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The Credit Line Channel

Author

Listed:
  • Daniel L. Greenwald
  • John Krainer
  • Pascal Paul

Abstract

Aggregate bank lending to firms expands following adverse macroeconomic shocks, such as the outbreak of COVID-19 or a monetary policy tightening, at odds with canonical models. Using loan-level supervisory data, we show that these dynamics are driven by draws on credit lines by large firms. Banks that experience larger drawdowns restrict term lending more — an externality onto smaller firms. Using a structural model, we show that credit lines are necessary to reproduce the flow of credit toward less constrained firms after adverse shocks. While credit lines increase total credit growth, their redistributive effects exacerbate the fall in investment.

Suggested Citation

  • Daniel L. Greenwald & John Krainer & Pascal Paul, 2020. "The Credit Line Channel," Working Paper Series 2020-26, Federal Reserve Bank of San Francisco.
  • Handle: RePEc:fip:fedfwp:88497
    DOI: 10.24148/wp2020-26
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    Citations

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    Cited by:

    1. Andrea Bellucci & Alexander Borisov & Gianluca Gucciardi & Alberto Zazzaro, 2020. "The Reallocation Effects of COVID-19: Evidence from Venture Capital Investments around the World," Mo.Fi.R. Working Papers 167, Money and Finance Research group (Mo.Fi.R.) - Univ. Politecnica Marche - Dept. Economic and Social Sciences.
    2. Viral V. Acharya & Robert F. Engle III & Sascha Steffen, 2021. "Why Did Bank Stocks Crash During COVID-19?," NBER Working Papers 28559, National Bureau of Economic Research, Inc.
    3. Galaasen, Sigurd & Jamilov, Rustam & Juelsrud, Ragnar Enger & Rey, Hélène, 2020. "Granular Credit Risk," CEPR Discussion Papers 15385, C.E.P.R. Discussion Papers.
    4. Altavilla, Carlo & Barbiero, Francesca & Boucinha, Miguel & Burlon, Lorenzo, 2020. "The Great Lockdown: pandemic response policies and bank lending conditions," CEPR Discussion Papers 15298, C.E.P.R. Discussion Papers.
    5. Sebnem Kalemli-Ozcan & Pierre-Olivier Gourinchas & Veronika Penciakova & Nick Sander, 2020. "COVID-19 and SME Failures," IMF Working Papers 2020/207, International Monetary Fund.
    6. Deimantė Teresienė & Greta Keliuotytė-Staniulėnienė & Rasa Kanapickienė, 2021. "Sustainable Economic Growth Support through Credit Transmission Channel and Financial Stability: In the Context of the COVID-19 Pandemic," Sustainability, MDPI, Open Access Journal, vol. 13(5), pages 1-34, March.
    7. Lei Li & Philip Strahan, 2020. "Who Supplies PPP Loans (And Does it Matter)? Banks, Relationships and the COVID Crisis," NBER Working Papers 28286, National Bureau of Economic Research, Inc.
    8. Larry D. Wall, 2020. "Financial Stability and the Coronavirus Pandemic," Policy Hub 2020-13, Federal Reserve Bank of Atlanta.

    More about this item

    Keywords

    Credit Lines; Monetary Policy; covid-19; Banks; Firms;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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