Supply of bank loans and business debts: A view from historical bankruptcy cases. (17th March 2020)

• Record Type: Journal Article
• Authors: Xie, Dongping; Hansen, Mary Eschelbach
• Other Names: Payne James E. guestEditor.; Rodgers Mary T. guestEditor.
• Is Part Of: Review of financial economics. Volume 38(2020) Supplement S1
• Page Start: 170
• Page End: 187
• Publication Date: 2020-03-17
• Subjects: bank lending -- business bankruptcy -- monetary policy regimes; Business -- Periodicals; Economics -- Periodicals; Business; Economics; Electronic journals; Periodicals; 332.05
• DOI: 10.1002/rfe.1076
• Languages: English
• ISSNs: 1058-3300

Abstract

Abstract: As bank loans fell in the 2008 crisis, business bankruptcy increased. To study how bank loans affect business balance sheets and bankruptcy, we use new data on bankrupt businesses in Missouri between 1898 and 1942. We confirm that when banks curtail loans, courts see more bankruptcies among businesses with high exposure to bank debt. To reduce real volatility, policy‐makers can set tough bank liquidity requirements in the upswing of business cycle but allow weaker requirements in the downswing. We also find that between 1914 and 1933, businesses in St. Louis were more sensitive to changes in bank loans than businesses in Kansas City, probably due to the tight monetary policy conducted by the conservative St. Louis Fed. The Glass‐Steagall Act weakened the relationship between bank loans and business debt structure. The takeaway is that lender‐of‐last‐resort practices stabilize both the financial sector and the real economy.