Bank Funding Risk, Reference Rates, and Credit Supply

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Staff Reports

Bank Funding Risk, Reference Rates, and Credit Supply

Number 1042
December 2022 Revised February 2023

JEL classification: G01, G02, G20, G21, E4, E43

Authors: Harry Cooperman, Darrell Duffie, Stephan Luck, Zachry Wang, and Yilin (David) Yang

Corporate credit lines are drawn more heavily when funding markets are more stressed. This covariance elevates expected bank funding costs. We show that credit supply is dampened by the associated debt-overhang cost to bank shareholders. Until 2022, this impact was reduced by linking the interest paid on lines to credit-sensitive reference rates such as LIBOR. We show that transition to risk-free reference rates may exacerbate this friction. The adverse impact on credit supply is offset if drawdowns are expected to be left on deposit at the same bank, which happened at some of the largest banks during the COVID recession.

Available only in PDF

Author Disclosure Statement(s)

Harry Cooperman
I have no relevant or material financial interests that relate to the research described in this paper.

Darrell Duffie
I declare that I have no relevant or material financial interests that relate to the research described in this paper,

Title: Bank Funding Risk, Reference Rates, and Credit Supply
Author(s): Darrell Duffie, Harry Cooperman, Stephan Luck, Zachry Wang, Yilin Yang

Prior to circulation, this paper was reviewed in accordance with the Federal Reserve Bank of New York review policy, available at https://www.newyorkfed.org/research/staff_reports/index.html

Stephan Luck
I have nothing to disclose.

Zachry Wang
The author declares that (s)he has no relevant or material financial interests that relate to the research described in this paper. Prior to circulation, this paper was reviewed in accordance with the Federal Reserve Bank of New York review policy, available at https://www.newyorkfed.org/research/staff_reports/index.html.

Yilin (David) Yang
Nothing to disclose.

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