How do banks propagate economic shocks?

This study exploits the COVID-19 pandemic as a negative shock on firm revenues in affected industries and studies the transmission of this shock via banks. We use the ex-ante heterogeneity in the amount of loans issued to affected industries to measure the variation in banks' exposure to the negative shock. Using bankfirm level credit register data from Turkey, we show that banks transmitted the negative shock with a reduction in their loan supply not only to affected but also to unaffected industries. The effect persists at the firm level, yet is lower for large firms and for firms with existing relationships to state-owned banks. SUERF Policy Briefs No 219, November 2021