Abstract:

Revolving credit is at the core of the banking business. Corporate revolving credit
lines are demandable claims; thus, similar to a traditional bank run on deposits,
sudden widespread drawdowns on credit lines can be destabilizing to the banking
sector. However, we show that, unlike deposits, credit line utilization has a large
interest rate sensitivity. A revolving line run is less likely in a high-interest-rate
environment, but can introduce vulnerability when the Fed cuts the interest rate to support a weak banking sector.