Quantitative Easing, Banks’ Funding Costs and Credit Line Prices

Mario Cerrato and Shengfeng Mei

Working Papers from Business School - Economics, University of Glasgow

Abstract: Recently, Cooperman et al. (2023) show that the covariance of banks’ funding costs and credit lines draw-downs is debt overhang costs for the bank’s equity holders. In this paper, we empirically and theoretically study whether this cost can be mitigated by central banks’ quantitative easing. We focus on the COVID-19 shock. Based on Cooperman et al. (2023), we empirically f ind that funding costs generate frictions related to banks’ shareholders (debt overhang cost), and banks transfer that cost to the credit lines’ fees. However, our econometric analysis, event studies, and theory suggest and formalise why central banks’ quantitative easing (QE) can be crucial to mitigating that cost, thereby ensuring a cheaper supply of credit to the economy. Our f indings shed further light on the intricate relationship between banks’ funding costs and related debt overhang (Andersen et al. 2019), focusing on an important source of credit for firms: credit lines.

Keywords: Quantitative Easing; Central Bank; Debt Overhang; Credit Line (search for similar items in EconPapers)
JEL-codes: E44 E58 G01 G21 G28 G32 (search for similar items in EconPapers)
Date: 2024-05
New Economics Papers: this item is included in nep-cba, nep-cfn and nep-mon
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