Lower Loan Spreads Research Articles

Labour unions and global bank loan market

ABSTRACTThis article attempts to collect a data set of labour unions in global 500 biggest banks and investigate whether labour unions of banks influence the designing of bank loan contracts. We use global syndicate loan market to examine this issue. For simplicity, banks with and without labour unions are referred to as ‘unionized banks’ and ‘nonunionized banks’, respectively. We find that unionized banks tend to loosen their lending standard in the bank loan contract: unionized banks are more likely to charge lower loan spread and favourable nonprice terms compared with nonunionized banks. Hence, our results support that unionized banks tend to lend more loans to reduce the negative effect of labour unions.

Unconventional Monetary Policy and Bank Risk Taking

In this paper we use corporate syndicated loan data to study the presence of a bank risk-taking channel of unconventional monetary policy in the United States over the period 2008-2015. To account for both actual policy decisions and anticipation effects, we measure the stance of monetary policy by estimating a financial VAR model. We find that accommodative monetary conditions are associated with overall lower loan spreads. Controlling for borrower creditworthiness, we show that the spread reduction is lower for riskier firms, indicating that risk is appropriately priced during the period of unconventional monetary policy. Banks with low non-performing loan ratios and banks characterized by high revenue diversification offer larger loan spread discounts compared to banks with a large amount of non-performing loans and banks with less income diversification. We also find that banks with low capital ratios, less profitable banks and smaller banks more aggressively reduce the corporate loan spreads following an expansionary monetary policy shock, but only for the safest firms. Our findings indicate that unconventional monetary policy actions of the Federal Reserve are not associated with excessive risk taking by banks in the syndicated loan market.

Chapter 11 Bankruptcy and Loan Covenant Strictness

We propose a new determinant of covenant strictness in syndicated loan contracts: the degree of creditor friendliness of Chapter 11 bankruptcy practices. This new channel dictates that the more debtor(creditor)-friendly the bankruptcy practice is, the more creditors will seek to increase(decrease) their level of loan monitoring outside of bankruptcy through an adjustment in covenant strictness. Borrowers would agree on stricter covenants in exchange for a lower loan spread, and vice-versa. We first theoretically illustrate our claim by providing a framework linking creditor control inside and outside of bankruptcy. We next empirically show that judicial discretion is the primary driver of bankruptcy outcomes. This finding allows us to use several debtor or creditor-friendly Chapter 11 bankruptcy practice proxies as instruments in order to test our channel, with a focus on the U.S. manufacturing sector. Using both covenant tightness and covenant intensity as proxies for covenant strictness, we show that our legal channel not only impacts covenant strictness but also ultimately accounts for a significant fraction of the total cost of credit.

Audit Profession Development and Bank Loan Pricing

This study examines the relation between country-level audit profession development and bank loan pricing around the world. Using a sample of bank loan contracts from 36 countries during 2002–2010, we find that stronger audit profession development is associated with lower loan spreads, and such effect is observed for Big 4 clients and firms in countries with strong rule of law. Further analysis suggests that creditors view auditor litigation environment as the most relevant aspect of audit profession development in their lending decisions. Our results are robust to a battery of sensitivity tests.

Information Spillovers and Cross Monitoring between the Stock Market and Loan Market: Evidence from Regulation SHO

We explore information spillovers and cross monitoring between the stock and loan markets. To break simultaneity between the stock and loan markets, we use a regulatory experiment, Regulation SHO, that relaxes short selling constraints for a randomly selected sample of Russell-3000 stocks, which directly affects information production and monitoring by short sellers in the stock market but is exogenous to the loan market. We find that while firms without bank monitors exhibit a significant decline in stock prices upon the announcement of SHO, firms with bank monitors do not react. Further evidence shows that firms affected by SHO enjoy a 21 basis point lower loan spread that increases to 36 basis points for bank-dependent firms. Regulation SHO, however, does not appear to affect non-price loan terms such as loan maturity, amount, collateral, and covenants. Overall, our evidence suggests bi-directional information spillovers and cross monitoring between the stock and loan markets. The effects on loan markets are consistent with a reduction in the information monopoly that banks possess over their borrowers.

