Banks' Liquidity and the Cost of Liquidity to Corporations

We consider the liquidity shock banks experienced following the collapse of the asset-backed commercial paper market in the fall of 2007 to investigate whether banks' liquidity condition affect their ability to provide liquidity to corporations. We find that banks that borrowed more from the Federal Home Loan Bank system or the Fed's discount window following that liquidity shock passed a larger portion of their borrowing costs onto corporations seeking access to liquidity in the fall of 2007 when compared to the pre-crisis period. This increase is larger among banks with a larger exposure to the asset-backed commercial paper market, credit lines that pose more liquidity risk to banks, and borrowers that are likely dependent on the credit-line provider. Our findings show that the crisis which affected the banking system had a negative effect not only on the price of credit to corporations, but also on the price corporations pay to guarantee access to liquidity