The Loan Covenant Channel: How Bank Health Transmits to the Real Economy

Chodorow-Reich, Gabriel; Falato, Antonio

doi:10.3386/w23879

Cited by 52 publications

(44 citation statements)

References 67 publications

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“…show that smaller borrowers were especially vulnerable to being unable to tap their credit commitments following the breakout of COVID-19, in contrast to their use of credit lines in "normal times" (Brown et al, 2020). Due to data limitations, much of this debate has concerned large firms and the role of loan covenants (Roberts and Sufi, 2009;Chodorow-Reich and Falato, 2020;Ippolito et al, 2019;Murfin, 2012). We broaden this focus to include a more general trade-off between commitment and discretion that extends to other loan terms, including maturity and collateral.…”

Section: Introductionmentioning

confidence: 99%

Bank Liquidity Provision Across the Firm Size Distribution

Chodorow-Reich¹,

Darmouni²,

Luck³

et al. 2020

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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.

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Section: Introductionmentioning

confidence: 99%

Bank Liquidity Provision Across the Firm Size Distribution

Chodorow-Reich¹,

Darmouni²,

Luck³

et al. 2020

Self Cite

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“…Another important strand of research has looked at debt covenants and reports pervasive heterogeneity in asset-based versus earning-based lending (Chodorow-Reich and Falato (2017), Lian and Ma (2018), Drechsel (2018)). Covas and Den Haan (2011) and Begenau and Salomao (2018) study debt versus equity issuance by firm size over the business cycle.…”

Section: Introductionmentioning

confidence: 99%

Monetary Policy, Corporate Finance and Investment

et al. 2019

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We provide new evidence on how monetary policy affects investment and fi rm fi nance in the United States and the United Kingdom. Younger fi rms paying no dividends exhibit the largest and most signifcant change in capital expenditure -even after conditioning on size, asset growth, Tobin's Q, leverage or liquidity -and drive the response of aggregate investment.Older companies, in contrast, hardly react at all. After a monetary policy tightening, net worth falls considerably for all fi rms but borrowing declines only for younger non-dividend payers, as their external fi nance is mostly exposed to asset value fl uctuations. Conversely, cash-fl ows change less markedly and more homogeneously across groups. Our fi ndings highlight the role of fi rm fi nance and fi nancial frictions in amplifying the effects of monetary policy on investment.Keywords: monetary policy, fi nancial frictions, fi rm fi nance, investment.JEL classifi cation: E22, E32, E52. ResumenEn este trabajo se presenta nueva evidencia acerca del efecto que la política monetaria tiene sobre la inversión y la fi nanciación de las empresas en Estados Unidos y en el Reino Unido.Las empresas más jóvenes y que no pagan dividendos son las que muestran la mayor, -y estadísticamente signifi cativa-, reacción en términos de inversión en capital fi jo, mientras que las empresas relativamente antiguas casi no presentan reacción alguna. Esto es así aun controlando por características tradicionales en esta literatura, como son el tamaño, el crecimiento en activos, la valuación, el apalancamiento y liquidez. La reacción de empresas jóvenes que no pagan dividendos explica el movimiento de la inversión agregada. Después de una contracción en la política monetaria, se observa una reacción de la valuación de todas las empresas, mientras que la deuda responde solo para aquellas empresas jóvenes que no pagan dividendos. Esto se debe a que estas últimas son las más expuestas a cambios en el valor del colateral a la hora de endeudarse. Por otro lado, se observa también una reacción en los fl ujos de caja, aunque dicha reacción es relativamente pequeña y homogénea entre empresas. Estos resultados resaltan la importancia de la estructura fi nanciera, así como de las fricciones en la fi nanciación externa de las empresas, en la amplifi cación de los efectos de la política monetaria sobre la inversión empresarial.Palabras clave: política monetaria, fricciones fi nancieras, fi nanciación empresarial, inversión.

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“…Finally, our paper fits in the literature that links observable financial health indicators of lenders to borrower actions. The studies most closely related to ours are Chodorow-Reich and Falato (2018) and Acharya, Almeida, Ippolito, and Perez-Orive (2016a). Both use changes in bank balance sheet characteristics during the financial crisis to explain heterogeneity in bank responses to covenant violations.…”

Section: Introductionmentioning

confidence: 97%

“…Both use changes in bank balance sheet characteristics during the financial crisis to explain heterogeneity in bank responses to covenant violations. Using SNC data, Chodorow-Reich and Falato (2018) show that during the financial crisis lenders used covenant violations as an opportunity to cut credit exposure that otherwise would have been hard to reduce given loans' high average maturity. Acharya et al (2016a) corroborate the findings of Chodorow-Reich and Falato (2018) using publicly available data on credit lines.…”

Section: Introductionmentioning

confidence: 99%

Benign Neglect of Covenant Violations: Blissful Banking or Ignorant Monitoring?

2019

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The responsibility for discussion papers lies solely with the individual authors. The views expressed herein do not necessarily represent those of IWH. The papers represent preliminary work and are circulated to encourage discussion with the authors. Citation of the discussion papers should account for their provisional character; a revised version may be available directly from the authors. Comments and suggestions on the methods and results presented are welcome.

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The Loan Covenant Channel: How Bank Health Transmits to the Real Economy

Cited by 52 publications

References 67 publications

Bank Liquidity Provision Across the Firm Size Distribution

Bank Liquidity Provision Across the Firm Size Distribution

Monetary Policy, Corporate Finance and Investment

Benign Neglect of Covenant Violations: Blissful Banking or Ignorant Monitoring?

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