The Effect of State Solvency on Bank Values and Credit Supply: Evidence from State Pension Cut Legislation
51 Pages Posted: 10 Oct 2012 Last revised: 20 Jun 2017
There are 2 versions of this paper
The Effect of State Solvency on Bank Values and Credit Supply: Evidence from State Pension Cut Legislation
The Effect of State Pension Cut Legislation on Bank Values
Date Written: May 23, 2017
Abstract
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.
Keywords: Credit supply, financial institutions, bank intermediation, municipal debt, public pensions
JEL Classification: G11, G21, G28, H72, H74, H75
Suggested Citation: Suggested Citation