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NATIONAL BUREAU OF ECONOMIC RESEARCH
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The Loan Covenant Channel: How Bank Health Transmits to the Real Economy

Gabriel Chodorow-Reich, Antonio Falato

NBER Working Paper No. 23879
Issued in September 2017, Revised in June 2020
NBER Program(s):Economic Fluctuations and Growth, Monetary Economics

We document the importance of covenant violations in transmitting bank health to non-financial firms using a new supervisory data set of bank loans. Roughly one-third of loans in our data breach a covenant during the 2008-09 period, providing lenders the opportunity 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 accounts for the majority of the cross-sectional variation in credit supply during the 2008-09 crisis.

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Document Object Identifier (DOI): 10.3386/w23879

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