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Credit Lines and the Liquidity Insurance Channel
Author(s) -
ACHARYA VIRAL V.,
ALMEIDA HEITOR,
IPPOLITO FILIPPO,
PEREZORIVE ANDER
Publication year - 2021
Publication title -
journal of money, credit and banking
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.763
H-Index - 108
eISSN - 1538-4616
pISSN - 0022-2879
DOI - 10.1111/jmcb.12821
Subject(s) - market liquidity , business , loan , credit reference , financial system , credit crunch , credit history , credit risk , monetary economics , finance , economics
We suggest a new mechanism—the liquidity insurance channel —based on the widespread reliance of high credit quality firms on bank credit lines for liquidity management. Our model matches the patterns of usage of loans and credit lines in the cross‐section of firms and defines the conditions under which shocks to bank health affect primarily low or high credit quality firms. Our framework can explain why credit line origination is more cyclical than loan origination. Overall, we uncover a novel interaction between bank health and economic activity through the provision of bank credit lines to high credit quality firms.