Loan Pricing at Investment versus Commercial Banks

Abstract

We study whether investment banks, which began to originate syndicated loans in 1996, price debt claims differently than commercial banks. Differences between the two institution types in funding access, regulation, accounting rules, scope economies, and the relevance of relationships could prompt differential loan pricing. We find that investment banks lend to less profitable, more leveraged firms than commercial banks and offer longer-term credits, more commonly with term rather than commitment contracts. Investment banks establish higher credit spreads than commercial banks, other things equal. Investment banks also exact smaller credit risk premia for leverage than commercial banks and price certain classes of term loans more generously than commercial banks. We confidently reject the hypothesis that the loan pricing processes of investment and commercial banks are identical.