The Political Economy of Bank Lending: Evidence from an Emerging Market

This study investigates the existence of political rents in bank lending, using a comprehensive loan-level data set of the universe of commercial loans in Mexico from 2003 to 2012. Identification relies on changes in the state of origin of a senate committee chairman as a source of exogenous variation in firms'political relationship. The study finds that banks offer favorable loan terms to politically connected firms with larger loan quantities, lower loan spreads, longer maturities, and lower collateral requirements. Furthermore, political loans exhibit higher default rates. To isolate the bank supply channel, a rich set of fixed-effects is included with various specifications. The favorable lending increases with the strength of a firm's political connection, varies gradually along the political cycle, and is mainly offered by large and domestic banks. Consistent with the quid pro quo hypothesis, the study finds that banks that extend political loans receive significantly more government borrowings with better credit quality. The study also shows that the greater credit supply due to political connection leads to a large and significant increase in firm-level employment and assets. The study provides estimates of the total social cost of political lending and net revenue for banks that are engaged in rent provision activity. Finally, a series of robustness tests are performed to rule out alternative mechanisms and explanations.

Executive Stock Ownership Guidelines and the Agency Cost of Debt

We examine how the adoption of executive stock ownership guidelines affects the agency cost of debt. We find that guideline adoption is associated with lower loan spreads, fewer collateral requirements, and fewer other restrictive covenants. The results are robust to using firm fixed effects, instrumental variables, and difference-in-differences estimation approaches. We also find that guideline adoption has a negative effect on bond yield spreads and that after the adoption, firms’ risk-taking incentives are lower and the quality of their financial reporting is higher. Thus, guideline adoption has a real impact on managerial incentives to reduce the agency cost of debt.

Is Social Capital Priced in Bank Loans?

We investigate whether societal-level social capital enjoyed by firms affects their cost of bank loans. Employing a county-level measure of societal-level social capital, we find that firms with higher social capital are associated with lower loan spreads and the effect is robust after controlling for measures of financial reporting quality and management characteristics. We also show that the effect of social capital is more pronounced for firms that have no previous relation with the lenders and firms that are geographically far away from the lenders. Finally, we utilize two exogenous shocks that significantly change societal-level social capital to identify the effect of social capital on bank loans. Our findings contribute to the rising literature on the benefits of societal-level social capital.

Does mandatory IFRS adoption facilitate debt financing?

We examine whether the mandated introduction of International Financial Reporting Standards (IFRS) is associated with the propensity to access the public rather than private debt market and the cost of debt. We use a global sample of public bonds and private loans and find that mandatory IFRS adopters are more likely, post-IFRS, to issue bonds than to borrow privately. We also find that mandatory IFRS adopters pay lower bond yield spreads, but not lower loan spreads, after the mandate. These findings are consistent with debt providers responding positively to financial reporting of higher quality and comparability, but only when there is a greater reliance on publicly available financial statements than private communication. Lastly, we document that the observed debt market benefits are concentrated in countries with larger differences between domestic GAAP and IFRS and are present even for EU countries that did not experience concurrent financial reporting enforcement or other institutional reforms. Overall, our study documents positive economic consequences around the mandated IFRS adoption for corporate debt financing and, in particular, for bond financing.

The cost of private debt over the credit cycle

We identify global and regional fluctuations in international private debt flows to emerging and developing countries using data on cross-border loans and international bond issuance over 1993–2009. We use micro-level data on syndicated cross-border loans and international bond placements to estimate the effects of individual borrower characteristics as well as macroeconomic conditions on the cost of foreign borrowing and test whether these effects differ across phases of the lending cycle. First, we find that borrower characteristics associated with lower loan spreads are not necessarily associated with lower bond spreads. Second, we find differential effects of borrower characteristics between cycle phases for loans and bonds separately. Third, we find strong reductions in the cost of debt finance during periods when international debt flows are more than one standard deviation above their mean, but not for expansionary periods, when the growth rate of debt flows is increasing. We also find that higher trade ratios in the borrower's home country raise loan spreads more in periods of high credit flows but have no effect on bond spreads. At the same time, borrowers residing in countries with high investment ratios pay lower spreads on bond issuance particularly during periods of high credit flows, but we find no similar effect for loan spreads. Inflation rates, real exchange rates and previous banking crises have small impacts on loan and bond spreads.

