This study investigates the effects of targeted credit rationing by banks on firms that are likely to generate negative externalities. We use data from Operation Choke Point, a regulatory initiative in the United States that aimed to limit bank relationships with firms in high-risk industries for fraud and money laundering. Our analysis of supervisory loan-level data reveals that targeted banks reduce lending and terminate relationships with affected firms. However, these firms fully substitute credit availability by obtaining loans from non-targeted banks under similar terms, resulting in no changes in total debt, investment, or profitability. Our findings suggest that targeted credit rationing is ineffective in promoting change.

We study the determinants of the liquidity dry-up in the commercial paper market in March 2020 and the role of central bank interventions in reviving the market. We show that the dry-up was driven by money market funds (MMFs) - the key investors in the commercial paper market - that faced investor outflows. Using security-level fund holdings, we establish that the liquidity crisis in MMFs affected corporate funding: non-financial companies were less likely to issue commercial paper if their commercial paper was held by funds experiencing larger investor outflows. We show that the revival of the market was driven by the ECB’s intervention in the European non-financial commercial paper market leading to better terms and conditions for eligible firms.

We develop a simple model of the liquidity and insurance capacity of the interbank network arising from loan syndication. We find that the liquidity capacity has increased significantly following the introduction of liquidity regulation, and that the liquidity co-insurance is economically important for the corporate sector. We also find that borrowers with higher reliance on credit lines have become more likely to obtain credit lines from syndicates with higher liquidity capacities. The increase in liquidity capacities and the assortative matching on liquidity characteristics has strengthened the importance of large banks as liquidity providers to the corporate sector.