Credit line runs and bank risk management: evidence from the disclosure of stress test results.

Series: Working Papers. 2245.

Author: José E. Gutiérrez and Luis Fernández Lafuerza.

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Credit line runs and bank risk management: evidence from the disclosure of stress test results. (1 MB)

Summary

As noted in recent literature, firms can run on credit lines due to fear of future credit restrictions. We exploit the 2011 stress test supervised by the European Banking Authority (EBA) and the Spanish Central Credit Register to explore: 1) the occurrence and magnitude of these runs after the release of negative stress test results; and 2) banks’ behaviour before and after the release of this information. We find that, following the release of the results, firms drew down approximately 10 pp more available funds from lines granted by banks that had a worse performance in the stress test. Moreover, before the release date, poorer performing banks were more likely to reduce the size of credit lines, while those with more significant balances of undrawn credit lines were more likely to cut term lending.