Bank Syndicates and Liquidity Provision

71 Pages Posted: 7 May 2020 Last revised: 29 Jul 2020

See all articles by João A. C. Santos

João A. C. Santos

Federal Reserve Bank of New York; New University of Lisbon - Nova School of Business and Economics

S. Viswanathan

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

Multiple version iconThere are 2 versions of this paper

Date Written: March 1, 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 drawdowns and
changes in drawdowns predict internal credit rating downgrades and credit line cuts, suggesting
substantial liquidity access before 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. 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 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 2008-09. Consistent with the model, credit lines
with higher expected drawdown rates pay higher commitment fees, and lead banks often increase
their credit line investments in response to the failure of syndicate members, reducing borrowers'
risk exposure to bank failures.

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 1, 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://HTTP://WWW.NEWYORKFED.ORG/RMAGHOME/ECONOMIST/SANTOS/CONTACT.HTML

New University of Lisbon - Nova School of Business and Economics ( email )

Campus de Campolide
Lisbon, 1099-032
Portugal

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

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
47
Abstract Views
382
PlumX Metrics