'What's the Use of Having a Reputation If You Can't Ruin It Every Now and Then?' Regulatory Enforcement Actions on Banks and the Structure of Loan Syndicates
71 Pages Posted: 26 Apr 2016 Last revised: 13 May 2018
Date Written: May 9, 2018
Regulatory enforcement actions for non-compliance with laws and regulations may have adverse reputational effects for punished banks acting as lead arrangers in loan syndicates, thereby disincentivizing participants from co-financing and forcing the lead arrangers to increase their own shares of the loans. Our empirical evidence based on hand-collected enforcement action data enacted from 2001 through 2010 in the U.S. and on matched syndicated loan-level data strongly supports this conjecture. The required share increases by lead arrangers can be mitigated by extending loan guarantees, performance pricing provisions, and covenants.
Keywords: Syndicated Loan Market, Syndicate Structure, Reputation of Lead Arranger, Enforcement Actions, Incomplete and Asymmetric Information, Loan-Level Data
JEL Classification: D82, G21, G28
Suggested Citation: Suggested Citation