Article

Capital Regulations and the Management of Credit Commitments during Crisis Times

Authors:
To read the full-text of this research, you can request a copy directly from the authors.

Abstract

Borrower drawdowns on credit commitments reduce a bank’s capital buffer. Using Austrian credit register data and exploiting the 2008-09 financial crisis as an exogenous shock to bank health, we provide novel evidence that capital-constrained banks manage this concern by cutting credit commitments that are not fully used. Controlling for their capital position, we find that banks also respond to liquidity problems by cutting such commitments. However, banks manage the capital and liquidity risk posed by undrawn credit in a way that limits negative macroeconomic implications: credit cuts are targeted at financially less constrained firms, and borrowers of more-affected banks can substitute lost credit with credit from other banks and do not suffer real effects. Additional findings suggest that voluntary agreements between constrained banks and strong firms to reduce spare borrowing capacity can explain why strong firms experience larger credit cuts.

No full-text available

Request Full-text Paper PDF

To read the full-text of this research,
you can request a copy directly from the authors.

Article
The public disclosure of bank‐level stress test results, while informative for market participants, can adversely affect underperforming entities. We uncover a novel cost of disclosing unfavorable stress test results: credit line runs. Using Spanish Credit Register data and the 2011 European Banking Authority stress test, we find that, after results were released, firms drew down about 10 percentage points more available funds from credit lines granted by banks with poor stress test performance. In addition, these banks reduced credit line sizes more before the release and were more likely to cut term lending to firms without credit lines afterward.
Article
While banks are expected to draw down regulatory capital buffers in case of need during a crisis, we find that banks kept at a safe distance from regulatory buffers during the pandemic by procyclically reducing corporate lending. By exploiting granular credit register data, we show that banks with little capital headroom above their buffers reduced credit supply and that this behavior was amplified for banks that entered the crisis with larger undrawn credit lines. Affected firms were unable to fully rebalance their borrowing needs with other banks, although public guarantees mitigated banks' procyclical behavior and its real effect at the firm level. These findings raise concerns that the capital buffers introduced by Basel III may not be as countercyclical as intended.
Article
Full-text available
We conduct face-to-face interviews with bank chief executive officers to classify 397 banks across 21 countries as relationship or transaction lenders. We then use the geographic coordinates of these banks' branches and of 14,100 businesses to analyze how the lending techniques of banks near firms are related to credit constraints at two contrasting points of the credit cycle. We find that while relationship lending is not associated with credit constraints during a credit boom, it alleviates such constraints during a downturn. This positive role of relationship lending is stronger for small and opaque firms and in regions with a more severe economic downturn. Moreover, relationship lending mitigates the impact of a downturn on firm growth and does not constitute evergreening of loans.
Article
Full-text available
We show that after the start of the euro area sovereign debt crisis, lending by non-GIIPS European banks with sizeable holdings of GIIPS sovereign bonds declined relative to nonexposed banks. This effect is not driven by changes in borrower demand or by other shocks to banks’ balance sheets. We also find that affected banks withdrew from all foreign markets with the exception of the USA, suggesting an increase in home bias. The slowdown in lending continued after ECB’s LTRO in December 2011, but it was lower for banks that increased their risky exposures in the early stages of the crisis.
Article
Full-text available
After Lehman Brothers filed for bankruptcy in September 2008, cross-border bank lending contracted sharply. To explain the severity and variation in this contraction, we analyze detailed data on cross-border syndicated lending by 75 banks to 59 countries. We find that banks that had to write down sub-prime assets, refinance large amounts of long-term debt, and experienced sharp declines in their market-to-book ratio, transmitted these shocks across borders by curtailing their lending abroad. While shocked banks differentiated between countries in much the same way as less constrained banks, they restricted their lending more to small borrowers.
