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Corporate borrowing has substantially changed over the last two decades. In this article, we investigate changes in borrowing of US publicly listed firms along trends in five key areas: ( a) the funding mix of firms and the importance of balance-sheet versus off-balance-sheet borrowing; ( b) the costs of corporate borrowing; ( c) trends in nonprice loan terms; ( d) the importance of banks versus nonbank institutional investors; and ( e) the purpose for corporate borrowing. We explore these trends graphically over the 2002–2019 period, provide a narrative for these trends based on the theoretical and empirical literature in the respective areas, and discuss some implications for the coronavirus disease 2019 (COVID-19) pandemic. Finally, we document these trends for firms in the Eurozone countries and delineate similarities and differences.

We document a 24% decline in loan issuances in the UK syndicated loan market after the Brexit vote relative to a set of comparable loan markets. The decline in lending is driven by a pervasive reduction in demand by UK firms. Changes in GDP forecast around the Brexit vote explain about 61% of the decline in lending. We do not find evidence, however, that the United Kingdom loses its attractiveness as a financial center for cross-border lending. Our results point to the resilience of global financial centers in the face of large unexpected shocks.

We study the transmission channels from central banks’ quantitative easing programs via the banking sector when central banks start purchasing corporate bonds. We find evidence consistent with a “capital structure channel” of monetary policy. The announcement of central bank purchases reduces the bond yields of firms whose bonds are eligible for central bank purchases. These firms substitute bank term loans with bond debt, thereby relaxing banks’ lending constraints: banks with low tier-1 ratios and high nonperforming loans increase lending to private (and profitable) firms, which experience a growth in investment. The credit reallocation increases banks’ risk-taking in corporate credit.

We find that chief executive officers and chief financial officers exert significant individual effects on bank risk. Manager transitions, including transitions generated by plausibly exogenous manager departures, lead to abnormally large changes in bank risk. We demonstrate that the effects of managers on bank risk are sizable and manager-specific. The effects are also partly anticipated by the board because they are reflected in managers’ pay. However, wide-ranging personal attributes, including biographical, experience, and compensation data, only explain a small share of managers’ impact on bank risk. This implies that attempts to rein in bank risk-taking by targeting manager characteristics will be challenging for investors and regulators.

We study the crash of bank stock prices during the COVID-19 pandemic. We find evidence consistent with a “credit line drawdown channel”. Stock prices of banks with large ex-ante exposures to undrawn credit lines as well as large ex-post gross drawdowns decline more. The effect is attenuated for banks with higher capital buffers. These banks reduce term loan lending, even after policy measures were implemented. We conclude that bank provision of credit lines appears akin to writing deep out-of-the-money put options on aggregate risk;we show how the resulting contingent leverage and stock return exposure can be incorporated tractably into bank capital stress tests.

We study the crash of bank stock prices during the COVID-19 pandemic. We find evidence consistent with a “credit line drawdown channel”. Stock prices of banks with large ex-ante exposures to undrawn credit lines as well as large ex-post gross drawdowns decline more. The effect is attenuated for banks with higher capital buffers. These banks reduce term loan lending, even after policy measures were implemented. We conclude that bank provision of credit lines appears akin to writing deep out-of-the-money put options on aggregate risk; we show how the resulting contingent leverage and stock return exposure can be incorporated tractably into bank capital stress tests.

Data on firm-loan-level daily credit line drawdowns in the United States expose a corporate “dash for cash” induced by the COVID-19 pandemic. In the first phase of the crisis, which was characterized by extreme precaution and heightened aggregate risk, all firms drew down bank credit lines and raised cash levels. In the second phase, which followed the adoption of stabilization policies, only the highest-rated firms switched to capital markets to raise cash. Consistent with the risk of becoming a fallen angel, the lowest-quality BBB-rated firms behaved more similarly to non-investment grade firms. The observed corporate behavior reveals the significant impact of credit risk on corporate cash holdings. (JEL G01, G14, G32, G35)Received July 13, 2020; editorial decision July 17, 2020 by Editor Andrew Ellul

Data on firm-loan-level daily credit line drawdowns in the United States expose a corporate “dash for cash” induced by the COVID-19 pandemic. In the first phase of the crisis, which was characterized by extreme precaution and heightened aggregate risk, all firms drew down bank credit lines and raised cash levels. In the second phase, which followed the adoption of stabilization policies, only the highest-rated firms switched to capital markets to raise cash. Consistent with the risk of becoming a fallen angel, the lowest-quality BBB-rated firms behaved more similarly to non-investment grade firms. The observed corporate behavior reveals the significant impact of credit risk on corporate cash holdings.

