Bank Runs and Interest Rates: A Revolving Lines Perspective 
Unused revolving lines of credit represent approximately 20 percent of bank liabilities, and like uninsured deposits, these unused lines can be subject to runs—widespread drawdowns—that threaten the stability of the banking system. Given the importance of revolving lines for the management of working capital and other financial needs, firms have, in the past, responded to uncertainty surrounding the banking sector by drawing down their revolving lines, similarly to how depositors have responded to such uncertainty by running on their deposits. Such precautionary runs on credit lines in both 2008 and 2020 contributed significantly to banks’ liquidity pressures. However, revolving lines are fundamentally different from deposits because borrowers must pay interest on drawn amounts, and when interest rates are high, the cost is greater. This paper quantifies the sensitivity of credit-line utilization to interest rates, showing that it is highly sensitive due to this cost structure and indicating that precautionary drawdowns are therefore less likely when policy rates are elevated.
Key Findings
- Based on early 2020, at the start of the pandemic, when interest rates were low and the motivation to draw down for precautionary purposes was high, the authors’ estimate indicates that when interest rates increase by 1 percentage point, the credit-line-utilization ratio (the percentage of committed credit that is drawn) falls by about 13 percentage points.
- More broadly, when precautionary motives are not dominant, the estimate indicates that a 1 percentage point increase in interest rates leads to a 20 to 30 percentage point decrease in credit-line utilization.
- The authors also find that banks seem to take a holistic approach to liquidity management: Banks that are more subject to deposit outflows in response to interest rate hikes extend credit lines that are less sensitive to interest rates.
Implications
The study's findings suggest that during the banking turmoil of 2023, the high-interest-rate environment may have reduced the risk of revolving-line drawdowns, serving as a stabilizing counterforce to deposit outflows that threatened bank stability during that period. More broadly, the findings demonstrate that holistic bank-liquidity management requires considering the interaction between assets and liabilities across different interest-rate scenarios, because the forces affecting deposits and revolving lines can act as opposing mechanisms. These insights can help supervisors and bank risk managers better model credit-line drawdowns for liquidity stress-test scenarios.
Abstract
Revolving credit is at the core of the banking business. Corporate revolving credit lines are demandable claims; therefore, as with a traditional bank run on deposits, sudden widespread drawdowns on credit lines can destabilize the banking sector. However, we show that, unlike with deposits, credit-line utilization is highly sensitive to interest rates. A run on revolving lines is less likely in a high-interest-rate environment, but when the Federal Reserve cuts the interest rate to support a weak banking sector, the sector can become vulnerable to such a run.