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
Date Written: June 2, 2016
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: Suggested Citation