Loan Commitments Research Articles

Financial Crisis and the Supply of Corporate Credit

Analyzing syndicated loan and public debt originations by publicly traded U.S. firms between 2004 and 2011, we document a sharp migration from bank borrowing to either no borrowing or public debt issuance in the crisis years. We find evidence for a bank-lending channel; the migration from bank borrowing was more prominent and subsequent investment was lower for firms that had relationships with the more severely distressed lead banks during the crisis. The ability of many publicly traded firms to promptly disintermediate and issue their own debt provided critical but imperfect debt substitutability. Sticky interest rates and a surge in loan commitment drawdowns suggest that bank credit rationing was prevalent during the crisis as banks hoarded liquidity to reduce their risk of insolvency. Many firms originated public debt at interest rates far higher than syndicated loan rates.

Bank Liquidity Management and Bank Capital Shocks

The Basel III Accord imposes minimum liquidity standards on bank balance sheets that are already constrained by minimum capital standards. It is not clear whether or how banks’ behaviors will change in this new joint-constraint regime. To gain some insight, we study the balance sheet liquidity behavior of U.S. banking companies in response to negative equity capital shocks prior to the implementation of Basel III. Our 1998-2012 data indicate that banks treated regulatory capital and balance sheet liquidity (e.g., net stable funding ratios, core deposits-to-loans, liquid assets-to-assets) as substitutes rather than complements. This main finding is limited to so-called ‘community banks’ with assets less than $1 billion; equity capital and liquidity were neither substitutes nor complements at larger banks. In the course of rebuilding their capital ratios, shocked community banks substituted away from loans and loan commitments and reduced their dividend payouts, actions that resulted in greater balance sheet liquidity. Thus, in the state of nature that has traditionally most concerned bank regulators (i.e., stress to bank equity capital), community banks increase their liquidity buffers. Given that these lenders do not pose systemic risk, and that they have historically exceeded the Basel III liquidity minimums by wide margins, our findings suggest that imposing minimum liquidity thresholds on small banks will likely yield little prudential benefit.

Bernanke's Lesson: The Nature of Emergency Liquidity Provision in the Global Financial Crisis

Using a regression discontinuity design, I evaluate whether the nature of emergency liquidity provision matters for credit supply in the early stages of a financial crisis. Comparing marginal winners and losers in the Federal Reserve's emergency liquidity auctions, I exploit a unique feature of the Term Auction Facility to isolate the impact of billion dollar, short-term loans during the financial crisis. I show that the Term Auction Facility increased bank loan commitment growth by approximately 10-15 percentage points, an effect that arises despite banks? ability to borrow at the discount window on similar terms should they fail to obtain funding through the Term Auction Facility. I find some support for a stigma-based explanation: this liquidity matters in part because it provides funds that banks would otherwise not have borrowed at the discount window. This result suggests that the non-pecuniary cost of borrowing from the Federal Reserve likely played an important role in exacerbating the lending decline at the onset of the global financial crisis. Consistent with this interpretation, I also show that banks that were highly exposed to real estate provided more credit throughout the crisis when they had the ability to borrow relatively anonymously at the Federal Reserve.

Gulf Coast methanol plant gets $2 billion loan

A new firm called Lake Charles Methanol has received a $2 billion conditional loan commitment from the Department of Energy for a facility that will produce methanol by gasifying petroleum coke, a waste product from oil refining. The plant will capture and purify by-product carbon dioxide for use in enhanced oil recovery. Pending completion of financing, the $3.8 billion plant will be built in Lake Charles, La. and supplied with coke from nearby refiners. In addition to methanol and CO2 it will produce hydrogen, sulfuric acid, argon, krypton, and xenon. Although the plant will use existing technologies for its gasification and gas separation and purification units, it will be the first in the U.S. to make methanol from petroleum coke. In the U.S., methanol is most commonly made from natural gas; plants in China rely on coal gasification. The chemical industry has long known that petroleum coke could be used

The World Bank and Emerging Powers: Beyond the Multipolarity–Multilateralism Conundrum

ABSTRACTThe discrepancy between the increasingly multipolar world economy of the recent decades and the stubbornly limited representativeness of the organisations mandated with its governance causes much strain in global politics. Some scholars suggest that this chronic mismatch will undermine existing multilateral bodies, while others expect the present architecture to persist. This article contends that the outcomes of this challenge are institution-specific. In settings where significant operational realignments are possible within existing mandates and governance structures, the multipolarity–multilateralism conundrum could be partly mitigated. The argument is based on a thematic analysis of all IBRD-IDA loan commitments between 2002 and 2015 in the World Bank’s seven all-time top borrowers: Argentina, Brazil, China, India, Indonesia, Mexico and Turkey (collectively, the Big Seven). The key finding is that while these emerging countries remain the Bank’s biggest clients, the terms of their engagement have shifted precisely along the lines where they had already differed from the rest of the Bank’s clientele: away from politically onerous governance and institutional reforms, and towards developing physical and market infrastructure while attaining social sustainability. This implicit realignment is facilitated by the Bank’s diverse policy repertoire, which allows considerable inter-regional and intra-regional variation in lending patterns to accommodate member preferences.

