This paper presents a contract-theoretic model in which banks choose pre-arranged and ex-post funding to finance firms' liquidity needs through credit lines. In states with high liquidity needs, pre-arranged funding is key to sustaining lending and reducing the number of liquidated firms. Yet, in the presence of a pecuniary externality on firms' liquidation values, competitive banks choose insufficient pre-funding compared to a constrained social planner. Constrained efficiency can be restored using regulatory liquidity ratios. The optimal regulatory ratio depends on the frequency of high liquidity need states, the value lost after a firm liquidation, and the premium on pre-funding. 

This paper studies the impact of supervisory expectations regarding non-performing loans (NPLs) on banks' NPL disposal and lending behavior as well as on the real economy. Using the supervisory intervention announced by the European Central Bank in 2018q1 as a quasi-natural experiment, we show that banks disposed of old NPLs at a higher rate after the policy. Furthermore, banks that were more heavily exposed to the policy tightened their lending standards, especially for risky firms. We also find that firms borrowing from banks affected by the policy intervention experienced a decline in the growth rate of their total assets, investment, employment, and sales. Our results highlight the importance of timely recognition of NPLs as a factor that can affect credit allocation. We also shed light on the importance of strong bank fundamentals in cleansing banks' balance sheets without disrupting credit intermediation.

This paper analyzes how lending relationships affect the incentives of borrowers to default using loan-level data in Spain. We provide new evidence showing that firms first default on loans from non-main banks. This effect is stronger in small firms and the lower the bank solvency. Our results suggest that firms have lower incentives to default to their most important banks to preserve the most valuable lending relationships. Our findings also indicate that banks internalize this borrower behavior in their credit risk management because most important banks recognize lower discretionary loan impairments. The results are robust to alternative specifications and control for potential bank forbearance, loan characteristics, and a variety of time-varying fixed effects.

This paper investigates the impact on credit supply resulting from the first sale of business bank resolution conducted under the new post-Global Financial Crisis frameworks. Our findings reveal that this resolution adversely affected credit supply of the acquiring bank, albeit unevenly across borrowers. The acquiring bank protected the credit supply to borrowers inherited from the failed bank, compensating for this by reducing credit to its less important customers and those facing high switching costs. Our results highlight the potential benefits of the sale-of-business tool in managing a bank failure without causing significant disruption to credit intermediation, provided that the acquirer is well-capitalized and its business strategy aims to maintain the acquired franchise.

We exploit a one-time, unexpected increase in loan provisions in Spain to estimate the cross-border real effects of macroprudential policies through international trade linkages. Using comprehensive data from the Spanish credit register matched with customs records from 2009 to 2013, we find that Spanish importers and exporters relying on banks most affected by the policy faced significant reductions in credit supply. These firms subsequently experienced a substantial contraction in trade flows. Leveraging bilateral trade data at the country and product level, we further show that overall Spanish imports decreased following the policy, which indicates limited trade reallocation across domestic firms. Moreover, the decline in Spain's import demand led to a contraction in the total exports of Spain's main trading partners. Our paper documents a novel international trade channel through which macroprudential policies can have real effects on foreign countries.