Working Paper: NBER ID: w27256
Authors: Lei Li; Philip E. Strahan; Song Zhang
Abstract: In March of 2020, banks faced the largest increase in liquidity demands ever observed. Firms drew funds on a massive scale from pre-existing credit lines and loan commitments in anticipation of cash flow disruptions from the economic shutdown designed to contain the COVID-19 crisis. The increase in liquidity demands was concentrated at the largest banks, who serve the largest firms. Pre-crisis financial condition did not limit banks’ liquidity supply. Coincident inflows of funds to banks from both the Federal Reserve’s liquidity injection programs and from depositors, along with strong pre-shock bank capital, explain why banks were able to accommodate these liquidity demands.
Keywords: No keywords provided
JEL Codes: G2
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| COVID-19 crisis (H12) | firm demand for liquidity (E41) |
| firm demand for liquidity (E41) | drawdowns on existing credit lines (G21) |
| bank size (G21) | ability to meet liquidity demands (E41) |
| liquidity demands (E41) | increases in lending (G21) |
| pre-crisis bank liquidity and capital (F65) | increases in lending during the crisis (F65) |
| regulatory changes post-2008 (G28) | banks' ability to accommodate liquidity shock (G21) |
| aggregate increase in deposits (G21) | drawn funds from credit lines (G21) |