Do Banks Compete on Non-Price Terms? Evidence from Loan Covenants

67 Pages Posted: 6 Nov 2018 Last revised: 2 May 2023

See all articles by Rustam Abuzov

Rustam Abuzov

University of Virginia - Darden School of Business

Christoph Herpfer

University of Virginia, Darden School

Roberto Steri

University of Luxembourg

Date Written: May 2, 2023

Abstract

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

Suggested Citation

Abuzov, Rustam and Herpfer, Christoph and Steri, Roberto, Do Banks Compete on Non-Price Terms? Evidence from Loan Covenants (May 2, 2023). Available at SSRN: https://ssrn.com/abstract=3278993 or http://dx.doi.org/10.2139/ssrn.3278993

Rustam Abuzov

University of Virginia - Darden School of Business ( email )

P.O. Box 6550
Charlottesville, VA 22906-6550
United States

Christoph Herpfer (Contact Author)

University of Virginia, Darden School ( email )

P.O. Box 6550
Charlottesville, VA 22906-6550
United States

Roberto Steri

University of Luxembourg ( email )

Kirchberg, 6, rue Richard Coudenhove-Kalergi
Luxembourg
Luxembourg

HOME PAGE: http://https://sites.google.com/site/robertosteripersonalpage/

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