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Do banks propagate debt market shocks?

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Abstract

Over the years, U.S. banks have increasingly relied on the bond market to finance their business. This created the potential for a link between the bond market and the corporate sector whereby borrowers, including those that do not rely on bond funding, became exposed to the conditions in the bond market. We investigate the importance of this link. Our results show that when the cost to access the bond market goes up, banks that rely on bond financing charge higher interest rates on their loans. Banks that rely exclusively on deposit funding follow bond financing banks and increase the interest rates on their loans, though by smaller amounts. Further, banks pass the bond market shocks predominantly to their risky borrowers that have access to the bond market and to their borrowers that do not have access to the bond market. These results show that banks propagate shocks to the bond market by passing them through their loan policies to their borrowers, including those that do not use bond financing.

Suggested Citation

  • Galina Hale & João A. C. Santos, 2010. "Do banks propagate debt market shocks?," Working Paper Series 2010-08, Federal Reserve Bank of San Francisco.
    • Handle: RePEc:fip:fedfwp:2010-08
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    Cited by:

    1. Isoré, Marlène, 2016. "International propagation of financial shocks in a search and matching environment," Bank of Finland Research Discussion Papers 28/2016, Bank of Finland.
    2. Galina Hale & Tümer Kapan & Camelia Minoiu & Philip Strahan, 2020. "Shock Transmission Through Cross-Border Bank Lending: Credit and Real Effects," The Review of Financial Studies, Society for Financial Studies, vol. 33(10), pages 4839-4882.
    3. Jason Allen & Teodora Paligorova, 2011. "Bank Loans for Private and Public Firms in a Credit Crunch," Staff Working Papers 11-13, Bank of Canada.
    4. Anna Kovner & Peter Van Tassel, 2022. "Evaluating Regulatory Reform: Banks' Cost of Capital and Lending," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 54(5), pages 1313-1367, August.
    5. Albertazzi, Ugo & Barbiero, Francesca & Marqués-Ibáñez, David & Popov, Alexander & Rodriguez d’Acri, Costanza & Vlassopoulos, Thomas, 2020. "Monetary policy and bank stability: the analytical toolbox reviewed," Working Paper Series 2377, European Central Bank.
    6. Teodora Paligorova & João Santos, 2014. "Rollover Risk and the Maturity Transformation Function of Banks," Staff Working Papers 14-8, Bank of Canada.
    7. repec:zbw:bofrdp:2016_028 is not listed on IDEAS
    8. Vitaly M. Bord & João A.C. Santos, 2014. "Banks' Liquidity and the Cost of Liquidity to Corporations," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 46(s1), pages 13-45, February.
    9. repec:wsr:wpaper:y:2011:i:068 is not listed on IDEAS
    10. Marlène Isoré, 2011. "International Propagation of Financial Shocks in a Search and Matching Environment," FIW Working Paper series 068, FIW.

    More about this item

    Keywords

    Banks and banking; Banks and banking - Costs; bond markets;
    All these keywords.

    JEL classification:

    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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