This paper presents a contract-theoretic model in which banks choose pre-arranged long-term and spot funding to finance firms' liquidity needs via credit lines. In high liquidity need states, long-term funding reduces reneging on credit lines, sustains lending, and decreases liquidated firms. Under externalities generated by firm liquidations, banks choose insufficient long-term funding compared to a social planner. A long-term funding requirement, such as the Basel III net stable funding ratio, can restore constrained efficiency. The optimal requirement depends on the frequency of high liquidity need states, the value lost after a liquidation, and the excess cost of long-term 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 uncovers new benefits of lending relationships for banks. Using a loan-level database, we find that firms in financial distress avoid delaying payments on loans from their most important banks to preserve their most valuable lending relationships. This effect is stronger for microenterprises and when firms' borrowing is concentrated in fewer banks. We also find that banks internalize this borrower behavior in the recognition of discretionary loan impairments. Our analysis controls for potential zombie lending, loan characteristics, endogenous matching between banks and firms, and time-varying firm and bank fixed effects to identify borrowers' choices to repay loans. We confirm our results by exploiting a bank merger and showing that firms that prioritize payments to their main banks perform better in the two years after their first payment delay.

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 document a novel channel through which domestic bank regulations generate cross-border real effects via international trade. Our setting is a one-time, unexpected increase in loan loss provisions in Spain in 2012. Using comprehensive administrative data from the Spanish credit register matched with customs data, we show that importers relying on the most affected banks experienced sharp reductions in credit supply, which led to a decline in their purchases abroad. Leveraging bilateral trade data at the country-product level, we find that Spanish aggregate imports declined, indicating limited reallocation across firms: the shock on highly exposed importers was not offset by the expansion from less exposed ones. This decline in Spain's import demand is transmitted internationally, as total exports of Spain's trading partners fell. The effect was stronger for countries with less developed financial systems, for exporters facing higher bilateral trade costs vis-à-vis Spain, and for products that are harder to reallocate across markets. Our findings highlight international trade as a key transmission mechanism of banking regulation-and domestic shocks more broadly-with implications for the cross-border coordination of prudential policy.