The Evolution of a Financial Crisis: Collapse of the Asset‐Backed Commercial Paper Market
TL;DR: This article found that one third of ABCP programs experienced a run within weeks of the onset of the crisis and that runs, as well as yields and maturities for new issues, were related to program-level and macro-financial risks.
Abstract: This paper documents “runs” on asset-backed commercial paper (ABCP) programs in 2007. We find that one-third of programs experienced a run within weeks of the onset of the ABCP crisis and that runs, as well as yields and maturities for new issues, were related to program-level and macro-financial risks. These findings are consistent with the asymmetric information framework used to explain banking panics, have implications for commercial paper investors’ degree of risk intolerance, and inform empirical predictions of recent papers on dynamic coordination failures.
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TL;DR: In this paper, the authors measure the amount of repurchase funding extended by money market funds (MMF) and securities lenders to the shadow banking system, including quantities, haircuts, and repo rates by type of underlying collateral.
Abstract: We measure the repo funding extended by money market funds (MMF) and securities lenders to the shadow banking system, including quantities, haircuts, and repo rates by type of underlying collateral We find that repo played only a small role in funding private sector assets prior to the crisis, as most repos are backed by Treasury and Agency collateral Repo with private sector collateral contracts during the crisis, but the magnitude is relatively insignificant compared with the contraction in asset-backed commercial paper (ABCP) While relatively small in aggregate, the contraction in repo particularly affected key dealer banks with large exposures to private sector securities, which then had knock-on effects on security markets, and led these dealer banks to resort to the Fed's emergency lending programs We also find that haircuts in MMF-to-dealer repo rise less than the dealer-to-dealer or dealer-to-hedge fund repo haircuts reported in earlier papers This finding suggests that the contraction in repo led dealers to take defensive actions, given their own capital and liquidity problems, raising credit terms to their borrowers The picture that emerges from these findings looks less like a traditional bank run of depositors and more like a credit crunch among dealer banks
349 citations
TL;DR: This paper showed that at the onset of the crisis, aggregate deposit inflows into banks weakened and their loan-to-deposit shortfalls widened, and these patterns were pronounced at banks with greater undrawn commitments.
Abstract: Can banks maintain their advantage as liquidity providers when exposed to a financial crisis? While banks honored credit lines drawn by firms during the 2007 to 2009 crisis, this liquidity provision was only possible because of explicit, large support from the government and government-sponsored agencies. At the onset of the crisis, aggregate deposit inflows into banks weakened and their loan-to-deposit shortfalls widened. These patterns were pronounced at banks with greater undrawn commitments. Such banks sought to attract deposits by offering higher rates, but the resulting private funding was insufficient to cover shortfalls and they reduced new credit.
267 citations
TL;DR: In this article, the credit supply effects of the unexpected freeze of the European interbank market, using exhaustive Portuguese loan-level data, were studied and it was shown that banks that rely more on interbank borrowing before the crisis decrease their credit supply more during the crisis.
Abstract: We study the credit supply effects of the unexpected freeze of the European interbank market, using exhaustive Portuguese loan-level data. We find that banks that rely more on interbank borrowing before the crisis decrease their credit supply more during the crisis. The credit supply reduction is stronger for firms that are smaller, with weaker banking relationships. Small firms cannot compensate the credit crunch with other sources of debt. Furthermore, the impact of illiquidity on the credit crunch is stronger for less solvent banks. Finally, we find no overall positive effects of central bank liquidity but instead higher hoarding of liquidity.
234 citations
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TL;DR: In this article, the authors analyze a data set of repurchase agreements (repo), that is, loans between nonbank cash lenders and dealer banks collateralized with securities, to understand which short-term debt markets experienced ''runs� during the financial crisis.
Abstract: To understand which short-term debt markets experienced �runs� during the financial crisis, we analyze a novel data set of repurchase agreements (repo), that is, loans between nonbank cash lenders and dealer banks collateralized with securities. Consistent with a run, repo volume backed by private asset-backed securities falls to near zero in the crisis. However, the reduction is only $182 billion, which is small relative to the stock of private asset-backed securities as well as the contraction in asset-backed commercial paper. While the repo contraction is small in aggregate, it disproportionately affected a few dealer banks.
214 citations
TL;DR: In this paper, the authors developed and estimated an empirical model of the U.S. banking sector using a new data set covering the largest U. S. banks over the period 2002-2013.
