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FinanceandEconomicsDiscussionSeries

FederalReserveBoard,Washington,D.C.

ISSN1936-2854(Print)

ISSN2767-3898(Online)

MonetaryPolicyExposureofBanksandLoanContracting

AhmetDegerli,JingWang

2026-008

Pleasecitethispaperas:

Degerli,Ahmet,andJingWang(2026).“MonetaryPolicyExposureofBanksandLoanContracting,”FinanceandEconomicsDiscussionSeries2026-008.Washington:BoardofGovernorsoftheFederalReserveSystem,

/10.17016/FEDS.2026.008

.

NOTE:StafworkingpapersintheFinanceandEconomicsDiscussionSeries(FEDS)arepreliminarymaterialscirculatedtostimulatediscussionandcriticalcomment.TheanalysisandconclusionssetfortharethoseoftheauthorsanddonotindicateconcurrencebyothermembersoftheresearchstafortheBoardofGovernors.ReferencesinpublicationstotheFinanceandEconomicsDiscussionSeries(otherthanacknowledgement)shouldbeclearedwiththeauthor(s)toprotectthetentativecharacterofthesepapers.

MonetaryPolicyExposureofBanks

andLoanContracting*

AhmetDegerliFederalReserveBoardahmet.degerli@

JingWang

UniversityofMissourijingwang@

January26,2026

Abstract

Weprovideevidencethatbanksuseloancovenantstoprepareforfuturemonetarypolicytightening,therebyfacilitatingthebanklendingchannelofmonetarypolicytransmission.Specifically,bankswithgreatermonetarypolicyexposure—thosewhoselendingcapacitycontractsmoreasthefederalfundsrateincreases—includestricterfinancialcovenantsinloancontracts,grantingthemflexibilitytoreduceexistingloancommitmentsduringmonetarypolicytighteningwhenfirmsbreachcovenants.Theresultingcreditreductionstocovenantviolatorsbyhigh-exposurebanksaccountforoverone-thirdofthetotaldeclineincreditduringrecentfederalfundsratehikes.

Keywords:Loancontracting,Covenantstrictness,Covenantviolations,Monetarypolicyexposure,Monetarypolicytransmission,Banklendingchannel

JELclassification:G21,E52,M41,G32

*WewouldliketothankManuelAdelino,YavuzArslan,AllenN.Berger,AlonBrav,MahfuzChy,DaveDenis,ScottDyreng,IsilErel,DanielW.Green,SashaIndarte,GaziKabas,InderKhurana,HoyounKyung,FangLin,FergalMcCann,GregoryNini,ManjuPuri,AdrianoRampini,CarolaSchenone,VishViswanathan,YufengWu,DavidZekeforhelpfulcomments.Allerrorsareourown.ThispaperisadaptedfromachapterofAhmetDegerli’sdissertationcompletedatDukeUniversity.TheviewsexpressedherearethoseoftheauthorsandnotnecessarilythoseoftheFederalReserveBoardortheFederalReserveSystem.

1

1Introduction

Commercialbanksplayacriticalroleintransmittingmonetarypolicytotherealeconomy.Akeymechanismisthebanklendingchannel:whenthefederalfundsrateincreases,banks’lendingcapacitycontracts,leadingtoreducedlendingtofirms.

1

Forexample,duringatypical400-basis-pointfederalfundsratehikingcycle,bankscutcommerciallendingbyasmuchas10percent(

Drechsleretal.

,

2017

).

2

Besidesafectingapplicationsfornewloans,suchasignificantlendingreductionmayalsoafectexistingloans(

Jim´enezetal.

,

2012

).However,giventhatmostcommercialloansarelong-termcommitments,animportantquestionremains:howdobanksretaintheflexibilitytoreduceexistingloancommitmentsduringmonetarypolicytightening?

Inthispaper,weexaminetheexantedesignoffinancialcovenantsinloancontractstoaddressthisquestion.Theloancontractingliteratureestablishesthatstricterfinancialcovenantsareassociatedwithahigherlikelihoodofcovenantviolations,whichgrantlenderstherighttomodifyloanterms—includingreducingorterminatingtheloancommitment(

ChavaandRoberts

,

2008

;

Ninietal.

