Fragile Financing? How Corporate Reliance on Shadow Banking Affects Bank Provision of Liquidity

Abstract

We document that banks appear reluctant to provide contingent liquidity in the form of credit lines to corporations that are reliant on shadow bank financing, in particular, on leveraged loans. A higher ratio of a firm's leveraged loans to its bank term loans is associated in times of aggregate stress with a greater drawdown of credit lines. Ex ante, this leads to firms having a lower access to bank credit lines both at the extensive as well as the intensive (size and fees) margin and stricter financial covenants on the credit line. In turn, this leads to a greater employment of cash in corporate liquidity management. We exploit the oil price shock of 2014-16 and the attendant decline in leveraged loan issuance as a plausibly exogenous shock to reliance on shadow banking. We find this episode is associated with de-leveraging by exposed firms but the reduced reliance on leveraged loans led to a subsequent increase in bank credit lines at lower fees.

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