Bank Stability and the Price of Loan Commitments

This paper documents novel empirical evidence on how financial stability matters to firms. I find that firms pay a higher price for loan commitments (i.e., credit lines) from safer banks. A one standard deviation increase in the cross-sectional mean of bank capital increases the commitment fees by 5%. I further exploit exogenous variation in the market value of banks' assets from natural disasters to identify the effect of lender stability on commitment fees. The sensitivity of the fees to changes in the financial health of the bank are higher for firms with higher short term liabilities and higher income uncertainty. However, I do not find evidence that the effects depend on the size of the firm. These results indicate that firms internalize the uncertainty regarding accessibility of credit lines due to financial distress of their lender