This research analyzes a newly available database which provides information from 1982 to 1995 on the income statements and balance sheets of over 27,000 Italian firms. This information can be linked to information on the firms' relationships with their banks-mainly how much is borrowed from different banks and an imprecise measure of how long the firm has borrowed from the bank. Data on the balance sheets of the banks and supervisory reports on the banks are also available. Consequently, this data base provides a much more comprehensive picture of bank firm relations than any other available source. The major part of this project looks at the fallout from a banking crisis. This study documents what happens to an otherwise healthy firm when its main lender runs into trouble. These data will permit analyses of the substitution of other sources of financing; the employment, investment and sales adjustments undertaken by the firm; and the responses of the firm's competitors. Thus, it is possible to estimate a much more complete general-equilibrium impact of the shock than is typical in the literature on liquidity constraints. A companion study will analyze the role of financial factors in the propagation of idiosyncratic and industry level shocks. In this study, it is investigated whether firms' adjustment of employment and investment following these shocks relates to the structure of the firms' financing. The combination of the large sample size and detailed data on the ties between firms and banks will allow a significantly improvement on past estimates of the degree to which financial relationships shape a firm's response to financial distress. Finally, the role of bank lending in the transmission of monetary policy is investigated. Whether the impact of monetary policy in Northern and Southern Italy is influenced by the differences in the banking markets is analyzed. One goal is to determine the extent to which lending smoothly flows across regions. Answering this question is important because an efficient adjustment to a common European monetary policy may depend on large credit flows across regions.
