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Discussion Paper
Weathering the Storm: Who Can Access Credit in a Pandemic?
Credit enables firms to weather temporary disruptions in their business that may impair their cash flow and limit their ability to meet commitments to suppliers and employees. The onset of the COVID recession sparked a massive increase in bank credit, largely driven by firms drawing on pre-committed credit lines. In this post, which is based on a recent Staff Report, we investigate which firms were able to tap into bank credit to help sustain their business over the ensuing downturn.
Report
Bank Funding Risk, Reference Rates, and Credit Supply
Corporate credit lines are drawn more heavily when funding markets are more stressed. This covariance elevates expected bank funding costs. We show that credit supply is dampened by the associated debt-overhang cost to bank shareholders. Until 2022, this impact was reduced by linking the interest paid on lines to credit-sensitive reference rates such as LIBOR. We show that transition to risk-free reference rates may exacerbate this friction. The adverse impact on credit supply is offset if drawdowns are expected to be left on deposit at the same bank, which happened at some of the largest ...
Discussion Paper
How the LIBOR Transition Affects the Supply of Revolving Credit
In the United States, most commercial and industrial (C&I) lending takes the form of revolving lines of credit, known as revolvers or credit lines. For decades, like other U.S. C&I loans, credit lines were typically indexed to the London Interbank Offered Rate (LIBOR). However, since 2022, the U.S. and other developed-market economies have transitioned from credit-sensitive reference rates such as LIBOR to new risk-free rates, including the Secured Overnight Financing Rate (SOFR). This post, based on a recent New York Fed Staff Report, explores how the provision of revolving credit is likely ...