Loan syndication under Basel II: How do firm credit ratings affect the cost of credit?

65 Pages Posted: 4 Nov 2020 Last revised: 16 Mar 2021

See all articles by Iftekhar Hasan

Iftekhar Hasan

Fordham University ; Bank of Finland; University of Sydney

Suk-Joong Kim

The University of Sydney Business School

Panagiotis N. Politsidis

The University of Sydney

Eliza Wu

The University of Sydney - Business School; Financial Research Network (FIRN)

Date Written: June 25, 2020

Abstract

This paper investigates how lenders react to borrowers’ rating changes under heterogeneous conditions and different regulatory regimes. Our findings suggest that corporate downgrades that increase capital requirements for lending banks under the Basel II framework are associated with increased loan spreads and deteriorating non-price loan terms relative to downgrades that do not affect capital requirements. Ratings exert an asymmetric impact on loan spreads, as these remain unresponsive to rating upgrades, even when the latter are associated with a reduction in risk weights for corporate loans. The increase in firm borrowing costs is mitigated in the presence of previous bank-firm lending relationships and for borrowers with relatively strong performance, high cash flows and low leverage.

Keywords: corporate credit ratings, cost of credit, rating-contingent regulation, capital requirements, Basel II

JEL Classification: G21, G24, G28, G32

Suggested Citation

Hasan, Iftekhar and Kim, Suk-Joong and Politsidis, Panagiotis N. and Wu, Eliza, Loan syndication under Basel II: How do firm credit ratings affect the cost of credit? (June 25, 2020). Available at SSRN: https://ssrn.com/abstract=3693122 or http://dx.doi.org/10.2139/ssrn.3693122

Iftekhar Hasan

Fordham University ( email )

45 COLUMBUS AVENUE
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Bank of Finland ( email )

P.O. Box 160
Helsinki 00101
Finland

University of Sydney ( email )

P.O. Box H58
Sydney, NSW 2006
Australia

Suk-Joong Kim

The University of Sydney Business School ( email )

Cnr. of Codrington and Rose Streets
Sydney, NSW 2006
Australia
+61 2 9114 0940 (Phone)
+61 2 9351 6461 (Fax)

Panagiotis N. Politsidis (Contact Author)

The University of Sydney ( email )

Rm 540, H-69 Codrington Building
The University of Sydney
Sydney, NSW 2006
Australia

Eliza Wu

The University of Sydney - Business School ( email )

University of Sydney
Darlington
Sydney, NSW 2006
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

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