Crowding Out Bank Loans: Liquidity-Driven Bond Issuance

Why Did Bank Stocks Crash during COVID-19?

“…We demonstrate how the episodic nature of credit-line drawdowns and balance-sheet liquidity risk can be incorporated tractably into bank stress tests. Darmouni and Siani (2020) show that U.S. non-financial firms issued bonds following the monetary policy and fiscal interventions in March 2020 and used the proceeds to repay credit lines. While a large proportion of credit lines has been repaid in Q2 and Q3 2020, corporate preference for cash of firms has remained high (Online Appendix B) and total debt on firms' balance sheet has substantially increased.…”

“…Greenwald et al (2020) also show that particularly large firms used their credit lines and banks with larger drawdowns reduced term lending to small firms more relative to other banks. Darmouni and Siani (2020) show that a large percentage of credit lines were repaid through bond issuances in Q2 and Q3 2020. By examining both gross drawdowns and net (of deposit inflows) drawdowns, we demonstrate that credit-line drawdowns reduce banks' franchise value because of binding capital constraints.…”

Bank liquidity provision across the firm size distribution

“…additional drawdown among firms in the bond market over and above the size gradient. Including it only modestly reduces the size gradient, indicating that disruptions in the bond market by themselves cannot explain the differences between large and small firms, consistent with many bond issuers leaving their credit line untouched in 2020Q1 (Darmouni and Siani, 2020).…”

Who Supplies PPP Loans (and Does It Matter)? Banks, Relationships, and the COVID Crisis

“…The exception is Unused commitments, which has a negative impact on non-PPP C&I lending (but no effect on non-PPP total credit). This reflects firms, who had drawn funds during the March financial-market meltdown, repaying those funds as bond-market access came back online (see Chodorow-Reich et al (2020) and Darmouni and Siani (2020)).…”