6. Concluding remarks
This article examines the extent to which the source of debt financing (banks or public debt markets) affects the default risk of firms in the U.S. market from 2006 to 2010. In the initial crisis stage (2007–2009), firms with close links to bank financing suffer significantly higher increases in default risks than similar firms that do not depend on bank financing, in support of the bank supply shock theory. When firms rely solely on financing from public debt markets, they do not experience significant increases in default risk. This evidence is inconsistent with the notion that an overall credit crunch is the main channel of transmission of the effects from the financial crisis to the real economy. Finally, our results indicate that bank-dependent firms, with or without an ability to replace bank loans with public debts, experience similar increased default risk in early periods of the crisis. Public debt markets thus have a limited role in offsetting funding shocks, as far as default risk is concerned.
Our work provides useful information for policy makers interested in understanding the extent to which impairments in the bank lending channel contribute to an increase in the probability of bankruptcies, thus deepening recessions. Monetary policy can work through an impact on interest rates in the bond market or on the supply of intermediated loans. Our key result suggests that regulators should assign greater importance to fixing the bank lending channel in a timely manner when a financial crisis materializes.