Effects of Bank Regulation and Lender Location on Loan Spreads

AbstractWe investigate how differences in regulation regarding banking-commerce integration and banking sector concentration influence loan spreads across 29 countries. Theoretical research posits conflicting effects based on agency costs, information asymmetry costs, and market power. Increased integration is associated with lower loan spreads in countries with low concentration, but moving to high levels of integration increases spreads in countries with high concentration. Starting from lower levels, an increase in integration is associated with an increase in informational efficiency that disappears at higher levels of integration. We also show that market concentration affects loan spreads differently under high-, medium-, and low-integration regimes.

Project finance loan spreads and disaggregated political risk

This article provides novel evidence on project finance loan pricing using economic and disaggregated political risk determinants. As expected, our findings suggest that the presence of loan guarantees and lower levels of aggregate political risk results in cheaper project finance loans. The evidence in support of disaggregated political risk as a pricing determinant is negligible for developed countries, but significant for developing countries. For the latter we find that loan spreads are negatively related to the effectiveness, quality and strength of a country's legal and institutional systems whilst lower levels of government stability and democratic accountability are associated with lower loan spreads. Our results are consistent with a risk allocation approach to project finance deals.

Securitisation and Lending Standards: Evidence from the Wholesale Loan Market

We assess the effect of securitization activity on banks’ loan pricing practices employing a uniquely detailed dataset from the euro-denominated syndicated loan market. We find that in the run up to the 2007-2009 crisis banks that were more active at originating asset-backed securities did not price their loans more aggressively (i.e. with narrower loan spreads) than non-active banks. Using a unique feature of our dataset, we show that within the set of loans which were already securitized, the amount of securitization activity by the originating bank was not related to lower loan spreads. Our results therefore suggest that broad credit cycle conditions correspond much stronger with looser credit standards (measured via price aggressiveness) than securitization activity.

The Effect of Information Asymmetries Among Lenders on Syndicated Loan Spreads

We examine the effect information asymmetries among syndicate members on loan spreads. In particular we measure the past relationship of each participant and arranger with the borrower separately by using the previous number of borrowing/lending interactions and the duration of these interactions. Using a sample of 5,842 syndicated loan transactions, we find that when participant banks have an information inferiority in the syndicate they require higher spreads to compensate for this asymmetry. This is amplified when the borrowers are more opaque. On the contrary, the availability of borrower credit ratings significantly reduces information asymmetries and nullifies the impact of information set differences among arrangers and participants on loan spreads. We also provide evidence that the presence of reputable arrangers leads to lower spreads only for those borrowers with potentially fewer asymmetric information problems. For opaque borrowers, mandating a reputable arranger facilitates access to funds available in the syndicated loan market but does not lower loan spreads. JEL classification: D40, F30, G21

The Economic Consequences of Mandatory IFRS Adoption for Debt Financing

We examine whether the mandated introduction of International Financial Reporting Standards (IFRS) is associated with the propensity to access the public rather than private debt market and the cost of debt. We use a global sample of public bonds and private loans and find that mandatory IFRS adopters are more likely, post-IFRS, to issue bonds than to borrow privately. We also find that mandatory IFRS adopters pay lower bond yield spreads, but not lower loan spreads, after the mandate. These findings are consistent with debt providers responding positively to financial reporting of higher quality and comparability, but only when there is a greater reliance on publicly available financial statements than private communication. Lastly, we document that the observed debt market benefits are concentrated in countries with larger differences between domestic GAAP and IFRS and are present even for EU countries that did not experience concurrent financial reporting enforcement or other institutional reforms. Overall, our study documents positive economic consequences around the mandated IFRS adoption for corporate debt financing and, in particular, for bond financing.