The Home Bias and the Credit Crunch:
A Regional Perspective
Andrea F. Presbitero Gregory F. Udell Alberto Zazzaro
February 24, 2012
A major policy issue is whether troubles in the banking system reflected in the bankruptcyof Lehman Brothers in September 2008 have spurred a credit crunch and, if so, how and whyits severity has been different across markets and firms. In this paper, we tackle this issueby looking at the Italian case. We take advantage of a dataset on a large sample of manu-facturing firms, observed quarterly between January 2008 and September 2009. Thanks todetailed information about loan applications and lending decisions, we are able to identifythe occurrence of a credit crunch in Italy which has been found to be harsher in provinceswith a large share of branches owned by distantly-managed banks. Inconsistent with theflight to quality hypothesis, however, we do not find evidence that economically weaker andsmaller firms suffered more during the crisis period than during tranquil periods. By con-trast, we find that large and healthy firms, the segment of borrowers which, according totheoretical predictions, are cream-skimmed by distantly-headquartered banks, were moreintensely hit by the credit tightening in functionally distant credit markets than in the onespopulated by less distant banks. This last result is consistent with the hypothesis of a homebias on the part of nationwide banks.
JEL Classification: F33, F34, F35, O11
Key words: Banking; Credit crunch; Distance; Home bias; Flight to quality.
Andrea F. Presbitero (corresponding author), Department of Economics Universita Politecnica delle Marche(Italy), Money and Finance Research group (MoFiR) and Centre for Macroeconomic and Finance Research (Ce-MaFiR). E-mail: email@example.com; personal web page: https://sites.google.com/site/presbitero/. GregoryF. Udell, Indiana University, Kelley School of Business and Money and Finance Research group (MoFiR). E-mail: firstname.lastname@example.org Alberto Zazzaro, Department of Economics Universita Politecnica delle Marche(Italy) and Money and Finance Research group (MoFiR). E-mail: email@example.com; personal web page:http://utenti.dea.univpm.it/zazzaro/. We thank Raoul Minetti and the participants at the MoFiR workshop onbanking (Ancona, 2012) and at seminars held at the Universita di Milano Bicocca and Universita Politecnicadelle Marche for valuable suggestions.
The financial crisis that began in the third quarter of 2007 originated with the bursting of areal estate bubble in the US and hit its peak in the quarters immediately after the collapse ofLehman Brothers in September 2008. This led to massive capital shocks to the US bankingsystem that quickly propagated to Europe as global interbank loan markets seized up. Thecontagion from the US shock was subsequently exacerbated by Europes own problems in thereal estate sector in countries like Ireland and Spain compounded by sovereign debt problemsparticularly in the southern Euro zone.
One of the most feared and debated consequences of the crisis in both Europe and the UShas been the possible credit crunch caused by the contraction of banks capital and the adverseliquidity shocks in interbank markets. However, identifying the existence of a credit crunchduring a global crisis, disentangling the shrinking of credit supply from the parallel reduction incredit demand, and distinguishing the factors that may have driven differences in the severity ofthe crunch across firms and markets are major concerns to policymakers and one of the biggestchallenges facing empirical work. In the absence of unusual natural experiments that createan easily identifiable supply shock (e.g. Khwaja and Mian; 2008; Peek and Rosengren; 1997)several identification strategies have been employed in the literature. One strategy is to exploitcredit registry data on firms that have multiple lenders in order to control for demand effects(e.g. Albertazzi and Marchetti; 2010; Iyer et al.; 2010; Jimenez et al.; 2011; Gobbi and Sette;2012). Another approach is to apply a disequilibrium model to identify credit constrained firms(e.g. Carbo-Valverde, Rodriguez-Fernandez and Udell; 2011; Kremp and Sevestre; 2011). Analternative approach to identify constrained firms, that we will follow in this paper, is to usesurvey data that contain information on loan applications and bank decisions (e.g. Popov andUdell; 2012; Winston Smith and Robb; 2011; Ferrando and Mulier; 2011; Puri et al.; 2011).
