Advertisement

Banking market concentration and syndicated loan prices

  • Biao Mi
  • Liang Han
Original Research
  • 24 Downloads

Abstract

This paper investigates the ‘price–concentration’ relationship in pricing syndicated loans. By measuring bank concentration at a state level in US, we show supporting evidence to market power hypothesis that syndicated loan prices are positively associated with the concentration of both borrower’s and lead arranger’s markets but not the concentration of participant lenders’ markets. We also show that loan prices are more sensitively to lead arranger’s market concentration than to borrower’s and a borrower could reduce loan costs by borrowing from a less concentrated bank market. In sharp contrast, loan prices are negatively associated with bank concentration if a loan syndication is led by an investment bank or non-bank financial institution. Our findings are robust to a variety of bank concentration measures and model specification.

Keywords

Banking market Concentration Syndicated loan Market power 

JEL Classification

G20 G21 G23 G32 

References

  1. Ahmed JI, Anderson C, Zarutskie RE (2015) Are the borrowing costs of large financial firms unusual? FEDS.  https://doi.org/10.17016/FEDS.2015.024 CrossRefGoogle Scholar
  2. Altunbaş Y, Gadanecz B (2004) Developing country economic structure and the pricing of syndicated credits. J Dev Stud 68540:143–173.  https://doi.org/10.1080/0022038042000218170 CrossRefGoogle Scholar
  3. Amore MD, Schneider C, Žaldokas A (2013) Credit supply and corporate innovation. J Financ Econ 159109:835–855.  https://doi.org/10.1016/j.jfineco.2013.04.006 CrossRefGoogle Scholar
  4. Ariss RT (2010) On the implications of market power in banking: evidence from developing countries. J Bank Finance 121734:765–775.  https://doi.org/10.1016/j.jbankfin.2009.09.004 CrossRefGoogle Scholar
  5. Asker J, Ljungqvist A (2010) Competition and the structure of vertical relationships in capital markets. J Polit Econ 2724118:599–647CrossRefGoogle Scholar
  6. Bae SC, Chang K, Yi H-C (2018) Corporate social responsibility, credit rating, and private debt contracting: new evidence from syndicated loan market. Rev Quant Finance Acc 273350:261–299.  https://doi.org/10.1007/s11156-017-0630-4 CrossRefGoogle Scholar
  7. Bellón C (2016) How local is a local banking market? Bank competition, borrower competition and interest rates. SSRN.  https://doi.org/10.2139/ssrn.2665173 CrossRefGoogle Scholar
  8. Berg T, Saunders A, Steffen S (2015) The total cost of corporate borrowing in the loan market: don’t ignore the fees. J Finance.  https://doi.org/10.1111/jofi.12281 CrossRefGoogle Scholar
  9. Bikker JA, Haaf K (2002) Competition, concentration and their relationship: an empirical analysis of the banking industry. J Bank Finance 74526:2191–2214.  https://doi.org/10.1016/s0378-4266(02)00205-4 CrossRefGoogle Scholar
  10. Cetorelli N, Gambera M (2001) Banking market structure, financial dependence and growth: International evidence from industry data. J Finance 1056:617–648.  https://doi.org/10.1111/0022-1082.00339 CrossRefGoogle Scholar
  11. Cetorelli N, Strahan PE (2006) Finance as a barrier to entry: bank competition and industry structure in local US markets. J Finance 16161:437–461CrossRefGoogle Scholar
  12. Chan ALC, Hsieh YT, Lee E, Yueh ML (2015) Does financial statement information affect cross-border lending by foreign banks in the syndicated loan market? Evidence from a natural experiment. J Account Public Policy 68634:520–547.  https://doi.org/10.1016/j.jaccpubpol.2015.05.005 CrossRefGoogle Scholar
