Bank lines of credit as contingent liquidity: Covenant violations and their implications

Viral Acharya, Heitor Almeida, Filippo Ippolito and Ander Perez Orive

Journal of Financial Intermediation, 2020, vol. 44, issue C

Abstract: 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.

Keywords: Lines of credit; Bank liquidity; Covenant violations (search for similar items in EconPapers)
JEL-codes: E22 E5 G21 G31 G32 (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (18)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinin:v:44:y:2020:i:c:s1042957319300191

DOI: 10.1016/j.jfi.2019.03.004

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