A number of studies have analyzed the effects on the credit markets in the country wherethe crisis began (i.e., the US). These studies have found evidence of significant shocks to thesupply of credit by large and small banks (e.g. Contessi and Francis; 2010; Gozzi and Goetz;2010; Ivashina and Scharfstein; 2010; Santos; 2010). However, missing from the research on theimpact of the credit crunch in the US is an analysis of the impact across different categories ofborrowers and regions. Virtually all of this research on credit in the US during the crisis eitherfocuses on large firms the least likely to be affected by the crunch or on indirect evidencesuch as the Federal Reserves Senior Loan Officer Survey (e.g. Udell; 2009)1. As a consequenceof data limitations in the US2, firm level analysis of the effect of the current crisis on small andmedium enterprises (SMEs) has been substantially limited to Europe. In general these studieshave confirmed a credit crunch in the European credit markets (e.g. Albertazzi and Marchetti;2010; Carbo-Valverde, Degryse and Rodriguez-Fernandez; 2011; Carbo-Valverde, Rodriguez-Fernandez and Udell; 2011; Ferrando and Mulier; 2011; Iyer et al.; 2010; Jimenez et al.; 2011;Puri et al.; 2011). The evidence also suggests that younger, smaller and informationally moreopaque firms may have been more severely affected (e.g. Artola and Genre; 2011; Canton et al.;
1One exception is a study of how start-up firms faired during the crisis (Winston Smith and Robb; 2011).This study used the Kaufman Firm Survey and was confined to very young and very small firms. Examples ofindirect evidence include a study of how large firms supplied trade credit during the crisis, some of which likelywent to small firms (Garcia-Appendini and Montoriol-Garriga; 2011), and a study by Gozzi and Goetz (2010)who show that metropolitan areas where banks relied less on retail deposits experienced a more severe economicdownturn during the crisis.
2Unlike many European countries the US does not have a public credit registry. In addition, the best availablefirm level data on SME finance in the US, the Federal Reserves Survey of Small Business Finance (SSBF), wasdiscontinued just before the crisis began. While the SSBF data were not panel data, they did contain extensivedata on firm characteristics, financial statements and loan terms. Moreover, the next survey would have beenconducted in the middle of the crisis, had it not been discontinued.
2011; Holton et al.; 2011; Popov and Udell; 2012).Our paper adds to this growing empirical literature on the determinants of the credit crunch
in two ways. First, we explore whether and how the hierarchical structure of banks in the localmarket affects the severity of the credit crunch in that market. Second, we look deeper intothe question of which type of firms are more exposed to credit tightening by investigating thecommon conjecture that small and risky firms suffer most if operating in credit markets largelypopulated by nationwide, distantly-managed banks rather than by local banks.
Our specific focus on the hierarchical structure of the local banking market centers on theissue of whether borrowers whose banks are less local are more vulnerable. The theoreticaland empirical literature on commercial lending suggests that hierarchical banks are less ableto provide relationship lending to SMEs because of difficulties associated with producing andtransmitting soft information (Stein; 2002; Berger et al.; 2005; Liberti and Mian; 2009). Thisimplies that as the functional distance between the loan officer and the headquarters wherefinal lending decisions are made increases, banks are less able to make relationship-based loansand access to credit to local firms becomes tighter (Alessandrini et al.; 2009).
In this paper, we explore this issue by conjecturing that, in times of crisis, banks retractdisproportionally from markets which are distant from their headquarters. If this actuallyoccurrs, then the adverse effect of functional distance on firms access to credit should beobserved to be more pronounced in the months following the collapse of Lehman Brothers. Inaddition, we investigate whether the withdrawal of banks from local markets is the result of aflight to quality or a home bias effect. To establish which of the two effects prevails, we testwhether more small and risky enterprises in more functionally distant banking systems are more(flight to quality) or less (home bias) likely to suffer from a contraction of credit after Lehmanscollapse.
Our study is closely related to studies that have examined the foreign ownership of banks andwhether shocks to parent banks are propagated across borders affecting the lending activitiesof their foreign operations (e.g. Cetorelli and Goldberg; 2011; Popov and Udell; 2012). A fewrecent contributions have considered the existence of a home bias in banks lending reactionsto adverse shocks to their own financial conditions at times of global crisis, by looking at thebehavior of international banks in syndicated loan market (Galindo et al.; 2010; de Haas andvan Horen; 2011; Giannetti and Laeven; 2011).