Credit Allocation when Borrowers are Economically Linked: An Empirical Analysis of Bank Loans to Corporate Customers
Iftekhar Hasan, Kristina Minnick, Kartik Raman
Journal of Corporate Finance,
June
2020
Abstract
Using detailed loan level data, we examine bank lending to corporate customers relying on principal suppliers. Customers experience larger loan spreads, higher intensity of covenants and greater likelihood of requiring collateral when they depend more on the principal supplier for inputs. The positive association between the customer’s loan spread and its dependence on the principal supplier is less pronounced when the bank has a prior loan outstanding with the principal supplier, and when the bank has higher market share in the industry. Longer relationships between the customer and its principal supplier, and between the bank and the principal supplier, mitigate lending constraints. The evidence is consistent with corporate suppliers serving as an informational bridge between the lender and the customer.
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Transmitting Fiscal Covid-19 Counterstrikes Effectively: Mind the Banks!
Reint E. Gropp, Michael Koetter, William McShane
IWH Online,
No. 2,
2020
Abstract
The German government launched an unprecedented range of support programmes to mitigate the economic fallout from the Covid-19 pandemic for employees, self-employed, and firms. Fiscal transfers and guarantees amount to approximately €1.2 billion by now and are supplemented by similarly impressive measures taken at the European level. We argue in this note that the pandemic poses, however, also important challenges to financial stability in general and bank resilience in particular. A stable banking system is, in turn, crucial to ensure that support measures are transmitted to the real economy and that credit markets function seamlessly. Our analysis shows that banks are exposed rather differently to deteriorated business outlooks due to marked differences in their lending specialisation to different economic sectors. Moreover, a number of the banks that were hit hardest by bleak growth prospects of their borrowers were already relatively thinly capitalised at the outset of the pandemic. This coincidence can impair the ability and willingness of selected banks to continue lending to their mostly small and medium sized entrepreneurial customers. Therefore, ensuring financial stability is an important pre-requisite to also ensure the effectiveness of fiscal support measures. We estimate that contracting business prospects during the first quarter of 2020 could lead to an additional volume of non-performing loans (NPL) among the 40 most stressed banks ‒ mostly small, regional relationship lenders ‒ on the order of around €200 million. Given an initial stock of NPL of €650 million, this estimate thus suggests a potential level of NPL at year-end of €1.45 billion for this fairly small group of banks already. We further show that 17 regional banking markets are particularly exposed to an undesirable coincidence of starkly deteriorating borrower prospects and weakly capitalised local banks. Since these regions are home to around 6.8% of total employment in Germany, we argue that ensuring financial stability in the form of healthy bank balance sheets should be an important element of the policy strategy to contain the adverse real economic effects of the pandemic.
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Employee Treatment and Contracting with Bank Lenders: An Instrumental Approach for Stakeholder Management
Bill Francis, Iftekhar Hasan, Liuling Liu, Haizhi Wang
Journal of Business Ethics,
2019
Abstract
Adopting an instrumental approach for stakeholder management, we focus on two primary stakeholder groups (employees and creditors) to investigate the relationship between employee treatment and loan contracts with banks. We find strong evidence that fair employee treatment reduces loan price and limits the use of financial covenants. In addition, we document that relationship bank lenders price both the levels and changes in the quality of employee treatment, whereas first-time bank lenders only care about the levels of fair employee treatment. Taking a contingency perspective, we find that industry competition and firm asset intangibility moderate the relationship between good human resource management and bank loan costs. The cost reduction effect of fair employee treatment is stronger for firms operating in a more competitive industry and having higher levels of intangible assets.
