Bank Corporate Loan Pricing Following the Subprime Crisis

Abstract

The massive losses that banks have incurred with the meltdown of subprime mortgages have raised concerns with their ability to continue extending loans to corporations. In this paper, we attempt to ascertain these concerns by investigating if banks have changed their loan pricing policies in response to the losses they have incurred since the onset of the subprime crisis. We find that firms that borrowed after the onset of the crisis paid an additional 16 bps over Libor when compared to the loans they took out from the same bank prior to the crisis, after we control for firm-, bank-, and loan-specific factors. We also find that the increase in loan spreads is higher for those firms that have borrowed from banks that incurred larger losses in the current crisis. In addition, we find that these banks increased the interest rates on their loans to bank-dependent borrowers by more than they did on their loans to borrowers that have access to the bond market. These results are likely bank-driven because we derive them on a set of borrowers that took out loans both before and after the crisis from the same bank. Our findings, therefore, add some support to the concerns with the availability of bank credit since the onset of the subprime crisis.

Keywords: subprime losses, bank losses, loan spreads, hold-up, information monopolies

JEL Classification: E51, G21, G32