@article{7bdaf6820495497787ce7f3aa0aa8161,
title = "Bank lines of credit as contingent liquidity: Covenant violations and their implications",
abstract = "We examine the relation between banks{\textquoteright} 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.",
keywords = "Bank liquidity, Covenant violations, Lines of credit",
author = "Viral Acharya and Heitor Almeida and Filippo Ippolito and Orive, {Ander Perez}",
note = "Funding Information: Firms employ credit lines as an instrument for liquidity management. Banks grant these credit lines and become exposed to the liquidity risk associated with drawdowns. This risk is particularly acute at times when banks find it hard to raise funding from the market, as happened during the last financial crisis. In this paper, we investigate whether banks that face greater liquidity risk reduce their supply of credit to borrowers upon the violation of a covenant on a credit line. Covenant violations offer banks an opportunity to renegotiate the terms of the credit line, and thus allow banks to toughen the conditions under which the borrower can draw down capital. For banks, drawdowns represent a “loss” in the sense that borrowers choose to draw on existing credit lines when the cost of raising funds on the spot market is higher than the spread agreed to in the credit line. Publisher Copyright: {\textcopyright} 2019 Elsevier Inc. Copyright: Copyright 2020 Elsevier B.V., All rights reserved.",
year = "2020",
month = oct,
doi = "10.1016/j.jfi.2019.03.004",
language = "English (US)",
volume = "44",
journal = "Journal of Financial Intermediation",
issn = "1042-9573",
publisher = "Academic Press Inc.",
}