Bank Lending Networks, Experience, Reputation, and Borrowing Costs: Empirical Evidence from the French Syndicated Lending Market

Abstract

We investigate the network structure of bank lending markets and evaluate the impact of lenders' network centrality, considered a measure of their experience and reputation, on borrowing costs. We show that the French market for syndicated bank loans is a 'small world' characterized by large local density and short social distances between lenders. Such a network structure allows for better information and resources flows between banks thus enhancing their social captial. We then show that lenders' experience and reputation play a significant role in reducing loan spreads and thus increasing borrower's wealth.

Financial Institutions Network and the Certification Value of Bank Loans

“…(), Godlewski et al. (), and Wu et al. () who account for the relations only between lead and participant banks (also among lead banks, in case there are multiple lead banks in the lending syndicate) but not between ordinary participants.…”

“…The syndicated lending market bears several social network functions because it serves as an information network that allows the lender to acquire private information on borrowers’ quality and as a capital network that is used to raise of the necessary funding of loans (Baum, Shipilov, and Rowley, ; Baum, Rowley, and Shipilov, ; Morrison and Wilhelm, ; Godlewski, Sanditov, and Burger‐Helmchen, ) . These two network functions address issues caused by inherent information asymmetries at the two layers of relationships typical for such markets by decreasing screening and monitoring costs at the borrower‐lender level, and by creating conditions for building trust and reputation at the arranger(s)‐other participants of the syndicate level.…”

“…In the context of syndicated lending, Godlewski et al. () show that borrowers can gain from reduced loan pricing when they are funded by syndicates composed of lenders that are central in the syndicated loans market.…”

“…We consider several commonly used social network metrics: betweenness, closeness, and degree centrality. Each measures how well a lender is positioned with respect to control over information flow or other resources in a network (Meuleman and Wright, ; Godlewski et al., ; Wu et al., ).…”

“…We use unweighted projections of lenders‐deals bipartite networks, which might omit some important information on the frequency of interactions between the lenders; however, it allows us to employ “classical” measures of centralities (Freeman, ) widely adopted in social network analysis that have been used in earlier research on networks of syndicated deals (Baum et al., ; Godlewski et al., ; Houston et al., ).…”