Sharing the Pain? Credit Supply and Real Effects of Bank Bail ins
We analyze the credit supply and real sector effects of bank bail ins by exploiting the unexpected failure of a major bank in Portugal and its subsequent resolution. Using a unique dataset of matched firm bank data on credit exposures and interest rates from the Portuguese credit register, we show that while banks more exposed to the bail in significantly reduced credit supply after the shock, affected firms were able to compensate this credit contraction with other sources of funding, including new lending relationships. Although there was no loss of external funding, we observe a moderate tightening of credit conditions as well as lower investment and employment at firms more exposed to the intervention, particularly SMEs. We explain the latter real effects by higher precautionary cash holdings due to increased uncertainty.