Bank Syndicates and Liquidity Provision

52 Pages Posted: 7 May 2020

See all articles by João A. C. Santos

João A. C. Santos

Federal Reserve Bank of New York

S. Viswanathan

Duke University - Fuqua School of Business; Duke University - Department of Economics

Date Written: March 2020

Abstract

We provide evidence that credit lines offer liquidity insurance to borrowers. Borrowers are able to extensively use their credit lines in recessions and ahead of credit line cuts. In fact draw-downs and changes in draw-downs predict internal credit rating downgrades and credit line cuts. Credit line cuts are concentrated on borrowers who do not use credit lines, and when they occur they still leave borrowers with funds to draw down. Further, lead banks often increase their credit line investments in response to the failure of syndicate members, reducing borrowers' risk exposure to bank failures. Building on this evidence, we develop a model where syndicates faced with liquidity shocks continue to support credit line commitments due to the continuation value of their relationship with borrowers. Our model yields a set of additional predictions that find support in the data, including the substantial increase in the lead bank's retained loan share and in the commitment fees on the credit lines issued during the financial crisis of 2008-2009.

Keywords: Loan Syndicates, Loan Commitments, Credit Lines, Pricing, Liquidity

JEL Classification: G01, G21, G23

Suggested Citation

Santos, João A. C. and Viswanathan, S., Bank Syndicates and Liquidity Provision (March 2020). Available at SSRN: https://ssrn.com/abstract=3571038 or http://dx.doi.org/10.2139/ssrn.3571038

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

S. Viswanathan

Duke University - Fuqua School of Business ( email )

Durham, NC 27708-0120
United States
919-660-7784 (Phone)
919-684-2818 (Fax)

Duke University - Department of Economics

213 Social Sciences Building
Box 90097
Durham, NC 27708-0204
United States

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
18
Abstract Views
147
PlumX Metrics