,

2009

;

Murfin

,

2012

;

DemerjianandOwens

,

2016

;

Wang

,

2017

).Therefore,byenhancingbanks’expostcontrolrights,strictercovenantsgivebankstheflexibilitytocurtailexistingloancommitmentsduringperiodsofmonetarypolicytighteningifacovenantisbreached.Sincebanksdiferintheirexposuretomonetarypolicy—thosewithgreaterexposureexperiencelargerreductionsinlendingcapacityasthefederalfundsraterisesand,consequently,reducelendingmore(

Drechsleretal.

,

2017

)—ourcentralpredictionisthatbankswithgreaterexposuretomonetarypolicyincludestricterfinancialcovenantsintheirloancontracts.

Totestthisprediction,weusedepositmarketconcentrationasaproxyforabank’smon-etarypolicyexposure,motivatedbyevidencethatbanks’depositmarketpowerdetermines

1See

BlinderandStiglitz

(

1983

);

BernankeandBlinder

(

1988

);

KashyapandStein

(

1994

);

Vanden

Heuvel

(

2002

).

2See

BernankeandBlinder

(

1992

)forasimilarmagnitudeofestimate.

2

theextenttowhichtheirlendingcontractsinresponsetomonetarypolicytightening(

Drech-

sleretal.

,

2017

;

Wangetal.

,

2022

;

Xiao

,

2020

).Inparticular,

Drechsleretal.

(

2017

)showthattheloanreductionsattributabletobankdepositmarketpoweraccountfortheentiretyofthebanklendingchannel.Forcovenantstrictness,weusethefinancialcovenantstrictnessmeasuredevelopedby

Murfin

(

2012

)and

DemerjianandOwens

(

2016

),whichincorporatesthenumberofcovenants,theslacknessofeachcovenant,andthevariance–covariancestruc-tureofthefinancialvariablesunderlyingeachcovenant.

WestartwithanOrdinaryLeastSquaresregression(OLS)modelanddocumentthatbankswithgreatermonetarypolicyexposureincludestrictercovenantsinloancontracts,controllingforvariousborrower,lender,andloancharacteristics,andincludingborrower,lender,andyearfixedefects.Importantly,thesefindingsremainrobustevenwhencon-trollingforvariousmeasuresofbanks’loanmarketpower.Ourfindingsareeconomicallysignificantasaone-standard-deviationincreaseinbanks’monetarypolicyexposureincreasesloancontractstrictnessbyasmuchas19percent.

However,toestablishcausality,theidentificationchallengeistheendogenousmatchingbetweenfirmsandbanksdrivenbyunobservedfirmcharacteristics.Forexample,iffirmswithcertainuncontrolledriskfactorstendtoborrowfrombankswithgreatermonetarypolicyexposure,strictercovenantscouldreflectthefirms’riskprofileratherthanthebanks’monetarypolicyexposure.Weemploytwoidentificationstrategiestoaddressthisconcern.First,following

KhwajaandMian

(

2008

),wefocusonfirmsthatborrowmultipleloanswithinthesameyearandestimateawithin-firmspecificationthatcomparesthecovenantstrictnessofloancontractsoriginatedbybankswithdiferentlevelsofmonetarypolicyexposuretothesamefirminthesameyear.Second,following

GarmaiseandMoskowitz

(

2006

)

3

,weexploitbank–merger–inducedvariationinbanks’monetarypolicyexposureinaninstrumentalvari-able(IV)framework.Bothidentificationstrategiesproduceresultsconsistentwithourmainfindings,providingsupportforacausalinterpretationoftherelationshipbetweenbanks’

3Seealso

ScharfsteinandSunderam

(

2016

),

FavaraandGiannetti

(

2017

)

3

monetarypolicyexposureandcovenantstrictness.

