Working Paper: NBER ID: w30907
Authors: Harry R. Cooperman; Darrell Duffie; Stephan Luck; Zachry Z. Wang; Yilin Yang
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: bank funding; credit supply; reference rates; Libor; SOFR
JEL Codes: E4; E43; G00; G01; G02; G20; G21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| market stress (G10) | corporate credit lines drawn more heavily (G32) |
| bank funding costs (G21) | credit supply (E51) |
| debt overhang (H63) | dampened credit supply (E51) |
| credit-sensitive reference rates (E43) | mitigated adverse effects on credit supply (E51) |
| transition to risk-free reference rates (E43) | exacerbated issue of credit supply (E51) |
| increased costs for shareholders (G34) | heavier drawdowns on credit lines (G21) |
| reference rate choice (E43) | credit supply (E51) |
| expected cost increase of drawn credit (E51) | 15 basis points (E43) |
| welfare loss associated with dynamics (D69) | estimated at about 26 (C13) |