Scandinavian Working Papers in Economics

Working Paper Series,
Sveriges Riksbank (Central Bank of Sweden)

No 425: Do Credit Lines Provide Reliable Liquidity Insurance? Evidence from Commercial-Paper Backup Lines

Niklas Amberg (niklas.amberg@riksbank.se)
Additional contact information
Niklas Amberg: Research Department, Central Bank of Sweden, Postal: Sveriges Riksbank, SE-103 37 Stockholm, Sweden

Abstract: Commercial-paper backup lines account for a substantial share of undrawn loan commitments in the corporate sector, but have despite this received scant attention in the credit-line literature. In this paper, I study the liquidity-insurance properties of backup lines using a comprehensive loan- and security-level dataset and the sharp contraction of the Swedish commercial-paper market during the COVID-19 pandemic as an exogenous shock to the supply of market-provided liquidity. I find that backup lines provide commercial-paper issuers with reliable liquidity insurance and that banks’ liquidity provision via commercial-paper backup lines in periods of distress does not crowd out lending to other firms.

Keywords: Credit lines; bank lending; liquidity insurance; commercial paper; COVID-19

JEL-codes: D22; G21; G32

Language: English

39 pages, June 1, 2023

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