Bank Responses to the 2014 Oil Price Shock

Marsh, W. Blake; Rodziewicz, David; Sengupta, Rajdeep

doi:10.18651/RWP2024-14

Working Paper Revision

Bank Responses to the 2014 Oil Price Shock

Abstract: We exploit the 2014 decline in oil prices to understand how banks change contract terms for distressed firms. Using panel data on new and existing loans, we find that oil and gas firms (i.e., upstream and support services) most directly affected by the 2014 oil price shock initially increased their use of credit. However, as the oil price decline persisted, those same firms ultimately saw increased borrowing costs, smaller loan sizes, and fewer originations and renewals than less affected oil industry firms. We then demonstrate that credit spreads rose more than might be predicted based on changes in firm risk alone, suggesting that lending standards tightened for distressed oil and gas firms. These tighter credit standards are also associated with modestly reduced capital investment. Our results suggest that bank credit can cushion the effect of transitory economic shocks while amplifying more persistent downturns.

JEL Classification: E44; G21; G28; Q40;

https://doi.org/10.18651/RWP2024-14