Contingent Credit Under Stress

Viral Acharya, Maximilian Jager and Sascha Steffen

No 18583, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: Over the past two decades, banks have increasingly focused on offering contingent credit in the form of credit lines as a primary means of corporate borrowing. We review the existing body of research regarding the rationales for banks’ provision of liquidity insurance in the form of credit lines, their significance in managing corporate liquidity, and the reasons and circumstances under which firms opt to utilize them. We emphasize that the options for firms to both draw down and repay credit lines are put options issued by banks, which are exercised by firms in a correlated manner during periods of widespread stress, with adverse affects on bank intermediation thereafter. We discuss the bank capital and the bank funding channels that can drive these effects, contrasting their roles during the Global Financial Crisis and the Covid-19 outbreak. We conclude by discussing the increasing extension of bank credit lines to non-bank financial intermediaries, as well as the role of stress tests and monetary policy in managing the risks of contingent credit under stress.

JEL-codes: G01 G21 (search for similar items in EconPapers)
Date: 2023-11
References: Add references at CitEc
Citations:

Downloads: (external link)
https://cepr.org/publications/DP18583 (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cpr:ceprdp:18583

Ordering information: This working paper can be ordered from
https://cepr.org/publications/DP18583

Access Statistics for this paper

More papers in CEPR Discussion Papers from Centre for Economic Policy Research 33 Great Sutton Street, London EC1V 0DX, UK.
Bibliographic data for series maintained by CEPR ().