The Loan Covenant Channel: How Bank Health Transmits to the Real Economy
We document the importance of covenant violations in transmitting bank health to non-financial firms using a new supervisory data set of bank loans. Roughly one-third of loans in our data breach a covenant during the 2008-09 period, providing lenders the opportunity 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 accounts for the majority of the cross-sectional variation in credit supply during the 2008-09 crisis.
Published Versions
Gabriel Chodorow‐Reich & Antonio Falato, 2022. "The Loan Covenant Channel: How Bank Health Transmits to the Real Economy," Journal of Finance, American Finance Association, vol. 77(1), pages 85-128, February. citation courtesy of 
GABRIEL CHODOROW‐REICH & ANTONIO FALATO, 2022. "The Loan Covenant Channel: How Bank Health Transmits to the Real Economy," The Journal of Finance, vol 77(1), pages 85-128.
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