Funding Versus Real Economy Shock: The Impact of the 2007-09 Crisis on Small Firms' Credit Availability

We analyze how banks adjust their lending to small firms after distinct shocks from the cross-border transmission of the 2007-09 crisis by using unique loan application and contract data from AccessBank Azerbaijan. These data allow us to disentangle the effects of a funding shock from the effects of a real shock. Contrary to conventional assumptions, we find that the funding shock works through reduced prospecting-as opposed to tightened lending standards-and leads to fewer loan applications among new applicants in particular, which improves the borrower pool. The real economy shock instead works through loan approval and affects small and medium enterprise rather than micro borrowers.