  13. Chava S, Roberts MR (2008) How does financing impact investment? The role of debt covenants. J Finance 97763:2085–2121.  https://doi.org/10.1111/j.1540-6261.2008.01391.x CrossRefGoogle Scholar
  14. Cornaggia J, Mao Y, Tian X, Wolfe B (2015) Does banking competition affect innovation? J Financ Econ 153115:189–209CrossRefGoogle Scholar
  15. Cyrnak AW, Hannan TH (1999) Is the cluster still valid in defining banking markets? Evidence from a new data source. Antitrust Bull 68744:313Google Scholar
  16. Degryse H, Ongena S (2005) Distance, lending relationships, and competition. J Finance 74260:231–266.  https://doi.org/10.1111/j.1540-6261.2005.00729.x CrossRefGoogle Scholar
  17. Delis MD, Tsionas EG (2009) The joint estimation of bank-level market power and efficiency. J Bank Finance 70233:1842–1850.  https://doi.org/10.1016/j.jbankfin.2009.04.006 CrossRefGoogle Scholar
  18. Demiroglu C, James C (2015) Bank loans and troubled debt restructurings. J Financ Econ 699118:192–210.  https://doi.org/10.1016/j.jfineco.2015.01.005 CrossRefGoogle Scholar
  19. Demsetz H (1973) Industry structure, market rivalry, and public policy. J Law Econ 70616:1–9.  https://doi.org/10.1086/466752 CrossRefGoogle Scholar
  20. Dennis SA, Mullineaux DJ (2000) Syndicated loans. J Financ Intermed 459:404–426.  https://doi.org/10.1006/jfin.2000.0298 CrossRefGoogle Scholar
  21. Esty BC (2001) Structure loan syndicates: a case study of the Hong Kong Disneyland project loan. J Appl Corp Finance 74314:80–95.  https://doi.org/10.1111/j.1745-6622.2001.tb00440.x CrossRefGoogle Scholar
  22. Felici R, Pagnini M (2008) Distance, bank heterogeneity and entry in local banking markets. J Ind Econ 69156:500–534.  https://doi.org/10.1111/j.1467-6451.2008.00357.x CrossRefGoogle Scholar
  23. Fungáčová Z, Shamshur A, Weill L (2017) Does bank competition reduce cost of credit? Cross-country evidence from Europe. J Bank Finance 251583:104–120.  https://doi.org/10.1016/j.jbankfin.2017.06.014 CrossRefGoogle Scholar
  24. Gelos RG, Sahay R, Sandleris G (2011) Sovereign borrowing by developing countries: What determines market access? J Int Econ 69383:243–254.  https://doi.org/10.1016/j.jinteco.2010.11.007 CrossRefGoogle Scholar
  25. Gropp R, Kok C, Lichtenberger J-D (2014) The dynamics of bank spreads and financial structure. QJF 4(4):1–53.  https://doi.org/10.1142/s2010139214500141 CrossRefGoogle Scholar
  26. Guzman MG (2000) Bank structure, capital accumulation and growth: a simple macroeconomic model. Econ Theory 69716:421–455.  https://doi.org/10.1007/PL00004091 CrossRefGoogle Scholar
  27. Harjoto M, Mullineaux DJ, Yi H-C (2006) A comparison of syndicated loan pricing at investment and commercial banks. Financ Manag 48935:49–70.  https://doi.org/10.1111/j.1755-053X.2006.tb00159.x CrossRefGoogle Scholar
  28. Hasan I, Liu L, Wang H, Zhen X (2017) Bank market power and loan contracts: empirical evidence. Econ Notes 250946:649–676CrossRefGoogle Scholar
  29. Haselmann R, Wachtel P (2011) Foreign banks in syndicated loan markets. J Bank Finance 113435:2679–2689.  https://doi.org/10.1016/j.jbankfin.2011.02.023 CrossRefGoogle Scholar
  30. Heitfield EA (1999) What do interest rate data say about the geography of retail banking markets? Antitrust Bull 271744:333–348Google Scholar
  31. Heitfield E, Prager RA (2004) The geographic scope of retail deposit markets. J Financ Serv Res 271925:37–55.  https://doi.org/10.1023/B:FINA.0000008664.47740.a5 CrossRefGoogle Scholar
  32. Ivashina V (2009) Asymmetric information effects on loan spreads. J Financ Econ 75692:300–319.  https://doi.org/10.1016/j.jfineco.2008.06.003 CrossRefGoogle Scholar
  33. Ivashina V, Scharfstein D (2010) Bank lending during the financial crisis of 2008. J Financ Econ 189597:319–338.  https://doi.org/10.1016/j.jfineco.2009.12.001 CrossRefGoogle Scholar
