Borrower Correlated Liquidity Demands and the Use of Minimum Liquidity Covenants in Loan Contracts | Episode No.92

Workshop’s Topic: Banks serve as important liquidity providers to the corporate sector. However, a bank’s ability to provide liquidity is limited if many of its borrowers demand liquidity at the same time (i.e., correlated liquidity demands). We predict and find that a bank is more likely to include covenants that require a borrower to hold minimum liquidity (minimum liquidity covenants) in loan contracts when the borrower has higher correlated liquidity demands with the bank’s loan portfolio. We further find that the effect of borrower-lender portfolio liquidity demand correlation on the use of minimum liquidity covenants is stronger when banks are more affected by the Liquidity Coverage Ratio regulations, when borrowers experience negative liquidity shocks, and when borrowers face greater financial constraints. Lastly, we find that borrowers have lower liquidity risks after obtaining loans with minimum liquidity covenants. Overall, our findings suggest that banks actively monitor their borrowers’ liquidity to ensure their role as liquidity providers.

Time and Location: 10:00-12:00 PM (GMT+8), Room A423 (School of Management)

Language: Bilingual (Chinese and English)

Introduction of Speakers

Ph.D JIANG Shushu

National University of Singapore, Department of Accouting

JIANG Shushu is an assistant professor in the Department of Accounting at the National University of Singapore. She received a bachelor’s degree in management from Zhejiang University and a doctor’s degree in accounting from the University of Toronto. Her research field is the contractual role of accounting, focusing on how to design and execute contractual contracts to solve agency problems, as well as environmental, social, and corporate governance issues. Her academic achievements have been published in journals such as the Journal of International Business Studies. She also serves as an anonymous reviewer for the top accounting journal, Contemporary Accounting Research.