Bank supply shocks significantly impact firm investment in euro area

This study employs the Amiti and Weinstein (2018) methodology to decompose loan growth rates into four distinct components: bank-specific, firm-specific, industry-specific, and common shocks.

Using the novel AnaCredit database, the research investigates how these credit supply shocks impact firm-level investment across the euro area.

A key finding is that idiosyncratic bank supply shocks significantly affect firm-level investment, particularly for firms highly dependent on bank loans.

These granular bank-specific shocks are also shown to explain most of the aggregate loan dynamics.

The study highlights the critical role banks play in shaping investment dynamics, especially under varying economic conditions, by providing detailed, matched bank-firm loan data across the euro area for the period 2019-2023.

The effects of bank shocks vary depending on firm characteristics, such as firm size, loan portfolio composition, and reliance on external financing.

Smaller and younger firms, often lacking alternative funding sources like bonds or internal cash, are more vulnerable to these shocks.

In contrast, larger firms with diversified financial resources are less affected.

Firms with a higher reliance on short-term debt are also more susceptible due to continuous refinancing needs.

The study also finds that firms in the manufacturing sector and those in Italy and Spain are more vulnerable to bank supply shocks.

These micro-level shocks are key drivers of aggregate credit fluctuations, supporting the 'financial accelerator' theory, which posits that credit market disruptions can amplify economic fluctuations.