How do shocks to banks transmit to loan terms faced by borrowers on different loan markets? In our model of multidimensional contracting between heterogeneous risky borrowers and intermediaries with limited lending capacity, loan terms depend on loan demand elasticities and default elasticities. These two sufficient statistics predict how the cross-section of loan terms and bank risk react to changes in capital and funding costs. Using empirical estimates, they explain the heterogeneous transmission of shocks across loan markets and borrower risk categories. Accounting for non-price loan terms is important for dynamics because their endogenous response can increase the persistence of credit crises.

Does global financial market integration alleviate or exacerbate the transmission of major disruptions in global trade? Using novel data linking regional banking markets with import flows in Brazil, we document that the presence of globally-active banks at the municipal level is associated with a weakened transmission of trade disruptions to imports. For identification, we exploit municipalities’ exposure to pandemic-related lockdowns in their trade partners abroad, controlling for local imports demand. The supply-driven and robust results suggest that global banks compensate for the effect of lockdowns by providing wider access to US dollar funding as well as by reducing cross-border information frictions. This evidence highlights a strong link between global financial integration and the resilience of real-sector integration.

This paper studies how interconnected plants distribute additional liquidity from banks

through the supply chain. Using a spatially segmented bank branch expansion rule in India, we find that direct exposure to additional bank credit allows plants to hold less precautionary cash and increase bank debt. Directly exposed plants pass through liquidity to customer plants as short-term trade credit. This liquidity spillover improves sales, employment, and productivity at customer plants. Structural estimation yields an average credit multiplier of 1.48. Our results underscore the credit multiplier effects of production networks and the importance of financial integration among firms with limited banking services.