The Effect of State Solvency on Bank Values and Credit Supply: Evidence from State Pension Cut Legislation
Lee J. Cohen
University of Georgia - Department of Finance
Marcia Millon Cornett
Bentley University - Department of Finance
Federal Reserve Bank of New York
Boston College - Department of Finance
April 14, 2015
We find the financial condition of states impacts bank credit supply through their municipal bond holdings. In particular, we treat sudden political and statutory actions during the 2011 union bargaining rights debates in Wisconsin and Ohio as exogenous shocks to state solvency. We show bank valuations and municipal bond spreads adjust to the announcements, and, over longer horizons, a new lending channel linked to state solvency emerges, whereby banks supply credit as municipal bond appreciations free up capital.
Number of Pages in PDF File: 57
Keywords: Credit supply, financial institutions, bank intermediation, municipal debt, public pensions
JEL Classification: G11, G21, G28, H72, H74, H75
Date posted: October 10, 2012 ; Last revised: May 27, 2015
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