This paper studies the benefits and costs of lending specialization along supply chains, where banks serve as common lenders. Using firm-to-firm transaction and credit registry data from Belgium, we show that common lending is persistent and widespread. We develop and estimate a structural model of credit demand and supply in imperfectly competitive markets, where firms are connected through the production network. Our estimation results reveal that firms prefer to borrow from the same bank as their suppliers or customers, which gives common lenders market power and enables them to charge higher markups. At the same time, the network effects of common lending give banks an incentive to offer lower interest rates to maintain their role as common lenders. Exploiting the closure of a large manufacturing plant as an exogenous shock, we show that common lending also creates costs: the shock propagates through the production network, reducing credit demand along the supply chain and among common lenders, with banks more exposed to the affected network experiencing significantly larger declines in lending. A simulated counterfactual shows that the preference for borrowing from common lenders amplifies the propagation of the shock, concentrating the losses on the banks most specialized in the disrupted supply chain.

In direct lending, nonbank financial institutions originate bilaterally negotiated loans to risky firms. We document that issuance in this segment of the private credit market is countercyclical relative to issuance in other high-yield corporate credit markets, such as syndicated loans. This countercyclicality is the result of firms substituting across credit markets. Rather than forgo debt financing, firms switch to direct lending when credit conditions in other credit markets tighten. This substitution behavior is especially pronounced among sponsor-backed firms. Contrary to the concern that private credit could amplify credit supply shocks, our results indicate that private credit may dampen the corporate credit cycle. Thus, our findings have important implications for assessing the financial stability ramifications of the rapid growth in private credit.

We show that commonly used empirical approaches in the banking literature do not recover the impact of credit supply shocks on loan-level lending, on total firm-level borrowing or on real outcomes. Using a simple model of firm borrowing with standard ingredients, we propose new estimators that recover these effects. We apply our methodology to the 2011 credit crisis in Spain and show that it implies significantly smaller effects of loan supply shocks than those generated by current empirical approaches.