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Bank Lending

Paper Session

Friday, Jan. 3, 2025 8:00 AM - 10:00 AM (PST)

San Francisco Marriott Marquis, Yerba Buena Salon 8
Hosted By: American Finance Association
  • Bo Becker, Stockholm School of Economics

Collateral and Bank Monitoring

Tong Zhao
,
KU Leuven and National Bank of Belgium

Abstract

I study the role of collateral types in bank monitoring. I differentiate between tangible movable assets and immovable assets, which involve different degrees of collateralization frictions. Exploiting legal reforms forcing banks to lose physical control over tangible movable collateral and inducing higher frictions in collateralizing such assets, I find that reforms reduce distant banks' monitoring incentives and increase the covenant requirements. Using corporate credit registry data to construct direct measures for bank monitoring activities, I find that distant banks monitor tangible movable collateral less than local banks. To deal with the higher cost of collateralizing tangible movable assets, distant banks reduce loan issuance amounts, suggesting that banks internalize ex-post monitoring costs into ex-ante lending decisions. My results highlight the importance of frictions associated with collateralization in shaping credit markets.

Debt Flexibility

Nicolas Crouzet
,
Northwestern University
Rhys Bidder
,
King's College London
Margaret M. Jacobson
,
Federal Reserve Board
Michael Siemer
,
Federal Reserve Board

Abstract

This paper documents new facts on the modification of bank loans using Y-14 regu- latory data on C&I loans. We find that loan-level modifications of key contractual terms, such as interest and maturity, occur at least once for 41% of loans. Cross sectional dif- ferences in modifications are substantial and amplified by borrower distress. Relative to single-lender loans, syndicated loans are 1.5 times more likely to be modified and interest rate changes are twice as likely. Our findings call into question whether 1) creditor dis- persion makes loan modifications more challenging and 2) relationship lending between banks and small borrowers creates more scope for flexibility when firm-level conditions change.

Non-Fundamental Loan Renegotiations

AJ Yuan Chen
,
University of British Columbia
Matthew Phillips
,
Massachusetts Institute of Technology
Regina Wittenberg-Moerman
,
Northwestern University
Tiange Ye
,
University of Southern California

Abstract

In contrast to prior research that focuses on the role of borrower fundamentals in explaining loan renegotiations, we examine non-fundamental renegotiations of loans traded on the secondary loan market. We exploit the semi-annual rebalancing of the Morningstar LSTA US Leveraged Loan 100 Index as an exogenous shock to the trading conditions in this market, which are critical to non-bank institutional lenders that largely rely on the secondary market for their liquidity needs. In line with improved loan liquidity and greater institutional demand arising from the index inclusions, we find that index-included loans achieve lower bid-ask spreads, higher prices, and greater mutual fund holdings. We further find that index-included loans experience significantly higher likelihood of interest rate-reducing renegotiations than index-excluded loans, consistent with non-bank lenders sharing with borrowers non-fundamental surplus driven by the index inclusion. We rule out explanations related to borrower fundamental by showing that non-traded loans included in the same package as index-included loans do not experience interest rate reducing renegotiations and by conducting placebo analyses that employ an artificial index inclusion threshold and the time period preceding the index origination. Overall, our findings provide novel evidence that non-fundamental forces, such as a loan's inclusion in a major index, can trigger loan renegotiation.

Monetary Policy in the Age of Universal Banking

Michael Gelman
,
University of Delaware
Itay Goldstein
,
University of Pennsylvania
Andrew Mackinlay
,
Virginia Tech

Abstract

In this paper, we establish that universal banks reduce the efficacy of the monetary policy pass-through to the economy. When the monetary policy tightens and retail deposits flow out of the banking sector, universal banks utilize other funding sources to maintain a higher credit supply. We show that this has positive real effects on the economy as the higher credit supply by universal banks leads to lower unemployment rates in areas where they lend more. This channel is distinct from existing theories of monetary policy transmission, and we validate that the findings hold beyond a variety of alternative explanations. The results shed new light on the Fed’s execution of monetary policy, as well as how it should regulate the banking system.

Discussant(s)
Stefano Rossi
,
Bocconi University
David Smith
,
University of Virginia
Shohini Kundu
,
University of California-Los Angeles
Richard Thakor
,
University of Minnesota
JEL Classifications
  • G2 - Financial Institutions and Services