Using data from the Italian Credit Register we identify the adverse effect of the freeze of the securitization market on bank lending during the crisis of 2007–2008. Applying a differences-in-differences estimation to data on firms that borrow from multiple banks, we single out credit supply by including firm fixed effects. Our results show that the degree to which banks tightened credit supply to nonfinancial firms is positively related to the share of loans they securitized before the crisis. The tightening translated into lower credit growth, higher interest rates, lower probability of accepting loan applications and higher probability of relationship termination. Firms were unable to fully compensate the negative credit supply shock, which suggests that the securitization freeze played a role in reducing aggregate credit availability.

We quantify the real effects of the bank-lending channel exploiting the dramatic liquidity drought in interbank markets that followed the 2007 financial crisis as a source of variation in credit supply. Using a large sample of matched firm–bank data from Italy, we find had the interbank market not collapsed, investment expenditure would have been more than 20% higher and would have increased by around 30 cents per additional euro of available credit at the average firm. We also find that credit shocks affect the firm's value added, employment and input purchases, and propagate through firms' trade credit chains.