Working Paper  |  September 14, 2022

Quick on the Draw: Line Adjustment and Draw Behavior in

Failing Banks

By: Amanda Rae Heitz, Jeffrey Traczynski and Alexander Ufier

Abstract: 

Using a proprietary set of transaction-level HELOC data from five banks, we explore whether banks actively manage HELOCs for periods prior to and during bank distress. Banks are more likely to revoke credit lines that exhibit potentially problematic characteristics at origination and time-varying borrower “early warning signals” of risk. In the three months before each bank’s staggered failure date, when bank capital constraints and incentives to strategically deploy that capital increase, our findings grow in magnitude. In contrast, during this time, we find that, on average, borrowers do not increase HELOC drawdown rates. The existing literature focuses on how bank relationships can be valuable during periods of economic or borrower stress. To our knowledge, we are the first paper to examine the value of lending as well as deposit relationships during bank stress. Before the bank becomes distressed, we find that existing relationships have no adverse effects on banks’ decision to revoke credit. As failure approaches, however, borrowers with other lending relationships are more likely to have their HELOCs cut, suggesting that lending relationships do not benefit borrowers during times of bank stress. We contribute to a growing literature that explores how contractions in the supply of credit and deteriorating bank financial health affect bank and borrower behavior.

Read the working paper, “Quick on the Draw: Line Adjustment and Draw Behavior in Failing Banks” by Amanda Rae Heitz, Jeffrey Traczynski and Alexander Ufier.

FDIC Center for Financial Research working papers are preliminary materials circulated to stimulate discussion and critical comment. The analysis, conclusions, and opinions set forth in the papers are those of the author(s) alone and do not necessarily reflect the views of the Federal Deposit Insurance Corporation.

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