Domestic lending and the pandemic: How does banks’ exposure to COVID-19 abroad affect their lending in the United States?

Abstract

Shortly after the pandemic began, globally active U.S. banks cut their term lending to U.S. businesses. Combining three granular bank regulatory datasets, we examine how U.S. banks’ exposure to COVID-related restrictions abroad contributed to these lending cuts. Even after controlling for changes in firms’ credit demand through extensive industry*state*quarter fixed effects, we find strong evidence that U.S. banks with higher foreign COVID exposures reduced their corporate lending, and tightened terms on such loans, significantly more. Banks’ increased risk perception, balance sheet liquidity effects due to higher foreign credit line drawdowns, and higher losses on corporate loans abroad served as mechanisms.