Banks as Lenders of First Resort: Evidence from the COVID-19 Crisis
42 Pages Posted: 21 May 2020 Last revised: 8 Jun 2020
Date Written: June 6, 2020
In March of 2020, banks faced the largest increase in liquidity demands ever observed. Firms drew funds on a massive scale from pre-existing credit lines and loan commitments in anticipation of cash flow disruptions from the economic shutdown designed to contain the COVID-19 crisis. The increase in liquidity demands was concentrated at the largest banks, who serve the largest firms. Pre-crisis financial condition did not limit banks’ liquidity supply. Coincident inflows of funds to banks from both the Federal Reserve’s liquidity injection programs and from depositors, along with strong pre-shock bank capital, explain why banks were able to accommodate these liquidity demands.
Keywords: COVID-19, bank liquidity supply, loan commitments
JEL Classification: G21
Suggested Citation: Suggested Citation