Bo Becker (Harvard University) presenting 'Cyclicality of Credit Supply: Firm Level Evidence' - Abstract: Theory predicts that there is a close link between bank credit supply and the evolution of the business cycle. Yet this effect has been hard to quantify in the time-series. While loan issuance falls in recession, it is not clear if this is due to demand or supply. We focus on firms’ substitution between bank debt and public bonds using firm-level data from 1990 to 2009. Any firm that raises new debt must have a positive demand for external funds. If the same firm switches from loans to bonds, we conclude that this is due to a contraction in bank credit supply. We find strong evidence of substitution from loans to bonds at times characterized by tight lending standards, high levels of non-performing loans to bank equity, low bank share prices and tight monetary policy. Although the bank-to-bond substitution can only be measured for firms with access to bond markets, we show that this substitution has strong predictive power for bank borrowing and investments by small, out-of-sample firms.