Article
Full-text available
Using a new dataset of UK-syndicated loans, we document a significant loan cost disadvantage incurred by privately held firms. For identification, we use the distance of a firm's headquarters to London's capital markets as a plausibly exogenous variation in corporate structure (i.e., public/private) choice. We analyze the channels of the loan cost disadvantage of being private by documenting the importance of: the higher costs of information production, the lower bargaining power, the differences in ownership structure, and the differences in secondary market trading. Interestingly, we find no evidence that lenders price expected future performance into the loan spread differential. The Author 2011. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please e-mail: journals.permissions@oup.com., Oxford University Press.
Article
Using loan‐level data from Germany, we investigate how the introduction of model‐based capital regulation affected banks' ability to absorb shocks. The objective of this regulation was to enhance financial stability by making capital requirements responsive to asset risk. Our evidence suggests that banks “optimized” model‐based regulation to lower their capital requirements. Banks systematically underreported risk, with underreporting more pronounced for banks with higher gains from it. Moreover, large banks benefitted from the regulation at the expense of smaller banks. Overall, our results suggest that sophisticated rules may have undesired effects if strategic misbehavior is difficult to detect. This article is protected by copyright. All rights reserved
Article
We document the importance of covenant violations in transmitting bank health to nonfinancial firms. Roughly one‐third of loans in our supervisory data breach a covenant during the 2008 to 2009 period, allowing lenders to force a renegotiation of loan terms or to accelerate repayment of otherwise long‐term credit. Lenders in worse health are more likely to force a reduction in the loan commitment following a violation. The reduction in credit to borrowers who violate a covenant can account for the majority of the cross‐sectional variation in credit supply during the 2008 to 2009 crisis. This article is protected by copyright. All rights reserved
Article
Did banks curb lending to creditworthy small and mid-sized enterprises (SME) during the COVID-19 pandemic? Sitting on top of minimum capital requirements, regulatory capital buffers introduced after the 2008 global financial crisis (GFC) are costly regions of "rainy day" equity capital designed to absorb losses and provide lending capacity in a downturn. Using a novel set of confidential loan level data that includes private SME firms, we show that "buffer-constrained" banks (those entering the pandemic with capital ratios close to this regulatory buffer region) reduced loan commitments to SME firms by an average of 1.4 percent more (quarterly) and were 4 percent more likely to end pre-existing lending relationships during the pandemic as compared to "buffer-unconstrained" banks (those entering the pandemic with capital ratios far from the regulatory capital buffer region). We further find heterogenous effects across firms, as buffer-constrained banks disproportionately curtailed credit to three types of borrowers: (1) private, bank-dependent SME firms, (2) firms whose lending relationships were relatively young, and (3) firms whose pre-pandemic credit lines contractually matured at the start of the pandemic (and thus were up for renegotiation). While the post-2008 period saw the rise of banking system capital to historically high levels, these capital buffers went effectively unused during the pandemic. To the best of our knowledge, our study is the first to: (1) empirically test the usability of these Basel III regulatory buffers in a downturn, and (2) contribute a bank capital-based transmission channel to the literature studying how the pandemic transmitted shocks to SME firms.
Article
We use supervisory loan-level data to document that small firms (SMEs) obtain shorter maturity credit lines than large firms, post more collateral, have higher utilization rates, and pay higher spreads. We rationalize these facts as the equilibrium outcome of a trade-off between lender commitment and discretion. Using the COVID recession, we test the prediction that SMEs are subject to greater lender discretion. Consistent with this hypothesis, SMEs did not draw down whereas large firms did, even in response to similar demand shocks. PPP recipients reduced non-PPP loan balances, indicating the program bolstered their liquidity and alleviated the shortfall.
