Bank Funding Risk, Reference Rates, and Credit Supply / Harry R. Cooperman, Darrell Duffie, Stephan Luck, Zachry Z. Wang, Yilin Yang.

Format:

Book

Author/Creator:

Cooperman, Harry R.

Contributor:

National Bureau of Economic Research.

Duffie, Darrell.

Luck, Stephan.

Wang, Zachry Z.

Yang, Yilin.

Series:

Working Paper Series (National Bureau of Economic Research) no. w30907.

NBER working paper series no. w30907

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2023.

Summary:

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.

Notes:

Print version record

February 2023.