Bank Balance Sheets and the Value of Lending

May 5, 2017

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Jiaqian Chen, and Giuseppe Vera. Bank Balance Sheets and the Value of Lending, (USA: International Monetary Fund, 2017) accessed December 11, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

We study 1,400 UK syndicated loans, together with the financial history of the lead bank and the borrowing firm. We interpret abnormal equity returns around loan announcements as the value of the lending relationship to the firm. We find that: (i) Consistent with previous evidence, the value of lending is higher when the firm is riskier or more opaque, suggesting that it primarily reflects the lead bank’s screening and monitoring activities. (ii) 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. (iii) Firms which receive low-value loans are more likely to experience low profitability and financial distress during the lending relationship. By relating the state of bank balance sheets to borrower performance, we offer a new angle to evaluate the impact of financial conditions on the real economy.

Subject: Bank credit, Banking, Financial institutions, Financial statements, Loans, Money, Public financial management (PFM), Stocks, Syndicated loans

Keywords: 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

Publication Details

Pages:

28
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2017/111
Stock No:

WPIEA2017111
ISBN:

9781475599053
ISSN:

1018-5941

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