Credit line exposures worsened Covid bank stock crash – NBER paper
Authors suggest “contingent leverage” could be included in stress tests
Banks with greater exposures via undrawn credit lines suffered sharper stock price falls during the Covid-19 crisis, new research finds.
Authors Viral Acharya, Robert Engle and Sascha Steffen construct a new measure of banks’ balance-sheet liquidity risk, comprised of “undrawn commitments” and wholesale finance minus cash or cash equivalents.
“We show that our measure of the liquidity risk of banks is important to understand the decline of bank stock prices during the first phase of the
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