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Bank stability and the price of loan commitments

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  • Rauf, Asad

Abstract

Firms insure themselves from liquidity shocks by contracting on credit lines from banks. I document novel empirical evidence on how the risk of contract nonperformance by banks is priced. Firms pay a higher price for loan commitments from safer banks. A one standard deviation increase in the cross-sectional mean of bank capital increases the commitment fees by 5%. To investigate a potential causal effect of lender stability on commitment fees, I exploit exogenous variation in the market value of banks’ assets from natural disasters. The sensitivity of the fees is higher for firms with higher short-term liabilities and higher income uncertainty.

Suggested Citation

  • Rauf, Asad, 2023. "Bank stability and the price of loan commitments," Journal of Financial Intermediation, Elsevier, vol. 54(C).
    • Handle: RePEc:eee:jfinin:v:54:y:2023:i:c:s1042957323000104
    DOI: 10.1016/j.jfi.2023.101027
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    More about this item

    Keywords

    Loan commitments; Credit lines; Liquidity insurance; Contract nonperformance; Loan pricing;
    All these keywords.

    JEL classification:

    • D25 - Microeconomics - - Production and Organizations - - - Intertemporal Firm Choice: Investment, Capacity, and Financing
    • G01 - Financial Economics - - General - - - Financial Crises
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies

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