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Domestic Lending and the Pandemic: How Does Banks' Exposure to Covid-19 Abroad Affect Their Lending in the United States?

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Abstract

Shortly after the onset of the pandemic, U.S. banks cut their term lending to businesses–but little is known about how much, and why, banks' choice to ration credit contributed to this contraction. Afforded by a unique combination of several highly granular bank regulatory datasets, we identify the role of banks' exposure to Covid-related restrictions abroad – a balance sheet "shock" that affects only banks' credit supply, but not their US borrowers' demand for loans. We find that US banks with higher foreign Covid exposure cut their lending to US firms, and tightened terms on such loans, significantly more. Banks having become less risk tolerant, as well as foreign borrowers defaulting and drawing down on their cross-border credit lines, were potent mechanisms through which foreign Covid exposure reduced banks' domestic lending.

Suggested Citation

  • Judit Temesvary & Andrew Wei, 2021. "Domestic Lending and the Pandemic: How Does Banks' Exposure to Covid-19 Abroad Affect Their Lending in the United States?," Finance and Economics Discussion Series 2021-056r1, Board of Governors of the Federal Reserve System (U.S.), revised 17 Nov 2021.
    • Handle: RePEc:fip:fedgfe:2021-56
    DOI: 10.17016/FEDS.2021.056r1
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    More about this item

    Keywords

    Cross-border exposure; Bank lending; Bank capital; Bank balance sheet liquidity;
    All these keywords.

    JEL classification:

    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • F65 - International Economics - - Economic Impacts of Globalization - - - Finance
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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