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The corporate “dash for cash” and banks’ pullback from risk-taking
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In spring 2020, stay-at-home policies aimed at containing the spread of the coronavirus led to a sharp decline in the revenues of nonfinancial firms. To shore up cash positions and ride out the crisis, firms approached their banks and drew down on pre-committed lines of credit. As a result, between early March and the end of April, the banking system was hit by a tidal wave of credit line drawdowns (figure 1), estimated at about half a trillion USD (Li et al. 2020). Banks were able to withstand the unprecedented credit demand, successfully providing liquidity to the real sector during a time of stress. However, they also curtailed new loan originations and tightened lending standards by an extent not seen since the 2008 financial crisis (figure 2). ....

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