Risk-Taking and Monetary Policy Transmission: Evidence from Loans to Smes and Large Firms

Government Procurement and Access to Credit: Firm Dynamics and Aggregate Implications

“…8 A few papers in this literature have studied the interplay of financial frictions with different forms of taxation (Erosa and González, 2019;Itskhoki and Moll, 2019;Guvenen et al, 2019;Blanco and Baley, 2022) but none has focused on the expenditure side of government policies. Our finding that the type of financial frictions matters in understanding the effects of procurement on the macroeconomy is also related to recent papers that show that the type of financial frictions, i.e., earnings-vs. asset-based, and not only their severity, plays a crucial role in explaining important economic outcomes: the gains from trade liberalization (Brooks and Dovis, 2020), aggregate productivity (Li, 2022), macroeconomic fluctuations (Drechsel, 2021), and the transmission of monetary policy (Caglio et al, 2021).…”

“…The fourth fact that we document is that winning a procurement contract generates a differential impact on firm's credit conditions relative to selling to the private sector. Recent papers show evidence of earning based financial constraints (e.g., see Lian and Ma, 2020;Aguirre et al, 2021;Caglio et al, 2021;Drechsel, 2021;Li, 2022). These papers base their empirical specification on models where a firm's ability to borrow is not only a function of its net worth as in traditional macro-finance models (e.g., Kiyotaki and Moore, 1997), but also on its earnings.…”

Capital controls, domestic macroprudential policy and the bank lending channel of monetary policy

“…These vector of bank-level variables is meant to control for bank balance sheet items which the previous literature on the bank-lending channel of monetary policy (dating back to Bernanke and Gertler, 1995) has shown to significantly interact with variation in the policy rate. Moreover, we also control for lagged total firm credit as a proxy for firm leverage, 25 as companies with different levels of leverage respond differently to macroeconomic and monetary policy changes (see, e.g., Caglio et al, 2021).We saturate the model with firm*bank fixed effects, denoted by δ f,b , which take care of all (observed and unobserved) time-invariant heterogeneity at the level of the single lending relationship. Finally, ε f,b,yq is an error term.…”

Did High Leverage Render Small Businesses Vulnerable to the COVID-19 Shock?

“…29 In exploring the role of leverage as a proxy for default risk, we also add controls for the type of collateral backing a loan (along with their interactions with the COVID indicator), since loans to more levered firms may have different types of collateral pledged, which in turn can affect loan volume and spread. Moreover, previous studies show that collateral is a prevalent risk mitigant for loans to SMEs, and loans backed by different types of collateral react differently to shocks (see, for example, Caglio et al, 2021). 30 The types of collateral as 29 Another possible, data-specific explanation is that the ratings data (from banks' internal risk models) in Y-14 are somehow less timely than the data on firm leverage (from financial statements on borrowers).…”

“…30 Also using Y-14 data, Caglio et al (2021) document that essentially all bank loans to private firms, most of which are SMEs, are secured by some form of collateral, the most important types being accounts receivable and inventory, and blanket liens. The common property uniting these types of collateral is that they are all created intrinsically as a result of a firm's operations; that is, they are embedded in the firm's value as a going concern instead of tied to an asset (such as equipment or real estate) with independent value even without the firm's operations.…”