Article
Data on firm-loan-level daily credit line drawdowns in the United States expose a corporate “dash for cash” induced by the COVID-19 pandemic. In the first phase of the crisis, which was characterized by extreme precaution and heightened aggregate risk, all firms drew down bank credit lines and raised cash levels. In the second phase, which followed the adoption of stabilization policies, only the highest-rated firms switched to capital markets to raise cash. Consistent with the risk of becoming a fallen angel, the lowest-quality BBB-rated firms behaved more similarly to non-investment grade firms. The observed corporate behavior reveals the significant impact of credit risk on corporate cash holdings. (JEL G01, G14, G32, G35) Received July 13, 2020; editorial decision July 17, 2020 by Editor Andrew Ellul
Article
We study the impact of higher capital requirements on banks’ balance sheets and their transmission to the real economy. The 2011 EBA capital exercise is an almost ideal quasi-natural experiment to identify this impact with a difference-in-differences matching estimator. We find that treated banks increase their capital ratios by reducing their risk-weighted assets, not by raising their levels of equity, consistent with debt overhang. Banks reduce lending to corporate and retail customers, resulting in lower asset, investment, and sales growth for firms obtaining a larger share of their bank credit from the treated banks. Received November 28, 2016; editorial decision March 9, 2018 by Editor Philip Strahan. Authors have furnished an Internet Appendix, which are available on the Oxford University Press Web site next to the link to the final published paper online.
Article
We study the credit supply effects of the unexpected freeze of the European interbank market, using exhaustive Portuguese loan-level data. We find that banks that rely more on interbank borrowing before the crisis decrease their credit supply more during the crisis. The credit supply reduction is stronger for firms that are smaller, with weaker banking relationships. Small firms cannot compensate the credit crunch with other sources of debt. Furthermore, the impact of illiquidity on the credit crunch is stronger for less solvent banks. Finally, we find no overall positive effects of central bank liquidity but instead higher hoarding of liquidity. The version of record [Interbank Liquidity Crunch and the Firm Credit Crunch: Evidence from the 2007–2009 Crisis, Rajkamal Iyer, José-Luis Peydró, Samuel da-Rocha-Lopes, Antoinette Schoar, The Review of Financial Studies, January 2014, 78(1): 347-372] is available online at https://academic.oup.com/rfs/article-abstract/27/1/347/1573768?redirectedFrom=fulltext; DOI: https://doi.org/10.1093/rfs/hht056
Article
We analyze how time-varying bank-specific capital requirements affect bank lending to the non-financial corporate sector as well as banks' balance sheet adjustments. To do so, we relate Pillar 2 capital requirements to a comprehensive corporate credit register coupled with bank and firm balance sheet data. Our analysis consists of three components. First, we investigate how capital requirements affect the supply of bank credit to the corporate sector, both on the intensive and extensive margin, as well as for different types of credit. Subsequently, we document how bank and firm characteristics as well as the monetary policy stance impact the relationship between bank capital requirements and the supply of credit. Finally, we examine how time-varying bank-specific capital requirements affect banks' balance sheet composition.
Article
We examine the relation between banks’ liquidity risk and their willingness to supply capital to borrowers under previously committed credit lines. We show that during the collapse of the asset-backed commercial paper (ABCP) market in the last quarter of 2007 and the first half of 2008, banks with higher exposure to ABCP conduits renegotiated significantly tougher conditions on the outstanding credit lines offered to borrowers in violation of a covenant. Specifically, we find that borrowers faced higher spreads over the prime rate and LIBOR as well as higher commitment fees on undrawn amounts. Our paper suggests that an increase in lender liquidity risk can bear financial implications for firms that use credit lines as an instrument of liquidity management.
Article
This paper provides evidence on the strategic lending decisions made by banks facing a negative funding shock. Using bank–firm level credit data, we show that banks reallocate credit within their loan portfolio in at least three different ways. First, banks reallocate to sectors where they have a high market share. Second, they also reallocate to sectors in which they are more specialized. Third, they reallocate credit toward low-risk firms. These reallocation effects are economically large. A standard deviation increase in sector market share, sector specialization, or firm soundness reduces the transmission of the funding shock to credit supply by 22%, 8%, and 10%, respectively.
Article
We explore the causes of the credit crunch during the European sovereign debt crisis and its impact on the corporate policies of European firms. Our results show that value impairment in banks’ exposures to sovereign debt and the risk-shifting behavior of weakly capitalized banks reduced the probability of firms being granted new syndicated loans by up to 53%. This lending contraction depressed investment, employment, and sales growth of firms affiliated with affected banks. Our estimates based on firm-level data suggest that the credit crunch explains between 44% and 66% of the overall negative real effects suffered by European firms. Received April 5, 2016; editorial decision February 3, 2018 by Editor Andrew Karolyi. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.
