Bank Funding Risk, Reference Rates, and Credit Supply

Harry R. Cooperman, Darrell Duffie, Stephan Luck, Zachry Z. Wang and Yilin Yang

No 30907, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Corporate credit lines are drawn more heavily when funding markets are more stressed. This covariance elevates expected bank funding costs. We show that credit supply is dampened by the associated debt-overhang cost to bank shareholders. Until 2022, this impact was reduced by linking the interest paid on lines to credit-sensitive reference rates such as LIBOR. We show that transition to risk-free reference rates may exacerbate this friction. The adverse impact on credit supply is offset if drawdowns are expected to be left on deposit at the same bank, which happened at some of the largest banks during the COVID recession.

JEL-codes: E4 E43 G00 G01 G02 G20 G21 (search for similar items in EconPapers)
Date: 2023-02
New Economics Papers: this item is included in nep-ban
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Citations: View citations in EconPapers (5)

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Working Paper: Bank Funding Risk, Reference Rates, and Credit Supply (2022)
Working Paper: Bank Funding Risk, Reference Rates, and Credit Supply (2022)
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