When Credit Dries Up: Job Losses in the Great Recession
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When Credit Dries Up: Job Losses in the Great Recession Samuel Bentolila Marcel Jansen CEMFI U. Autónoma de Madrid Gabriel Jiménez Sonia Ruano Banco de España Banco de España Presentation at IMéRA-AMSE Conference on “Growth in Europe?”, Marseille 24 September 2015 This paper is the sole responsibility of its authors. The views presented here do not necessarily re‡ect those of either the Banco de España or the Eurosystem 1 / 29
Motivation I Do shocks to the banking system have real e¤ects and, if so, do they give rise to employment losses? I Policymakers in Europe and the US are concerned because the decline the lending during the Great Recession is seen as a primary factor in the slow recovery (IMF, 2013) I These concerns led to massive injections of capital in banks with solvency problems (over e 600 Bn in Europe) I However, recent evidence on the real e¤ects of credit supply shocks and the economic bene…ts of bailouts is scarce. Why? I Lack of good data on bank credit to …rms (in the US) I Challenging identi…cation issues 2 / 29
The basic challenge I Disentangle credit supply and credit demand shocks: I A …nancial crisis may force banks to reduce credit supply, but it may also induce …rms to reduce credit demand I The troubles of …rms may cause the hardship of banks, inducing reverse causality I Firms may have alternative sources of funding I Selection, with an over-representation of vulnerable …rms in weak banks In recent years most studies exploit quasi-experimental techniques to overcome these identi…cation problems 3 / 29
The Spanish experience in the Great Recession (GR) The Spanish economy o¤ers an ideal setting to explore how shocks to credit supply spillover to the real economy: I A large employment fall: 9% over 2008-2010 I Spanish …rms rely heavily on bank credit and the high leverage ratios of many …rms, mostly SMEs, made them vulnerable to the reduction in credit supply during the GR I This credit supply shock, reducing credit by 40% in real terms from 2007 to 2010, was originated by a boom-bust cycle in housing prices with catastrophic e¤ects on bank solvency 4 / 29
Our approach We exploit large cross-sectional di¤erences in lender health at the onset of the crisis I The weakest banks, all of them cajas de ahorros (savings banks), were bailed out by the State –mostly after 2010. The rest survived without …nancial assistance I Bailed-out or weak banks overinvested in loans to real estate during the boom I Weak banks reduced credit more during the recession I We compare the change in employment from 2006 to 2010 at two sets of Spanish …rms: those with a pre-crisis exposure to weak banks in 2006 and those with no exposure 5 / 29
Our strength Data set I We have access to a unique dataset with con…dential information about all bank loans to non-…nancial …rms and loan applications to non-current banks I These data are linked to …rm and bank balance sheet data I The data allow us to reconstruct the entire banking relations and credit histories of close to 170,000 non-…nancial …rms To the best of our knowledge, it is the most extensive database ever assembled for the analysis of credit supply shocks In our empirical analysis we include an exhaustive set of …rm controls to account for selection and have instruments generating exogenous variation in weak-bank exposure 6 / 29
Summary of results I Controling for selection, weak-bank exposure caused an extra employment fall of around 2.2 pp from 2006 to 2010 I This corresponds to about one-quarter of aggregate job losses in …rms exposed to weak banks in our sample I The results are very robust and reveal sizable di¤erences depending on …rm …nancial vulnerability and …rm size I Di¤erences in employment destruction and …rm exit are concentrated at multi-bank …rms 7 / 29
Plan of the talk I The …nancial crisis in Spain I Data and treatment variable I Empirical strategy I Empirical results: I Baseline (DD) I Transmission mechanism and exogenous exposure I Treatment heterogeneity I Probability of exit I Job loss estimates I Conclusions 8 / 29
The …nancial crisis in Spain I The Spanish cycle I Expansion, 2002-2007: GDP 3.7%; employment 4.2% (p.a.) I Recession, 2008-2010: GDP -3.0%; employment -9.0% I Bank credit boom-bust: Real annual ‡ow of new credit to non-…nancial …rms by deposit institutions I 2003-2007: 23%, 2007-2010: -38% I Euro membership + Expansionary monetary policy (ECB): Sharp drop in real interest rates and easy loans to real estate developers and construction companies (REI): 14.8% of GDP 2002 to 43% in 2007 ! Housing bubble: 59% rise in real housing prices over 2002-2007 (-15% over 2008-2010) 9 / 29
