How do banks propagate economic shocks?

Title: How do banks propagate economic shocks?

Abstract: This paper exploits the COVID-19 pandemic as a negative shock on firm revenues in affected industries and studies the transmission of this shock to the rest of the economy via banks. We use the ex-ante heterogeneity in the amount of loans issued to the affected industries to measure the variation in banks' exposure to the negative shock. Using detailed credit register data from Turkey, we show that banks transmitted the negative shock by a reduction in their loan supply: A 1 percentage point increase in banks' exposure led to a 0.74 percent decline in their lending. The reduction is of similar size across firms in more- and less-affected industries. The effect persists at the firm level suggesting that firms could not entirely switch to other banks to avoid the reduction. Large firms with more than 500 employees and firms with an existing relationship to state-owned banks could alleviate the size of the negative effect.