Bank default risk propagation along supply chains: evidence from the U.K.

Spatareanu, Mariana, Manole, Vlad, Kabiri, Ali and Roland, Isabelle (2023) Bank default risk propagation along supply chains: evidence from the U.K. International Review of Economics and Finance, 84. pp. 813-831. ISSN 1059-0560

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Abstract

How does banks’ default risk affect the probability of default of non-financial busi-nesses? The literature has focused on the banks’ direct corporate customers. It fails to consider the role of supply chain relationships as a powerful channel for default risk contagion. Our paper fills this gap by analyzing the direct as well as the indirect im-pact of banks’ default risk on firms’ default risk in the U.K. Relying on Input-Output tables, we devise methods that enable us to examine this question in the absence of data on firm-to-firm linkages. To capture all potential propagation channels, we ac-count for horizontal and vertical linkages, both between the firm and upstream indus-tries (suppliers) and between the firm and downstream industries (customers). We further examine how trade credit and input specificity amplify or dampen the propa-gation of default risk. Our results show that increases in banks’ default risk from the banking crisis of 2007-2008 propagated strongly to U.K. non-financial firms via sup-ply chains.

Item Type:	Article
Additional Information:	© 2022
Divisions:	Financial Markets Group
JEL classification:	G - Financial Economics > G2 - Financial Institutions and Services > G21 - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages G - Financial Economics > G3 - Corporate Finance and Governance > G34 - Mergers; Acquisitions; Restructuring; Corporate Governance O - Economic Development, Technological Change, and Growth > O1 - Economic Development > O16 - Economic Development: Financial Markets; Saving and Capital Investment; Corporate Finance and Governance O - Economic Development, Technological Change, and Growth > O3 - Technological Change; Research and Development > O30 - General
Date Deposited:	16 Nov 2022 14:03
Last Modified:	04 Jan 2023 16:39
URI:	http://eprints.lse.ac.uk/id/eprint/117351

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