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Bank Funding Risk, Reference Rates, and Credit Supply

  • Harry Cooperman
  • , Darrell Duffie
  • , Stephan Luck
  • , Zachry Wang
  • , Yilin Yang

Research output: Contribution to journal › Article › peer-review

Abstract

Corporate credit lines are drawn more heavily when funding markets are stressed. This elevates expected bank funding costs. We show that credit supply is dampened by the associated debt-overhang cost to bank shareholders. Until 2022, this impact was reduced by linking the interest paid on lines to a credit-sensitive reference rate like the London interbank offered rate (LIBOR). We show that transition to risk-free reference rates may exacerbate this friction. The adverse impact on credit supply is offset if drawdowns are expected to be deposited at the same bank, which happened at some of the largest banks during the global financial crisis and COVID recession.

Original languageEnglish (US)
Pages (from-to)5-56
Number of pages52
JournalJournal of Finance
Volume80
Issue number1
DOIs
StatePublished - Feb 2025
Externally publishedYes

Bibliographical note

Publisher Copyright:
© 2024 the American Finance Association.

UN SDGs

This output contributes to the following UN Sustainable Development Goals (SDGs)

  1. SDG 10 - Reduced Inequalities
    SDG 10 Reduced Inequalities

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