Savings banks and the credit collapse I Savings banks: same regulation and supervision, di¤erent ownership and governance I Market shares and exposure to REI (%): Credit to Non- Loans to REI/ Fin. Firms Loans to NFF Weak banks 32 68 Healthy banks 67 37 I Di¤erential credit growth: I Expansion (2002-2007): Weak 40% v. healthy 12% I Recession (2007-2010): Weak -46% v. healthy -35% I Both at intensive and extensive margins 10 / 29
Savings banks and the credit collapse New credit to non-…nancial …rms by bank type (12-month backward moving average, 2007:10=100) 11 / 29
Savings banks and the credit collapse Acceptance rates of loan applications by non-current clients, by bank type (%) 12 / 29
The bank restructuring process Steps: 1. Nationalization and reprivatization (2 WBs, 3/2009-7/2010): 0.44% GDP 2. Mergers (26 WBs) and takeovers (5 WBs), from 3/2010: 1.1% GDP by 12/2010 3. Further consolidations and nationalizations (since 2011). Loan from European Financial Stability Facility to …nance weak-bank recapitalization (6/2012, 4% GDP) So: I Weak bank de…nition: nationalized, merged with State support, or taken over by another bank I 2009-2010: Run by own managers (exc. 2 weak banks in 1.) I Institutional Protection System: separate legal entities 13 / 29
Data: Six di¤erent databases 1. Central Credit Register of the Bank of Spain (CIR): I All loans above e 6,000: identity of bank and borrower, collateral, maturity, etc. I Firms’credit history: non-performing loans and potentially problematic loans 2. CIR: Loan applications by non-current borrowers 3. Annual balance sheets and income statements of …rms from Spanish Mercantile Registers via SABI I Exclude construction, real estate, and related industries: 169,295 …rms I Coverage: 21% …rms, 32% value added, 48% private employees 4. Firm entry and exit from Central Business Register 5. Bank balance sheets from supervisory Bank of Spain database 6. Bank location database 14 / 29
The treatment variable I WBi : Dummy variable that takes the value 1 if the …rm had any loans with weak banks in 2006 I Alternative continuous treatment: WB intensityi : loans from weak banks to asset value I Sample data: I Employment fell by 8.1% I 39% of …rms had credit from weak banks 15 / 29
Firm characteristics There are signi…cant di¤erences in the characteristics of …rms in the treatment and control groups. Treated …rms are on average: I Older and larger I Financially worse: less capitalized, liquid, and pro…table, more indebted with banks I More loan applications to non-current banks, more frequent defaults These di¤erences lead to di¤erent unconditional trends. We rely on random selection conditional on controls 16 / 29
Empirical strategy Di¤erences in di¤erences (DD), estimated in di¤erences: ∆4 log 1 + nijkt = α + βWBi + Xi γ + dj δ + dk λ + uijkt I ∆4 =4-year di¤erence, nijkt =employment at …rm i in municipality j, industry k, year t=2010 ! Trends in all control variables I nijkt set to zero for …rms in the sample in 2006 but not in 2010 because they closed down ! log(1 + nijkt ) ! Surviving and closing …rms I β measures Average Treatment e¤ect on the Treated (ATT) 17 / 29
Threats to identi…cation I Demand e¤ects (Mian-Su…, 2014): Lending in REI / certain areas ! Larger drop in household demand and higher density of (non-REI) …rms exposed to WB ! Job losses from consumption rather than credit ! Dummies by: Municipality (3,697) and Industry (80) I Non-random matching: laxer loan-approval criteria at WB may cause bias in risk pro…le and reduce access to credit. And aggregate shocks may di¤erentially a¤ect productivity (Paravisini et al., 2015) ! Firm controls: I Productivity: age, age2 , size, ROA, share of temp contracts I Finance: bank debt, short-term and long-term bank debt, liquidity, own funds, no. past loan applications to non-current banks and whether all accepted, past loan defaults, current loan defaults, credit lines, no. banking relationships and square, share of uncollateralized loans 18 / 29
Baseline: Di¤erence in di¤erences Dependent variable: ∆4 log 1 + nijkt No …rm Some …rm Baseline Placebo controls controls (’02-’06) WBi -0.067 -0.059 -0.022 0.004 (0.010) (0.010) (0.007) (0.008) R2 0.050 0.063 0.074 0.156 No. obs. 169,295 169,295 169,295 126,997 Municipality and industry …xed e¤ects, and …rm controls included (No controls: -7.7% di¤erence.) 19 / 29
