Examining the Financial Accelerator: Bank Responses to the 2014 Oil Price Shock

We exploit the 2014 decline in oil prices to understand how banks change contract terms for distressed firms. Using panel data on new and existing loans, we find that firms most financially affected by the 2010 oil price shock initially increased their use of credit. However, those same firms ultimately saw increased borrowing costs, smaller loan sizes, and fewer originations and renewals than less affected firms as the oil price decline persisted. We then demonstrate that credit spreads rose more than might be predicted based on changes in firm risk alone, suggesting that lending standards tightened for distressed firms. Our results suggest that bank credit can cushion the effect of transitory economic shocks while amplifying more persistent downturns.