Credit Crunches from Occasionally Binding Bank Borrowing Constraints

Tom Holden, Paul Levine () and Jonathan Swarbrick

Journal of Money, Credit and Banking, 2020, vol. 52, issue 2-3, 549-582

Abstract: We present a model in which banks and other financial intermediaries face both occasionally binding borrowing constraints, and costs of equity issuance. Near the steady state, these intermediaries can raise equity finance at no cost through retained earnings. However, even moderately large shocks cause their borrowing constraints to bind, leading to contractions in credit offered to firms, and requiring the intermediaries to raise further funds by paying the cost to issue equity. This leads to the occasional sharp increases in interest spreads and the countercyclical, positively skewed equity issuance that are characteristics of the credit crunches observed in the data.

Date: 2020
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Citations: View citations in EconPapers (7)

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https://doi.org/10.1111/jmcb.12601

Related works:
Working Paper: Credit crunches from occasionally binding bank borrowing constraints (2018)
Working Paper: Credit Crunches from Occasionally Binding Bank Borrowing Constraints (2017)
Working Paper: Credit crunches from occasionally binding bank borrowing constraints (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:wly:jmoncb:v:52:y:2020:i:2-3:p:549-582

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