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Lending relationships and the real economy: evidence in the context of the euro area sovereign debt crisis

Publication Year 
JEL Code 
E22 - Capital; Investment (including Inventories); Capacity
E24 - Employment; Unemployment; Wages
E44 - Financial Markets and the Macroeconomy
E51 - Money Supply; Credit; Money Multipliers
G21 - Banks; Other Depository Institutions; Mortgages
G31 - Capital Budgeting; Investment Policy
The recent euro area sovereign debt crisis put the financial sector under pressure and imposed several challenges, mainly in the countries most affected by the crisis. The sovereign-bank linkage can negatively affect the economic activity, especially by bank-dependent firms. This study explores the heterogeneity across banks in their funding structure, sovereign exposures, solvency, and availability of collateral, with the aim of investigating the effect of the crisis on firms' investment and employment decisions. Exploring a detailed database that covers virtually all bank loans granted to Portuguese firms, for the period 2007-2012, the results suggest an impact on investment and employment paths for firms whose lenders depend more heavily on interbank and market funding. Moreover, the results also stress the importance of assets eligible as collateral in monetary operations conducted by Central Bank. The findings suggest how a deterioration in sovereign creditworthiness can affect the real economy via the banking sector.
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