Bank Capital, Competition and Loan Spreads

Abstract

This paper empirically investigates the effect of bank capital ratios on loan spreads using a dataset of all syndicated loans issued by public non-financial U.S. firms during the 1993 to 2007 period. We find evidence that banks with high capital ratios charge higher spreads. We further investigate whether this result can be explained by banks holding-up their borrowers. Using various proxies for information asymmetry we encounter that this effect even persists for the most transparent borrowers. Moreover, we find that a higher level of competition between banks does not attenuate this effect.

Keywords: capital ratio, competition, information asymmetry, loan spreads

JEL Classification: G14, G21, G3