Risk Taking and Low Longer-Term Interest Rates: Evidence from the U.S. Syndicated Term Loan Market

Abstract

We use supervisory data to investigate the ex-ante credit risk taken by different types of lenders in the U.S. syndicated term loan market during the LSAPs period. We find that nonbank lenders, mutual funds and structured-finance vehicles, take higher risk when longer-term interest rates decrease. The results are stronger for mutual funds that charge higher fees. Banks accommodate other lenders' investment choices by originating riskier loans and selling them off. These results are consistent with "search for yield" by nonbanks and with a risk-taking channel of monetary policy. Over the sample we study, lower longer-term interest rates appear to have only a minimal effect on loan spreads.

Keywords: Syndicated Term Loans; Shared National Credit Program; Shadow Banking; Zero Lower Bound; Search for Yield; Risk-Taking Channel of Monetary Policy

JEL Classification: E43; E44; E52; E58; G11; G20