Lenders use strict covenants to hedge against rate hikes – study
US banks exposed to policy volatility use breaches to cut lending in tightening cycles, authors say
US banks with greater exposure to changes in monetary policy are hedging against future rate rises by placing more restrictive covenants in their loan contracts, a new study finds.
The discussion paper by researchers from the Federal Reserve board and the University of Missouri, published this month, uses banks’ “deposit market power” as a proxy for their exposure to monetary policy. Such banks experiences larger deposit outflows, and larger reductions in their lending capacity, than their peers
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