Bank Stability and the Price of Loan Commitments

Abstract

Firms insure themselves from liquidity shocks by contracting on credit lines from banks. I document novel empirical evidence on how the risk of contract nonperformance by banks is priced. Firms pay a higher price for loan commitments from safer banks. A one standard deviation increase in the cross-sectional mean of bank capital increases the commitment fees by 5%. I further exploit exogenous variation in the market value of banks' assets from natural disasters to identify causal effect of lender stability on commitment fees. The sensitivity of the fees is higher for firms with higher short-term liabilities and higher income uncertainty.