Credit Crunch Caused by Bank Failures and Self-Selection Behavior in Lending Markets

Abstract

This study investigates how bank failures affect the real economy from the lenders' perspective. Using experimental settings of unique bank failures in Japan, this paper identifies the credit crunch effect by bank failures. The main findings are the following. First, bank failures decrease the investments of the client firms by approximately 30%. Second, the high investment growth/level firms deal with unhealthy banks. These choices generate a self-selection bias of 30-80%. Third, there is no evidence that bank-failure shock is related to the firms' accessibility to other financial sources. © 2011 The Ohio State University.