| Abstract: | This article studies how a shock to the financial health ofbanks, caused by a decline in the asset markets, affects thereal economy. The land market collapse in Japan provides anideal testing field in separating the impact of a loan supplyshock from demand shocks. I find that banks with greater realestate exposure have to reduce lending. Firms' investment andmarket valuation are negatively associated with their top lender'sreal estate exposure. The lending channel is economically important:it accounts for one-third of lending contraction, one-fifthof the decline in investment, and a quarter of value loss. |
