Bank Balance Sheets and the Value of Lending
IMF Working Papers, May 5, 2017
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- Bank Balance Sheets and the Value of Lending
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Bibliographic details
- Authors: Jiaqian Chen, Giuseppe Vera
- Published: May 5, 2017
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781475599053.001
Overview
- Authors: Jiaqian Chen, Giuseppe Vera
- Date: May 5, 2017
- Sample studied: 1,400 UK syndicated loans, combined with the financial history of the lead bank and the borrowing firm.
- Conceptual approach: Interpret abnormal equity returns around loan announcements as the value of the lending relationship to the firm.
- Relevant subjects: Bank credit, Banking, Financial institutions, Financial statements, Loans, Money, Public financial management (PFM), Stocks, Syndicated loans.
- Keywords included in the source: announcement effect, asset growth, Bank balance sheets, Bank credit, bank monitoring, borrower performance, capitalized bank, Financial statements, lead bank balance sheet, lending relationship, loan announcement, loan announcement effect, loan origination, Loans, monitoring intensity, return on assets, Stocks, syndicated loan, Syndicated loans, WP
Key findings
- The value of lending is higher when the firm is riskier or more opaque, consistent with previous evidence; this suggests the value primarily reflects the lead bank’s screening and monitoring activities.
- As a bank becomes larger, more profitable or more capitalized, the value of its loans first increases and then decreases. The largest, most capitalised or most profitable banks do not give the most valuable loans.
- Firms which receive low-value loans are more likely to experience low profitability and financial distress during the lending relationship.
Data and empirical approach
- Empirical proxy: Abnormal equity returns around loan announcements used as a measure of the value of the lending relationship to the borrower.
- Sample size: 1,400 UK syndicated loans.
- Focus links the state of bank balance sheets (size, profitability, capitalization) to borrower performance over the lending relationship.
Implications and interpretation
- The higher value of loans to riskier or more opaque firms points to the importance of bank screening and monitoring in the syndicated loan market.
- Non-monotonic relationship between bank size/profitability/capitalization and loan value implies that beyond some point, larger or more capitalised/profitable banks provide less valuable lending relationships to borrowers.
- Borrower outcomes: Receiving a low-value loan is correlated with subsequent low profitability and financial distress, indicating real-economy consequences of variations in lending value.
- Policy relevance: Relating bank balance sheet conditions to borrower performance offers a novel angle to evaluate how financial conditions affect the real economy.
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- Bank Balance Sheets and the Value of Lending