Australian Syndicated Loans: Domestic and Foreign Banks

Abstract

Australian banks are different from foreign banks in terms of domestic reputation, sources of funding and regulatory environment. This study explores whether there is a home market advantage and reputation effect in the price of syndicated loans led by the big 4 domestic banks versus those arranged by foreign banks. The analysis takes into account important factors which may determine potential value of lead bank reputation, such as availability of borrower credit rating, past lending relationships, and loan type. Our results confirm the existence of a home market advantage and reputation effect in that loans arranged by the big 4 domestic banks carry lower interest rates than those led by foreign banks. The loan price savings offered by domestic lead banks are enjoyed by unrated borrowers, relationship borrowers, and those financed through a revolving loan. When a distinction is made regarding loans originated before and after GFC, we find that the average loan prices to be higher post GFC. The magnitude of such price increases is, however much lower for loans led by the domestic big 4 banks. This is a reflection on the stability of domestic banks and Australian banking system.