Transmission of the Sovereign Debt Crisis: Bank-Firm Level Evidence From France

Abstract

Using a large panel dataset of more than 60.000 firms matched to 125 banks in France, we investigate the transmission of the Sovereign Debt Crisis to the French economy via lending relations. We show that French banks’ exposure to sovereign stress negatively affected their corporate borrowers and this impact is heterogeneous across firms. We document three main findings. First, banks most exposed to risky sovereign debt decreased overall lending by more relatively to less exposed banks during the Sovereign Debt Crisis. Second, firms that borrowed from banks with higher sovereign debt exposure obtained less short-term loans and faced higher funding costs with respect to firms related to other banks. Third, the magnitude of these effects depends on the likelihood of firms being financially constrained: among firms related to banks with larger exposure to sovereign risk, younger and smaller firms were relatively more affected by these credit restrictions. These results support existing evidence on the spill-overs of the Sovereign Debt Crisis in the Euro Area from peripheral to core countries via the direct exposure of their domestic banking system.