Bank Funding Risk, Reference Rates, and Credit Supply

Harry Cooperman, Darrell Duffie, Stephan Luck, Zachry Wang and Yilin (David) Yang
Additional contact information
Harry Cooperman: Stanford U
Zachry Wang: Stanford U
Yilin (David) Yang: City U of Hong Kong

Research Papers from Stanford University, Graduate School of Business

Abstract: Corporate credit lines are drawn more heavily when funding markets are more stressed. This covariance elevates expected bank funding costs. We show that credit supply is inefficiently dampened by the associated debt-overhang cost to bank shareholders. Until 2022, this impact was reduced by linking the interest paid on lines to credit-sensitive reference rates such as LIBOR. We show that transition to risk-free reference rates may exacerbate this friction. The adverse impact on credit supply is offset to the extent that drawdowns are expected to be left on deposit at the same bank, which happened at the largest banks during the COVID shock.

JEL-codes: E4 E43 G00 G01 G02 G20 G21 (search for similar items in EconPapers)
Date: 2022-12
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Citations: View citations in EconPapers (2)

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Related works:
Working Paper: Bank Funding Risk, Reference Rates, and Credit Supply (2023)
Working Paper: Bank Funding Risk, Reference Rates, and Credit Supply (2022)
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Persistent link: https://EconPapers.repec.org/RePEc:ecl:stabus:4066

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