  34. Ivashina V, Sun Z (2011) Institutional demand pressure and the cost of corporate loans. J Financ Econ 75599:500–522.  https://doi.org/10.1016/j.jfineco.2010.10.009 CrossRefGoogle Scholar
  35. Jackson JE, Thomas AR (1995) Bank structure and new business creation lessons from an earlier time. Reg Sci Urban Econ 35625:323–353.  https://doi.org/10.1016/0166-0462(94)02069-s CrossRefGoogle Scholar
  36. Johnson CA, Rice T (2008) Assessing a decade of interstate bank branching. SSRN.  https://doi.org/10.2139/ssrn.981214 CrossRefGoogle Scholar
  37. Kim M, Surroca J, Tribo JA (2014) Impact of ethical behavior on syndicated loan rates. J Bank Finance 69038:122–144.  https://doi.org/10.1016/j.jbankfin.2013.10.006 CrossRefGoogle Scholar
  38. Lee SW, Mullineaux DJ (2004) The size and composition of commercial lending syndicates. SSRN.  https://doi.org/10.2139/ssrn.292874 CrossRefGoogle Scholar
  39. Lian Y (2017) Bank competition and the cost of bank loans. Rev Quant Finance Acc.  https://doi.org/10.1007/s11156-017-0670-9 CrossRefGoogle Scholar
  40. Lim J, Minton BA, Weisbach MS (2014) Syndicated loan spreads and the composition of the syndicate. J Financ Econ 696111:45–69.  https://doi.org/10.1016/j.jfineco.2013.08.001 CrossRefGoogle Scholar
  41. Lin C, Ma Y, Malatesta P, Xuan Y (2012) Corporate ownership structure and bank loan syndicate structure. J Financ Econ 1902104:1–22.  https://doi.org/10.1016/j.jfineco.2011.10.006 CrossRefGoogle Scholar
  42. Osborne DK (1988) Competition and geographical integration in commercial bank lending. J Bank Finance 270712:85–103.  https://doi.org/10.1016/0378-4266(88)90052-0 CrossRefGoogle Scholar
  43. Pagano M (1993) Financial markets and growth. Eur Econ Rev 69837:613–622.  https://doi.org/10.1016/0014-2921(93)90051-B CrossRefGoogle Scholar
  44. Petersen MA, Rajan RG (1995) The effect of credit market competition on lending relationships. Q J Econ 695110:407–443.  https://doi.org/10.2307/2118445 CrossRefGoogle Scholar
  45. Petersen MA, Rajan RG (2002) Does distance still matter? The information revolution in small business lending. J Finance 193657:2533–2570.  https://doi.org/10.1111/1540-6261.00505 CrossRefGoogle Scholar
  46. Radecki L (1998) The expanding geographic reach of retail banking markets. Econ Pol Rev 2716:15–34Google Scholar
  47. Rice T, Strahan PE (2010) Does credit competition affect small-firm finance? J Finance 16065:861–889CrossRefGoogle Scholar
  48. Sapienza P (2002) The effects of banking mergers on loan contracts. J Finance 70457:329–367.  https://doi.org/10.1111/1540-6261.00424 CrossRefGoogle Scholar
  49. Schuermann T (2004) Why were banks better off in the 2001 recession? SSRN 676. https://ssrn.com/abstract=601145
  50. Sharpe SA (1990) Asymmetric information, bank lending and implicit contracts: a stylized model of customer relationships. J Finance 95145:1069.  https://doi.org/10.2307/2328715 CrossRefGoogle Scholar
  51. Taylor A, Sansone A (2007) The handbook of loan syndications and trading. McGraw-Hill, New YorkGoogle Scholar
  52. Tian L, Han L (2018) How local is local? Evidence from bank competition and corporate innovation in US. Rev Quant Finance Acc 2720:1–36Google Scholar
  53. von Thadden E-L (2004) Asymmetric information, bank lending and implicit contracts: the winner’s curse. Financ Res Lett 4851:11–23.  https://doi.org/10.1016/s1544-6123(03)00006-0 CrossRefGoogle Scholar

Copyright information

© Springer Science+Business Media, LLC, part of Springer Nature 2018

Authors and Affiliations

  1. 1.Henley Business SchoolUniversity of ReadingReadingUK

Personalised recommendations