Forourinterpretationoftheaboveresultstohold—thatbankswritestrictcovenantstopreserveflexibilityinreducingloancommitmentswhenmonetarypolicytightensinthefuture—weshouldobservethat,conditionalonacovenantbreachduringtighteningcycles,bankswithgreatermonetarypolicyexposurereducecommitmentsmore.Wefindevidenceconsistentwiththisconjecture.Specifically,usingproprietarydataonloanmodificationandcovenantcompliancefromtheSharedNationalCreditProgram(SNC),wedocumentthatduringfederalfundsratehikingcycles,bankswithgreatermonetarypolicyexposurearemorelikelytocutloancommitmentsfollowingacovenantbreach,comparedtobankswithlowermonetarypolicyexposure.Aback-of-the-envelopecalculationsuggeststhatthischannelofcreditreductionaccountsforoverone-thirdofthetotalcreditreductionduringtheexaminedfederalfundsratehikingcycles.Thisevidencehighlightstheroleofcovenantsinthebanklendingchannelofmonetarypolicytransmission.

Weconductseveraladditionalanalysesthatcorroborateourmainfindings.First,weexplorewhetherourmainfindingsvarywiththetypeoffinancialcovenants.Specifically,weexaminethedistinctrolesofcapitalcovenants—thosebasedonbalancesheetinforma-tion(suchasleverageratiocovenants)—andperformancecovenants—thosebasedonincomestatementinformation(suchasinterestcoverageratiocovenants).Priorliteratureshowsthatcapitalcovenantsprimarilyalignshareholder-creditorinterestsexante,whileperformancecovenantsfunctionasexposttripwiresthattriggercovenantviolationswhenaborrower’sfinancialconditiondeteriorates(

ChristensenandNikolaev

,

2012

;

Wang

,

2017

).Assuch,thestrictnessofperformancecovenantsshouldbemorerelevantforbanks’expostflexibilitytoreduceexistingloancommitmentsduringmonetarypolicytightening.Consistentwiththisview,wefindthattheefectofbanks’monetarypolicyexposureoncovenantstrictnessisdrivenentirelybyperformancecovenants.Thisresultalsohelpsmitigateconcernsaboutomittedborrowercharacteristicsdrivingourfindings—ifthatwerethecase,wewouldexpectasimilarefectforcapitalcovenants.

4

Next,weexaminewhetherbanks’monetarypolicyexposureinfluencesanotherkeyaspectofloancontracts—maturity.Onepotentialalternativemechanismforbankstopreserveflexibilityinreducingcreditduringfuturemonetarypolicytighteningistoofershorter-maturityloans.Shortermaturitieswouldgivebanksmorefrequentopportunitiestoreducelendingbychoosingnottorenewmaturingloanswhentheirlendingcapacityisconstrainedbytherisingfederalfundsrate.However,wefindnoevidencesupportingthisalternative.Thisfindingisconsistentwithbothfirms’strongpreferenceforlong-termloans(

Grahamand

Harvey

,

2001

)andthesignificantunderwritingandsyndicationcoststhatmakeshort-termloanslessattractiveforbanks(

Blickleetal.

,

2020

;

Brucheetal.

,

2020

).

Wecontinuebyexaminingwhetherourmainfindingsvarywiththelevelofuncertaintyaboutfuturemonetarypolicyatthetimeofloanorigination.Becausestrictcovenantshelpbanksreservetheoptiontocutexistingloancommitmentsafterthelendingrelationshipisunderway,thevalueofthisoptionshouldbemorevaluableifthereisgreateruncertaintyaboutthefuturepathofmonetarypolicy.Accordingly,theefectofbanks’monetarypolicyexposureoncovenantstrictnessshouldbestrongerforloansoriginatedduringperiodsofhighmonetarypolicyuncertainty.Wefindresultsconsistentwiththisprediction.Thisfindingfurthersupportsourinterpretationthatbanksusestrictcovenantsasahedgingtoolagainsttheirmonetarypolicyexposure.

