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Bank Funding Risk, Reference Rates, and Credit Supply

Author

Listed:
  • Cooperman, Harry

    (Stanford U)

  • Duffie, Darrell

    (Stanford U)

  • Luck, Stephan

    (Federal Reserve Bank of New York)

  • Wang, Zachry

    (Stanford U)

  • Yang, Yilin (David)

    (City U of Hong Kong)

Abstract

Corporate credit lines are drawn more heavily when funding markets are more stressed. This covariance elevates expected bank funding costs. We show that credit supply is inefficiently dampened by the associated debt-overhang cost to bank shareholders. Until 2022, this impact was reduced by linking the interest paid on lines to credit-sensitive reference rates such as LIBOR. We show that transition to risk-free reference rates may exacerbate this friction. The adverse impact on credit supply is offset to the extent that drawdowns are expected to be left on deposit at the same bank, which happened at the largest banks during the COVID shock.

Suggested Citation

  • Cooperman, Harry & Duffie, Darrell & Luck, Stephan & Wang, Zachry & Yang, Yilin (David), 2022. "Bank Funding Risk, Reference Rates, and Credit Supply," Research Papers 4066, Stanford University, Graduate School of Business.
    • Handle: RePEc:ecl:stabus:4066
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    File URL: https://www.gsb.stanford.edu/faculty-research/working-papers/bank-funding-risk-reference-rates-credit-supply
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    Citations

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    Cited by:

    1. Sven Klingler & Olav Syrstad, 2023. "Does SOFR-linked debt cost borrowers more than LIBOR-linked debt?," Working Paper 2023/7, Norges Bank.
    2. Joseph G. Haubrich, 2023. "Financial Stability: Frontier Risks, a New Normal, and Policy Challenges," Economic Commentary, Federal Reserve Bank of Cleveland, vol. 2023(14), pages 1-5, August.

    More about this item

    JEL classification:

    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • G00 - Financial Economics - - General - - - General
    • G01 - Financial Economics - - General - - - Financial Crises
    • G02 - Financial Economics - - General - - - Behavioral Finance: Underlying Principles
    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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