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The Value of Repeat Lending

29 Pages Posted: 12 Oct 2011  

Blaise Gadanecz

Bank for International Settlements - Monetary and Economic Department

Philip Molyneux

Alper Kara

Loughborough University

Date Written: July 1, 2011

Abstract

The unique structure of syndicated lending results in information asymmetries within the lending syndicate between banks of varying degrees of seniority. While previous studies have attempted to use indirect proxy measures to capture the effects of such information asymmetries, in this paper we propose a more direct measure. This offers new insights into how junior and senior banks rely on their own and each other's information sets in lending syndicates. In particular, we look at the previous number of borrowing/lending relationships between individual borrowers and lenders and the duration of these interactions. Using this new, direct and explicit measure on a sample of 5,842 syndicated loan transactions between 1993 and 2006, we find that when participant banks have information inferiority in the syndicate they require higher loan spreads to compensate for this asymmetry. This is amplified when the borrowers are more opaque. We thus show how junior participant banks with repeat relationships with the same borrower graduate from uniformed to informed lenders (the spread goes down as asymmetry diminishes) and how they rely both on the arranger's reputation and their own repeat experience with the borrower.

Keywords: syndicated loans, repetitive lending, arranger opportunistic behaviour, arranger reputation, opaque borrowers

JEL Classification: D40, F30, G21

Suggested Citation

Gadanecz, Blaise and Molyneux, Philip and Kara, Alper, The Value of Repeat Lending (July 1, 2011). BIS Working Paper No. 350. Available at SSRN: https://ssrn.com/abstract=1942172

Blaise Gadanecz (Contact Author)

Bank for International Settlements - Monetary and Economic Department ( email )

Centralbahnplatz 2
CH-4002 Basel
Switzerland
+41 61 280 8417 (Phone)
+41 61 280 8100 (Fax)

Alper Kara

Loughborough University ( email )

No contact information is available for Philip Molyneux

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