Bank stability and the price of loan commitments

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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.
Original languageEnglish
Article number101027
Number of pages16
JournalJournal of Financial Intermediation
Volume54
DOIs
Publication statusPublished - Apr-2023

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