Finance and Economics Discussion Series (FEDS)
August 2021 (Revised November 2021)
Domestic Lending and the Pandemic: How Does Banks' Exposure to Covid-19 Abroad Affect Their Lending in the United States?
Judit Temesvary and Andrew Wei
Abstract:
Shortly after the onset of the pandemic, U.S. banks cut their term lending to businesses–but little is known about how much, and why, banks' choice to ration credit contributed to this contraction. Afforded by a unique combination of several highly granular bank regulatory datasets, we identify the role of banks' exposure to Covid-related restrictions abroad – a balance sheet "shock" that affects only banks' credit supply, but not their US borrowers' demand for loans. We find that US banks with higher foreign Covid exposure cut their lending to US firms, and tightened terms on such loans, significantly more. Banks having become less risk tolerant, as well as foreign borrowers defaulting and drawing down on their cross-border credit lines, were potent mechanisms through which foreign Covid exposure reduced banks' domestic lending.
Accessible materials (.zip)
Keywords: Cross-border exposure, bank lending, bank capital, bank balance sheet liquidity
DOI: https://doi.org/10.17016/FEDS.2021.056r1
PDF: Full Paper
Original Paper: PDF | Accessible materials (.zip)
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