Bank Liquidity Provision Across the Firm Size Distribution

Abstract

Using loan-level data covering two-thirds of all corporate loans from U.S. banks, we document that SMEs (i) obtain much shorter maturity credit lines than large firms; (ii) have less active maturity management and therefore frequently have expiring credit; (iii) post more collateral on both credit lines and term loans; (iv) have higher utilization rates in normal times; and (v) pay higher spreads, even conditional on other firm characteristics. We present a theory of loan terms that rationalizes these facts as the equilibrium outcome of a trade-off between commitment and discretion. We test the model's prediction that small firms may be unable to access liquidity when large shocks arrive using data on drawdowns in the COVID recession. Consistent with the theory, the increase in bank credit in 2020Q1 and 2020Q2 came almost entirely from drawdowns by large firms on pre-committed lines of credit. Differences in demand for liquidity cannot fully explain the differences in drawdown rates by firm size, as we show that large firms also exhibited much higher sensitivity of drawdowns to industry-level measures of exposure to the COVID recession. Finally, we match the bank data to a list of participants in the Paycheck Protection Program (PPP) and show that SME recipients of PPP loans reduced their non-PPP bank borrowing in 2020Q2 by between 53 and 125 percent of the amount of their PPP funds, suggesting that government-sponsored liquidity can overcome private credit constraints.

Has the Crisis Introduced a New Paradigm in Banks' Credit Allocation? The Non‐financial Corporations' Perspective

“…These results are in line with a recent paper from Chodorow‐Reich et al. (2020) who find that, during Covid‐19, US small firms obtain shorter maturity credit lines than large firms, have less active maturity management, post more collateral, have higher utilization rates and pay higher spreads.…”

Why Did Bank Stocks Crash during COVID-19?

“…There is a growing literature on the implications of COVID-19 for corporate finance, and the use of credit lines in particular. Chodorow-Reich et al (2020) show that drawdowns of credit lines came exclusively from large firms during the first phase of the pandemic and document that banks did not honor commitments to smaller firms. Greenwald et al (2020) also show that particularly large firms used their credit lines and banks with larger drawdowns reduced term lending to small firms more relative to other banks.…”

“…1 Within three weeks, public firms drew down more than USD 300bn, with drawdowns particularly concentrated among riskier BBB-rated and non-investment-grade firms. 2 Recent data shows that firms benefited from having access to credit lines during the pandemic when capital market funding froze (e.g., Acharya and Steffen, 2020a;Chodorow-Reich et al, 2020;Greenwald et al, 2020). Banks, however, faced unprecedented aggregate demand for credit-line drawdowns when the pandemic broke out at the beginning of March 2020.…”

When Selling Becomes Viral: Disruptions in Debt Markets in the COVID-19 Crisis and the Fed’s Response

“…While this demand for debt might not be realized immediately, the expectation of future issuance can depress prices immediately—in the same way that the expectation of future purchases by the Fed can increase prices immediately. Chodorow-Reich et al (2020) , Fahlenbrach, Rageth, and Stulz (2020) , and Greenwald, Krainer, and Paul (2020) analyze the expansion of corporate borrowing because of firms’ demand for liquidity during the COVID-19 crisis. Consistent with the role of corporate demand, we show that the firms that subsequently issued more debt experienced the larger increase in bond spreads in March.…”