How Committed are Bank Lines of Credit? Experiences in the Subprime Mortgage Crisis

40 Pages Posted: 17 Aug 2010 Last revised: 16 Dec 2010

See all articles by Rocco Huang

Rocco Huang

Michigan State University - Department of Finance; Wharton Financial Institutions Center

Date Written: August 10, 2010


Using the subprime mortgage crisis as a shock to the banking sector, this paper shows that commercial and industrial (C&I) borrowers served by more distressed banks took out fewer loans under their precommitted lines of credit. Bank distress is measured by a bank’s nonperforming loan ratio or its recent stock market performance. The credit constraints affected mainly smaller, riskier (by internal loan ratings), and shorter-relationship borrowers, and depended also on the lenders’ size, liquidity condition, capitalization position, and core deposit funding. The evidence suggests that credit lines provided only contingent and partial insurance during the crisis since bank conditions appeared to influence credit line utilization in the short term. The results provide a new explanation as to why credit lines are not perfect substitutes for cash holdings for some (e.g. small) firms. Finally, loan level analyses show that more distressed banks charged higher credit spreads on newly negotiated loans but not on funds disbursed from precommitted lines of credit. Our analyses are based on the loan flow data from the confidential Survey of Terms of Business Lending (STBL).

Suggested Citation

Huang, Rocco, How Committed are Bank Lines of Credit? Experiences in the Subprime Mortgage Crisis (August 10, 2010). FRB of Philadelphia Working Paper No. 10-25, Available at SSRN: or

Rocco Huang (Contact Author)

Michigan State University - Department of Finance ( email )

315 Eppley Center
East Lansing, MI 48824-1122
United States


Wharton Financial Institutions Center

2306 Steinberg Hall-Dietrich Hall
3620 Locust Walk
Philadelphia, PA 19104
United States

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