Fragile Financing? How Corporate Reliance on Shadow Banking Affects Bank Provision of Liquidity

Abstract

We document that banks appear reluctant to provide contingent liquidity in the form of credit lines to corporations that are reliant on non-bank funding. A higher dependence on non-bank funding correlates with a greater likelihood of firms drawing on credit lines during widespread financial distress. Ex-ante, this results in non-bank dependent firms having reduced access to bank-provided credit lines, both in terms of their availability (extensive margin) and terms (intensive margin). Consequently, these firms rely more on cash than credit lines for managing liquidity. We exploit the oil price shock of 2014-16 and the subsequent drop in leveraged loan purchases by affected non-bank lenders as a plausibly exogenous supply-side shock to funding reliance of firms on non-banks. Firms facing immediate risks of refinancing their leveraged loans had to de-lever. However, consistent with an anticipation of decreased dependence on leveraged loans, access to bank credit lines improved, often with lower fees, for firms not facing immediate refinancing pressure, which enhanced their liquidity management and capital growth.