Wealsoshowthatloanmaturityandloantypeinfluencetheefectofbanks’monetarypolicyexposureoncovenantstrictness.Becausetheoptionvalueofstrictcovenantsishigherforlonger-termloans,andlonger-termloansaremorelikelytospanacontractionarymone-tarypolicycycle(allelseequal),weexpecttheefectofbanks’monetarypolicyexposureoncovenantstrictnesstobemorepronouncedfortheseloans.Furthermore,becausecreditlinestypicallyremainonbanks’balancesheets—–unliketermloans,whichareoftendistributedtoinstitutionalinvestors—–andexposebankstohigherliquidityrisk(

DruckerandPuri

,

2008

;

GatevandStrahan

,

2009

;

IraniandMeisenzahl

,

2017

;

Balasubramanyanetal.

,

2019

),weexpectourresulttobestrongerforlonger-termcreditlines.Wefindresultsconsistent

5

withtheseexpectations.

Finally,weinvestigatewhyfirmsacceptstricterloancovenantsratherthanswitchingtobankswithlowermonetarypolicyexposurethatmightoferlessrestrictivecovenants.Althoughbankswithgreatermonetarypolicyexposureincludestrictercovenants,wefindnoevidencethattheycompensateborrowerswithlowerloanspreads.Thissuggeststhatfirmsdonotacceptstrictercovenantsinexchangeforlowerinterestrates.Weinterpretthisfindingasconsistentwithpriorresearchshowingthatlendingrelationshipsarestickyandswitchingbanksiscostly.Asaresult,firmsmaytoleratestrictercovenantsimposedbybanksthataremoreexposedtomonetarypolicytightening,withoutbeingcompensatedbylowerinterestrates.Becauseswitchingcostsareparticularlyhighforinformationallyopaqueandfinanciallydistressedfirms(

Fama

,

1985

;

Diamond

,

1991

;

PetersenandRajan

,

1994

;

Drucker

andPuri

,

2008

),wepredict—andfind—thattheefectofbankmonetarypolicyexposureoncovenantstrictnessisstrongerforthesefirms.Overall,theresultssuggestthatfirmsfacinggreaterfrictionsinchanginglendersaremoresusceptibletotheinfluenceofbanks’monetarypolicyexposureoncovenantstrictness.

Ourfindingscontributetoseveralstrandsoftheliterature.First,weextendtheliteratureonthebanklendingchannelofmonetarypolicytransmission.Whilepriorworkfocusesonhowbanksadjusttheirlendingbehaviorafterchangesinthefederalfundsrate,

4

theyarelargelysilentonhowbanksgaintheflexibilitytodosoforexistingloancommitments.Wecontributebyidentifyingaspecificchannel—covenantdesign—throughwhichbanksprepareforfuturemonetarypolicytightening.Wealsoshowthattheexantedesignofcovenantstrictnesshelpsbanksrespondtofuturemonetarypolicytighteningbyreducingexistingloancommitmentstoborrowersthatviolateacovenant.Furthermore,althoughfirmsoftenrelyonlong-termloanstoavoidrefinancingrisk,ourfindingsrevealthattheyremainexposedtocreditcontractionsinducedbymonetarypolicytighteningthroughcovenantenforcement.

4Pleasesee

BlinderandStiglitz

(

1983

),

BernankeandBlinder

(

1988

),

BernankeandBlinder

(

1992

),

KashyapandStein

(

1995

),

KashyapandStein

(

2000

),

KishanandOpiela

(

2000

),

Campello

(

2002

),

Peek

etal.

(

2003

),

PeekandRosengren

(

2010

),

Drechsleretal.

(

2017

),

Englishetal.

(

2018

),

Temesvaryetal.

(

2018

),and

BruningandIvashina

(

2020

)forexample.

6

Second,wecontributetotheliteratureonthesupply-sidedeterminantsofcovenantstrict-ness.

Murfin

(

2012

)showsthatlenders’exantescreeningability—proxiedbypaymentde-faultsintheirloanportfolios—afectscovenantstrictness.

WangandXia

(

2014

)findthatbanksmoreactiveintheloansecuritizationmarketoriginateloanswithloosercovenants.

