Damaged Collateral and Firm-Level Finance: Evidence from Russia's War in Ukraine

How much has Russia's war in Ukraine damaged the collateral of Ukrainian firms, and how much damage has that caused the Ukrainian financial system? We address this question using unusually rich high-frequency supervisory data of Ukrainian banks combined with a survey of banks on the location and condition of corporate borrowers' collateral between February and November 2022. Exploiting plausibly exogenous variation in collateral value resulting from damage to collateral, we find that a 10-percent reduction in the collateral-loan ratio lowers the probability of getting any new loan by nearly eight percentage points; new lending falls by over two percentage points. Our results additionally imply that the same reduction in collateral value raises default rates and banks' assessment of firms' probability of default by approximately eight and four percentage points, respectively. The results imply that, in the absence of sufficient aid to repair the damage, Ukraine may experience reduced investment and lower economic growth in the future.