Global Systemically Important Bank Classification and its Impact on Private Debt Structure

58 Pages Posted: 31 May 2019 Last revised: 26 Jun 2019

See all articles by Daeun Lee

Daeun Lee

City University of New York (CUNY), Baruch College, Zicklin School of Business, Stan Ross Department of Accountancy, Students

Date Written: December 2, 2016

Abstract

Following the classification of large U.S. financial institutions as Global Systemically Important Banks (G-SIBs), I investigate how they respond to stringent requirements imposed both by the Basel Committee on Banking Supervision (BCBS) and the Financial Stability Board (FSB), mainly on the aspect of bank lending. I find that, compared to the level prior to the designation, G-SIBs tend to demand tighter loan covenants — specifically, the number of financial covenants, prepayment covenants, and dividend restrictions — to combat the uncertainty about the future state. The increase in the number of covenants is more pronounced among G-SIBs that do not satisfy the capitalization level requirements. Loan size bore by each lead lender is reduced in the period following the classification while maturity does not show significant changes, after controlling for bank/borrower characteristics. The evidence suggests that the new regulation leads banks to institute enhanced measures in an effort to better monitor the borrower’s financials in a more comprehensive fashion, as well as secure repayment if applicable.

Keywords: Bank, Regulation, Systemic Risk, G-SIB, Private Debt Contracting, Loan

JEL Classification: G21, M40, M41

Suggested Citation

Lee, Daeun, Global Systemically Important Bank Classification and its Impact on Private Debt Structure (December 2, 2016). Baruch College Zicklin School of Business Research Paper No. 2019-06-01. Available at SSRN: https://ssrn.com/abstract=3364959 or http://dx.doi.org/10.2139/ssrn.3364959

Daeun Lee (Contact Author)

City University of New York (CUNY), Baruch College, Zicklin School of Business, Stan Ross Department of Accountancy, Students ( email )

One Bernard Baruch Way, Box B12-225
New York, NY 10010
United States

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