Bank soundness and bank lending to new firms during the global financial crisis

Abstract

This paper examines how the soundness of financial institutions affected bank lending to new firms during the 2008 financial crisis by using a unique firm–bank match-level dataset of 1,467 unlisted small and medium-sized enterprises incorporated in Japan. We employ a within-firm estimator that can control for unobserved firms’ demand for credit through firm ∗ time fixed effects. The major findings of this paper are the following four points. First, sounder financial institutions may be generally less likely to provide financing to new firms. Second, our results suggest that sounder financial institutions were less likely to provide loans to new firms during the 2008 financial crisis. Third, financial institutions were less likely to provide financing to new firms during such crisis as compared to those with the same soundness during non-crisis periods. Finally, such lending relationships to new firms that are established during the financial crisis by sounder financial institutions are more likely to be continued than such lending by less sound financial institutions.