Regulator Supervisory Power and Bank Loan Contracting

56 Pages Posted: 15 Mar 2021

See all articles by Zhongda He

Zhongda He

Central University of Finance and Economics (CUFE) - Chinese Academy of Finance and Development

Guannan Qiao

Renmin University of China - Hanqing Institute

Le Zhang

Australian National University (ANU) - College of Business and Economics

Wenrui Zhang

The Chinese University of Hong Kong (CUHK) - Department of Finance

Date Written: January 25, 2021

Abstract

Using a sample from 38 economies, we examine the relation between bank regulators’ supervisory power and loan spreads. We find that loans issued by banks in economies with more powerful supervisors have higher spreads. The positive association is more pronounced when firms have lower credit quality, when the relationships between firms and banks are less established, when syndicate loans involve fewer lenders, and when lead banks have a riskier profile. Further analyses reveal that loans issued by banks that operate under more powerful supervisors have smaller size and shorter maturity, and the loans are more likely to have collateral requirements and restrictive covenants. Overall, these results suggest that stronger supervisory power of bank regulators affects loan contracting by mitigating lenders’ excessive risk taking.

Keywords: Bank supervisory power, Risk aversion, Loan spreads, Loan contracting

JEL Classification: G21, G32, G38, K2

Suggested Citation

He, Zhongda and Qiao, Guannan and Zhang, Le and Zhang, Wenrui, Regulator Supervisory Power and Bank Loan Contracting (January 25, 2021). Journal of Banking and Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3772462 or http://dx.doi.org/10.2139/ssrn.3772462

Zhongda He (Contact Author)

Central University of Finance and Economics (CUFE) - Chinese Academy of Finance and Development ( email )

Room 807, Academic Hall
39 South College Road, CUFE
Beijing, Beijing 100081
China
86-10-62289266 (Phone)

Guannan Qiao

Renmin University of China - Hanqing Institute ( email )

59 Zhongguancun Street
Beijing, 100872
China

Le Zhang

Australian National University (ANU) - College of Business and Economics ( email )

Canberra
Australia

Wenrui Zhang

The Chinese University of Hong Kong (CUHK) - Department of Finance ( email )

Shatin, N.T.
Hong Kong

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