Christensenetal.

(

2022

)showthatfinancialshockstolendersleadtomorerestrictiveperfor-mancecovenants.

Demerjianetal.

(

2023

)documentthatbankswithlowerregulatorycapitalissueloanswithlessrestrictivecovenantstoavoidloandowngradesthatwouldfurthererodetheircapital.Thisliteraturealsohighlightstheroleofindividualloanofficersinshapingloancovenants(

Bushmanetal.

,

2021

;

Herpfer

,

2021

;

Cheongetal.

,

2025

).Weextendthisbodyofworkbyidentifyinganewsupply-sidedeterminantofcovenantstrictness:banks’exposuretomonetarypolicy.Unlikepriorsupply-sidedeterminantsthatfocuslargelyoncharacteristicsrelatedtobanks’lendingoperations,ourevidenceshowsthatbanks’depositcharacteristicsalsoplayasignificantroleinshapingcovenantstrictness.

Third,ourpaperrelatesto,butdifersfrom,theliteraturethatstudieshowfinanciallyunhealthybanksusecovenantviolationstoreducelendingexpost(

Ippolitoetal.

,

2019

;

Chodorow-ReichandFalato

,

2022

).Thisliteraturefocusesonbankhealthshocksandlendingresponsesconditionalonacovenantviolation.Weinsteadexamineadiferentdriver—banks’exposuretomonetarypolicy—andadiferentmargin—ex-antecovenantdesign.Weshowthatmoreexposedbankswritestrictercovenants,increasingthelikelihoodthatacovenantviolationoccurslaterandtherebyprovidingbankswithflexibilitytocontractcreditwhenpolicytightens.Ourfindings,therefore,shiftthefocusfromexpostenforcementbyunhealthybankstoexantecontractdesignbybanksanticipatingmonetarypolicycycles.

Theremainderofthispaperisorganizedasfollows.Section

2

reviewstherelatedlit-eratureanddevelopsourmainhypothesis.Section

3

describesourdataandsample,andpresentssummarystatistics.Section

4

reportstheresultsofthemainempiricalanalyses.Section

5

providesevidencefromcorroborativeanalyses.Section

6

concludes.

7

2RelatedLiteratureandHypothesisDevelopment

Ourresearchismotivatedbytwostrandsofliterature.Thefirstemphasizestheimpor-tanceofcovenantdesigninanincompletecontractingenvironment.Thesecondhighlightshowdepositmarketpowerdeterminesbanks’exposuretomonetarypolicy.

Debtcontractsareinherentlyincompleteandaredesignedwiththeconsiderationoffuturerenegotiation(

HartandMoore

,

1988

;

AghionandBolton

,

1992

).Priorstudiesshowthatfinancialcovenants,whichspecifyminimumormaximumthresholdsforfinancialratiosthatborrowersmustcomplywithduringthelifeoftheloan,playacrucialroleinfacilitatingcontractrenegotiation.Thesecovenantstransfercontrolrightsfromshareholderstocreditorswhentheyarebreachedorexpectedtobebreached.Forexample,aninterestcoverageratiocovenantsetsaminimumratioofEBITDAtointerestexpenses;iftheborrower’sinterestcoverageratiofallsbelowthisminimumthreshold,thiscovenantisbreached,grantinglenderstherighttomodifytheloanterms.Theliteraturedocumentsthatcovenantviolationsandrenegotiationsarecommon(

ChavaandRoberts

,

2008

;

Ninietal.

,

2012

;

DenisandWang

,

2014

;

Roberts

,

2015

;

Chodorow-ReichandFalato

,

2022

).Sincepaymentdefaultsoccurlessfrequently,thesecovenant-triggereddebtcontractrenegotiationsareessentialinprovidinglenderstheopportunitytoadjustloanterms,includingloanamount,duringthecourseofthelendingrelationship.

