Credit lines can amplify stress – NBER paper

Study finds junk-grade firms draw more credit, and drawdowns can worsen liquidity shocks

Financial crisis

Credit lines offer firms an important hedging option but could expose banks to poorly understood risks, research finds.

A working paper published by the US National Bureau of Economic Research reviews the literature on contingent credit and how it performs under stress. 

Authors Viral Acharya, Maximilian Jager and Sascha Steffen find drawdowns tend to double in periods of stress, with junk-grade firms drawing most heavily on the credit. 

During the Covid crisis, firms drew down their credit lines

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