The Effects of Firm Network on Banks' Portfolio Consideration
45 Pages Posted: 27 Aug 2016
Date Written: March 25, 2015
Managing the quality of a loan portfolio is an important factor in bank lending decisions, especially when lending to a firm generates "credit synergy" with the bank's existing borrowers through their input-output connections. In this paper, I examine whether a firm's connection with a bank's loan portfolio can affect the borrowing conditions offered by that bank to the firm. Using a network based on extensive customer-supplier relations to measure interfirm connections, I show that firms that are closely connected with a bank's loan portfolio are more likely to receive loans from the bank in the future and will receive lower interest rate spreads. Using bank mergers as exogenous shocks to bank-firm connections, I show that a firm's increased connection with a bank following a merger leads to larger reductions in loan spreads offered by the bank.
Keywords: firm network, syndicate loans, bank portfolio, supply chain
JEL Classification: G21, G30, G32
Suggested Citation: Suggested Citation