Followingtheincompletecontractingtheory,lenderswhoaremorelikelytoreviseloanagreementsbasedonfutureinformation—suchasmonetarypolicytightening—shoulddesigncovenantstobemorelikelytobecomebinding.Thiswouldprovidethemtheopportunitytoreassessandadjusttheloanagreementsasnewinformationemerges.Becausetheinitialdesignofloancovenantsiscloselytiedtothelikelihoodofthembecomingbinding—strictercovenantsbeingmorelikelytotriggercovenantviolationsorrenegotiation—banksthataremorelikelytoreassesslendingdecisionsinthefutureshouldincludestrictercovenantsintheirloancontracts.

8

Regardingbanks’exposuretomonetarypolicy,theliteraturehaslongestablishedthat

banksplayacentralroleintransmittingmonetarypolicy(

BlinderandStiglitz

,

1983

;

Bernanke

andBlinder

,

1988

;

KashyapandStein

,

1994

;

VandenHeuvel

,

2002

).Recentliteraturehigh-lightsthatbanksdiferintheirexposuretomonetarypolicy—someexperiencealargercontractioninlendingcapacitythanothersduringperiodsofmonetarypolicytightening.Importantly,thisliteratureprovidesevidencethatbanks’depositmarketpowerisakeydeterminantoftheirexposuretomonetarypolicy,shapingtheextenttowhichtheirlendingcontractsinresponsetoincreasesinthefederalfundsrate.

Specifically,

Drechsleretal.

(

2017

)presentamodelshowingthatwhenthefederalfundsrateincreases,banksthatcollectdepositsinconcentratedmarketswidentheirdepositspread—thediferencebetweenthefederalfundsrateandthebankdepositsrate,mak-ingdepositslessattractivetodepositorsand,therefore,makingdepositsflowoutofthesebanks;becausedepositsarethelargestandmoststablefundingsourceforbanks,thoseexperiencingdepositoutflowsreducetheirloansupply.

Drechsleretal.

(

2017

)provideevi-dencethat,inresponsetomonetarypolicytightening,banksthatcollectdepositsinmoreconcentratedmarketsincreasedepositspreadsmore,experiencelargerdepositoutflows,andultimatelyreducelendingmore,indicatinggreaterexposuretomonetarypolicy.Theseau-thorsfurtherdemonstratethatthischannelaccountsfortheentiretransmissionofmonetarypolicythroughbankbalancesheets.Usingstructuralestimations,

Wangetal.

(

2022

)and

Xiao

(

2020

)alsodocumentfindingssupportingtheimportanceofdepositmarketpowerinmonetarypolicytransmissionbybanks.

Basedontheabovediscussion,bankswithgreatermonetarypolicyexposure—duetotheirdepositmarketconcentration—aremorelikelytoneedtorevisetheirlendingdecisionsduringcontractionarymonetarypolicycycles.Anticipatingsuchaneed,thesebankshaveastrongerincentivetoincludestrictercovenants,whichgivethemthenecessarycontractualrightstoreduceloancommitmentsexpostwhenmonetarypolicytightensandacovenantisbreached.Therefore,ourcentralpredictionisthatbankswithgreatermonetarypolicy

9

exposureincludestricterfinancialcovenantsintheirloancontracts.

3Data

Inthissection,wedefinethevariablesusedinouranalysis,discussoursampleconstruc-tion,andpresentsummarystatistics.

3.1MainVariables

Ourmainoutcomevariableisloan-levelcovenantstrictness,whichcapturestheprob-abilitythataborrowerwillbreachafinancialcovenantinaloancontract(

Murfin

,

2012

;

DemerjianandOwens

,

2016

).WeobtainthecovenantstrictnessmeasurefromPeterDe-merjian’swebsite.Thismeasurecombinesinformationonthenumberoffinancialcovenants,theslacknessofeachcovenant

5

,andthevariance-covariancestructureoftheunderlyingfi-nancialvariablesacrossallcovenantsincludedinaloancontract,providingacomprehensiveassessmentoftheoverallstrictnessoffinancialcovenantsinthecontract.

Ourmainindependentvariableofinterestisbank-year-levelmonetarypolicyexposure.