Article
I investigate whether bank exposures to sovereign debt during the European debt crisis affected the real economy. I show that a shock to the marked-to-market (MTM) value of bank exposures to sovereign debt led to credit tightening in 2010–2011 that had negative real effects on small and young firms. Because banks do not usually mark their holdings of sovereign bonds to market, I explore the transmission channels of the unrealized losses on credit supply. I show that a shock to MTM exposures reduced short-term bank funding from U.S. money market funds rather than affecting equity or working through alternative channels.
Article
We investigate how differential exposures by German banks to the US real-estate market affect domestic lending in Germany when home prices started to decline in the USA. We find that banks with an exposure to the US real-estate sector and to conduits shift their domestic lending to industry-region combinations with lower insolvency ratios following a decrease in US home prices. These banks also contract their lending to German firms more than banks that do not have such exposure. We mainly document that possible losses abroad shift bank lending at home where the size of the effect depends on the type and the degree of exposure the bank has.
Article
We investigate how financial contracting interacts with lending-channel effects by tracing the anatomy of a credit supply shock using micro-level data from a multinational bank. Borrowers with stronger lending relationships, higher nonlending revenues, and those that pledge collateral, especially outside assets and real estate, experience less credit rationing. Consistent with a tightening of financing constraints post shock, borrower composition shifts toward larger and less risky firms, and loans exhibit higher collateralization rates. Our analysis highlights the value of relationships and suggests that relationship banking is a channel through which borrowers can mitigate lending-channel effects.
Article
The paper studies the international transmission of shocks from the banking to the real sector during the global financial crisis. For identification, it uses matched bank-firm-level data, covering mainly small and medium-sized firms in Eastern Europe and Turkey, and exploits the Lehman failure. The paper finds that internationally borrowing domestic and especially foreign owned banks contract their credit more during the crisis than locally funded domestic banks do. Firms dependent on credit and with a relationship with internationally borrowing domestic or foreign banks suffer more in their financing and real performance, especially when single-bank, small or with limited tangible assets. Moreover, firms in countries with lower financial development, more reliance on foreign funding and slower contract enforcement are more affected. Overall the results suggest the existence of spillovers to the real sector through an international banking channel but with heterogeneous effects across firms and countries. The published version of this article [‘Shocks Abroad, Pain at Home? Bank-Firm-Level Evidence on the International Transmission of Financial Shocks’, Steven Ongena, José-Luis Peydró, Neeltje van Horen, IMF Economic Review 63: 698–750 (2015)] is available online at: https://doi.org/10.1057/imfer.2015.34 Another version is available at Universitat Pompeu Fabra’s repository: http://hdl.handle.net/10230/43262
Article
This paper examines the broader effects of the US financial crisis on global lending to retail customers. In particular we examine retail bank lending in Germany using a unique data set of German savings banks during the period 2006 through 2008 for which we have the universe of loan applications and loans granted. Our experimental setting allows us to distinguish between savings banks affected by the US financial crisis through their holdings in Landesbanken with substantial subprime exposure and unaffected savings banks. The data enable us to distinguish between demand and supply side effects of bank lending and find that the US financial crisis induced a contraction in the supply of retail lending in Germany. While demand for loans goes down, it is not substantially different for the affected and nonaffected banks. More important, we find evidence of a significant supply side effect in that the affected banks reject substantially more loan applications than nonaffected banks. This result is particularly strong for smaller and more liquidity-constrained banks as well as for mortgage as compared with consumer loans. We also find that bank-depositor relationships help mitigate these supply side effects.