Liquidity Risk of Banks, Deposit Diversification and Insurance During Financial Crises: Evidence from G8 and BRICS Countries

This paper studies the relationship between liquidity demand risk, deposit diversification and insurance in 12 countries during the period 2005-2014. We capture liquidity risk by focusing on the unfunded loan commitments. We find that higher diversification in the deposit base can reduce the impact of liquidity demand risk during the crisis by decreasing the cost of funding, increasing the funding inflow, maintaining the total amount of loan lending and enhancing the liquid ratio. However, it is interesting that higher concentrations in the deposit base may reduce the cost of funding increase the deposit inflow and liquid ratio in normal times. Finally, we find that although deposit insurance has a positive impact during the crisis, its effect cannot mitigate the liquidity demand risk. The “moral hazard effect” of deposit insurance is greater than the “stabilization effect” on liquidity demand risk. Banks in a country with deposit insurance may be more likely to suffer liquidity demand risk than banks in a country without this safety net.

The Role of Deposit Insurance in Liquidity Risk Management: Evidence from Systematic Banking Crises

Customer deposits have traditionally been viewed as the primary source of liquidity risk facing banks. However, research over the past decade suggests that customer deposits can hedge the liquidity risk, stemming from unused loan commitments, since the liquidity demands of depositors and borrowers are not perfectly correlated. We argue in this paper that this complementarity between the simultaneous provision of liquidity to depositors and borrowers is only possible in the presence of deposit insurance. Accordingly, we use IMF-defined episodes of banking crises over the last 25 years as shocks to market liquidity to identify the impact of deposit insurance on bank lending during crises. The results suggest that there is significant positive relation between continued loan growth during crises and whether banks have access to deposit insurance. Further, this effect is concentrated in banks, relying more on core deposit funding.

Who Lost Russia (This Time)? Vladimir Putin

In the late 1990s, as Russia’s economy descended into a death spiral—eventually culminating in the August 1998 crash of the ruble and the government’s default on its international loan commitments—...

Loan Commitments

Loan Commitments

Credit line takedown and endogenous bank capital

This paper investigates the implications of the uncertain timing and usage of loan commitments for the optimal level of bank capital. We use trended Brownian motion to proxy the stochastic takedown of credit lines. Relying on “time to first passage” mathematics, we derive a probability density function for the time to depletion of the bank credit line as well as the likelihood for the time to exhausting the sources of liquidity that fund the loan takedown. Armed with these analytical results, we solve for the optimal level of bank capital within a simultaneous equation framework in order to capture the interrelationships of the endogenous variables. The optimality conditions produce a system of integral differential equations which refuse to yield reduced form solutions and provide no immediate intuition. Therefore, the maximizing values of the bank’s decision variables were simulated over a host of realistic scenarios. We document the comparative static behavior of the bank’s decision variables when equity is unencumbered by capital requirements and, also, examine the impact of the same parametric changes on bank behavior when equity is a fixed proportion of lending. Further simulations produce the expected time to liquidity depletion under different capital requirement schemes.

Off-balance sheet activities and community bank performance

Purpose – The purpose of this paper is to examine loan commitments and lending patterns of community banks. The authors also test for shifts in these relationships in the period unwinding the subprime crisis. Design/methodology/approach – Standard panel fixed-effect models as well as hierarchical (mixed) regression models are estimated given that banks operating in a specific geographic market may vary systematically with differences in firm-level characteristics. Hierarchical (mixed) regression models can control for within-counties and within-banks similarities. The authors also employ pooled estimations with clustered standard errors at the bank level as robustness check. Findings – The empirical results show that the use of loan commitments is generally associated with moderate increase in profitability and higher insolvency risk. However, during the recent financial crisis, the use of loan commitments becomes safer. The use of loan commitments is more risky for community banks that concentrate more on loans that focus on real estate, while it is safer for community banks with higher equity. In regards to the performance of community banks’ balance sheet loan activities, a more concentrated loan portfolio results in lower return and higher insolvency risks. High loan growth generates higher return and higher risks. Originality/value – Prior to the 2008 credit meltdown, community banks significantly increased their issuance of off-balance sheet loan commitments. While the ratio of loan commitments to total loans has come down in recent years it continues to exceed the levels reached in the 1990s. This evolution has, however resulted in little research regarding its implications on community bank profitability and risk.