Syndication increases the overlap of bank loan portfolios and makes them more vulnerable to contagious effects. We develop a novel measure of bank interconnectedness using syndicated corporate loan portfolios, overlap based on industry and region, and different weights such as equal weights, size and relationships. We find that interconnectedness is driven mainly by bank diversification, less by bank size or overall loan market size. Interconnectedness is positively correlated with different bank-level systemic risk measures including SRISK, DIP and CoVaR, and such a positive correlation mainly arises from an elevated effect of interconnectedness on systemic risk during recessions. Overall, our results highlight that institution-level risk reduction through diversification ignores the negative externalities of an interconnected financial system.

This paper examines the dynamic allocation of control rights in private debt contracts of firms. We show that a covenant violation in the prior loan contract implies a stigma for borrowers which results in stricter loan contract terms in subsequent new loan contracts. Our analyses reject potentially other explanations such as firm characteristics or agency problems between the lender and firm management, shareholders or public debtholders. After covenant violations in the prior contract, new loans have on average 18 bps higher spreads and include more of those covenant types which also have been violated in the prior contract, with tighter thresholds.

Using a unique dataset of more than 1 million loans made by 296 German banks, we evaluate the impact of many aspects of customer–bank relationships on loan default rates. Our research suggests a practical solution to reducing loan defaults for new customers: Have the customer open a simple transactions account – savings or checking account. Observe for some time and then decide whether to make a loan. Loans made under this model have lower default, as banks can use historical data about their borrowers to establish a baseline against which new client-related information can be evaluated. Banks assemble this historical information through relationships of different forms. We define relationships in many different ways to capture non-credit relationships, transaction accounts, as well as the depth and intensity of relationships, and find each of these can provide information that helps reduce default – even establishing a simple savings or checking account and observing the activity prior to loan granting can help reduce loan defaults. Our results show that banks with relationship-specific information act differently compared with banks that do not have this information both in screening and subsequent monitoring borrowers which helps reduce loan defaults.

We use secondary corporate loan market prices to construct a novel loan market-based credit spread. This measure has additional predictive power across macroeconomic outcomes beyond existing bond credit spreads as well as other commonly used predictors in both the U.S. and Europe. Consistent with theoretical predictions, our evidence highlights the joint role of financial intermediary and borrower balance sheet frictions. In particular, loan market borrowers are compositionally different from bond market borrowers, which helps explain the differential predictive power of loan over bond spreads. Exploiting industry specific loan spreads and alternative weighting schemes further improves our business cycle forecasts.

This online appendix to "Brexit" and the Contraction of Syndicated Lending presents further robustness tests of the Brexit effect, cross-sectional results of the Brexit effect for UK firms, further results on the type of the shock the Brexit represents, the Siamese Twins matching methodology as well as the UK market share decomposition.

We analyze the determinants and the long-run consequences of government interventions in the eurozone banking sector during the 2008/09 financial crisis. Using a novel and comprehensive dataset, we document that fiscally constrained governments “kicked the can down the road” by providing banks with guarantees instead of full-fledged recapitalizations. We adopt an econometric approach that addresses the endogeneity associated with governmental bailout decisions in identifying their consequences. We find that forbearance caused undercapitalized banks to shift their assets from loans to risky sovereign debt and engage in zombie lending, resulting in weaker credit supply, elevated risk in the banking sector, and, eventually, greater reliance on liquidity support from the European Central Bank. Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.

