Banks as Lenders of First Resort: Evidence from the COVID-19 Crisis
In March of 2020, banks faced the largest increase in liquidity demands ever observed. Firms drew funds on a massive scale from pre-existing credit lines and loan commitments in anticipation of cash flow disruptions from the economic shutdown designed to contain the COVID-19 crisis. The increase in liquidity demands was concentrated at the largest banks, who serve the largest firms. Pre-crisis financial condition did not limit banks’ liquidity supply. Coincident inflows of funds to banks from both the Federal Reserve’s liquidity injection programs and from depositors, along with strong pre-shock bank capital, explain why banks were able to accommodate these liquidity demands.
The results and conclusions of this paper represent those of the authors and do not represent the views of the Federal Reserve Board of Governors or any other institutions or persons affiliated with the Federal Reserve. Some data in this article were obtained through a confidential survey of depository institutions that requires confidential treatment of institution-level data and any information that identifies the individual institutions that reported the data. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
Philip E. Strahan
Strahan has visited the Federal Reserve Bank of New York on many occasions over the past 10 years as a research consultant. In addition, he served for three years on the Federal Reserve's Model Validation Council, which provides input into the U.S. stress testing regime.