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SUMMARY:A New Perspective on Bank-Dependency: The Bank Liquidity Channel 
DTSTART;VALUE=DATE:20151211
DTSTAMP:20260427T224106Z
UID:d17f74ab18d3e8a0b68a308bf827f0421dab8a4c71d927888ac0e162
CATEGORIES:Conferences - Seminars
DESCRIPTION:Filippo IPPOLITO (Universitat Pompeu Fabra)\nWe propose a nove
 l channel through which shocks to bank health affect real economic activit
 y. This channel arises from the provision of liquidity insurance from bank
 s to firms\, through pre-committed credit lines. While bank-dependency is 
 usually associated with low credit quality\, liquidity insurance through c
 redit lines is most common for large\, high credit quality firms. We propo
 se a model that matches this cross-section of bank dependency and liquidit
 y insurance\, and test its empirical implications. Shocks to bank health a
 ffect firms that rely on credit lines in two different ways. First\, weak 
 banks are less likely to waive covenant violations\, and more likely to wi
 thhold funds under pre-committed lines of credit. Second\, firms that rely
  on credit lines\, but which have not violated covenants\, tend to switch 
 from credit lines to cash. This substitution from credit lines into cash b
 y high quality firms can amplify the negative shock to bank health\, by dr
 aining bank liquidity. This amplification effect can contaminate the provi
 sion of regular loans to bank-dependent firms\, and thereby cause large ne
 gative effects on real activity. We test the main implications of the mode
 l by examining the freeze-out of the Asset-Backed Commercial Paper (ABCP) 
 market in late 2007. We find that banks with larger exposure to the ABCP m
 arket offer tighter conditions on credit lines for borrowers that are in b
 reach of a covenant\, when compared with banks with a lower exposure to AB
 CP. At the same time\, banks with large ABCP exposure offer easier conditi
 ons on terms loans. These effects are not driven by selection of borrowers
 \, nor by different contract conditions. Our findings suggest that tighter
  conditions on credit lines are motivated by liquidity management at banks
 \, and that banks allocate scarce liquidity to loans rather than credit li
 nes\, in times of financial market stress. Banks' optimal allocation of li
 quidity also appear to affect firms' responses to covenant violations: gre
 ater leniency from banks is associated with higher borrowing\, employment\
 , and sales growth.
LOCATION:UNIL\, Extranef\, room 126 https://planete.unil.ch/plan/?local=EX
 T-126
STATUS:CONFIRMED
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