We analyze differences in the pricing of syndicated loans between U.S. and European loans. For credit lines, U.S. borrowers pay significantly higher spreads, but also lower fees, resulting in similar total costs of borrowing in both markets. For term loans, U.S. firms pay significantly higher spreads. While European firms across the rating spectrum issue terms loans, only low quality U.S. firms rely on term loans. U.S. issuers perform worse after loan origination compared to European issuers, which explains 30% of the spread differential. Increasing loan supply by institutional lenders in the U.S. since 2003 eventually fully removed the term loan pricing gap.

More than 80% of US syndicated loans contain at least one fee type and contracts typically specify a menu of spread and different types of fees. We test the predictions of existing theories about the main purposes of fees and provide supporting evidence that: (1) fees are used to price options embedded in loan contracts such as the draw-down option for credit lines and the cancellation option in term loans; and (2) fees are used to screen borrowers about the likelihood of exercising these options. We also propose a new total-cost-of-borrowing measure that includes various fees charged by lenders.

European banks are exposed to a substantial amount of risky sovereign debt. “Missing capital” in the banking system resulting from the zero-risk weight exemption for European sovereign debt amplifies the co-movement between sovereign CDS spreads and facilitates cross-border crisis spillovers. Risks spill over from risky peripheral sovereigns to safer core countries, but not in the opposite direction nor for exposures to countries not exempted from risk-weighting. Unfunded non-domestic sovereign bond exposures primarily affect CDS spreads of non-GIIPS banks, while domestic sovereign-to-bank linkages are particularly important for GIIPS banks. Spillovers are attenuated when banks fund their sovereign bond exposures with capital.

This paper provides empirical evidence suggesting that misallocation of capital distorts competition and impedes innovation and productivity. Using a sample of Spanish firms over the 2010 to 2016 period, we document that industries with more severe misallocation of capital have both lower exit rates of low-type firms and lower entry rates of young and innovative firms. In these industries output declines and concentration increases. Consistent with negative effects associated with a reduction in competition on innovation, we find that capital misallocation depresses patent applications, particularly in high-tech sectors, and industries with neck-and-neck competition.

Die Veroffentlichung der Ergebnisse des Comprehensive Assessment im Oktober 2014 durch die Europaische Zentralbank (EZB) markierte den Hohepunkt und Abschluss der bis dato umfassendsten Bilanzprufung des europaischen Bankensektors. Die Uberprufung stutzte sich in der Bewertung der Gesundheit der bedeutendsten Finanzinstitute auf sich erganzende Analysen, einen stichtagsbezogenen Asset Quality Review und einen Stresstest, und verfolgte hochgesteckte Ziele: Die auf vereinheitlichten Kriterien beruhende Bewertung sollte sowohl die allgemeine Transparenz der Bankbilanzen erhohen als auch die umfassende Rekapitalisierung der europaischen Finanzinstitute einleiten und das langfristige Vertrauen in den Bankensektor sicher- bzw. wiederherstellen. Die grose Herausforderung bestand daher in der Konzeptionierung und Durchfuhrung eines Tests, der zum einen streng genug ist, um eine Bereinigung der Bilanzen europaischer Banken einzuleiten und einer deflationaren Entwicklung (wie in Folge der japanischen Bankenkrise der 1990er) vorzubeugen, der zum anderen jedoch nicht durch ubermasige Harte zu einer weiteren Destabilisierung des Sektors fuhrt. Das Ziel dieses Artikels ist zu beleuchten, inwieweit der EZB die Meisterung dieser Aufgabe gelungen ist. Denn auch wenn eindeutige Verbesserungen im Gegensatz zu vorangegangen Stresstests festzustellen sind, so bestehen doch weiterhin fundamentale Kritikpunkte bezuglich Methodik, Ausfuhrung und allgemeiner Transparenz und Glaubwurdigkeit. Zudem bot auch die diesjahrige Bilanzprufung nur eine unzureichende Abbildung systemischer Risiken.

