When a Crisis Hits: How Buffers Reach Corporate Borrowers

This chapter examines the bank-borrower side of usable liquidity: when many companies draw committed credit at once, do banks with more room above the LCR floor provide more of the funding? The Federal Reserve study of the March 2020 shock offers a focused answer. Its comparison of the same firms across different bank relationships helps separate a bank-supply effect from the simple fact that large or well-connected banks may serve different customers.

The episode is useful because credit lines are designed to be valuable in bad states. A firm can keep a line undrawn in normal times and draw it when uncertainty rises, which makes the promise a contingent claim on the bank's liquidity. If many firms exercise that option together, the bank's buffer is tested not in an abstract ratio but through actual requests for cash. The result shows what a high buffer can do—and, just as importantly, what it cannot do for every borrower.

Why March 2020 exposed the bank-supply problem

In March 2020, companies drew heavily on existing credit lines as financial markets seized up and the economic outlook became unusually uncertain. The behavior was precautionary: firms wanted cash on hand before they knew how long the disruption would last or whether outside funding would remain available. This rush created a natural stress test for banks. A committed line is a promise made in advance, but the bank must honor many such promises while its own funding conditions may be deteriorating.

The timing matters. A line that is available after a crisis has passed is not an equivalent substitute for liquidity available during the first days of the shock. At the peak, the bank has to decide how to allocate limited room across existing relationships. It may have assets recognized as HQLA, but it also has to manage projected outflows, preserve its regulatory position, and maintain the confidence of its creditors. The Federal Reserve paper asks whether the buffer above the applicable minimum helped a bank accommodate this synchronized demand.

The study combines three kinds of information. FR Y-14 Schedule H.1 supplies quarterly bank-firm credit-line data, including committed and utilized amounts, firm characteristics, and covenant information. The researchers match those observations to hand-collected LCR disclosures and to FR Y-9C balance-sheet data. The final panel covers 29 bank holding companies from 2017Q1 through 2024Q4. It contains 174,526 bank-firm-quarter observations and 47,876 unique firm-bank relationships in the 2019Q4 baseline.

The central comparison has three dimensions. First, banks are divided into higher- and lower-buffer groups using their pre-shock LCR buffer. Second, firms are divided according to whether they had relatively high or low undrawn credit-line capacity. Third, the study compares the COVID Q1 period—2020Q1, with the acute turmoil concentrated in March—with the pre-COVID baseline in 2019Q4. The relevant result is not simply whether high-buffer banks had more utilization. It is whether high-undrawn firms increased utilization more through high-buffer banks during the shock than through the comparison relationships.