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Do banks propagate debt market shocks?

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Author Info

  • Galina Hale
  • João A. C. Santos

Abstract

Over the years, U.S. banks have increasingly relied on the bond market to finance their business. This created the potential for a link between the bond market and the corporate sector whereby borrowers, including those that do not rely on bond funding, became exposed to the conditions in the bond market. We investigate the importance of this link. Our results show that when the cost to access the bond market goes up, banks that rely on bond financing charge higher interest rates on their loans. Banks that rely exclusively on deposit funding follow bond financing banks and increase the interest rates on their loans, though by smaller amounts. Further, banks pass the bond market shocks predominantly to their risky borrowers that have access to the bond market and to their borrowers that do not have access to the bond market. These results show that banks propagate shocks to the bond market by passing them through their loan policies to their borrowers, including those that do not use bond financing.

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Bibliographic Info

Paper provided by Federal Reserve Bank of San Francisco in its series Working Paper Series with number 2010-08.

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Date of creation: 2010
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Handle: RePEc:fip:fedfwp:2010-08

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Keywords: Banks and banking ; Banks and banking - Costs ; Bond market;

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Cited by:
  1. Marlène Isoré, 2011. "International Propagation of Financial Shocks in a Search and Matching Environment," FIW Working Paper series 068, FIW.
  2. Jason Allen & Teodora Paligorova, 2011. "Bank Loans for Private and Public Firms in a Credit Crunch," Working Papers 11-13, Bank of Canada.

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