How does the organizational form of loan syndicates evolve and what are the effects on price collusion? We develop a novel measure of distance in lending expertise among syndicate lenders, and relate this novel measure to the organizational form of loan syndicates and loan pricing. Studying the U.S. syndicated loan market from 1989 to 2017, we find that the organizational form of loan syndicates significantly varies across our lender measure based on similar specializations in lending which we call syndicated distance. Large lead arrangers prefer to form close and concentrated syndicates by letting lenders with similar lending expertise into their syndicates and allocating those lenders higher loan shares. Analyzing loan pricing, we find that concentrated syndicates possess improved screening abilities, but collude on loan pricing. Consistent with Hatfield et al. (2017), we find however that price collusion of concentrated syndicates only occurs during periods of low market concentration. Our findings imply that both the organizational form of loan syndicates and the level of market concentration affect price collusion.

European banks are exposed to a substantial amount of risky sovereign debt. The “missing bank capital” resulting from the zero-risk weight exemption for European banks for European sovereign debt amplifies the co-movement between sovereign CDS spreads and facilitates cross-border financial-crisis spillovers. Risks spill over from risky periphery sovereigns to safer core countries, but not in the opposite direction nor for exposures to countries not exempted from risk-weighting. We consider the trade-off of benefits of sovereign debt (for banks and sovereigns) and spillover risk when applying risk-weights. More bank capital as well as positive risk-weighting for sovereign exposures mitigates spillovers.

We analyze auctions of unsecured money market deposits of firms to banks via a FinTech platform. In each auction, only the firm observes the banks and their interest rate bids and decides where to deposit its funds. We observe that deposit interest rate bids increase monotonically with bank risk and that firms in general prefer higher deposit interest rates. However, our results show that firms’ selection of banks in which to deposit is concave in the bid interest rate in line with the general notion of credit rationing. We find this confirmed on the intensive as well as on the extensive margin. Risky banks eventually exit the market, and re-enter when their risk decreases again. Risky banks exit when the bid-interest rate increases above central bank policy rates suggesting that central bank funding crowds out deposits thereby reducing monitoring by short-term creditors. This has important implications for banks’ access to unsecured corporate funding, financial stability and the understanding of deposit markets more broadly.

In this paper, we study the organizational form of loan syndicates, how banks choose their syndicate partners and how this affects syndicate structure, loan pricing, and borrower performance. We develop a set of novel measures in terms of the distance in lending expertise with respect to both borrower industry and borrower geographic location between any two lenders and relate these measures to the organizational form of loan syndicates. We find that lead arrangers choose banks that have a similar focus in terms of lending expertise, i.e., close competitors, and give these banks more senior roles in the syndicate. We also find that these more senior syndicate members hold larger loan shares. Borrowers, especially those presenting more severe information asymmetry, benefit from such an organizational design by paying lower interest spreads. These results support the hypothesis that syndicate members that are close to lead arrangers are delegated some responsibilities such as screening and monitoring and thus can lower the overall loan syndication costs. We do not find, however, significant evidence of more effective ex-post monitoring from such a strategy based on loan default when ex-ante borrower quality and creditworthiness is taken into account. This implies that banks collaborate to pool on screening rather than monitoring.

We study the transmission channels from central banks’ quantitative easing programs via the banking sector when central banks start purchasing corporate bonds. We find evidence consistent with a “capital structure channel” of monetary policy. The announcement of central bank purchases reduces the bond yields of firms whose bonds are eligible for central bank purchases. These firms substitute bank term loans with bond debt, thereby relaxing banks’ lending constraints: banks with low Tier-1 ratios and high non-performing loans increase lending to private (and profitable) firms, which experience a growth in capital expenditures and sales. The credit reallocation increases banks’ risk-taking in corporate credit.

Excessive sovereign debt exposures of banks contributed to the gravity of the financial and sovereign debt crisis in 2011 and 2012, as well as to the slow and asymmetric recovery of European countries. Various policies that improve banks’ resilience were introduced in recent years, however the regulatory regime for the sovereign debt exposure of banks has not changed. We identify four criteria that a new regime for bank sovereign exposures should fulfill: (1) attenuate the home bias to the domestic sovereign, (2) break the doom loop, (3) avoid a flight-to-quality of assets, and (4) mitigate risk spillovers. We assess the implications for banks’ balance sheets for five policy proposals, based on simulations on a sample of European banks. We show that none of the proposals would fulfill all four criteria in the absence of a safe asset. We conclude that a new regime for bank sovereign exposure should be conditional on restoring the value of sovereign bonds as a safe asset.

