Banks' Exposure to Rollover Risk and the Maturity of Corporate Loans

Review of Finance, Forthcoming

40 Pages Posted: 3 Mar 2014 Last revised: 30 Jun 2016

See all articles by Teodora Paligorova

Teodora Paligorova

Board of Governors of the Federal Reserve System

João A. C. Santos

Federal Reserve Bank of New York

Date Written: June 2, 2016

Abstract

In this paper, we show that when banks increase their use of wholesale funding they shorten the maturity of loans to corporations. This effect appears to be linked to banks' exposure to rollover risk resulting from their increasing use of short-term uninsured funding. Banks that use more wholesale funding shorten both the maturity of newly issued loans and the maturity of their loan portfolios. These results are not present among banks that rely predominantly on insured deposits. The link between wholesale funding and loan maturity is robust, and holds when we include firm-year fixed effects, suggesting that the decline in loan maturity is bank driven. In line with this premise, we find that the slope of the loan yield curve becomes steeper for banks that use more wholesale funding, and that borrowers turn to the bond market to raise funding with longer maturity in response to banks' loan maturity shortening.

Keywords: wholesale funding, loan maturity, bond financing

JEL Classification: G21

Suggested Citation

Paligorova, Teodora and Santos, João A. C., Banks' Exposure to Rollover Risk and the Maturity of Corporate Loans (June 2, 2016). Review of Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2403418 or http://dx.doi.org/10.2139/ssrn.2403418

Teodora Paligorova

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

João A. C. Santos (Contact Author)

Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States
212-720-5583 (Phone)
212-720-8363 (Fax)

HOME PAGE: HTTP://WWW.NEWYORKFED.ORG/RMAGHOME/ECONOMIST/SANTOS/CONTACT.HTML

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