The European Central Bank published Working Paper No 3008 under its Lamfalussy Fellowship Programme examining whether privately held firms can substitute external equity for debt financing during a banking crisis. Using German firm-level data and firm-bank linkages, the paper exploits Commerzbank’s imported credit supply cut during the Great Financial Crisis and estimates that, on average, private firms raised EUR 0.27 in external equity for every EUR 1 reduction in financial debt, implying partial substitution (the views are those of the author and not necessarily those of the ECB). For firms fully dependent on Commerzbank, the estimates show 7.9% lower financial debt and 4.1% higher external equity than firms with no linkage to the bank in the post-cut period (2009–2013), alongside a 7.4% decline in internal equity and a 3.1% decline in total financial capital. The paper also reports real-side effects for fully dependent firms, including 5.7% lower tangible capital, 1.8% lower employment, and 3.5% lower output. Equity injections were infrequent but large: 12% of firms received at least one injection between 2009 and 2013, and conditional on an injection the average size was 15% of financial capital; ownership data indicate outsiders supplied equity in 40% of injected firms (43.5% for Commerzbank-dependent firms), with existing owners supplying the remainder.
European Central Bank 2025-01-07
European Central Bank working paper finds private German firms raised EUR 0.27 of external equity for each EUR 1 drop in debt after a bank lending cut
The European Central Bank's Working Paper No 3008 examines privately held firms' ability to substitute external equity for debt during a banking crisis, using Great Financial Crisis data. Private firms raised EUR 0.27 in equity for every EUR 1 reduction in debt, with Commerzbank-dependent firms experiencing significant financial structure shifts and real-side effects. Equity injections were infrequent but substantial, with outsiders supplying equity in 40% of cases.