Bank lines of credit as contingent liquidity: Covenant violations and their implications

Viral Acharya, Heitor Almeida, Filippo Ippolito, Ander Perez Orive

Research output: Contribution to journalArticlepeer-review

Abstract

We examine the relation between banks’ liquidity risk and their willingness to supply capital to borrowers under previously committed credit lines. We show that during the collapse of the asset-backed commercial paper (ABCP) market in the last quarter of 2007 and the first half of 2008, banks with higher exposure to ABCP conduits renegotiated significantly tougher conditions on the outstanding credit lines offered to borrowers in violation of a covenant. Specifically, we find that borrowers faced higher spreads over the prime rate and LIBOR as well as higher commitment fees on undrawn amounts. Our paper suggests that an increase in lender liquidity risk can bear financial implications for firms that use credit lines as an instrument of liquidity management.

Original languageEnglish (US)
Article number100817
JournalJournal of Financial Intermediation
Volume44
DOIs
StatePublished - Oct 2020

Keywords

  • Bank liquidity
  • Covenant violations
  • Lines of credit

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics

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