The Loan Covenant Channel: How Bank Health Transmits to the Real Economy

2021/08/08 by GABRIEL CHODOROW‐REICH, Gabriel Chodorow-Reich, ANTONIO FALATO +1 · 14 citations
Business, Management and Accounting · Economics, Econometrics and Finance · #Banking stability, regulation, efficiency #Business #Corporate Finance and Governance #Covenant #Cross-collateralization #Economics #Finance #Financial system #Law #Loan #Monetary economics #Non-conforming loan #Non-performing loan #State Capitalism and Financial Governance #Term loan

paper · open access · doi:10.1111/jofi.13074

published in The Journal of Finance 77(1), 85-128 (Wiley)

openalex publication_date 2021/08/08 · openalex created_date 2025/10/10 · openalex updated_date 2026/07/15

Abstract

ABSTRACT We document the importance of covenant violations in transmitting bank health to nonfinancial firms. Roughly one‐third of loans in our supervisory data breach a covenant during the 2008 to 2009 period, allowing lenders 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 can account for the majority of the cross‐sectional variation in credit supply during the 2008 to 2009 crisis.

Citations

• Information Asymmetry and Financing Arrangements: Evidence from Syndicated Loans
• Large–Sample Evidence on the Debt Covenant Hypothesis

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