What Hinders Investment in the Aftermath of Financial Crises: Insolvent Firms or Illiquid Banks?∗
نویسندگان
چکیده
We quantify the effects of lending and balance sheet channels on corporate investment during large crises in emerging markets. The depreciated currency creates investment opportunities in the tradable sector but firms might be financially constrained due to: 1) a deterioration of their balance sheet via un-hedged foreign currency debt (balance sheet channel) and 2) a decline in the supply of credit by banks (lending channel). We find that during twin crises, domestic exporters holding un-hedged foreign currency debt decrease investment while foreign exporters with better access to credit increase investment, in spite of their un-hedged foreign currency debt. We do not find such a differential effect under pure currency crises. Using firm-bank matched data during global financial crisis, we show that both domestic and foreign-owned firms experienced a decline in bank credit from affected banks however, foreign-owned firms substituted the lost credit. JEL: E32, F15, F36, O16
منابع مشابه
What Hinders Investment in the Aftermath of Financial Crises: Insolvent
There are two leading views on how financial crises turn into recessions. The first view highlights the importance of a troubled banking sector that cannot provide credit to domestic firms. The second view stresses the relevance of short-term borrowing in foreign currency and the associated decline in net worth through a weak balance sheet. Both views underline the role of financial constraints...
متن کاملBank-Firm Relationships and Contagious Banking Crises
This paper shows that in an open economy a banking system with close bank-firm relationships may be easily subject to contagious banking crises, because it is difficult to distinguish between “crony capitalism” and main bank relationships. There is cronyism if banks renew loans to insolvent projects and, as a consequence, accumulate losses. On the other hand, banks could be only temporarily ill...
متن کاملFinancial Intermediation, Agency and Collateral and the Dynamics of Banking Crises: Theory and Evidence for the Japanese Banking Crisis
We outline a model of an endogenously evolving banking crisis in a growing economy subject to either idiosyncratic or aggregate productivity shocks. The model incorporates agency problems at two levels: between firms and their banks and between banks and the banks’ depositors and deposit insurers. In equilibrium, banks have an incentive to renegotiate loans to insolvent firms, leading to an inc...
متن کاملFinancial Crises and Systemic Bank Runs in a Dynamic Model of Banking
What are the effects of unconventional monetary policies during panic-based financial crises? To address this question, I develop a dynamic general equilibrium model of banking. A novel mechanism gives rise to multiple equilibria. In the good equilibrium, all banks are solvent. In the bad equilibrium, many banks are insolvent and subject to runs. The bad equilibrium is also characterized by def...
متن کاملThe Banking Crisis: Causes, Consequences and Remedies
The paradigm that financial markets are efficient has provided the intellectual backbone for the deregulation of the banking sector since the 1980s, allowing universal banks to be fully involved in financial markets, and investment banks to become involved in traditional banking. There is now overwhelming evidence that financial markets are not efficient. Bubbles and crashes are an endemic feat...
متن کامل