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

Lee J. Cohen

University of Georgia - Department of Finance

Marcia Millon Cornett

Bentley University - Department of Finance

Hamid Mehran

Independent

Hassan Tehranian

Boston College - Department of Finance

Multiple version iconThere are 2 versions of this paper

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

Cohen, Lee J. and Cornett, Marcia Millon and Mehran, Hamid and Tehranian, Hassan, The Effect of State Solvency on Bank Values and Credit Supply: Evidence from State Pension Cut Legislation (May 23, 2017). Journal of Financial and Quantitative Analysis (JFQA), Forthcoming. Available at SSRN: https://ssrn.com/abstract=2158780 or http://dx.doi.org/10.2139/ssrn.2158780

Lee J. Cohen

University of Georgia - Department of Finance ( email )

Terry College of Business
Athens, GA 30602-6253
United States

Marcia Millon Cornett

Bentley University - Department of Finance ( email )

175 Forest Street
Waltham, MA 02154
United States

Hamid Mehran

Independent ( email )

No Address Available

Hassan Tehranian (Contact Author)

Boston College - Department of Finance ( email )

Carroll School of Management
140 Commonwealth Avenue
Chestnut Hill, MA 02467-3808
United States
617-552-3944 (Phone)
617-552-0431 (Fax)

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