Bank’s trading activity, the lending channel and real investment - Evidence from individual firm-bank relationships in Germany
What began as a financial crisis in 2007/2008 quickly became a massive crisis of the real economy. We investigate the importance of the bank lending and firm borrowing channel in the transmission of asset price shocks to real investment. For the analysis we match individual firm and bank financial statements in Germany for the period of 2004-2010. The data include a large number of medium sized businesses. Using IV estimations in first differences to eliminate firm- and bank-specific effects, we find that banks which experience losses from their trading activities cut back lending, and firms whose relationship banks reduce lending decrease investment. The results support the view that a separation of own trading from commercial bank activities may contribute to shielding the real economy from financial crises.