Bank Runs and Interest Rates: A Revolving Lines Perspective

Revolving credit is at the core of the banking business. Corporate revolving lines are demandable claims; thus, similar to a traditional run on deposits, sudden and widespread drawdowns can destabilize banks. However, unlike deposits, credit line utilization exhibits substantial interest rate sensitivity. As a result, a run on revolving credit lines is less likely in a high-interest-rate environment but can introduce vulnerabilities when policy rates are lowered. Using an interest rate discontinuity commonly embedded in commercial credit contracts, we propose a methodology to estimate the elasticity of credit demand and apply it to measure the sensitivity of precautionary drawdowns.