Year: 2021
Type: article
Abstract: ABSTRACT We document the importance of covenant violations in transmitting bank health to nonfinancial firms. Roughly one‐third of loans in our supervisory data breach a covenant during the 2008 to 2009 period, allowing lenders to force a renegotiation of loan terms or to accelerate repayment of otherwise long‐term credit. Lenders in worse health are more likely to force a reduction in the loan commitment following a violation. The reduction in credit to borrowers who violate a covenant can account for the majority of the cross‐sectional variation in credit supply during the 2008 to 2009 crisis.
Source: The Journal of Finance
DOI: 10.1111/jofi.13074
Authors: GABRIEL CHODOROW‐REICH, ANTONIO FALATO
Institutions: Harvard University, Federal Reserve Board of Governors
Language: English
Subfield: Finance
Domain: Social Sciences
Open Access status: green
OpenAlex ID: W3132700901