Board of Governors of the Federal Reserve System

July 2020 (Revised May 2025)

Related Exposures to Distressed Borrowers and Bank Lending

Sumit Agarwal, Ricardo Correa, Bernardo Morais, Jessica Roldán and Claudia Ruiz-Ortega

Abstract:

We study how banks’ exposure to a large set of related and suddenly-distressed borrowers impacts their commercial lending and risk taking. Using Mexican credit registry data, we examine the effect of the 2014 collapse in energy prices. After this shock, energy-exposed banks—regardless of their ex-ante financial health—raise further their exposure to the energy sector by expanding lending at looser credit terms to borrowers with higher expected losses, while recapitalizing through retained earnings. The shock is transmitted to non-energy firms—despite price controls on retail-energy products—via a contraction in bank lending, especially to bank-dependent borrowers.

Keywords: Credit exposure, bank lending, financial stability, commodity prices, emerging markets

DOI: https://doi.org/10.17016/IFDP.2020.1288r1

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