How Much do Bank Shocks Affect Investment? Evidence from Matched Bank-Firm Loan Data

We show that supply-side financial shocks have a large impact on firms' investment. We do this by developing a new methodology to separate firm-borrowing shocks from bank supply shocks using a vast sample of matched bank-firm lending data. We decompose loan movements in Japan for the period 1990 to 2010 into bank, firm, industry, and common shocks. The high degree of financial institution concentration means that individual banks are large relative to the size of the economy, which creates a role for granular shocks as in Gabaix (2011). As a result, bank supply shocks--i.e., movements in the supply of bank loans net of borrower characteristics and general credit conditions--can have large impacts on aggregate loan supply and investment. We show that these bank supply shocks explain 40 percent of aggregate loan and investment fluctuations.