Abstract

http://ssrn.com/abstract=1343897
 
 

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Bank Capital, Borrower Power, and Loan Rates


João A. C. Santos


Federal Reserve Bank of New York

Andrew Winton


University of Minnesota - Twin Cities - Carlson School of Management

May 6, 2013

EFA 2009 Bergen Meetings Paper
AFA 2010 Atlanta Meetings Paper

Abstract:     
We test the predictions of several recent theories of how bank capital affects the rates that banks charge their borrowers. Consistent with previous studies, higher bank capital has a negative impact on loan rates, and this effect is focused on bank-dependent borrowers. Further investigation shows that borrower cash flow is a critical determinant of this relationship: compared to high-capital banks, low-capital banks charge more for bank-dependent borrowers with low cash flow, but offer greater discounts for bank-dependent borrowers with high cash flow. Our results support the bank-fragility theory, which argues that low bank capital generally toughens bank bargaining power, especially vis-a-vis low-cash-flow borrowers, but weakens bank bargaining power vis-a-vis high-cash-flow borrowers. By contrast, our results are not consistent with models where low-capital banks either consume reputational capital or are generally more risk averse than high-capital banks.

Number of Pages in PDF File: 49

Keywords: Bank loans, bank capital, loan spreads, cash flow, hold-up, information monopolies

JEL Classification: E51, G21, G32

working papers series


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Date posted: February 18, 2009 ; Last revised: February 1, 2014

Suggested Citation

Santos, João A. C. and Winton, Andrew, Bank Capital, Borrower Power, and Loan Rates (May 6, 2013). EFA 2009 Bergen Meetings Paper; AFA 2010 Atlanta Meetings Paper. Available at SSRN: http://ssrn.com/abstract=1343897 or http://dx.doi.org/10.2139/ssrn.1343897

Contact Information

João A. C. Santos (Contact Author)
Federal Reserve Bank of New York ( email )
33 Liberty Street
New York, NY 10045
United States
212-720-5583 (Phone)
212-720-8363 (Fax)
HOME PAGE: HTTP://WWW.NEWYORKFED.ORG/RMAGHOME/ECONOMIST/SANTOS/CONTACT.HTML
Andrew Winton
University of Minnesota - Twin Cities - Carlson School of Management ( email )
321 19th Avenue South
Department of Finance
Minneapolis, MN 55455
United States
612-624-0589 (Phone)
612-626-1335 (Fax)
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