Spillovers to small business credit risk

Dennis Bams, Magdalena Pisa*, Christian C. P. Wolff

*Corresponding author for this work

Research output: Contribution to journalArticleAcademicpeer-review

Abstract

Do large credit risk shocks spill over to small businesses and affect their real economic activity? Using information on small business credit risk, we find that small businesses show increased default and bankruptcy rates following a shock to a customer industry. On an industry level, the shock to a customer industry is followed by a decrease in industry markups, disproportionate closure of firms, and cutbacks in inventories. Our analysis quantifies the elevated credit risk among small businesses and suggests a non-negligible 0.83% increase in expected losses on a diversified loan portfolio following a credit risk shock. This study provides banks and supervisors with greater clarity on timing and on the extent of elevated small business credit risk. It also allows them to assess the exposure of a bank portfolio to fluctuations in small business default rate. Such improved default prediction reduces credit rationing to the small business economy.
Original languageEnglish
Pages (from-to)323-352
Number of pages30
JournalSmall Business Economics
Volume57
Issue number1
Early online date4 Jan 2020
DOIs
Publication statusPublished - Jun 2021

Keywords

  • Spillover effects
  • Supply chain
  • Small businesses
  • Credit risk
  • TRADE CREDIT
  • CONTAGION
  • INFORMATION
  • BANKRUPTCY
  • COMPETITION
  • DEFAULTS
  • LINKAGES
  • ORIGINS
  • MARKETS
  • FINANCE

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