Fwd: Quick on the Draw: Line Adjustment and Draw Behavior in Failing Banks

Thu Sep 15 09:20:17 PDT 2022

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From: FDIC Subscriptions <subscriptions at subscriptions.fdic.gov>
Date: Wed, Sep 14, 2022, 10:13 AM
Subject: Quick on the Draw: Line Adjustment and Draw Behavior in Failing
Banks
To: <g at xny.io>

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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”
<https://lnks.gd/l/eyJhbGciOiJIUzI1NiJ9.eyJidWxsZXRpbl9saW5rX2lkIjoxMDEsInVyaSI6ImJwMjpjbGljayIsImJ1bGxldGluX2lkIjoiMjAyMjA5MTQuNjM2NzM1NTEiLCJ1cmwiOiJodHRwczovL3d3dy5mZGljLmdvdi9hbmFseXNpcy9jZnIvd29ya2luZy1wYXBlcnMvMjAyMi9jZnItd3AyMDIyLTExLnBkZj9zb3VyY2U9Z292ZGVsaXZlcnkmdXRtX21lZGl1bT1lbWFpbCZ1dG1fc291cmNlPWdvdmRlbGl2ZXJ5In0.6oUIWxDZjv_Z_2YSVFdroMf35HJnavERRL0kxLMfvXY/s/1689017519/br/143970724672-l>
by Amanda Rae Heitz, Jeffrey Traczynski and Alexander Ufier.

FDIC Center for Financial Research
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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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