Do Banks Compete on Non-Price Terms? Evidence from Loan Covenants
67 Pages Posted: 6 Nov 2018 Last revised: 2 May 2023
Date Written: May 2, 2023
We study the interplay between non-price loan terms and competition in credit markets. We exploit a regulatory shock to regulated banks' ability to offer favorable non-price terms, particularly covenant-lite loans. We find that borrowers trade-off increased covenants and lower interest rates from regulated banks, with covenant-lite loans and higher rates from non-banks. This non-price competition alters market structure: less covenant-sensitive borrowers remain with regulated lenders, and financially weaker borrowers switch to shadow banks or leave the leveraged lending market. As a result, banks' market share declines. Our findings on borrower behavior and loan terms align with a stylized equilibrium model.
Keywords: non-price competition, shadow banks, leveraged lending, covenants, syndicated loans, relationship lending
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