We assess the relative importance of ratings versus stock exchange listings in reducing information asymmetry using a dataset of syndicated loans to public and private firms in the UK. We find that the certification effect of ratings is largest for private firms and that syndicates are smallest if firms are privately held or unrated. Moreover, we find that the marginal effect of being stock exchange listed is insignificant once these firms are rated. Exploiting the heterogeneity among lenders, we find that especially foreign bank and non-bank investors do not provide capital if firms are unrated. Our paper highlights the information produced by rating agencies as an important mechanism by which ratings improve access to capital. Our results also emphasize the importance of syndicate moral hazard on the supply of uninformed capital: bank–borrower relationships significantly increase the loan share syndicated to investors particularly if firms are not listed and unrated.

In this paper, we examine the behavior of individual consumers in financial distress. We provide a novel description of consumer delinquency and investigate whether or not consumers recover from delinquency. We use a large data set from a German credit bureau containing the credit history of more than 500,000 anonymous individuals in Germany who became delinquent for the first time in 2007. We observe changes in their arrears on a quarterly basis over the 2007 to June 2010 period. Our results show that younger consumers are more likely to fall behind on payments to telecommunication firms and older consumers on payments to financial institutions. The median arrears of the first delinquency event is €599 and there is substantial cross-sectional variation with respect to creditor (and debt) type. Repayment performance differs by level of initial arrears and number of delinquency events as well as by age, creditor type, and socioeconomic environment. We construct a repayment performance measure that combines repayment speed with actual repayments. We show that medium-age bank debtors have the highest repayment performance, although they have at the same time the highest bankruptcy risk. An understanding of individual behavior during financial distress is important for the design and implementation of policy tools to support these individuals and to prevent distress.

We document channels of monetary policy transmission to banks following two interventions of the European Central Bank (ECB). As a lender of last resort via the long-term refinancing operations (LTROs), the ECB improved the collateral value of sovereign bonds of peripheral countries. This resulted in an elevated concentration of these bonds in the portfolios of domestic banks, increasing fire-sale risk and making both banks and sovereign bonds riskier. In contrast, the ECB’s announcement of being a potential buyer of last resort via the Outright Monetary Transaction (OMT) program attracted new investors and reduced fire-sale risk in the sovereign bond market.

Using the syndicated loan market as a laboratory, we analyze the effect of the Brexit referendum on corporate loan origination. Issuances in the UK syndicated loan market dropped by 25% after the Brexit referendum relative to a set of comparable syndicated loan markets. We propose a new matching strategy – “Siamese Twins Matching” – to identify appropriate counterfactuals for the UK market. We further document a novel channel, market attractiveness, that plays an important role beyond standard demand and supply factors: firm-bank combinations that used to issue loans in both the UK market and other markets decrease their issuances in the UK market more than in other markets after the Brexit referendum. Our results help to understand the dynamics of competition between financial centers and the role of policy uncertainty shocks in this competition.

We investigate the transmission of central bank liquidity to bank deposits and loan spreads in Europe over the period from January 2006 to June 2010. We find evidence consistent with an impaired transmission channel due to bank risk. Central bank liquidity does not translate into lower loan spreads for high-risk banks for maturities beyond one year, even as it lowers deposit spreads for both high- and low-risk banks. This adversely affects the balance sheets of high-risk bank borrowers, leading to lower payouts, lower capital expenditures, and lower employment. Overall, our results suggest that banks’ capital constraints at the time of an easing of monetary policy pose a challenge to the effectiveness of the bank-lending channel and the central bank's lender of last resort function.

