Bank Reputation in the Private Debt Market

European Banking Center Discussion Paper No. 2011-003

CentER Discussion Paper Series No. 2011-009

44 Pages Posted: 14 Feb 2011

See all articles by Joseph A. McCahery

Joseph A. McCahery

Tilburg University - School of Law; European Banking Center (EBC); Tilburg Law and Economics Center (TILEC); European Corporate Governance Institute (ECGI)

Armin Schwienbacher

SKEMA Business School

Multiple version iconThere are 2 versions of this paper

Date Written: March 30, 2010

Abstract

We examine the impact of lead arrangers’ reputation on the design of loan contracts such as spread and fees charged. Controlling for the non-randomness of the lender-borrower match (self-selection bias), we find that the reputation of top tier arrangers leads to higher spreads, and that top tier arrangers retain larger fractions of their loans in their syndicates. These larger spreads are especially pronounced for borrowers without credit rating that have the most to gain from the certification assumed by virtue of a loan contract with a top tier arranger. This certification channel differs from the one found in public markets, where certification leads to a reduced spread offered to the best clients. These differences between public and private markets can be explained by differences in the way they operate and are structured. Interestingly, the effect is strongest for transactions done after the changes in the banking regulations (including the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994) that led to significant consolidations in the banking industry, including among the largest commercial banks.

Keywords: private debt, syndicated loans, bank reputation, syndication, certification

JEL Classification: G2, G21

Suggested Citation

McCahery, Joseph A. and Schwienbacher, Armin, Bank Reputation in the Private Debt Market (March 30, 2010). European Banking Center Discussion Paper No. 2011-003, CentER Discussion Paper Series No. 2011-009, Available at SSRN: https://ssrn.com/abstract=1759965 or http://dx.doi.org/10.2139/ssrn.1759965

Joseph A. McCahery (Contact Author)

Tilburg University - School of Law; European Banking Center (EBC) ( email )

Warandelaan 2
Tilburg, 5000 LE
Netherlands
+31-(0)13-466-2306 (Phone)
+31-(0)13-466-2323 (Fax)

Tilburg Law and Economics Center (TILEC)

Warandelaan 2
Tilburg, 5000 LE
Netherlands

European Corporate Governance Institute (ECGI)

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

HOME PAGE: http://www.ecgi.org

Armin Schwienbacher

SKEMA Business School ( email )

Avenue Willy Brandt
Euralille, 59777
France

HOME PAGE: http://sites.google.com/view/armin-schwienbacher

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