Article
We investigate how differential exposures by German banks to the US real estate market during the recent financial crisis affect their corporate lending in Germany. Using unique bank-level exposure data, we distinguish between three different types of bank exposures, i.e. direct exposure to the US real estate sector, direct exposure to subprime lenders in the US, and indirect exposure through the liquidity provided to ABCP conduits. We find that banks with a higher exposure to the US real estate sector and to conduits cut their lending to German firms by more following a decrease in US home prices than banks that do not have such an exposure. Moreover, these banks then also shift their lending to industry-region combinations with lower insolvency ratios. Hence possible losses abroad shift bank lending at home, and the size of this effect depends on the type and the degree of exposure the bank has.
Article
We examine how lending channel effects are transmitted by tracing the anatomy of a credit supply shock in a single multinational bank for small and medium sized business-lending in emerging markets. Using cross-country loan-level data, we find that borrowers with stronger banking relationships and borrowers that yield higher non-lending revenues experience lower cuts in lending. Less risky borrowers and borrowers that pledge non-specific collateral such as cash and property also experience smaller cuts in borrowing. Our analysis highlights the value of relationships and suggests that relationship banking is a channel through which borrowers can mitigate bank-specific lending channel effects.
Article
One aim of post-crisis monetary policy has been to ease credit conditions for borrowers by unlocking bank lending. We find that bank equity is an important determinant of both the bank's funding cost and its lending growth. In a cross-country bank-level study, we find that a 1 percentage point increase in the equity-to-total assets ratio is associated with a four basis point reduction in the cost of debt financing and with a 0.6 percentage point increase in annual loan growth. These findings suggest that greater retention of bank earnings and hence higher bank capital would have aided the transmission of accommodative monetary policy to ease financial conditions faced by ultimate borrowers. In particular, we find that the effects of a monetary tightening are smaller for banks with higher capitalization, which have easier access to uninsured financing. These results suggest that if the banking system as a whole is weakly capitalized, there may be some tension between the monetary policy imperative of unlocking bank lending (i.e., expanding credit) and the supervisory objective of ensuring the soundness of individual banks (i.e., shrinking credit).
Article
We quantify the real effects of the bank-lending channel exploiting the dramatic liquidity drought in interbank markets that followed the 2007 financial crisis as a source of variation in credit supply. Using a large sample of matched firm–bank data from Italy, we find had the interbank market not collapsed, investment expenditure would have been more than 20% higher and would have increased by around 30 cents per additional euro of available credit at the average firm. We also find that credit shocks affect the firm's value added, employment and input purchases, and propagate through firms' trade credit chains. Received July 8, 2014; accepted April 12, 2016 by Editor Andrew Karolyi.
Article
In this article, we show that when banks increase their use of wholesale funding they shorten the maturity of loans to corporations. This effect appears to be linked to banks’ exposure to rollover risk resulting from their increasing use of short-term uninsured funding. Banks that use more wholesale funding shorten both the maturity of newly issued loans and the maturity of their loan portfolios. These results are not present among banks that rely predominantly on insured deposits. The link between wholesale funding and loan maturity is robust, and holds when we include firm-year fixed effects, suggesting that the decline in loan maturity is bank driven. In line with this premise, we find that the slope of the loan yield curve becomes steeper for banks that use more wholesale funding and that borrowers turn to the bond market to raise funding with longer maturity in response to banks’ loan maturity shortening.
Article
More than 80% of U.S. syndicated loans contain at least one fee type and contracts typically specify a menu of spreads and fee types. We test the predictions of existing theories on the main purposes of fees and provide supporting evidence that: (1) fees are used to price options embedded in loan contracts such as the drawdown option for credit lines and the cancellation option in term loans, and (2) fees are used to screen borrowers based on the likelihood of exercising these options. We also propose a new total-cost-of-borrowing measure that includes various fees charged by lenders.
