In this article, we review the rapidly growing literature on the real effects of banks' corporate credit supply. We cover recent methodological advances and provide an in-depth survey of the existing evidence. The literature consistently shows that credit supply contractions lead to adverse real outcomes, but economic magnitudes vary across samples and identification strategies. This variation has become smaller in more recent work, using highly granular data. We further document heterogeneity in firm outcomes and show that the evidence is more ambiguous for expansionary shocks. Our analysis allows us to identify current knowledge gaps and worthwhile avenues for future research.

This paper shows that the trade costs of sovereign default depend on the identity of defaulted creditors. Comparing external and domestic defaults on privately held debt across 128 developing countries over 1980–2019, and applying both two-way fixed effects and stacked difference-in-differences estimators, we find that external defaults are associated with large and persistent import contractions, while domestic defaults have smaller and short-lived effects. This asymmetry is concentrated in imports of capital goods and is mirrored by declines in international lending to the private sector and in medium-to-long-term export credit insurance after external, but not domestic, defaults. By contrast, exports do not change significantly after either type of default. The results point to disruptions in cross-border trade finance as a key channel linking external defaults to trade, and highlight creditor composition as a central determinant of default-related trade costs.

This paper studies the role of production technology and credit availability for firms' hiring decisions following a labor supply shock. Our analysis uses matched firm- and loan-level data and exploits the closure of a large foreign manufacturing plant in Belgium. The closure exogenously increased labor supply to nearby firms but not to distant firms. Comparing nearby to similar distant firms, we find that nearby firms hire significantly more after the plant closure. Yet, the employment effect is not homogeneous. In industries with a low capital-labor elasticity of substitution, nearby firms only hire more if credit supply enables complementary capital expenditures. In industries with a high elasticity of substitution, nearby firms hire more independent of credit supply, but (weakly) more when tight credit restricts capital expenditures. Our results have important implications, e.g., for managing unemployment during financial crises when both labor and credit supply are simultaneously affected.

We study how workers' preference for job security shapes re-employment following mass layoffs and how firms adjust to the resulting labor supply shock. Exploiting the closure of a large manufacturing plant in Belgium, we show that the resulting local increase in the supply of blue-collar workers raises blue-collar employment at exposed firms relative to otherwise similar firms. The effect is particularly pronounced among firms perceived to offer greater job security, suggesting that workers' preferences influence where displaced workers are re-employed. Firms that hire more displaced workers become more blue-collar- and less capital-intensive, but do not become more profitable. To accommodate their higher wage bills, they reduce interest expenses by substituting short-term for long-term debt. Thus, re-employment responds to workers' preferences but alters firms' financial structure, making ex ante safer firms financially riskier. Our findings identify a novel channel through which labor supply shocks affect corporate financial decisions and firm solvency.

Using data on up to 5,337 banks in 154 countries over 1996–2020, we show that the response of bank lending to sovereign default depends jointly on bank ownership and on the type of default. During external defaults, lending by foreign-owned banks falls sharply, consistent with flight-home behavior, while state-owned banks cut credit less than private domestic banks. Domestic defaults produce the opposite pattern: foreign-owned banks sustain lending, shielded from the deposit outflows that hit their domestic peers, while state-owned banks suffer large increases in non-performing loans linked to their holdings of domestic sovereign bonds. Results on asset quality and deposit flows corroborate these mechanisms.