Enforcement actions on banks and the structure of loan syndicates

Abstract

The paper previously circulated under the title ""What's the Use of Having a Reputation If You Can't Ruin It Every Now and Then?" Regulatory Enforcement Actions on Banks and the Structure of Loan Syndicates". Ongena acknowledges financial support from ERC ADG 2016-GA 740272 lending.

Large customer-supplier links and syndicate loan structure

“…In fact, by bearing more risk, borrowers with large customer-supplier links require stricter control and due diligence from the lead agent of the syndicate, who is responsible for delivering monitoring activities. In line with previous studies (Delis et al, 2020a;Esty, 2001;Gustafson et al, 2020;Ivashina, 2009;Lin et al, 2012;Sufi, 2007), our expectation is that the lead agent is required to retain a greater loan share to signal its willingness to screen and monitor activities to participant lenders that fund part of the risky loan.…”

“…Therefore, the lead agent, who is the lender responsible for managing the relationship with the borrower and for monitoring activities in a syndicated loan, could be requested to increase its monitoring activities for such borrowers. This will imply that the lead agent could be required to retain a larger loan fraction for borrowers with large customer-supplier links by other lenders in the syndicate (Delis et al, 2020a;Esty, 2001;Gustafson et al, 2020;Ivashina, 2009;Lin et al, 2012;Sufi, 2007). In the syndicate market, retaining a larger share of the loan is seen as a mechanism to incentivize the lead agent to exert the optimal level of monitoring (Diamond, 1984;Gustafson et al, 2020;Holmstrom and Tirole, 1997;Lin et al, 2012).…”

“…Similar to previous studies (Campello and Gao, 2017;Cen et al, 2016;Delis et al, 2020a;Hasan et al, 2020;Lin et al, 2012;Rahaman et al, 2020), we consider loan facility as the unit of analysis for the reason that loan facilities or tranches are individual portions of a deal or package, which may exhibit different starting dates, maturity, pricing, amount, and loan type which in turns can affect the lead agent monitoring effort.…”

Syndicated Bank Lending and Rating Downgrades: Do Sovereign Ceiling Policies Really Matter?

“…The asymmetries are manifested between the lending counterparties and primarily relate to the lead banks' reputation. Lead banks subject to enforcement actions by their regulators increase their loan shares to entice participants to continue to co-finance the loan (see Delis, Iosifidi, Kokas, Xefteris, and Ongena, 2020). Furthermore, lead arrangers' reputation measured by large-scale bankruptcies affect their subsequent syndication activity (see Gopalan, Nanda, and Yerramilli, 2011), while greater control-ownership divergence causes lead arrangers to retain higher loan shares (see Lin, Ma, Malatesta, and Xuan, 2012).…”

Development Banks and the Syndicate Structure: Evidence From a World Sample

“…Consequently, can the reputation of development banks be instrumental in reducing asymmetry information problems between the lead bank, which is responsible for the information collection and monitoring activities, and the other participant lenders? Previous studies on syndicate loans widely acknowledge the importance of both the lead banks' and borrowers' reputations for mitigating adverse selection and moral hazard problems in the syndicate (e.g., Dennis and Mullineaux, 2000;Esty and Megginson, 2003;Sufi, 2007;Gopalan et al, 2011;Lin et al, 2012;Cen et al, 2016 andDelis et al, 2020). Quite distinct from these studies, this paper explores whether the reputation of participant lenders can convey a positive signal about the quality of the loan and thereby reducing frictions between the lead bank and the other participant lenders.…”