What Drives Global Lending Syndication? Effects of Cross-Country Capital Regulation Gaps

51 Pages Posted: 1 Feb 2018 Last revised: 22 Aug 2019

See all articles by Janet Gao

Janet Gao

Indiana University - Kelley School of Business

Yeejin Jang

UNSW Australia Business School, School of Banking and Finance

Date Written: August 21, 2019

Abstract

We examine how cross-country differences in capital regulations shape the structure of global lending syndicates. Using globally syndicated loans extended by banks from 44 countries, we find that strictly regulated banks participate more in syndicates originated by lead lenders facing less stringent capital regulations. This finding is consistent with the explanation that strictly regulated banks seek risky deals outside the border and loosely regulated banks have an advantage to procure such deals. Accordingly, lending syndicates involving loosely regulated lead arrangers and strictly regulated participants extend loans to riskier borrowers, charge higher spreads, and incur higher default rates. The effect of regulatory differences is mitigated when participants are subject to higher accounting standards, and amplified when the participant and lead banks share prior syndicate relations. Finally, we show that global syndication exposes both participants and lead arrangers to greater systemic risk.

Keywords: Global Syndication, Syndicated Loans, Capital Regulation

JEL Classification: G21, G30

Suggested Citation

Gao, Janet and Jang, Yeejin, What Drives Global Lending Syndication? Effects of Cross-Country Capital Regulation Gaps (August 21, 2019). Kelley School of Business Research Paper No. 18-35. Available at SSRN: https://ssrn.com/abstract=3108792 or http://dx.doi.org/10.2139/ssrn.3108792

Janet Gao (Contact Author)

Indiana University - Kelley School of Business ( email )

1309 East Tenth Street
Indianapolis, IN 47405-1701
United States

Yeejin Jang

UNSW Australia Business School, School of Banking and Finance ( email )

Sydney, NSW 2052
Australia

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