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Quantitative Easing, Banks’ Funding Costs, and Credit Line Prices

Author

Listed:
  • Mario Cerrato
  • Shengfeng Mei

Abstract

Cooperman et al. (2025) show that the covariance of banks’ funding costs and credit line drawdowns is debt overhang cost to the bank’s equity holders (Myres, 1974). In this paper, we start from this important result and extend it by showing that central banks’ quantitative easing (QE) can mitigate this cost. We focus on the COVID-19 shock. We show empirically that funding costs generate frictions related to banks’ shareholders (debt overhang cost), and banks transfer the cost to the credit lines’ prices. Our novel econometric analysis, event studies, and theory suggest and formalise its mechanism. Our findings shed further light on the intricate relationship between banks’ funding costs and related debt overhang (Andersen et al. 2019), but, crucially, focusing on an important source of credit for firms: credit lines.

Suggested Citation

  • Mario Cerrato & Shengfeng Mei, 2025. "Quantitative Easing, Banks’ Funding Costs, and Credit Line Prices," Working Papers 2025_03, Business School - Economics, University of Glasgow.
    • Handle: RePEc:gla:glaewp:2025_03
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    More about this item

    Keywords

    Quantitative Easing; Central Bank; Debt Overhang; Credit Line;
    All these keywords.

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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