The Value of Bank Lending

Fisher College of Business Working Paper No. 2023-03-017

Charles A. Dice Center Working Paper No. 2023-17

113 Pages Posted: 21 Nov 2022 Last revised: 14 Jun 2024

See all articles by Thomas Flanagan

Thomas Flanagan

Ohio State University (OSU) - Fisher College of Business

Date Written: December 21, 2023

Abstract

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 180 bps in gross risk-adjusted returns and earn higher returns when they lend to financially constrained borrowers. Risk-adjusted returns on bank loan portfolios exhibit persistence. However, banks require higher risk-adjusted returns when facing their own financing frictions and 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

JEL Classification: G21, G12

Suggested Citation

Flanagan, Thomas, The Value of Bank Lending (December 21, 2023). Fisher College of Business Working Paper No. 2023-03-017, Charles A. Dice Center Working Paper No. 2023-17, Available at SSRN: https://ssrn.com/abstract=4268309 or http://dx.doi.org/10.2139/ssrn.4268309

Thomas Flanagan (Contact Author)

Ohio State University (OSU) - Fisher College of Business ( email )

2100 Neil Avenue
Columbus, OH 43210-1144
United States

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