CFCM Seminar: Sebnem Kalemli-Ozcan (University of Maryland)

Risk-taking and monetary policy transmission: Evidence from loans to SMEs and large firms

Abstract:  Using administrative firm-bank-loan level data from the U.S., we document new facts about the credit market. First, private firms mostly borrow from banks and bank debt comprises the entire balance sheet debt of private SMEs, compared to large publicly listed firms who can switch between bond markets and drawing from their credit lines. Second, both private firms and SMEs borrow shorter maturity and pay higher interest rates relative to large listed firms. Third, SMEs mostly use their enterprise's continuation value as collateral rather than fixed assets and real estate. Fourth, the relation between collateral and risk-|where risk is measured by the loan spread - is positive for large listed firms but negative for private firms and SMEs. Based on these facts, we show that monetary policy transmission and risk-taking differ across SMEs and large listed firms. When monetary policy is expansionary, credit demand of SMEs with high leverage increases more. SMEs' borrowing capacity expands more given their frequent use of earnings and operations-based collateral. We find no evidence of risk-taking by banks as they lend less to firms who defaulted before and likely to default in the future. Our results from the sample of all U.S. Firms are driven by U.S.private firms and SMEs, implying the aggregate effects of monetary policy depend on both the size distribution of firms and the type of collateral used. Since SMEs cover 99 percent of all firms and over 50 percent of U.S. employment and output, our results have important implications for aggregate boom-bust cycles.