Corporate liquidity and the contingent nature of bank credit lines: Evidence on the costs and consequences of bank default

I study the impact of Lehman Brothers' bankruptcy and resultant inability to honor its obligations as a lender under committed credit lines. Firms that lost access to a credit line committed by Lehman Brothers experienced abnormal stock returns of −3%, on average, on the day of and day after Lehman's bankruptcy filing, amounting to roughly $5.7 billion in aggregate, risk-adjusted losses. These losses were significantly larger for firms that were more financially constrained, firms with less cash, firms for whom Lehman was a lead-bank, and firms that lost access to larger amounts of committed credit. During the four quarters immediately following Lehman's collapse, firms that lost access to a credit line cut their investment spending significantly while simultaneously hoarding more cash than comparable firms. Overall, these findings indicate that firms that lost access to a credit line incurred economically significant costs and real-side consequences as a result of Lehman's default on its loan commitments.

Perils of excessive credit growth: evidence from 11 new EU member states

We investigate the association between banks' credit expansion and loan loss reserves on a panel of banks from 11 new EU member countries from Central and Eastern Europe during 2004–2010. Unused committed credit lines capture the decline in banks' risk aversion being associated with a supply shift. As the existence of loan commitments may lead to overlending, we expect that banks with a higher share of unused committed credit lines are more prone to subsequent increase in loan loss reserves. The system and difference GMM estimations as well as pooled OLS and panel fixed effects estimations confirm that an excessive credit supply, reflected in overextension of committed credit lines, predicts increase in bank loan loss reserves two years ahead while controlling for bank asset returns, real growth in loan portfolio, country GDP, inflation and EBRD banking sector reform index. This stresses the importance of credit lines monitoring by regulatory and supervisory authorities for timely recognition of credit overextension episodes. The negative association between loan loss reserves and real GDP growth was affirmed.

Corporate Liquidity and the Contingent Nature of Bank Credit Lines: Evidence on the Costs and Consequences of Bank Default

I study the impact of Lehman Brothers’ bankruptcy and resultant inability to honor its obligations as a lender under committed credit lines. Firms that lost access to a credit line committed by Lehman Brothers experienced abnormal stock returns of -3%, on average, on the day of and day after Lehman’s bankruptcy filing, amounting to roughly $5.7 billion in aggregate, risk-adjusted losses. These losses were significantly larger for firms that were more financially constrained, firms with less cash, firms for whom Lehman was a lead-bank, and firms that lost access to larger amounts of committed credit. During the four quarters immediately following Lehman’s collapse, firms that lost access to a credit line cut their investment spending significantly while simultaneously hoarding more cash than comparable firms. Overall, these findings indicate that firms that lost access to a credit line incurred economically significant costs and real-side consequences as a result of Lehman’s default on its loan commitments.

Czech Commercial Banks: Are they Liquid Enough to Finance Loan Commitments?

The aim of this paper is to find out if Czech commercial banks are liquid enough to meet sold loan commitments and if there are any significant differences depending on the size of the bank. We have used the scenario analysis for three liquidity ratios in the period from 2007 to 2012. The majority of Czech banks is able to finance the use of 50 % of loan commitments. The most vulnerable banks belong to the group of medium banks; they focus strongly on lending activity which they finance also from other sources of financing.

Why the MAC Clause is so Ubiquitous in Bank Loan Commitments Although it is Hardly Ever Invoked

Many loan commitment contracts contain a material adverse change clause which allows banks to renege or step back from their commitment based on rather subjective claims regarding the borrowers' prospective financial situation. While this sounds like an attractive option for banks, empirical evidence shows that, despite its frequent appearance in contracts, the clause is rarely invoked (cf. Sufi, 2009; Ivashina and Scharfstein, 2010). In the present paper, we argue that this is due to the fact that, in combination with appropriate pricing on the spot loan market, the clause is essentially an effective means to screen the borrowers' riskiness. In particular, it renders loan commitment contracts comparably more expensive for high-risk borrowers, thereby directing them to the spot loan market. Low-risk borrowers, in turn, are still attracted to loan commitment contracts as for them the implicit extra cost is lower. Thus, in equilibrium, there is no need for banks to step back from earlier promises. Moreover, we show that the presence of the clause increases welfare as it decreases credit rationing for low-risk entrepreneurs and reduces total loan costs.

