Liquidity Advantage of Domestic Banks: Evidence from Australian Syndicated Loans
32 Pages Posted: 20 Aug 2012
Date Written: August 20, 2012
This paper explore whether there are competitive advantage of Australian domestic banks relative to international banks in absorbing liquidity risk originated from loan contract. We focus on the Australian syndicated loan market and the two types of syndicated loans: term loans and revolving loans. Term loans, entirely funded at origination, are credit risk intensive loans, whilst revolving loans are liquidity intensive as they can be drawn-down at any time by the borrower. We find evidence suggesting that Australian domestic banks are more willing to take liquidity risk. In particular, the proportion of loans held by Australian domestic banks significantly higher for revolving loans. Furthermore, such liquidity advantage amplifies for high risk borrower and when market condition deteriorates. There is also evidence suggesting that the higher level liquidity risk of Australian domestic banks is due to their risk seeking behavior.
Keywords: liquidity risk, syndicated loans, syndicated composition
JEL Classification: G21, G24
Suggested Citation: Suggested Citation