Article
The effect of bank capital on lending is a critical determinant of the linkage between financial conditions and real activity, and has received especial attention in the recent financial crisis. We use panel regression techniques-following Bernanke and Lown (1991) and Hancock and Wilcox (1993, 1994)-to study the lending of large bank holding companies (BHCs) and find small effects of capital on lending. We then consider the effect of capital ratios on lending using a variant of Lown and Morgan's (2006) VAR model, and again find modest effects of bank capital ratio changes on lending. These results are in marked contrast to estimates obtained using simple empirical relations between aggregate commercial bank assets and leverage growth, which have recently been very influential in shaping forecasters' and policymakers' views regarding the effects of bank capital on loan growth. Our estimated models are then used to understand recent developments in bank lending and, in particular, to consider the role of TARP-related capital injections in affecting these developments.
Article
We construct an index of firms’ external finance constraints via generalized method of moments (GMM) estimation of an investment Euler equation. Unlike the commonly used KZ index, ours is consistent with firm characteristics associated with external finance constraints. Constrained firms’ returns move together, suggesting the existence of a financial constraints factor. This factor earns a positive but insignificant average return. Much of the variation in this factor cannot be explained by the Fama–French and momentum factors. Cross-sectional regressions of returns on our index and other firm characteristics show that constrained firms earn higher returns and that the financial-constraints effect dominates the size effect.
Article
By providing liquidity to depositors and credit-line borrowers, banks can be exposed to double-runs on assets and liabilities. For identification, we exploit the 2007 freeze of the European interbank market and the Italian Credit Register. After the shock, there are sizeable, aggregate double-runs. In the cross-section, credit-line drawdowns are not larger for banks more exposed to the interbank market; however, they are larger when we condition on the same firms with multiple credit lines. We show that, ex-ante, more exposed banks actively manage their liquidity risk by granting fewer credit lines to firms that run more during crises. The published version [‘Double Bank Runs and Liquidity Risk Management’, Filippo Ippolito, José-Luis Peydró, Andrea Polo, Enrico Sette, Journal of Financial Economics, October 2016, 122(1): 135-154] is available online at [https://www.sciencedirect.com/science/article/abs/pii/S0304405X16301076] [DOI: https://doi.org/10.1016/j.jfineco.2015.11.004]. A working paper version is available from the European Systemic Risk Board Working Paper no. 8: https://www.esrb.europa.eu/pub/pdf/wp/esrbwp8.en.pdf
Article
This article investigates the effect of bank lending frictions on employment outcomes. I construct a new data set that combines information on banking relationships and employment at 2,000 nonfinancial firms during the 2008–9 crisis. The article first verifies empirically the importance of banking relationships, which imply a cost to borrowers who switch lenders. I then use the dispersion in lender health following the Lehman crisis as a source of exogenous variation in the availability of credit to borrowers. I find that credit matters. Firms that had precrisis relationships with less healthy lenders had a lower likelihood of obtaining a loan following the Lehman bankruptcy, paid a higher interest rate if they did borrow, and reduced employment by more compared to precrisis clients of healthier lenders. Consistent with frictions deriving from asymmetric information, the effects vary by firm type. Lender health has an economically and statistically significant effect on employment at small and medium firms, but the data cannot reject the hypothesis of no effect at the largest or most transparent firms. Abstracting from general equilibrium effects, I find that the withdrawal of credit accounts for between one-third and one-half of the employment decline at small and medium firms in the sample in the year following the Lehman bankruptcy. JEL Codes: E24, E44, G20.
Article
We study the credit supply effects of the unexpected freeze of the European interbank market, using exhaustive Portuguese loan-level data. We find that banks that rely more on interbank borrowing before the crisis decrease their credit supply more during the crisis. The credit supply reduction is stronger for firms that are smaller, with weaker banking relationships. Small firms cannot compensate the credit crunch with other sources of debt. Furthermore, the impact of illiquidity on the credit crunch is stronger for less solvent banks. Finally, we find no overall positive effects of central bank liquidity but instead higher hoarding of liquidity. The version of record [Interbank Liquidity Crunch and the Firm Credit Crunch: Evidence from the 2007–2009 Crisis, Rajkamal Iyer, José-Luis Peydró, Samuel da-Rocha-Lopes, Antoinette Schoar, The Review of Financial Studies, January 2014, 78(1): 347-372] is available online at https://academic.oup.com/rfs/article-abstract/27/1/347/1573768?redirectedFrom=fulltext; DOI: https://doi.org/10.1093/rfs/hht056
Article
We trace the anatomy of a credit supply shock for small and medium sized business-lending in emerging markets. Using a novel data set that captures both lending and a bank-wide shock for a multinational bank, we examine how lending channel effects vary by firm and loan contract characteristics. Borrowers with better ratings, borrowers that pledge firm non-specific collateral such as cash and property, and borrowers that yield higher non-lending revenues experience lower cuts in lending when there is a bank-wide credit supply shock. Our results suggest that loan contracting, and in particular non-specific collateral, is a channel through which borrowers can mitigate bank-specific lending channel effects without turning to alternate lenders in the credit market.