Alternative speci…cations I Selection: Exact matching within municipality, industry, and …rm control cells (0-1 dummies) I Selection: Panel with …rm-speci…c trends (t=2007,...,2010): -3.3 pp ∆ log (1 + nijkt )=αi0 +WBi dt β0 +Xi dt γ0 +dj dt δ0 +dk dt λ0 +dt φ + vijkt I Demand: traded-goods sectors, based on high concentration - highest quartile Her…ndahl (Mian-Su…, 2014) I Alternative de…nition of weak banks: 2006 loan exposure to …rms in REI within upper quartile I E¤ect is expected to increase with the degree of exposure I WB Intensityi = Loans from weak banks / Asset Value I At average intensity of exposure, the e¤ect is 1.9 pp 20 / 29
Alternative speci…cations Dependent variable: ∆4 log 1 + nijkt Exact Tradable Loans Intensity matching goods to REI WBi -0.034 -0.049 -0.021 (0.010) (0.020) (0.008) WBi Intensity -0.104 (0.028) R2 0.001 0.109 0.074 0.074 No. obs. 169,295 21,029 169,295 169,295 Municipality and industry …xed e¤ects, and …rm controls included 21 / 29
Is credit the channel? I Bank-…rm sample (281,016 observations, 98,754 …rms) ∆4 log (1 + Creditibt ) =η i + βWBb +γFBib +εibt I Creditibt = total credit committed by bank b to …rm i, t=2010, FBit = …rm-bank controls [log(no. of years with the bank), past defaults with the bank] I Fixed e¤ects leave only …rms that work with more than 1 bank, but this speci…cation controls perfectly for credit demand (Khwaja-Mian, 2008) I Result: b β=-0.090 (0.040) ! Weak banks cut credit more to …rms that were their clients in 2006 22 / 29
Instrumental variables: Is credit the channel? I Transmission mechanism (t = 2010): ∆4 log 1 + nijkt = α00 + β00 ∆4 log 1 + Creditijkt +Xi γ00 +dj δ00 +dk λ00 +εijkt ∆4 log 1 + Creditijkt = ρ + µWBi +Xi η + dj σ + dk ψ + ω ijkt I Creditit = total credit committed by banks. Exclusion restriction: Working with a weak bank a¤ects ∆Employment only through ∆Credit I Trade credit: Subsample of …rms (8%), with …nancial institutions (32% of liabilities) and trade credit (35%) I Exogenous exposure to WB: regulatory change in 12/1988 allowing savings banks to expand beyond region of origin ! density of weak-bank branches in 12/1988 by municipality. Exclusion restriction: local weak-bank density only a¤ects employment through exposure to weak banks 23 / 29
Instrumental variables: Is credit the channel? Dependent variable: ∆4 log 1 + nijkt Instrumented ∆4 log ∆4 log WBi variable (1+Creditit ) (1+Creditit )a 0.447 0.849 -0.061 (0.127) (0.367) (0.026) First stage WBi -0.048 -0.039 (0.010) (0.019) Local weak-bank 0.496 densityi (0.071) Overall e¤ect -0.022 -0.033 -0.030 F test / p value 23.1/0.00 4.09/0.05 13.3/0.00 No. obs. 169,295 12,889 169,295 Industry f.e. and …rm controls included. Col. (1) has municipality f.e.; Col. (3) has coastal province f.e. a Col. (2) uses total credit 24 / 29
Treatment heterogeneity: Financial vulnerability Dependent variable: ∆4 log(1 + nijkt ) Rejected applicationsi -0.065 log(Total Assets)i 0.018 (0.008) (0.005) WBi Rejected applic.i -0.027 WBi log(Total Assets)i 0.004 (0.013) (0.006) Defaultsi -0.212 Single banki 0.033 (0.031) (0.007) WBi Defaultsi -0.059 WBi Single banki 0.037 (0.033) (0.016) Short-term debti -0.083 WBi -0.035 (0.013) (0.007) WBi Short-term debti -0.016 R2 0.071 (0.014) No. obs. 169,295 Municipality and industry …xed e¤ects, and …rm controls included 25 / 29
Probability of exit I Lower WB employment e¤ect on survivors (DD): 1.1 pp I Dependent variable: Probability of exit from 2006 to 2010i WBi 0.010 (0.004) WB Intensityi 0.070 0.080 (0.015) (0.016) WB Intensityi -0.054 Single banki (0.017) R2 0.080 0.081 0.078 No. obs. 169,295 169,295 169,295 Municipality and industry …xed e¤ects, and …rm controls included I WB Intensityi : 9th v. 1st decile ! 1.7% higher probability (17% of baseline rate) 26 / 29
Job loss estimates Caveat: I These are not macro e¤ects (Chodorow-Reich, 2014) I These are only di¤erential e¤ects Share of observed aggregate job losses in exposed …rms: I Baseline: 23.7% of job losses I Survivors: 52% of job losses I Closing …rms: 19% of job losses 27 / 29
Conclusions I Aim: measure the impact of credit constraints on employment during the Great Recession in Spain I Identi…cation: We exploit di¤erences in lender health at the onset of the crisis, as evidenced by savings banks’bailouts I We …nd that job losses from expansion to recession at …rms exposed to weak banks are signi…cantly larger than at similar non-exposed …rms I This explains around one-fourth of aggregate job losses at exposed …rms 28 / 29
Conclusions I The estimated e¤ects vary considerably with the …rm’s creditworthiness and the structure of its banking relationships, in particular how many banks it works with I Credit constraints do not just force …rms to purge jobs but also cause some of them to close down I Given our controls, constrained …rms would have received more credit had they not been attached to weak banks and, in this sense, these job losses are ine¢ cient 29 / 29
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