Abstract

Using a comprehensive employer-employee dataset from German social security records, we examine the impact of an exogenous shock to bank capital on firms’ employment and investment
decisions, and on individual workers’ careers. We find that German regional banks’ trading losses from U.S. mortgage-backed securities cause a deep economic contraction in the banks’ exclusive geographic domains. Loan growth and output growth decline, and the unemployment rate rises during each year of the crisis in affected states compared to unaffected states. The effect is stronger for privately held, bank-dependent firms than for publicly listed firms: private firms in affected states reduce net hiring and cut Investment compared to publicly listed firms. We then study how firms’ access to bank credit affects individuals’ wages, unemployment duration, and occupational choices. Workers in affected firms experience persistent earnings losses, longer unemployment spells, and a lower probability of climbing the job ladder than workers in unaffected firms.