Working Paper

Claim Dilution in the Municipal Debt Market

Abstract: Using loan-level municipal bank lending data, we examine the debt structure of municipalities and its response to exogenous income shocks. We show that small, more indebted, low-income, and medium credit quality counties are particularly reliant on private bank financing. Low income counties are more likely to increase bank debt share after an adverse permanent income shock while high income counties do not shift their debt structure in response. In contrast, only high income counties draw on their credit lines after adverse transitory income shocks. Overall, our paper raises concerns about claim dilution of bondholders and highlights the importance of municipal disclosure of private debt.

Keywords: Bank lending; Claim dilution; Disclosure; Municipal finance;

JEL Classification: G3; G1;

https://doi.org/10.17016/FEDS.2018.011

Bibliographic Information

Provider: Board of Governors of the Federal Reserve System (U.S.)

Part of Series: Finance and Economics Discussion Series

Publication Date: 2018-02-05

Number: 2018-011

Pages: 39 pages