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Lock‐in Effects in Relationship Lending: Evidence from DIP Loans
Iftekhar Hasan, Gabriel G. Ramírez, Gaiyan Zhang
Journal of Money, Credit and Banking,
No. 4,
2019
Abstract
Do prior lending relationships result in pass‐through savings (lower interest rates) for borrowers, or do they lock in higher costs for borrowers? Theoretical models suggest that when borrowers experience greater information asymmetry, higher switching costs, and limited access to capital markets, they become locked into higher costs from their existing lenders. Firms in Chapter 11 seeking debtor‐in‐possession (DIP) financing often fit this profile. We investigate the presence of lock‐in effects using a sample of 348 DIP loans. We account for endogeneity using the instrument variable (IV) approach and the Heckman selection model and find consistent evidence that prior lending relationship is associated with higher interest costs and the effect is more severe for stronger existing relationships. Our study provides direct evidence that prior lending relationships do create a lock‐in effect under certain circumstances, such as DIP financing.
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Can Lenders Discern Managerial Ability from Luck? Evidence from Bank Loan Contracts
Dien Giau Bui, Yan-Shing Chen, Iftekhar Hasan, Chih-Yung Lin
Journal of Banking and Finance,
2018
Abstract
We investigate the effect of managerial ability versus luck on bank loan contracting. Borrowers showing a persistently superior managerial ability over previous years (more likely due to ability) enjoy a lower loan spread, while borrowers showing a temporary superior managerial ability (more likely due to luck) do not enjoy any spread reduction. This finding suggests that banks can discern ability from luck when pricing a loan. Firms with high-ability managers are more likely to continue their prior lower loan spread. The spread-reduction effect of managerial ability is stronger for firms with weak governance structures or poor stakeholder relationships, corroborating the notion that better managerial ability alleviates borrowers’ agency and information risks. We also find that well governed banks are better able to price governance into their borrowers’ loans, which helps explain why good governance enhances bank value.
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When Arm’s Length is too Far: Relationship Banking over the Credit Cycle
Thorsten Beck, Hans Degryse, Ralph De Haas, Neeltje van Horen
Journal of Financial Economics,
No. 1,
2018
Abstract
We conduct face-to-face interviews with bank CEOs to classify 397 banks across 21 countries as either relationship or transaction lenders. We then use the geographic coordinates of these banks’ branches and of 14,100 businesses to analyze how the lending techniques of banks in the vicinity of firms are related to credit constraints at two contrasting points of the credit cycle. We find that while relationship lending is not associated with credit constraints during a credit boom, it alleviates such constraints during a downturn. This positive role of relationship lending is stronger for small and opaque firms and in regions with a more severe economic downturn. Moreover, our evidence suggests that relationship lending mitigates the impact of a downturn on firm growth and does not constitute evergreening of loans.
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On the Nonexclusivity of Loan Contracts: An Empirical Investigation
Hans Degryse, Vasso Ioannidou, Erik von Schedvin
Management Science,
No. 12,
2016
Abstract
We study how a bank's willingness to lend to a previously exclusive firm changes once the firm obtains a loan from another bank ("outside loan") and breaks an exclusive relationship. Using a difference-in-difference analysis and a setting where outside loans are observable, we document that an outside loan triggers a decrease in the initial bank's willingness to lend to the firm, i.e., outside loans are strategic substitutes. Consistent with concerns about coordination problems and higher indebtedness, we find that this reaction is more pronounced the larger the outside loan and it is muted if the initial bank's existing and future loans retain seniority and are protected with valuable collateral. Our results give a benevolent role to transparency enabling banks to mitigate adverse effects from outside loans. The resulting substitute behavior may also act as a stabilizing force in credit markets limiting positive comovements between lenders, decreasing the possibility of credit freezes and financial crises.
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Why Do Payday Lenders Enter Local Markets? Evidence from Oregon
H. Evren Damar
Review of Industrial Organization,
No. 2,
2009
Abstract
This study analyzes payday lenders’ entry strategies in the state of Oregon in order to look for changes in the nature of the industry and its relationship to traditional financial institutions. The results of fixed-effects logit regressions suggest that payday lenders have started to enter areas already being served by banks. Furthermore, the presence of “incumbent advantage” in entry decisions may also have implications concerning the level of competition in the industry. Finally, since payday lenders also enter areas with large Hispanic populations, it is still possible that payday loans represent the sole source of credit for certain segments of the population.
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