Are Bank Credit Lines the New Source of Financial Fragility?

Following the global financial crisis, regulators focused on ensuring that banks had access to enough liquidity to cover demands for wholesale funding. But another concern threatening banks’ stability is their requirement to draw down existing business credit lines, which in the immediate aftermath of the pandemic led to cuts in new corporate lending, investment and growth.

Main point: The growth of the shadow banking sector affects the banking sector and economy through credit lines provided by banks. A massive buildup of this risk since the global financial crisis has gone unnoticed and deserves some regulatory scrutiny.

A review of our work “Why did bank stock crash during COVID-19?” (co-authored with Viral Acharya and Robert Engle) has been published in the International Banker.

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