Loan Syndication under Basel II: How Do Firm Credit Ratings Affect the Cost of Credit?
Iftekhar Hasan, Suk-Joong Kim, Panagiotis Politsidis, Eliza Wu
Journal of International Financial Markets, Institutions and Money,
May
2021
Abstract
This paper investigates how syndicated lenders react to borrowers’ rating changes under heterogeneous conditions and different regulatory regimes. Our findings suggest that corporate downgrades that increase capital requirements for lending banks under the Basel II framework are associated with increased loan spreads and deteriorating non-price loan terms relative to downgrades that do not affect capital requirements. Ratings exert an asymmetric impact on loan spreads, as these remain unresponsive to rating upgrades, even when the latter are associated with a reduction in risk weights for corporate loans. The increase in firm borrowing costs is mitigated in the presence of previous bank-firm lending relationships and for borrowers with relatively strong performance, high cash flows and low leverage.
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Financial Analysts' Career Concerns and the Cost of Private Debt
Bill Francis, Iftekhar Hasan, Liuling Liu, Qiang Wu, Yijiang Zhao
Journal of Corporate Finance,
April
2021
Abstract
Career-concerned analysts are averse to firm risk. Not only does higher firm risk require more effort to analyze the firm, thus constraining analysts' ability to earn more remuneration through covering more firms, but it also jeopardizes their research quality and career advancement. As such, career concerns incentivize analysts to pressure firms to undertake risk-management activities, thus leading to a lower cost of debt. Consistent with our hypothesis, we find a negative association between analyst career concerns and bank loan spreads. In addition, our mediation analysis suggests that this association is achieved through the channel of reducing firm risk. Additional tests suggest that the effect of analyst career concerns on loan spreads is more pronounced for firms with higher analyst coverage. Our study is the first to identify the demand for risk management as a key channel through which analysts help reduce the cost of debt.
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Finance-Growth Nexus and Banking Efficiency: The Impact of Microfinance Institutions
Afsheen Abrar, Iftekhar Hasan, Rezaul Kabir
Journal of Economics and Business,
March-April
2021
Abstract
This paper investigates the relative importance of microfinance institutions (MFIs) at both the macro (financial development, economic growth, income inequality, and poverty) and micro levels (efficiency of traditional commercial banks). We observe a significant impact on most of the fronts. MFIs’ participation increases overall savings (total bank deposits) and credit allocation (loans to private sector) in the economy. Their involvement enhances economic welfare by reducing income inequality and poverty. Additionally, their active presence helps to discipline the traditional commercial banks by subjecting them to more competition triggering higher efficiency.
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Global Equity Offerings and Access to Domestic Loan Market: U.S. Evidence
Iftekhar Hasan, Haizhi Wang, Desheng Yin, Jingqi Zhang
International Review of Financial Analysis,
March
2021
Abstract
This study examines whether and to what extend global equity offerings at the IPO stage may affect issuing firms' ability to borrow in the domestic debt market. Tracking bank loans taken by U.S. IPO firms in the domestic syndicated loan market, we observe that global equity offering firms experience more favorable loan price than that offered to their domestic counterparts. This finding holds for a set of robustness tests of endogeneity issues. We also find that, compared with their domestic counterparts, global equity offering firms are less likely to have financial distress, engage more in international diversification, and are more likely to wait a longer time to apply for syndicated loans.
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Benign Neglect of Covenant Violations: Blissful Banking or Ignorant Monitoring
Stefano Colonnello, Michael Koetter, Moritz Stieglitz
Economic Inquiry,
No. 1,
2021
Abstract
Theoretically, bank's loan monitoring activity hinges critically on its capitalization. To proxy for monitoring intensity, we use changes in borrowers' investment following loan covenant violations, when creditors can intervene in the governance of the firm. Exploiting granular bank‐firm relationships observed in the syndicated loan market, we document substantial heterogeneity in monitoring across banks and through time. Better capitalized banks are more lenient monitors that intervene less with covenant violators. Importantly, this hands‐off approach is associated with improved borrowers' performance. Beyond enhancing financial resilience, regulation that requires banks to hold more capital may thus also mitigate the tightening of credit terms when firms experience shocks.
