 1,446 0.103 0.075
∆Lending 1,607 -16.288 12.208

13. Pre-Crisis Average Sample Characteristics of Low and High
Exposure Banks
Low High Difference t-statistic
Pre-crisis Total Lending (USD mln) 9.235 11.949 -2.714*** -3.90
Banks’ characteristics
Total Assets (USD mln) 61.094 57.398 3.696 0.11
Bank Size 15.456 16.009 -0.553 -1.21
Liquid Assets 0.202 0.167 0.035 1.23
Capital Ratio 0.118 0.169 -0.051* -1.81
ROA 0.003 0.005 -0.002 -1.25
NPL 0.012 0.008 0.004** 2.29
Firms’ characteristics
Firm’s Size 7.965 7.514 0.451*** 8.69
Collateral 0.450 0.459 -0.009 -1.07
Market-to-Book 1.524 1.490 0.034 1.08
ROA 0.014 0.012 0.002** 2.45
Leverage 0.316 0.298 0.018** 2.38
Cash 0.073 0.072 0.001 0.15
Cash Flow 0.041 0.036 0.005** 2.00
Z-score 0.625 0.683 -0.058 -1.19
Sales 6.421 6.011 0.410*** 8.08
Profit -0.037 -0.262 0.225 0.47
Investment 0.260 0.283 -0.023** -2.55

14. Pre-Crisis Average Sample Characteristics of Firms with
Single and Multiple Lending Relationships
Single Multiple Difference t-statistic
Firm’s Size 5.906 7.671 -1.765*** -20.19
Collateral 0.410 0.454 -0.044** -3.06
Tangibility 0.304 0.360 -0.056*** -3.81
Market-to-Book 1.599 1.525 0.074 1.14
ROA 0.001 0.012 -0.011*** -7.22
Leverage 0.286 0.313 -0.028 -1.76
Cash 0.127 0.071 0.056*** 9.26
Cash Flow 0.014 0.039 -0.025*** -3.63
Z-score 0.108 0.720 -0.612*** -5.11
Sales 4.555 6.168 -1.613*** -18.76
Profit 0.014 0.027 -0.013*** -7.09
Net Debt Issuance 0.080 0.059 0.022 1.48
Net Equity Issuance 0.062 0.000 0.062*** 4.22
Investment 0.405 0.269 0.136*** 7.23

15. 1. Effect of the shock to bank’s liquidity on bank lending
(1) (2) (3)
OLS FE FE
∆Lending ∆Lending ∆Lending
Core Deposits (t-1) 0.298** 0.200** 0.263***
Liquid Assets (t-1) -0.362* -0.201 -0.137
Bank Size (t-1) 0.960 0.773 -0.151
Capital Ratio (t-1) 0.367* 0.248* 0.172
ROA (t-1) 5.580** 3.539** 1.875
NPL (t-1) -1.930 -0.636 0.042
Relationship -2.548*** -1.531*** -1.470***
Inverse Mill’s Ratio 128.9***
Firm FE, multiple firms No Yes Yes
Location and industry dummies Yes No No
N 7,069 6,084 2,741
3,354 x 110 2,222 x 80 877 x 60
R2 0.146 0.725 0.641
• Banks with core deposits 1 SD above the mean ↓ lending by 5 p.p.
while banks with core deposits 1 SD below the mean ↓ lending by
10 p.p.

16. Robustness Checks
1. Effect of the shock to bank’s liquidity on bank lending
(1) (2) (3) (4) (5)
FE FE FE FE FE
∆Lending ∆Lending ∆Lending ∆Lending ∆Lending
Core Deposits (t-1) 26.28*** 26.38*** 28.86*** 28.69*** 25.75***
Liquid Assets (t-1) -13.70 -14.38 -8.339 -9.409 -13.49
Size (t-1) -0.151 -0.365 -0.124 -0.297 -0.128
Capital Ratio (t-1) 17.24 12.92 18.29 14.74 17.26
ROA (t-1) 187.5 184.3 176.7 175.3 183.8
NPL (t-1) 4.229 -11.62 -39.49 -47.84 0.132
Relationship -1.470*** -1.440*** -1.467*** -1.444*** -1.246**
Inverse Mill’s Ratio 128.9*** 128.6*** 128.9*** 128.7*** 127.3***
C&I Loans (t-1) -6.890 -5.494
RE Loans (t-1) 6.586 5.939
Relationship Amount -3.271**
N 2,741 2,741 2,741 2,741 2,741
R2 0.641 0.641 0.642 0.642 0.641

17. Results
2(a). Effect of the shock to bank’s liquidity on firm’s financial
outcomes
Yj (t) = α1 + α2 Liq. Exposurej (t − 1) + α3 Firms Controlsj (t − 1) + ej
(1) (2) (3) (4) (5)
∆Total ∆Long-Term ∆Net Debt ∆Net Equity ∆Cash
Debt Debt Issuance Issuance
Core Deposits 0.299 0.328** 0.168 0.299 -0.0645
Industry and
Yes Yes Yes Yes Yes
State Dummies
Firm Controls Yes Yes Yes Yes Yes
N 933 933 883 883 934
R2 0.179 0.231 0.217 0.281 0.324
• 1% ↓ in average core deposits ↓ firm’s long-term debt by 0.33%

18. Results
2(a). Effect of the shock to bank’s liquidity on firm’s real
outcomes
Yj (t) = α1 + α2 Liq. Exposurej (t − 1) + α3 Firms Controlsj (t − 1) + ej
(1) (2) (3)
∆Investment ∆Profit ∆Log
Employment
Core Deposits -0.107 0.0404*** 19.5
Industry and State Dummies Yes Yes Yes
Firm Controls Yes Yes Yes
N 877 930 903
R2 0.280 0.340 0.295
• 1% ↓ in average core deposits ↓ firm’s profit by 0.04%
• 1 SD ↑ in average core deposits ↓ firm’s profit by 0.3 p.p., or 43%
of average change in profit

19. 2(b). Effect of change in bank lending on firm’s outcomes
Yj (t) = γ1 Lendingj (t) + γ2 Firms Controlsj (t) + ej (t)
(1) (2) (3) (4) (5) (6) (7)
∆Total ∆Net Debt ∆Net Equity ∆Cash ∆Invest- ∆Profit ∆Log
Debt Issuance Issuance ment Employment
Lending 0.0369* 0.128*** -0.0685*** -0.0866*** 0.114** 0.0142*** 0.00273***
Firm
Yes Yes Yes Yes Yes Yes Yes
Controls
N 1064 1011 1011 1064 1007 1064 1036
R2 0.973 0.103 0.073 0.221 0.256 0.910 0.468
• 1% ↓ in lending ↓ firm’s net debt issuance by 0.13%
• 1% ↓ in lending ↓ firm’s investment by 0.11%

20. Conclusion
• Adverse shocks to bank liquidity trigger decline in bank lending
• Banks financed mainly with core deposits have lower decline in
lending
• Bank health is positively related to firm’s long-term debt and
firm’s profit
• Decline in bank lending reduces firm’s total debt, net debt
issuance, investment, profit and employment and increases
firm’s cash holdings and net equity issuance