We study the crash of bank stock prices during the COVID-19 pandemic. We find evidence consistent with a “credit line drawdown channel”. Stock prices of banks with large ex-ante exposures to undrawn credit lines as well as large ex-post gross drawdowns decline more. The effect is attenuated for banks with higher capital buffers. These banks reduce term loan lending, even after policy measures were implemented. We conclude that bank provision of credit lines appears akin to writing deep out-of-the-money put options on aggregate risk; we show how the resulting contingent leverage and stock return exposure can be incorporated tractably into bank capital stress tests.
Authors
- Acknowledgements & Disclosure
- We thank Jennie Bai, Tobias Berg, Allen Berger, Christa Bouwman, Olivier Darmouni, Darrel Duffie, Max Jager, Rafael Repullo, Phil Strahan, Daniel Streitz, Anjan Thakor, Josef Zechner and participants at the 2020 Federal Reserve Stress Testing Conference and seminar participants at the Annual Columbia SIPA/BPI Bank Regulation Research Conference, Banco de Portugal, Bank of England, CAF, Federal Reserve Bank of Cleveland, NYU Stern Finance, RIDGE Workshop on Financial Stability, University of Southern Denmark, University of Durham, Villanova Webinars in Financial Intermediation, the Volatility and Risk Institute, World Bank, WU Vienna, for comments and suggestions and Sophie-Dorothee Rothermund and Christian Schmidt for excellent research assistance. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
- DOI
- https://doi.org/10.3386/w28559
- Published in
- United States of America
