Contingent Credit Under Stress

36 Pages Posted: 7 Nov 2023

See all articles by Viral V. Acharya

Viral V. Acharya

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

Maximilian Jager

Frankfurt School of Finance and Management

Sascha Steffen

Frankfurt School of Finance & Management; Centre for Economic Policy Research (CEPR)

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Date Written: November 7, 2023

Abstract

Over the past two decades, banks have increasingly focused on offering contingent credit in the form of credit lines as a primary means of corporate borrowing. We review the existing body of research regarding the rationales for banks' provision of liquidity insurance in the form of credit lines, their significance in managing corporate liquidity, and the reasons and circumstances under which firms opt to utilize them. We emphasize that the options for firms to both draw down and repay credit lines are put options issued by banks, which are exercised by firms in a correlated manner during periods of widespread stress, with adverse affects on bank intermediation thereafter. We discuss the bank capital and the bank funding channels that can drive these effects, contrasting their roles during the Global Financial Crisis and the Covid-19 outbreak. We conclude by discussing the increasing extension of bank credit lines to non-bank financial intermediaries, as well as the role of stress tests and monetary policy in managing the risks of contingent credit under stress.

Keywords: Credit lines, banks, bank capital, COVID

JEL Classification: G01, G21

Suggested Citation

Acharya, Viral V. and Acharya, Viral V. and Jager, Maximilian and Steffen, Sascha, Contingent Credit Under Stress (November 7, 2023). Available at SSRN: https://ssrn.com/abstract=4625908 or http://dx.doi.org/10.2139/ssrn.4625908

Viral V. Acharya

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

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HOME PAGE: http://www.stern.nyu.edu/~vacharya

New York University (NYU) - Department of Finance ( email )

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

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

European Corporate Governance Institute (ECGI) ( email )

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Belgium

National Bureau of Economic Research (NBER) ( email )

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Maximilian Jager

Frankfurt School of Finance and Management ( email )

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Germany

Sascha Steffen (Contact Author)

Frankfurt School of Finance & Management ( email )

Adickesallee
32-34
Frankfurt, 60322
Germany
16097326929 (Phone)

HOME PAGE: http://www.sascha-steffen.de

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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