Article
In this paper, we measure and analyze runs in the asset-backed commercial paper (ABCP) market during the financial turmoil that erupted in 2007. While it has been suggested that commercial paper markets may be prone to runs, we are the first to conduct a comprehensive empirical analysis of runs in the ABCP market. We contribute to the general understanding of runs using a rich issue-level data set of ABCP transactions for all programs in the US market, where we define a run as no issuance at a commercial paper program with a substantial amount of maturing paper. In addition to identifying runs on ABCP programs, we follow the literature on bank runs and attempt to disentangle runs driven by panics from runs driven by deteriorating fundamentals. Our analysis uses a rich cross section of data to link runs to a number of fundamentals, including program and sponsor types, ratings, and contract characteristics. We attribute increases in the likelihood of runs across all programs, after controlling for fundamentals, to panic. Our analysis yields substantial evidence of runs in the ABCP market in 2007. Moreover, our results suggest that the nature of runs evolves rapidly through a crisis, with widespread runs taking place during the first weeks of the turmoil, but with runs later on centered on fundamentally impaired programs.
Article
We analyze the impact of monetary policy on the supply of bank credit. Monetary policy affects both loan supply and demand, thus making identification a steep challenge. We therefore analyze a novel, supervisory dataset with loan applications from Spain. Accounting for time-varying firm heterogeneity in loan demand, we find that tighter monetary and worse economic conditions substantially reduce loan granting, especially from banks with lower capital or liquidity ratios; responding to applications for the same loan, weak banks are less likely to grant the loan. Finally, firms cannot offset the resultant credit restriction by applying to other banks. The published version [‘Credit Supply and Monetary Policy: Identifying the Bank Balance-Sheet Channel with Loan Applications’, Gabriel Jiménez, Steven Ongena, José-Luis Peydró, Jesús Saurina, American Economic Review, August 2012, 102(5): 2301-26] is available online at: https://www.aeaweb.org/articles?id=10.1257/aer.102.5.2301 DOI: 10.1257/aer.102.5.2301 Also European Central Bank Working Paper no. 1179 (https://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp1179.pdf) and UPF e-repository (http://hdl.handle.net/10230/44791)
Article
We use the 2007 credit crisis to assess the effect of financial contracting on real corporate behavior. We identify heterogeneity in financial contracting at the onset of the crisis by exploring ex-ante variation in long-term debt maturity. Our empirical methodology uses an experiment-like design in which we control for observed and unobserved firm heterogeneity via a differences-in-differences matching estimator. We study whether firms with large portions of their long-term debt maturing right at the time of the crisis observe more pronounced outcomes than otherwise similar firms that need not refinance their debt during the crisis. Firms whose long-term debt was largely maturing right after the third quarter of 2007 reduced investment by 2.5% more (on a quarterly basis) than otherwise similar firms whose debt was scheduled to mature well after 2008. This relative decline in investment is statistically significant and economically large, representing approximately one-third of pre-crisis investment levels. A number of falsification and placebo tests confirm our inferences about the effect of credit supply shocks on corporate policies. For example, in the absence of a credit shock ("normal times"), the maturity composition of long-term debt has no effect on investment outcomes. Likewise, that maturity composition has no impact on investment when long-term debt is not a major source of funding for the firm.
