Financial Intermediaries, Corporate Debt Financing, and The Transmission of Systemic Risk

51 Pages Posted: 28 Nov 2014 Last revised: 1 Aug 2018

See all articles by Christian T. Lundblad

Christian T. Lundblad

University of North Carolina Kenan-Flagler Business School

Zhongyan Zhu

Monash University

Date Written: November 30, 2017

Abstract

We revisit the spillover effects to non-financial, corporate borrowers from a systemic event in which a number of large, important banks simultaneously become imperiled. To shed light on this question, we build a novel, comprehensive dataset, covering both firms’ borrowing activities through bank loans, revolvers, corporate bonds, and commercial paper and the particular institutions to which they are connected. We demonstrate that while there are over one thousand financial institutions active in facilitating the borrowing activity of non-financial firms before the financial crisis, roughly 80% is facilitated by a group of large, central institutions. As many of these central institutions approach the edge of failure during the crisis, we uncover significant cross-sectional variability in the degree to which non-financial firms are affected, depending upon whether and how these firms rely on external debt financing. First, the one-third of firms that (largely) do not rely on external debt financing exhibit limited exposure to the systemic event. Second, for the remaining firms that do rely on external debt financing, the cross-sectional variation in their crisis exposure is mainly driven by measurable pre-crisis connections to the central financial institutions. Further, crisis exposures do not appear to be significantly lower for those firms that exhibit multiple bank connections or have access to the public debt market. The often-hypothesized means of diversifying funding risks appear to be limited in an episode where the central institutions are collectively impaired.

Keywords: financial crisis, liquidity provision, systemic crisis, and financial contagion

JEL Classification: G21, G23, G28

Suggested Citation

Lundblad, Christian T. and Zhu, Zhongyan, Financial Intermediaries, Corporate Debt Financing, and The Transmission of Systemic Risk (November 30, 2017). Institute of Global Finance Working Paper No. 8; 28th Australasian Finance and Banking Conference. Available at SSRN: https://ssrn.com/abstract=2531195 or http://dx.doi.org/10.2139/ssrn.2531195

Christian T. Lundblad

University of North Carolina Kenan-Flagler Business School ( email )

Kenan-Flagler Business School
Chapel Hill, NC 27599-3490
United States
919-962-8441 (Phone)

Zhongyan Zhu (Contact Author)

Monash University ( email )

Melbourne
Australia

HOME PAGE: http://sites.google.com/site/zhougyanzhu/

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