The Value of Bank Lending
Charles A. Dice Center Working Paper No. 2023-17
85 Pages Posted: 21 Nov 2022 Last revised: 26 Dec 2023
Date Written: December 21, 2023
Using a novel dataset of realized syndicated loan cash-flows and a risk-adjustment methodology adapted from the private equity literature, I provide a measure of risk-adjusted returns for bank loan cash-flows. Banks, on average, generate 190 bps in gross risk-adjusted returns and earn higher returns when they lend to financially constrained borrowers. However, shareholders earn nearly zero net risk-adjusted returns once bank staff are compensated for their effort in lending. Overall, these findings offer evidence that banks provide valuable services to mitigate borrowers’ financing frictions, and the present value of loan cash-flows pays for the costs of the bank providing these services.
Keywords: Bank Lending, Value Creation, Risk-Adjustment
JEL Classification: G21, G12
Suggested Citation: Suggested Citation