Informational Frictions and the Credit Crunch

In this paper, I estimate the magnitude of an informational friction limiting credit reallocation to firms during the 2007-2009 financial crisis. Because lenders rely on private information when deciding which relationship to end, borrowers looking for a new lender are adversely selected. I show how to separately identify private information from information common to all lenders but unobservable to the econometrician by using bank shocks within a discrete choice model of relationships. Quantitatively, these informational frictions appear to be too small to explain the credit crunch in the U.S. syndicated corporate loan market.