Bank Runs and Interest Rates: A Revolving Lines Perspective

Abstract

Revolving credit is at the core of the banking business. Corporate revolving credit lines are demandable claims; thus, similar to a traditional bank run on deposits, sudden widespread drawdowns on credit lines can be destabilizing to the banking sector. However, we show that, unlike deposits, credit line utilization has a large interest rate sensitivity. A revolving line run becomes less likely in a high-interest-rate environment, but can introduce vulnerability when the Fed cuts the interest rate to support a weak banking sector.

Keywords: bank liquidity, corporate credit lines, bank runs, financial crisis, interest rates

JEL Classification: G21, G32, G01, E5