Lending Booms, Reserves, and the Sustainability of Short-Term Debt: Inferences from the Pricing of Syndicated Bank Loans

44 Pages Posted: 20 Apr 2016

See all articles by Barry Eichengreen

Barry Eichengreen

University of California, Berkeley; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Ashoka Mody

International Monetary Fund (IMF) - Research Department

Multiple version iconThere are 2 versions of this paper

Date Written: August 1999

Abstract

International banks provide more credit to smaller borrowers (about whom information is least complete) than bond markets do. High external short-term debt can coexist with rapid growth for extended periods. But overdependence on such debt is risky, because it is likely to unravel if perceptions of sustainability shift.

Academics pay little attention to international bank lending, focusing instead on rapidly growing market segments such as the international bond market and derivative credit instruments. Eichengreen and Mody argue for paying more attention to international bank lending.

Why? Three reasons.

First, the syndicated bank loan is one of the workhorses of international capital markets.

Second, international bank lending is especially important for private-sector borrowers, whose participation in international capital markets will grow as capital markets are liberalized and state enterprises privatized. Sovereigns and other governmental borrowers rely more on the bond market, while private borrowers are disproportionately important to the market in international bank loans.

Private-sector borrowers establish long-term relationships with banks to resolve information problems. Eichengreen and Mody find that international banks provide more credit to smaller borrowers (about whom information is least complete) than bond markets do. Bank finance dominates that segment of international financial markets with the greatest information asymmetry.

Third, spreads on syndicated bank loans show much less variation than spreads on international bonds. Are bank lenders properly pricing country and credit risk? Does spread compression on syndicated bank loans suggest excessive moral hazard in international bank lending?

Eichengreen and Mody warn against overdependence on high levels of domestic debt. While growth in domestic debt reflects improved intermediation between savers and investors, rapid increases to high levels are viewed as unsustainable and raise the cost of international borrowing. They find evidence of growing bullishness among bank lenders to East Asia in the first half of the 1990s, which could reflect moral hazard, but the jury is still out on that issue. High external short-term debt can coexist with rapid growth for extended periods but is likely to unravel if perceptions of sustainability shift.

This paper - a product of the Development Prospects Group - is part of a larger effort in the group to study the microstructure of international capital markets. Ashoka Mody may be contacted at amody@worldbank.org.

Suggested Citation

Eichengreen, Barry and Mody, Ashoka, Lending Booms, Reserves, and the Sustainability of Short-Term Debt: Inferences from the Pricing of Syndicated Bank Loans (August 1999). Available at SSRN: https://ssrn.com/abstract=604961

Barry Eichengreen

University of California, Berkeley ( email )

310 Barrows Hall
Berkeley, CA 94720
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
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Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Ashoka Mody (Contact Author)

International Monetary Fund (IMF) - Research Department ( email )

700 19th Street NW
Washington, DC 20431
United States
202-623-9617 (Phone)
202-589-9617 (Fax)

HOME PAGE: http://www.amody.com

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