Article
We argue that a firm's aggregate risk is a key determinant of whether it manages its future liquidity needs through cash reserves or bank lines of credit. Banks create liquidity for firms by pooling their idiosyncratic risks. As a result, firms with high aggregate risk find it costly to get credit lines from banks and opt for cash reserves in spite of higher opportunity costs and liquidity premium. We verify our model's hypothesis empirically by showing that firms with high asset beta have a higher ratio of cash reserves to lines of credit, controlling for other determinants of liquidity policy. This effect of asset beta on liquidity management is economically significant, especially for financially constrained firms; is robust to variation in the proxies for firms' exposure to aggregate risk and availability of credit lines; works at the firm level as well as the industry level; and is significantly stronger in times when aggregate risk is high. Consistent with the channel that drives these effects in our model, we find that firms with high asset beta face higher spreads on bank credit lines.Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.
Article
This paper documents “runs” on asset-backed commercial paper (ABCP) programs using a novel dataset of all transactions in the U.S. market during its severe contraction in 2007. We find that one-third of programs were run within weeks of the onset of the ABCP crisis and that runs, as well as yields and maturities for new issues, were related to program-level and macro-financial risks. The findings are consistent with the asymmetric information framework used to explain banking panics, have implications for the degree of risk-intolerance of commercial paper investors, and inform upon empirical predictions of recent papers on dynamic coordination failures.
Article
We estimate the elasticity of exports to credit using matched customs and firm-level bank credit data from Peru. To account for non-credit determinants of exports, we compare changes in exports of the same product and to the same destination by firms borrowing from banks differentially affected by capital-flow reversals during the 2008 financial crisis. We find that credit shocks affect the intensive margin of exports, but have no significant impact on entry or exit of firms to new product and destination markets. Our results suggest that credit shortages reduce exports through raising the variable cost of production, rather than the cost of financing sunk entry investments.
Article
The massive losses that banks incurred with the meltdown of the subprime mortgage market have raised concerns about their ability to continue lending to corporations. We investigate these concerns. We find that firms paid higher loan spreads during the subprime crisis. Importantly, the increase in loan spreads was higher for firms that borrowed from banks that incurred larger losses. These results hold after we control for firm-, bank-, and loan-specific factors, and account for endogeneity of bank losses. These findings, together with our evidence that borrowers took out smaller loans during the crisis when they borrowed from banks that incurred larger losses, lend support to the concerns about bank lending following their subprime losses. The Author 2010. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please e-mail: journals.permissions@oup.com., Oxford University Press.
Article
Liquidity dried up during the financial crisis of 2007-2009. Banks that relied more heavily on core deposit and equity capital financing, which are stable sources of financing, continued to lend relative to other banks. Banks that held more illiquid assets on their balance sheets, in contrast, increased asset liquidity and reduced lending. Off-balance sheet liquidity risk materialized on the balance sheet and constrained new credit origination as increased takedown demand displaced lending capacity. We conclude that efforts to manage the liquidity crisis by banks led to a decline in credit supply.
Article
This paper reviews empirical evidence on the use of bank lines of credit as a source of corporate liquidity. Traditional explanation for lines of credit is that they provide insurance against liquidity shocks, in much the same as way hoarding cash does. However, recent empirical research suggests that access to lines of credit is contingent on the credit quality of the borrower as well as the financial condition of the lender. These findings suggest that lines of credit are an imperfect substitute for cash as a source of corporate liquidity.
Article
The behavior of a risk neutral corporation in selection of a line of credit is modeled in a new framework where demand for credit lines by a firm arises from the stochastic arrival in continuous time of short-lived opportunities to capture investment projects. The firm needs speed and secrecy to capture projects before competitors. The firm chooses a credit line that balances its up-front commitment cost against the expected extra cost of borrowing in the spot market upon exhaustion of its credit line. The firm's demanded credit line depends upon both relative pricing within the contract and the nature of the firm's growth opportunities. Interestingly, while credit line demand is positively related to business growth prospects, it is potentially negatively related to uncertainty in those prospects.