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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