Quantitative Easing, Banks’ Funding Costs, and Credit Line Prices

Cooperman et al. (2025) show that the covariance of banks’ funding costs and credit line drawdowns is debt overhang cost to the bank’s equity holders (Myres, 1974). In this paper, we start from this important result and extend it by showing that central banks’ quantitative easing (QE) can mitigate this cost. We focus on the COVID-19 shock. We show empirically that funding costs generate frictions related to banks’ shareholders (debt overhang cost), and banks transfer the cost to the credit lines’ prices. Our novel econometric analysis, event studies, and theory suggest and formalise its mechanism. Our findings shed further light on the intricate relationship between banks’ funding costs and related debt overhang (Andersen et al. 2019), but, crucially, focusing on an important source of credit for firms: credit lines.