Asdiscussedinsection

2

,priorliteratureshowsthatbanks’depositmarketpower,proxiedbytheirdepositmarketconcentration,substantiallyshapestheirresponsetomonetarypolicy.

Wefollow

Drechsleretal.

(

2017

)andusetheFederalDepositInsuranceCorporation’s(FDIC)SummaryofDeposits(SOD)datatocalculateabank’sdepositmarketconcentrationasaproxyforitsmonetarypolicyexposure.Specifically,wefirstcalculatecountydepositHerfindahl-HirschmanIndex(countydepositHHI)usingthefollowingequation:

N

whereDepositsharec,b,tisthedepositmarketshareofbankbincountycinyeart.CountyDepositHHIreflectsthedepositmarketconcentrationatthecounty-yearlevel.

Drechsleretal.

5Theslacknessofacovenantreferstothedistancebetweentheactualvalueoftheunderlyingfinancialvariableandthethresholdvaluesetbythecovenant

10

(

2017

)showthatcountydepositHHIcapturesthesensitivityofabank’stotaldepositsin

thecountytothechangesinthefederalfundsrate.

BecausemanybanksintheUScollectdepositsinmorethanonecounty,abank’soveralldepositmarketconcentrationisdeterminedbythedepositmarketconcentrationofallthecountiesinwhichthebankcollectsdeposits.Therefore,ourmainindependentvariableofinterest—bank-year-levelmonetarypolicyexposure(MPE)—iscalculatedasfollows:

whereDepositweightc,b,tisbankb’sdepositsincountycasapercentageofthebank’stotaldeposits.

Drechsleretal.

(

2017

)showthatthisvariablecapturesthesensitivityofabank’stotaldeposits—theprimarysourceoffundingforloans—and,therefore,itslendingcapacitytochangesinthefederalfundsrate.

3.2SampleConstruction

Webeginwiththesampleofloanswithavailablecovenantstrictnessmeasure.Wethenmergethisdatawithothersyndicatedloaninformation—suchasloanterms,loantype,loanpurpose,borroweridentity,andlenderidentity—fromLSEGData&Analytics’LoanConnectorDealScandatabase(DealScan)obtainedthroughWRDS.Ouranalysisfocusesonleadbanks,astheyareprimarilyresponsibleforsettingloancovenantsandmonitoringborrowers.Todirectlylinklenders’monetarypolicyexposuretothedesignofcovenants,werestrictoursampletoloanswithoneleadlender.

Weobtainbank-branch-leveldepositinformationfromtheSOD.WeobtainbankfinancialinformationfromU.S.ConsolidatedReportsofConditionandIncomeFilings(CallReports,obtainedthroughWRDS),submittedbybanksregulatedbytheFederalReserve,theFDIC,andtheOfficeoftheComptrolleroftheCurrency(OCC).WemanuallymatchleadlendersinDealScantobankholdingcompaniesintheSODandCallReportsusingnamesand

11

locations.Toobtainborrowerfinancialdata,weusethelinktablefromWRDS(

Chavaand

Roberts

,

2008

)tomatchDealScanborrowerstofirmsinCompustat.

Ourfinalsampleconsistsof9,354loansoriginatedbetween1995and2019by85uniquebanksastheleadlendersto2,110uniqueborrowers.

3.3OtherDataandVariables

WeobtainborrowerfinancialinformationfromCompustat,obtainedthroughWRDS,andconstructborrowercharacteristics,includingFirmSize(logoftotalassets),Market-to-Book(marketvaluedividedbybookvalue),andLeverage(long-termdebtdividedbytotalassets).Additionally,wecreatetwodummyvariables:HasRatingequaltooneifaborrowerhasanS&Pcreditrating,andHasIGRatingequaltooneiftheborrowerhasaninvestment-graderating.

WeusebankbalancesheetandincomestatementinformationfromtheCallReportstoconstructbankcharacteristics,includingBankSize(logoftotalassets),EquityRatio(equitydividedbybankassets),LiquidityRatio(cashandsecuritiesdividedby