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  2. ASSA Annual Meeting
  3. 2021
  4. Preliminary Program
  5. Financial Crises and Transmission of Shocks
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Financial Crises and Transmission of Shocks

Paper Session

Sunday, Jan. 3, 2021 10:00 AM - 12:00 PM (EST)

Hosted By: American Finance Association
  • Chair: Cecilia Parlatore, New York University

Dissecting Mechanisms of Financial Crises: Intermediation and Sentiment

Arvind Krishnamurthy
,
Stanford University
Wenhao Li
,
University of Southern California, Marshall School of Business

Abstract

We develop a model of financial crises with both a financial amplification mechanism, via frictional intermediation, and a role for sentiment, via time-varying beliefs about an illiquidity state. We confront the model with data on credit spreads, equity prices, credit, and output across the financial crisis cycle. In particular, we ask the model to match data on the frothy pre-crisis behavior of asset markets and credit, the sharp transition to a crisis where asset values fall, disintermediation occurs and output falls, and the post-crisis period characterized by a slow recovery in output. Our principal finding is that both the frictional intermediation mechanism and fluctuations in beliefs are needed to match the crisis cycle patterns. A pure amplification mechanism quantitatively matches the crisis and aftermath period but fails to match the pre-crisis evidence. We consider two versions of sentiment fluctuations, a Bayesian belief updating process and one that overweights recent observations. Our second finding is that the data we consider does not allow one to clearly distinguish between these two mechanisms. Both fit the patterns well. Last, we show that a lean-against-the-wind policy has a quantitatively similar impact in both versions of the belief model, indicating that policy need not condition on the true belief process.

Who Lends Before Banking Crises? Evidence from the International Syndicated Loan Market

Mariassunta Giannetti
,
Stockholm School of Economics
Yeejin Jang
,
University of New South Wales

Abstract

We show that foreign lenders and low market share lenders extend more credit in comparison to other lenders during lending booms leading to banking crises, but not during other credit expansions. Less established lenders also increase the amount of credit they extend to riskier borrowers without asking for collateral or imposing covenants and higher interest rates. Our results suggest that taking lenders’ characteristics into account could provide an indicator for how much risk an economy is accumulating and therefore be a useful barometer for macroprudential policies.

The Rise of Finance Companies in United States Small Business Lending

Manasa Gopal
,
New York University
Philipp Schnabl
,
New York University

Abstract

We analyze access to credit for small businesses after the 2008 financial crisis. Using novel loan-level data on U.S. small business loans from 2008 to 2016, we find that banks reduced their lending by 27% after 2008. At the same time, finance companies increased lending and almost perfectly offset the decline in lending by banks. By 2016, finance companies originated 60% of all new loans. The substitution is largest in counties that relied more on bank lending before 2008. We control for firms' credit demand by examining lending by banks and finance companies to the same firm, by comparing firms pledging the same collateral, and by comparing firms within the same narrow industry. Consistent with the substitution of credit supply by banks with credit supply from finance companies, we find no long-term effects of reduced bank lending on employment, new business creation, and business expansion by 2016. Our results show that finance companies played an important role in the recovery from the 2008 financial crisis and have grown into a major supplier of credit to small businesses.
Discussant(s)
Eduardo Davila
,
Yale University
Ramona Dagostino
,
University of Rochester
Greg Buchak
,
Stanford University
JEL Classifications
  • G2 - Financial Institutions and Services