Bank Liquidity Hoarding and the Financial Crisis: An Empirical Evaluation

I test and find supporting evidence for the precautionary motive hypothesis of liquidity hoarding for U.S. commercial banks during the recent financial crisis. I find that banks held more liquid assets in anticipation of future losses from securities write-downs. Exposure to securities losses in their investment portfolios and expected loan losses (measured by loan loss reserves) represent key measures of banks' on-balance sheet risks, in addition to off-balance sheet liquidity risk stemming from unused loan commitments. Furthermore, unrealized securities losses and loan loss reserves seem to better capture the risks stemming from banks' asset management and provide supporting evidence for the precautionary nature of liquidity hoarding. Moreover, I find that more than one-fourth of the reduction in bank lending during the crisis is due to the precautionary motive.

Macroeconomic Determinants Of Loan Portfolio Credit Risk In Banks

The credit risk is one of the main risks in commercial banks and the ability to manage it meaningly affect banks’ stability. This risk arises due to the particular reasons related with the possibility to lose loans if the debtors are not able to meet their financial obligations. When making the decisions of financing the loan applicants banks use the credit risk assessment models that allow to estimate the probability of the potential borrowers to default on their loan commitments. The main goal of managing the credit risk in banks is to compound the loan portfolio of the acceptable risk level. According to Derelioglu and Gurgen (2011) the credit risk analysis aims to decrease future losses by estimating the potential risk and eliminating the new credit proposal if the risk is higher than a defined tolerance value. In this respect, it is essential to identify the main factors causing this risk in order to manage it. When assessing the credit risk of every company banks usually analyze the financial data and some qualitative factors as the independent variables in the statistical credit risk assessment models. But changing the credit policy in banks and pricing the credits it is very important to predict the quality of loan portfolio in future. The problem can be summarized as finding the statistical methods that relates the proportion of doubtful and non-performing credits in the loan portfolio (dependent variable) with the set of explanatory variables (macroeconomic information of a country). The aim of this research is to find the macroeconomic determinants that significantly influence the changes of loan portfolio credit risk in banks and to develop the statistical model for prediction of the proportion of doubtful and non-performing loans. The scientific literature analysis results confirmed the influence of macroeconomic conditions on credit risk of debtors in banks and presented that the changes in quality of loan portfolio in banks depend on GDP, inflation, interest rates, money supply, industrial production index, current account balance and other. In empirical research 22 EU countries were grouped into 3 clusters according to their similarity in changes of the doubtful and non-performing loans percentage in banks. The set of 20 independent variables as factors determining the changes in amount of doubtful and non-performing loans was created. These variables were calculated from 9 macroeconomic indicators of 3 years. The model was developed to classify the countries into clusters applying the logistic regression, factor analysis and probit methods. The classification accuracy is 100%. The predictions of doubtful and non-performing loans indexes are based on the analysis of the scores of extracted 5 factors as new independent variables. The multiple regression and polynomial regression methods were applied for the index predictions in clusters. The developed model in this research enables to predict the percentage of doubtful and non-performing loans in banks with the average 98,06% accuracy. The research has confirmed that the amount of doubtful and non-performing loans in banks highly depends on macroeconomic changes in a country. The model can warn the banks in advance if the significant increase in the loan portfolio credit risk after 2 years is highly possible.DOI: http://dx.doi.org/10.5755/j01.ee.23.5.1890

Bank Liquidity Hoarding and the Financial Crisis: An Empirical Evaluation

I test and find supporting evidence for the precautionary motive hypothesis of liquidity hoarding for U.S. commercial banks during the recent financial crisis. I find that banks held more liquid assets in anticipation of future losses from securities write-downs. Exposure to securities losses in their investment portfolios and expected loan losses (measured by loan loss reserves) represent key measures of banks' on-balance sheet risks, in addition to off-balance sheet liquidity risk stemming from unused loan commitments. Furthermore, unrealized securities losses and loan loss reserves seem to better capture the risks stemming from banks' asset management and provide supporting evidence for the precautionary nature of liquidity hoarding. Moreover, I find that more than one-fourth of the reduction in bank lending during the crisis is due to the precautionary motive.

The performance of banks around the receipt and repayment of TARP funds: Over-achievers versus under-achievers

In this paper, we look at how the pre-crisis health of banks is related to the probability of receiving and repaying TARP capital. We find that financial performance characteristics that are related to the probability of receiving TARP funds differ for the healthiest (“over-achiever”) versus the least healthy (“under-achiever”) banks. We find that TARP under-achievers have some, but not consistent, weaknesses in income production. These banks also are experiencing liquidity issues as customers, shut out of public debt markets, get bank loans through drawdowns of loan commitments. Unlike TARP under-achievers, TARP over-achievers’ loans are performing well. Yet, liquidity issues (from low levels of liquid assets and core deposits and drawdowns of loan commitments) hurt the abilities of these banks to continue their lending. Differences between under-achiever and over-achiever banks are also found for repayment and deadbeat TARP banks.