The Loan Covenant Channel: How Bank Health Transmits to the Real Economy

Gabriel Chodorow‐reich and Antonio Falato
Authors registered in the RePEc Author Service: Gabriel Isaac Chodorow-Reich

Journal of Finance, 2022, vol. 77, issue 1, 85-128

Abstract: 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.

Date: 2022
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Citations: View citations in EconPapers (32)

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https://doi.org/10.1111/jofi.13074

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Working Paper: The Loan Covenant Channel: How Bank Health Transmits to the Real Economy (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:bla:jfinan:v:77:y:2022:i:1:p:85-128

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