Crowding Out Bank Loans: Liquidity-Driven Bond Issuance

Abstract

Using corporate balance sheets data following the COVID-19 shock, we provide evidence that the bond market is central to firms' access to liquidity, crowding out bank loans even when the crisis did not originate in the banking sector. Contrary to good times, bond issuers increased holdings of liquid assets rather than real investment. Moreover, many issuers left their bank credit lines untouched, while others used bond proceeds to repay existing bank loans. This liquidity-driven bond issuance suggests that the V-shaped recovery of bond markets, propelled by the Federal Reserve, is unlikely to lead to a V-shaped recovery in real activity.