Sharing the Pain? Credit Supply and Real Effects of Bank Bail-ins

We analyze the credit supply and real effects of bank bail-ins by exploiting the unexpected failure and subsequent resolution of a major Portuguese bank. Using matched firm-bank data on credit exposures and interest rates, we show that banks more exposed to the bail-in significantly reduced credit supply and tightened credit conditions at the intensive margin. While affected firms were on average able to compensate the reduction in overall credit, SMEs experienced a binding contraction of funds available through credit lines. Those with lower ex-ante internal liquidity responded to this shock by increasing precautionary cash holdings and reducing investment and employment