Local Bank Financial Constraints and Firm Access to External Finance

orrowers being credit rationed before the external finance shock to the banks. The overallevidence suggests that financial constraints at the bank level can result in financing constraintsat the firm level, and that shocks to the financial position of banks will affect the aggregateavailability of credit and the financial position of their borrowers.E. Testing the Identifying AssumptionsThe interpretation of the results so far has led to the conclusion that banks are financiallyconstrained. This interpretation rests upon the assumption that the external financing providedby the program was uncorrelated with changes in the marginal cost of financing or theinvestment opportunities of the bank. It also implies that the targeting restrictions imposed bythe program did not have a direct effect on the lending behavior of the banks. This finalsubsection provides additional evidence that corroborates these assumptions.Changes in the Risk Profile of BanksAn identification assumption throughout the paper is that the external financing provided bythe program was inframarginal, in the sense that the marginal cost of finance of the banks wasunaffected by the program. This is a necessary condition for the validity of the financingfrictions test. This assumption can be tested empirically by looking at how proxies for the riskprofile of the bank and its marginal cost of capital change when banks receive programfinancing. Two such proxies are the overnight interbank interest rate and the interest rate onsubordinated debt (see Ashcraft and Bleakley (2005) for evidence that federal funds marketrates reflect bank creditworthiness).The estimated coefficients of a regression of changes in interest rates on changes in externalfinancing provided by the program (actual and expected), bank and month fixed effects areshown in Table VIII. The point estimates of the sensitivity of both interest rates to actual34