Bank Credit Shocks and the Uneven Impact on Firm Investment Across the Euro Area

A new ECB study using AnaCredit data shows that bank-specific lending shocks strongly influence firms’ real investment, with small, young, and bank-dependent firms suffering the most when credit tightens. Negative credit shocks sharply cut investment, while credit expansions have weaker effects, making banks a key driver of economic cycles in Europe.

When banks change how they lend, firms feel it almost immediately. A new study by researchers from the European Central Bank and Universidad Carlos III de Madrid shows that these changes are not just background noise in the economy, they play a decisive role in determining whether firms invest, expand, or pull back. Using detailed loan-level data from the AnaCredit database, the researchers examine how credit supply shocks affect companies across Germany, France, Italy, and Spain between 2019 and 2023.

The study focuses on a simple but powerful question: Does it matter which bank a firm borrows from? The answer, according to the evidence, is yes, very much so. Individual banks’ lending decisions can significantly shape firms’ real investment behaviour, especially in economies where bank credit remains the main source of external finance.

Untangling Credit Supply from Credit Demand

One of the hardest problems in economics is separating credit supply from credit demand. When firms borrow less, it is often unclear whether they no longer want to invest or whether banks are unwilling to lend. To solve this, the authors use a well-established statistical approach that breaks loan growth into four parts: firm-specific demand, bank-specific supply, industry-wide effects, and economy-wide trends.

This method allows the researchers to isolate bank-specific shocks, changes in lending that come from banks themselves rather than from firms’ performance or broader economic conditions. The richness of AnaCredit, which covers millions of individual bank–firm loans, makes it possible to apply this approach across the euro area with unprecedented precision.

Small Firms Carry the Biggest Burden

The results show that bank-specific credit shocks have a clear and meaningful impact on firm investment, particularly in tangible assets such as machinery, equipment, and buildings. When banks tighten credit, firms reduce investment; when banks loosen lending, investment rises. But this effect is far from equal across firms.

Small and young firms are hit hardest. These companies rely heavily on bank loans and typically lack access to bond markets or large internal cash reserves. Firms with a high share of short-term debt are especially vulnerable because they face constant refinancing pressure. By contrast, firms with longer debt maturities or relationships with multiple banks are better able to absorb shocks and maintain investment.

The study also finds that negative credit shocks are much more damaging than positive ones are beneficial. When banks pull back, investment falls sharply. When banks become more generous, firms respond cautiously. This imbalance helps explain why financial downturns often cause deep investment slumps, while recoveries are slow and uneven.

Why Innovation Follows a Different Path

Not all investment reacts the same way to credit conditions. A key insight from the study is the stark difference between tangible and intangible investment. While bank lending strongly affects spending on physical capital, it has little influence on investment in research and development, software, or intellectual property.

Intangible investment depends much more on firms’ own cash flow and business prospects. Because these assets are hard to use as collateral and difficult for banks to value, firms largely finance them internally. As a result, credit tightening hurts traditional capital investment far more than innovation-related spending, shaping how economies evolve during financial cycles.

From Individual Banks to the Whole Economy

The effects of bank credit shocks do not stop at the firm level. When the researchers aggregate their results, they find that bank-specific and firm-specific shocks together explain a large share of overall credit fluctuations in the euro area. This supports the idea that problems at individual banks can have economy-wide consequences, especially when large lenders are involved.

However, aggregate investment is also shaped by industry trends and firm demand, particularly during major disruptions. The COVID-19 pandemic stands out as a clear example. During the crisis, credit expanded, often supported by public guarantees, but investment collapsed. Firms used loans to survive, not to grow, highlighting how uncertainty can weaken the link between credit and investment.

Monitoring total credit volumes is not enough. Policymakers must pay attention to who lends, who borrows, and under what conditions. Strengthening firms’ resilience through longer loan maturities, diversified financing sources, and better access to non-bank finance can reduce the real economic damage when banks come under stress. In bank-centred economies, the health of individual lenders remains a crucial driver of investment and growth.