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Transactional and Relational Approaches to Political Connections and the Cost of Debt
Taufiq Arifin, Iftekhar Hasan, Rezaul Kabir
Journal of Corporate Finance,
December
2020
Abstract
This paper examines the economic effects of a firm's approach to developing and maintaining political connections. Specifically, we investigate whether lenders favor transactional connection as opposed to relational connection. By tracing firms in a politically volatile emerging democracy in Indonesia, we find that firms following a transactional political connection strategy experience a relatively lower cost of debt than those with a relational strategy. The effect is more pronounced for firms facing high financial distress. The finding is robust to cost of bank loans and a variety of regression methods. Overall, the evidence suggests that in times of frequently changing political regimes, firms benefit from a transactional relationship with politicians as it enables to update connection with the government in power. Relational connection is valuable for a firm only when the political regime connected with it gains power.
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Financial Technologies and the Effectiveness of Monetary Policy Transmission
Iftekhar Hasan, Boreum Kwak, Xiang Li
Abstract
This study investigates whether and how financial technologies (FinTech) influence the effectiveness of monetary policy transmission. We use an interacted panel vector autoregression model to explore how the effects of monetary policy shocks change with regional-level FinTech adoption. Results indicate that FinTech adoption generally mitigates the transmission of monetary policy to real GDP, consumer prices, bank loans, and housing prices, with the most significant impact observed in the weakened transmission to bank loan growth. The relaxed financial constraints, regulatory arbitrage, and intensified competition are the possible mechanisms underlying the mitigated transmission.
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Public Bank Guarantees and Allocative Efficiency
Reint E. Gropp, Andre Guettler, Vahid Saadi
Journal of Monetary Economics,
December
2020
Abstract
A natural experiment and matched bank/firm data are used to identify the effects of bank guarantees on allocative efficiency. We find that with guarantees in place unproductive firms receive larger loans, invest more, and maintain higher rates of sales and wage growth. Moreover, firms produce less productively. Firms also survive longer in banks’ portfolios and those that enter guaranteed banks’ portfolios are less profitable and productive. Finally, we observe fewer economy-wide firm exits and bankruptcy filings in the presence of guarantees. Overall, the results are consistent with the idea that guaranteed banks keep unproductive firms in business for too long.
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Are Bank Capital Requirements Optimally Set? Evidence from Researchers’ Views
Gene Ambrocio, Iftekhar Hasan, Esa Jokivuolle, Kim Ristolainen
Journal of Financial Stability,
October
2020
Abstract
We survey 149 leading academic researchers on bank capital regulation. The median (average) respondent prefers a 10% (15%) minimum non-risk-weighted equity-to-assets ratio, which is considerably higher than the current requirement. North Americans prefer a significantly higher equity-to-assets ratio than Europeans. We find substantial support for the new forms of regulation introduced in Basel III, such as liquidity requirements. Views are most dispersed regarding the use of hybrid assets and bail-inable debt in capital regulation. 70% of experts would support an additional market-based capital requirement. When investigating factors driving capital requirement preferences, we find that the typical expert believes a five percentage points increase in capital requirements would “probably decrease” both the likelihood and social cost of a crisis with “minimal to no change” to loan volumes and economic activity. The best predictor of capital requirement preference is how strongly an expert believes that higher capital requirements would increase the cost of bank lending.
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Do Conventional Monetary Policy Instruments Matter in Unconventional Times?
Manuel Buchholz, Kirsten Schmidt, Lena Tonzer
Journal of Banking and Finance,
September
2020
Abstract
This paper investigates how declines in the deposit facility rate set by the ECB affect euro area banks’ incentives to hold reserves at the central bank. We find that, in the face of lower deposit rates, banks with a more interest-sensitive business model are more likely to reduce reserve holdings and allocate freed-up liquidity to loans. The result is driven by banks in the non-GIIPS countries of the euro area. This reveals that conventional monetary policy instruments have limited effects in restoring monetary policy transmission during times of crisis.
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