The Real Effects of Financial Sector Interventions during Crises

Authors

  • LUC LAEVEN,

    1. Luc Laeven is Deputy Division Chief, Research Department, International Monetary Fund, Professor of Finance at Tilburg University, and a Research Fellow at CEPR (E-mail: llaeven@imf.org). Fabián Valencia is an economist in the Research Department of the International Monetary Fund (E-mail: fvalencia@imf.org).
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  • FABIÁN VALENCIA

    1. Luc Laeven is Deputy Division Chief, Research Department, International Monetary Fund, Professor of Finance at Tilburg University, and a Research Fellow at CEPR (E-mail: llaeven@imf.org). Fabián Valencia is an economist in the Research Department of the International Monetary Fund (E-mail: fvalencia@imf.org).
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  • We would like to thank Kenneth West (the Editor), two anonymous referees, Olivier Blanchard, Carlo Cottarelli, Stijn Claessens, Giovanni Dell’Ariccia, Peter Doyle, Vikram Haksar, Randall Kroszner, Lamin Leigh, Andrea Maechler, David Marston, Paulo Mauro, Martin Mühleisen, Fabiano Rodriguez Bastos, David Romer, Sweta Saxena, Anna Ter-Martirosyan, Hui Tong, Kenichi Ueda, Jose Viñals, and Jaejoon Woo for useful comments and suggestions, and Jeanne Verrier for excellent research assistance. The views expressed in this paper are those of the authors and do not necessarily represent those of the IMF or the IMF Board.

Abstract

We assess the importance of supply-side credit market frictions by studying the impact of bank recapitalization on firm growth in 50 countries during the recent crisis. Our identification strategy exploits the crisis as a shock to credit supply and combines an exogenous measure of firms’ dependence on external financing with policy interventions aimed at restoring bank capital. We find that the growth of financially dependent firms is disproportionately positively affected by bank recapitalization. This effect is quantitatively important and robust to controlling for other policies. These results provide new evidence of the influence of credit market frictions on economic activity.

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