The COVID-19 pandemic induced an unprecedented “stress test” on the financial system and the ability of banks to supply liquidity to the real economy. A new paper by Lei Li, Phil Strahan, and Song Zhang entitled “Banks as Lenders of First Resort: Evidence from the COVID-19 Crisis” starts with the following important observation: In the last three weeks of March 2020, banks faced the largest increase in takedowns under existing credit lines ever observed – a weekly growth in demand for bank commercial and industrial loans that is 50 times the average weekly growth of the last half century! This unexpected increase in demand for liquidity, due to the COVID-19 shock, created the stress test on banks. The authors find that large banks serving large customers absorbed most of the demand. And, most importantly, pre-COVID financial conditions did not constrain these large banks’ liquidity supply.
Spotlight by Isil Erel
Photos courtesy of Lei Li, Philip E. Strahan, and Song Zhang
First published July 10, 2020