%0 Journal Article %J Journal of Finance %D 2022 %T The Loan Covenant Channel: How Bank Health Transmits to the Real Economy %A Gabriel Chodorow-Reich %A Antonio Falato %X

We document the importance of covenant violations in transmitting bank health to nonfinancial firms using a new supervisory data set of bank loans. Roughly one-third of loans in our data breach a covenant during the 2008-09 period, providing lenders the opportunity to force a renegotiation of loan terms or to accelerate repayment of otherwise long-term credit. Lenders in worse health are more likely to force a reduction in the loan commitment following a violation. The reduction in credit to borrowers who violate a covenant can account for the majority of the cross-sectional variation in credit supply during the 2008-09 crisis. 

%B Journal of Finance %V 77 %P 85-128 %G eng %U https://onlinelibrary.wiley.com/doi/10.1111/jofi.13074 %N 1