Bank expertise and startup success: evidence from Portugal
Bonfirm et al., in this paper, examine how bank specialization in lending to new firms impacts firm creation, credit access, and survival following a regulatory reform in Portugal that reduced barriers to starting a business. The authors exploit a staggered rollout of a reform (Empresa Na Hora or ENH) across Portuguese municipalities between 2005-2008 that drastically simplified the process of starting a business. They access the Portuguese credit register, which has comprehensive and granular data that allow them to measure each bank branch’s relative expertise in lending to new firms. They construct a novel measure of bank branch specialization in lending to new firms, based on the share of loans to firms 0-4 years old relative to other branches in the same municipality. Finally the analysis uses difference-in-differences and event study approaches to compare outcomes in treated vs untreated municipalities over time. Their main findings include:
- The ENH reform increased firm creation by about 24-25 new firms per 100,000 inhabitants annually in treated municipalities.
- This effect was concentrated in municipalities with a higher presence of bank branches specialized in lending to new firms. A one standard deviation increase in specialized branch presence was associated with 12-16 more new firms per 100,000 inhabitants annually.
- New firms in municipalities with more specialized branches had better access to credit after the reform. They were more likely to obtain loans and had higher leverage.
- Firms that borrowed from specialized branches had up to 5.6 percentage points higher 10-year survival probability compared to those borrowing from non-specialized branches.
- At 5 years old, firms that borrowed from specialized branches had 3-4 percentage points higher profitability. At 10 years old, they employed about 9% more workers.
- The effects of start-up lending specialization were stronger than other branch characteristics like industry specialization or size.
The authors conclude that bank specialization in lending to new firms can help mitigate potential negative effects of entry deregulation on firm quality by effectively screening increased firm entry. This highlights complementarities between local credit market conditions and policies aimed at stimulating entrepreneurship.
Bank Specialization in Lending to New Firms
Authors: Diana Bonfim, Ralph De Haas, Alexandra Matyunina, Steven Ongena
From: European Central Bank, Banco de Portugal, European Bank for Reconstruction and Development, KU Leuven, University of Zurich
Zombie firms and credit allocation: evidence from U.S. lenders
In this paper, Favara et al. examine whether zombie firms are kept alive by bank lending policies. They use the Federal Reserve Y-14 supervisory data on commercial and industrial loans from large U.S. banks and DealScan data on syndicated loans from both banks and nonbank financial institutions (NBFIs). The authors exploit the 2014-2015 oil price shock as a quasi-random shock to firm profitability to identify zombie firms. They use two definitions of zombie firms: a) a balance sheet definition to indicate highly indebted firms with low debt-servicing capacity and negative sales growth; and b)a credit-subsidy definition to indicate firms with speculative-grade ratings receiving subsidized loans. Finally, they employ difference-in-differences and regression analyses to examine lending patterns to zombie firms by banks and NBFIs. Their main findings include:
- U.S. banks do not engage in zombie lending, regardless of their capital levels or exposure to zombie firms. Banks actually reduce lending and charge higher interest rates to zombie firms.
- In contrast, NBFIs increase lending to zombie firms and offer them more favorable terms compared to banks.
- There is evidence of credit migration from banks to NBFIs for zombie firms, especially after the implementation of stricter bank capital regulations in 2014.
- Despite receiving credit support from NBFIs, zombie firms are twice as likely to file for bankruptcy compared to other financially distressed firms.
The authors suggest that efficient bankruptcy procedures in the U.S. may reduce incentives for lenders to keep unviable firms alive through zombie lending.
Zombie Lending to U.S. Firms
Authors: Giovanni Favara, Camelia Minoiu, Ander Perez-Orive
From: Board of Governors of the Federal Reserve System, Federal Reserve Bank of Atlanta
