This paper studies whether the solvency problem of Spain’s weakest banks during the Great Recession caused a reduction in credit supply and employment. The Spanish government bailed out thirty-three banks and the data from the Central Credit Register of the Bank of Spain shows that these weak banks strongly curtailed lending well in advance. The effects of this credit supply shock are assessed by comparing the change in employment between 2006 and 2010at firms indebted with weak banks in 2006 and the rest. The results show that the poor health of the weak banks caused significant employment losses at firms of all sizes. At the level of firms, the additional employment losses are in the range between 6 and 7 percentage points. This represents between 25 and 35% of aggregate losses during our sample period, and 10 to 25% of these losses are accounted for by firm exits.
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