Bank Reputation in the Private Debt Market

J.A. McCahery, A. Schwienbacher

Research output: Working paperDiscussion paperOther research output

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Abstract

We examine the impact of lead arrangers’ reputation on the design of loan contracts such as spread and fees charged. Controlling for the non-randomness of the lender-borrower match (self-selection bias), we find that the reputation of top tier arrangers leads to higher spreads, and that top tier arrangers retain larger fractions of their loans in their syndicates. These larger spreads are especially pronounced for borrowers without credit rating that have the most to gain from the certification assumed by virtue of a loan contract with a top tier arranger. This certification channel differs from the one found in public markets, where certification leads to a reduced spread offered to the best clients. These differences between public and private markets can be explained by differences in the way they operate and are structured. Interestingly, the effect is strongest for transactions done after the changes in the banking regulations (including the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994) that led to significant consolidations in the banking industry, including among the largest commercial banks.
Original languageEnglish
Place of PublicationTilburg
PublisherTilburg University
Volume2011-009
Publication statusPublished - 2011

Publication series

NameCentER Discussion Paper
Volume2011-009

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Private debt
Loans
Certification
Interstate banking
Credit rating
Banking regulation
Banking industry
Consolidation
Commercial banks
Syndicates
Fees
Self-selection bias

Keywords

  • private debt
  • syndicated loans
  • bank reputation
  • syndication
  • certification

Cite this

McCahery, J. A., & Schwienbacher, A. (2011). Bank Reputation in the Private Debt Market. (CentER Discussion Paper; Vol. 2011-009). Tilburg: Tilburg University.
McCahery, J.A. ; Schwienbacher, A. / Bank Reputation in the Private Debt Market. Tilburg : Tilburg University, 2011. (CentER Discussion Paper).
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McCahery, JA & Schwienbacher, A 2011 'Bank Reputation in the Private Debt Market' CentER Discussion Paper, vol. 2011-009, Tilburg University, Tilburg.

Bank Reputation in the Private Debt Market. / McCahery, J.A.; Schwienbacher, A.

Tilburg : Tilburg University, 2011. (CentER Discussion Paper; Vol. 2011-009).

Research output: Working paperDiscussion paperOther research output

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AB - We examine the impact of lead arrangers’ reputation on the design of loan contracts such as spread and fees charged. Controlling for the non-randomness of the lender-borrower match (self-selection bias), we find that the reputation of top tier arrangers leads to higher spreads, and that top tier arrangers retain larger fractions of their loans in their syndicates. These larger spreads are especially pronounced for borrowers without credit rating that have the most to gain from the certification assumed by virtue of a loan contract with a top tier arranger. This certification channel differs from the one found in public markets, where certification leads to a reduced spread offered to the best clients. These differences between public and private markets can be explained by differences in the way they operate and are structured. Interestingly, the effect is strongest for transactions done after the changes in the banking regulations (including the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994) that led to significant consolidations in the banking industry, including among the largest commercial banks.

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McCahery JA, Schwienbacher A. Bank Reputation in the Private Debt Market. Tilburg: Tilburg University. 2011. (CentER Discussion Paper).