Bank Regulations and Loan Contracts

Abstract:     
This study examines empirically how bank regulations adopted in lender countries influence the characteristics of loan contracts, using a sample of loans made by 278 large commercial banks around 39 countries, to borrowers in 83 countries, in the period from 1998 to 2006. The analyses provide evidence that: (1) loan spread margins and loan maturity have respectively inverse-U and U-shaped relationships with capital regulations stringency, (2) loan maturity decreases with official supervisory power (3) the loan share of arranger lenders decreases with capital stringency, while increases both with the level of private monitoring and with the official supervisory power. Our findings indicate that more stringent capital regulations are associated with lower priced risk characteristics (spread and maturity) of loan contracts and with higher loan risk diversification. By contrast, official supervisory power is associated with riskier and less diversified loan contracts. In addition, both official supervisory power and private monitoring work as substitutes to capital regulation to reduce the (priced) risk measures of loan contracts when capital stringency is low. For higher capital stringency, supervision and private monitoring are complements to capital regulation to reduce loan contracts risk measures.

Keywords: Banks, Regulation, Credit, Risk, Bank Lending, Syndicated Loans

JEL Classifications: G21, G28, G32

Working Paper Series