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Bank stability and the price of loan commitments

Asad Rauf

Journal of Financial Intermediation, 2023, vol. 54, issue C

Abstract: Firms insure themselves from liquidity shocks by contracting on credit lines from banks. I document novel empirical evidence on how the risk of contract nonperformance by banks is priced. Firms pay a higher price for loan commitments from safer banks. A one standard deviation increase in the cross-sectional mean of bank capital increases the commitment fees by 5%. To investigate a potential causal effect of lender stability on commitment fees, I exploit exogenous variation in the market value of banks’ assets from natural disasters. The sensitivity of the fees is higher for firms with higher short-term liabilities and higher income uncertainty.

Keywords: Loan commitments; Credit lines; Liquidity insurance; Contract nonperformance; Loan pricing (search for similar items in EconPapers)
JEL-codes: D25 G01 G12 G21 G22 (search for similar items in EconPapers)
Date: 2023
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Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinin:v:54:y:2023:i:c:s1042957323000104

DOI: 10.1016/j.jfi.2023.101027

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