Liquidity Insurance vs. Credit Provision: Evidence from the COVID-19 Crisis

60 Pages Posted: 27 Jan 2021 Last revised: 5 Oct 2021

See all articles by Tumer Kapan

Tumer Kapan

International Monetary Fund (IMF)

Camelia Minoiu

Board of Governors of the Federal Reserve System

Date Written: September 30, 2021

Abstract

We study the link between the unexpected surge in credit line drawdowns in March-April 2020 and banks’ subsequent lending decisions. We find that banks with larger ex ante credit line portfolios, thus higher risk of drawdowns, tightened loan supply and the terms on new loans, especially to small firms. Exposed banks were also more reluctant to participate in the Paycheck Protection Program. The main mechanism was a reduction of risk tolerance rather than immediate balance sheet constraints. Our findings highlight the tension between banks providing liquidity insurance through precommitted credit while simultaneously sustaining lending to the broader economy during crises.

Keywords: corporate credit line drawdowns, off balance sheet exposures, bank loans, Paycheck Protection Program, COVID-19

JEL Classification: G21, E52, E58, E63

Suggested Citation

Kapan, Tumer and Minoiu, Camelia, Liquidity Insurance vs. Credit Provision: Evidence from the COVID-19 Crisis (September 30, 2021). Available at SSRN: https://ssrn.com/abstract=3773328 or http://dx.doi.org/10.2139/ssrn.3773328

Tumer Kapan

International Monetary Fund (IMF) ( email )

1700 19th Street, NW
Washington, DC 20431
United States

Camelia Minoiu (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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