Quantitative Easing, Banks’ Funding Costs, and Credit Line Prices

Mario Cerrato and Shengfeng Mei

Working Papers from Business School - Economics, University of Glasgow

Abstract: Cooperman et al. (2025) show that the covariance of banks’ funding costs and credit line drawdowns is debt overhang cost to the bank’s equity holders (Myres, 1974). In this paper, we start from this important result and extend it by showing that central banks’ quantitative easing (QE) can mitigate this cost. We focus on the COVID-19 shock. We show empirically that funding costs generate frictions related to banks’ shareholders (debt overhang cost), and banks transfer the cost to the credit lines’ prices. Our novel econometric analysis, event studies, and theory suggest and formalise its mechanism. Our findings shed further light on the intricate relationship between banks’ funding costs and related debt overhang (Andersen et al. 2019), but, crucially, 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: 2025-03
References: Add references at CitEc
Citations:

Downloads: (external link)
https://www.gla.ac.uk/media/Media_1164161_smxx.pdf (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:gla:glaewp:2025_03

Access Statistics for this paper

More papers in Working Papers from Business School - Economics, University of Glasgow Contact information at EDIRC.
Bibliographic data for series maintained by Business School Research Team ().