The Effect of Public Debt Market Access on Bank Loan Spreads: Evidence of Competitive Spillover

Abstract

I provide evidence of a new mechanism by which access to public securities mitigates the bank hold-up problem and reduces loan spreads – it increases a borrower’s bargaining power vis-a-vis a lender by offering a bank loan substitute. Difference-in-differences results indicate that loan spreads are sensitive to legislation that makes public securities more attractive. The post-legislation spread reduction is largest for the bank borrowers that benefit most from the legislation. Importantly, the effect is concentrated in credit-rated borrowers taking out term loans and borrowers returning to the bank lending market quickly. Thus, the availability of public securities reduces loan spreads for established borrowers only when it offers a financing substitute and the hold-up problem is severe.