Speaker: Margherita Bottero is an Economist at Bank of Italy. More »
Abstract: In the context of the European sovereign crisis, we examine the transmission of a bank balance sheet shock to credit and its effects on corporate policies. Using Italian loan level data, we show that the shock to banks’ sovereign portfolio caused by the Greek bailout (2010) was passed on to firms through a contraction in credit. The contraction of the credit supply was similar in size for both large and small firms. However, it led to a reduction in investments and employment only for smaller firms, especially those relying heavily on external financing. These effects were further exacerbated by the geographical segmentation of the credit market. Investigating the heterogeneity of the credit shock across intermediaries, we found a sharper tightening of credit supply among banks closer to the regulatory capital constraint. We conclude that the interaction of banks’ and firms’ balance sheet is crucial for understanding the transmission of credit shocks to the economy.
*This is a joint event with IMF.
Last Updated: May 27, 2016