Bank Lines of Credit as Contingent Liquidity: Covenant Violations and Their Implications

46 Pages Posted: 16 Oct 2017

See all articles by Viral V. Acharya

Viral V. Acharya

New York University - Leonard N. Stern School of Business; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER); New York University (NYU) - Department of Finance

Heitor Almeida

University of Illinois at Urbana-Champaign; National Bureau of Economic Research (NBER)

Filippo Ippolito

Universitat Pompeu Fabra - Faculty of Economic and Business Sciences; Barcelona Graduate School of Economics; Centre for Economic Policy Research (CEPR)

Ander Perez-Orive

Federal Reserve Board

Date Written: June 2016

Abstract

We examine the relation between the financial health of banks and their willingness to supply capital to borrowers under previously committed credit lines. We show that during the collapse of the Asset Backed Commercial Paper market in the last quarter of 2007 and the first half of 2008, banks with higher exposure to conduits renegotiated significantly tougher conditions on the outstanding credit lines offered to borrowers in violation of a covenant. Looking at the broader period of the financial crisis (2007-2010), we find that a worsening in financial health at banks led to a lower probability of waivers, following a covenant violation on a credit line. Our paper suggests that a worsening in financial conditions of lenders can bear financial implications for firms that use credit lines as an instrument of liquidity management.

Keywords: Lines of Credit, Bank Financial Health, Covenant Violations

JEL Classification: G21, G31, G32, E22, E5

Suggested Citation

Acharya, Viral V. and Almeida, Heitor and Ippolito, Filippo and Perez-Orive, Ander, Bank Lines of Credit as Contingent Liquidity: Covenant Violations and Their Implications (June 2016). Available at SSRN: https://ssrn.com/abstract=3053727 or http://dx.doi.org/10.2139/ssrn.3053727

Viral V. Acharya

New York University - Leonard N. Stern School of Business ( email )

44 West 4th Street
Suite 9-160
New York, NY NY 10012
United States

HOME PAGE: http://pages.stern.nyu.edu/~sternfin/vacharya/public_html/~vacharya.htm

Centre for Economic Policy Research (CEPR)

London
United Kingdom

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

New York University (NYU) - Department of Finance

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States

Heitor Almeida

University of Illinois at Urbana-Champaign ( email )

515 East Gregory Drive
4037 BIF
Champaign, IL 61820
United States
217-3332704 (Phone)

HOME PAGE: http://www.business.illinois.edu/FacultyProfile/faculty_profile.aspx?ID=11357

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Filippo Ippolito (Contact Author)

Universitat Pompeu Fabra - Faculty of Economic and Business Sciences ( email )

Ramon Trias Fargas 25-27
Barcelona, 08005
Spain
(+34) 93 542 2578 (Phone)
(+34) 93 542 1746 (Fax)

Barcelona Graduate School of Economics ( email )

Ramon Trias Fargas, 25-27
Barcelona, Barcelona 08005
Spain

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Ander Perez-Orive

Federal Reserve Board ( email )

20th and C Streets, NW
Washington, DC 20551
United States

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