How Committed are Bank Lines of Credit? Experiences in the Subprime Mortgage Crisis (Huang R.)

Bank Lending Bank-Borrower Relationships Financial Crises Mortgage

Abstract Using the subprime mortgage crisis as a shock to the banking sector, this paper shows that commercial and industrial (C&I) borrowers served by more distressed banks took out fewer loans under their precommitted lines of credit. Bank distress is measured by a bank’s nonperforming loan ratio or its recent stock market performance. The credit constraints affected mainly smaller, riskier (by internal loan ratings), and shorter-relationship borrowers, and depended also on the lenders’ size, liquidity condition, capitalization position, and core deposit funding. The evidence suggests that credit lines provided only contingent and partial insurance during the crisis since bank conditions appeared to influence credit line utilization in the short term. The results provide a new explanation as to why credit lines are not perfect substitutes for cash holdings for some (e.g. small) firms. Finally, loan level analyses show that more distressed banks charged higher credit spreads on newly negotiated loans but not on funds disbursed from precommitted lines of credit. Our analyses are based on the loan flow data from the confidential Survey of Terms of Business Lending (STBL).
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Libref/ Huang R. (2010) "How Committed are Bank Lines of Credit? Experiences in the Subprime Mortgage Crisis", FRB of Philadelphia Working Paper No. 10-25, pp. 1 - 40
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