Bank Monitoring: Evidence from Syndicated Loans

Abstract

The rise in popularity of syndicated lending raises questions about the incentives of banks to actively monitor borrowers. We empirically investigate these incentives using a novel dataset that includes the frequency with which banks monitor borrowers' financial condition and the collateral underlying syndicated bank loans. We find that banks monitor frequently with approximately 50% of loans being monitored at least on a monthly basis. Monitoring frequency is increasing in the lead arranger's loan share for private borrowers and the lead bank's reputation for public borrowers. These results are consistent with lender reputation mitigating moral hazard only to the extent that monitoring effort is verifiable. Lead banks also monitor more when monitoring is likely to produce new information and when information is more valuable, such as when borrower financial health deteriorates. Overall, our results suggest that banks actively monitor the average syndicated loan in a manner consistent with theoretical predictions in the literature.