51 Pages Posted: 10 Oct 2012 Last revised: 20 Jun 2017
Date Written: May 23, 2017
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
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