Bank Funding Risk, Reference Rates, and Credit Supply

Darrell Duffie, Cooperman Harry, Stephan Luck, Zachry Wang () and Yilin Yang ()
Additional contact information
Zachry Wang: https://profiles.stanford.edu/zachry-wang
Yilin Yang: https://www.gsb.stanford.edu/programs/phd/academic-experience/students/david-yilin-yang

No 1042, Staff Reports from Federal Reserve Bank of New York

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 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 if drawdowns are expected to be left on deposit at the same bank, which happened at some of the largest banks during the COVID recession.

Keywords: credit supply; reference rates; credit lines; London Interbank Offered Rate (LIBOR); Secured Overnight Financing Rate (SOFR); bank funding risk (search for similar items in EconPapers)
JEL-codes: E4 E43 G01 G2 G20 G21 (search for similar items in EconPapers)
Pages: 64
Date: 2022-12-01
New Economics Papers: this item is included in nep-ban
Note: Revised February 2023.
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
https://www.newyorkfed.org/medialibrary/media/research/staff_reports/sr1042.pdf Full text (application/pdf)
https://www.newyorkfed.org/research/staff_reports/sr1042.html Summary (text/html)

Related works:
Working Paper: Bank Funding Risk, Reference Rates, and Credit Supply (2023)
Working Paper: Bank Funding Risk, Reference Rates, and Credit Supply (2022)
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:fip:fednsr:95388

Ordering information: This working paper can be ordered from

Access Statistics for this paper

More papers in Staff Reports from Federal Reserve Bank of New York Contact information at EDIRC.
Bibliographic data for series maintained by Gabriella Bucciarelli ().