We investigate the role of executive-specific attributes (or ‘styles’) in explaining bank business models beyond pay-per-performance incentives. We decompose the variation in business models and document that the ‘style’ of members of a bank’s top management team is reflected in key bank policy choices. Manager styles far outrank executive compensation and other observable manager variables in terms of their ability to describe variation in bank business models. Bank manager styles also explain differences in risk and performance across banks. Finally, we combine manager styles from various bank policies to derive manager profiles that are associated with manager’s personal risk preferences, board characteristics and whether or not managers will be appointed as CEO during their careers.

We investigate whether the application of risk weights impairs financial stability. Zero risk weight regulation associated with euro-denominated sovereign debt creates a “sovereign subsidy” for European banks, which amplifies the co-movement between sovereign credit default swap (CDS) spreads and a European sovereign CDS index. We do not find a similar co-movement with sovereign CDS spread changes of non-euro area sovereigns. More capital as well as less aggressive risk weighting mitigates this effect. Our results are robust to alternative hypotheses, and controlling for common shocks due to financial linkages among European countries, and the exposure of European banks to non-sovereign sectors.

As we are moving toward a eurozone banking union, the European Central Bank (ECB) is going to take over the regulatory oversight of 128 banks in November 2014. To that end, the ECB conducted a comprehensive assessment of these banks, which included an asset quality review (AQR) and a stress test. The fundamental question is how accurately will the financial condition of these banks have been assessed by the ECB when it commences its regulatory oversight? And, can the comprehensive assessment lead to a full repair of banks' balance sheets so that the ECB takes over financially sound banks and is the necessary regulation in place to facilitate this? Overall, the evidence presented in this paper based on the design of the comprehensive assessment as well as own stress test exercises suggest that the ECB's assessment might not comprehensively deal with the problems in the financial sector and risks may remain that will pose substantial threats to financial stability in the eurozone.

This paper analyzes the effect of the removal of government guarantees on bank risk taking. We exploit the removal of guarantees for German Landesbanken which results in lower credit ratings, higher funding costs, and a loss in franchise value. This removal was announced in 2001, but Landesbanken were allowed to issue guaranteed bonds until 2005. We find that Landesbanken lend to riskier borrowers after 2001. This effect is most pronounced for Landesbanken with the highest expected decrease in franchise value. Landesbanken also significantly increased their off-balance sheet exposure to the global ABCP market. Our results provide implications for the debate on how to remove guarantees.

Since the summer of 2007, the financial system has faced two major systemic crises. European banks have been at the center of both crises, particularly of the European sovereign debt crisis. This chapter analyzes the systemic risk of European banks across both crises exploiting the specific institutional nature of the European banking system. We employ the “Systemic Expected Shortfall” concept developed in Acharya et al. (2010) which creates a systemic risk index among financial institutions based on their individual contribution to the capital shortfall of the financial system.We analyze which banks are most systemic in Europe using this measure and its relationship to bank stock returns in cross-sectional tests. We then construct a systemic risk ranking of European banks and European countries as of June 2007 and calculate an estimate of the expected capital shortfall at that point of time. Our market-data based systemic risk measures suggest that markets demanded more capital from banks with high exposures to particularly peripheral countries in Europe, that is, banks’ sovereign debt holdings have been a major contributor to systemic risk. Finally, using hand-collected data of sovereign debt holdings and impairments, we provide estimates of how much capital was needed in the Fall of 2011 to restore confidence in the European banking sector. Introduction Since the summer of 2007, the financial system has faced two major systemic crises. While the financial crisis of 2007 to 2009 had its origin in the US housing market, the European sovereign debt crisis that started in 2010 is the result of excessive sovereign debt financed by the banking system.

We analyze pricing differences between U.S. and European syndicated loans over the 1992-2014 period. We explicitly distinguish credit lines from term loans. For credit lines, U.S. borrowers pay significantly higher spreads, but lower fees, resulting in similar total costs of borrowing in both markets. Credit line usage is more cyclical in the U.S., which provides a rationale for the pricing structure difference. For term loans, we analyze the channels of the cross-country loan price differential and document the importance of: the composition of term loan borrowers and the loan supply by institutional investors and foreign banks.