Abstract: PRELIMINARY AND INCOMPLETE, PLEASE DO NOT CITE WITHOUT PERMISSION. We develop and estimate an empirical model of the U.S. banking sector using a new data set covering the largest U.S. banks over the period 2002-2013. Our model incorporates insured depositors and run-prone uninsured depositors who have rich preferences over dierentiated banks. Banks compete for deposits in the spirit of Matutes and Vives (1996) and can endogenously default. We estimate demand for uninsured
185 citations
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TL;DR: This article showed that new loans to large borrowers fell by 47% during the peak period of the financial crisis (fourth quarter of 2008) relative to the prior quarter and by 79% relative to peak of the credit boom (second quarter of 2007).
Abstract: This paper documents that new loans to large borrowers fell by 47% during the peak period of the financial crisis (fourth quarter of 2008) relative to the prior quarter and by 79% relative to the peak of the credit boom (second quarter of 2007). New lending for real investment (such as working capital and capital expenditures) fell by only 14% in the last quarter of 2008, but contracted nearly as much as new lending for restructuring (LBOs, M&A, share repurchases) relative to the peak of the credit boom. After the failure of Lehman Brothers in September 2008 there was a run by short-term bank creditors, making it difficult for banks to roll over their short-term debt. We document that there was a simultaneous run by borrowers who drew down their credit lines, leading to a spike in commercial and industrial loans reported on bank balance sheets. We examine whether these two stresses on bank liquidity led them to cut lending. In particular, we show that banks cut their lending less if they had better access to deposit financing and thus they were not as reliant on short-term debt. We also show that banks that were more vulnerable to credit line drawdowns because they co-syndicated more of their credit lines with Lehman Brothers reduced their lending to a greater extent.
2,100 citations
TL;DR: This paper found that new loans to large borrowers fell by 37% during the peak period of the financial crisis (September-November 2008) relative to the prior three-month period and by 68% compared to the peak of the credit boom (Mar-May 2007).
1,588 citations
TL;DR: The authors survey 1,050 CFOs in the US, Europe, and Asia to assess whether their firms are credit constrained during the global financial crisis of 2008 and find that constrained firms planned deeper cuts in tech spending, employment, and capital spending.
Abstract: We survey 1,050 CFOs in the US, Europe, and Asia to directly assess whether their firms are credit constrained during the global financial crisis of 2008 We study whether corporate spending plans differ conditional on this survey-based measure of financial constraint Our evidence indicates that constrained firms planned deeper cuts in tech spending, employment, and capital spending Constrained firms also burned through more cash, drew more heavily on lines of credit for fear banks would restrict access in the future, and sold more assets to fund their operations We also find that the inability to borrow externally caused many firms to bypass attractive investment opportunities, with 86% of constrained US CFOs saying their investment in attractive projects was restricted during the credit crisis of 2008 More than half of the respondents said they canceled or postponed their planned investments Our results also hold in Europe and Asia, and in many cases are stronger in those economies Our analysis adds to the portfolio of approaches and knowledge about the impact of credit constraints on real firm behavior
1,467 citations
TL;DR: The authors survey 1,050 chief financial officers (CFOs) in the U.S., Europe, and Asia to assess whether their firms are credit constrained during the global financial crisis of 2008 and find that constrained firms planned deeper cuts in tech spending, employment, and capital spending.
1,351 citations
01 Dec 1988
TL;DR: The authors examined the seven panics during the U.S. National Banking Era (1863-1914) and examined depositor behavior under subsequent monetary regimes, concluding that panics are caused by the same relations governing consumer behavior during nonpanic times.
Abstract: THE nearly universal experience of banking panics has led many governments to regulate the banking industry. Economists, too, have increasingly focused on panics as evidence of bank uniqueness. Yet, competing theories to explain banking panics have never been tested. Are banking panics caused by the same relations governing consumer behavior during nonpanic times? Are panics random events, or are panics associated with movements in expected returns, in particular, with movements in perceived risk which are predictable on the basis of prior information? If so, what is the relevant information? Using newly constructed data this study addresses these questions by examination of the seven panics during the U.S. National Banking Era (1863-1914). Depositor behavior under subsequent monetary regimes is also examined. In all, one hundred years of depositor behavior are examined. A common view of panics is that they are random events, perhaps self-confirming equilibria in settings with multiple equilibria, caused by shifts in the beliefs of agents which are unrelated to the real economy. An alternative view makes panics less mysterious. Agents cannot discriminate between the riskiness of various banks because they lack bank-specific information. Aggregate information may then be used to assess risk, in which case it can occur that all banks may be perceived to be riskier. Consumers then withdraw enough to cause a panic. While the former hypothesis is not testable, it suggests that panics are special events and implies that banks are inherently flawed. The latter hypothesis is testable; it suggests that movements in variables predicting deposit riskiness cause panics just as such movements would be used to price such risk at all other times. This hypothesis links panics to occurrences of a threshold value of some variable predicting the riskiness of bank deposits.
896 citations