Working Paper: CEPR ID: DP15901
Authors: Viral Acharya; Robert Engle; Maximilian Jager; Sascha Steffen
Abstract: A two-sided "credit-line channel" – relating to drawdowns and repayments – explains the severedrop and partial subsequent recovery in bank stock prices during the COVID-19 pandemic.Banks with greater exposure to undrawn credit lines saw larger stock price declines butperformed better before the pandemic and after the policy interventions. Despite depositinflows, high drawdowns led to reduced bank lending, suggestive of capital encumbrance upondrawdowns. Repayments of credit lines unencumbered capital which explains the stock pricerecovery starting Q2 2020. Bank provision of credit lines resembles writing deep out-of-themoneyput options on aggregate risk, and we propose how to incorporate this feature into bankcapital stress tests.
Keywords: credit lines; liquidity risk; bank capital; loan supply; stress tests; pandemic; COVID-19
JEL Codes: G01; G21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| liquidity risk (G33) | bank stock returns (G17) |
| credit line drawdowns (G21) | bank stock returns (G17) |
| banks with greater exposure to undrawn credit lines (F65) | larger stock price declines (G19) |
| credit line repayments (G51) | stock price recovery (G17) |
| higher gross drawdowns (G19) | reduced lending (G21) |
| capital channel (F21) | dual impact of credit lines on stock returns (G12) |