Abstract
We provide a new perspective on bank-dependency - the (bank) "liquidity insurance channel" - based on the predominance of large, high credit quality firms among credit line users. Our model can match the pattern of bank dependency in the cross-section of firms, and predicts when shocks to bank health will affect primarily low or high credit quality firms. Our framework can also explain why credit line origination is more cyclical than loan origination. Overall, we uncover an important link between bank health and economic activity through the provision and effectiveness of bank credit lines to large, high credit quality firms.
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