Liquidity Provision of Syndicated Credit Lines

A large fraction of credit lines to the corporate sector are syndicated allowing for risk-diversification and coinsurance. We develop a simple model to study the provision of liquidity through syndicated credit lines. The capacity of banks to provide liquidity to firms depends on the structure of the interbank network arising from syndication and on a set of interbank commitments called fronting exposures that facilitate payment flows among syndicate members. We show that the liquidity capacity has increased significantly following the introduction of liquidity regulation. Furthermore, the liquidity co-insurance of interbank fronting exposures is economically important for the corporate sector. Finally, we document that borrowers with higher reliance on credit lines have become more likely to obtain credit lines from syndicates with higher liquidity capacities. This assortative matching on liquidity characteristics has strengthened the importance of large banks as liquidity providers to the corporate sector in the post GFC period.