The Loan Covenant Channel: How Bank Health Transmits to the Real Economy

Gabriel Chodorow-Reich and Antonio Falato ()

No 23879, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We document the importance of covenant violations in transmitting bank health to non-financial firms using a new supervisory data set of bank loans. Roughly one-third of loans in our data breach a covenant during the 2008-09 period, providing lenders the opportunity to force a renegotiation of loan terms or to accelerate repayment of otherwise long-term credit. Lenders in worse health are more likely to force a reduction in the loan commitment following a violation. The reduction in credit to borrowers who violate a covenant accounts for the majority of the cross-sectional variation in credit supply during the 2008-09 crisis.

JEL-codes: E44 G21 G32 (search for similar items in EconPapers)
Date: 2017-09
New Economics Papers: this item is included in nep-ban and nep-mac
Note: EFG ME
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Citations: View citations in EconPapers (24)

Published as Gabriel Chodorow‐Reich & Antonio Falato, 2022. "The Loan Covenant Channel: How Bank Health Transmits to the Real Economy," Journal of Finance, American Finance Association, vol. 77(1), pages 85-128, February.
Published as GABRIEL CHODOROW‐REICH & ANTONIO FALATO, 2022. "The Loan Covenant Channel: How Bank Health Transmits to the Real Economy," The Journal of Finance, vol 77(1), pages 85-128.

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