This paper aims to investigate whether banks exploit their information advantage over bank-dependent borrowers, analyzing the impact of capital level on banking credit risk-taking under syndication loans. By using a unique data composed of 4828 syndicated loan of publicity banks facilities from the U.S. for the period 1987-2010, we propose theoretical issues of the impact and effectiveness of banks’ credit risk-taking from the perspectives of borrowers’ bank dependent. The results show that there is positive correlation between the ratios of bank’s capital over its total assets and banks’ credit risk-taking. It implies that banks with lower capital level charge higher lending spread for borrowers with fewer cash flows; hence the banks would bear a lower probability of default.
Since the subprime mortgage crisis began in 2007, bank with low capital led to significant cutbacks in lending caused by huge credit crunches. It is critically important for authorities to better understand the relation between bank capital levels and lending behavior, and seek to oversee the stability and its impact on the wider financial system. Existing studies on the effect of the banks’ lending behavior have begun to draw more attention recently, but the consequences on banks’ credit risk-taking have been relatively scarce.
Recently, several theories advocate that a banks’ capital level should affect their lending behavior (Gadanecz, et al.; Kim, et al.) [
Through the perspective of supervision mechanism, the study tests the hypotheses linked to the predictions of Diamond and Rajan’s [
This study proposes theoretical issues of the impact and effectiveness of banks’ credit risk-taking from the perspectives of borrowers’ bank dependent. The banking sectors during the financial crisis caused by credit crunch also notice the importance of supervisiory mechanisms. Overall, one important task of this study is to explore the transitions of supervisory mechanism to the loan practices in baking sectors. The study contributions to the prior literatures are summarized as follows.
The study provides new insights resulting from supervisory mechanism prevalent in the U.S., and a total of 4828 samples of publicity banks over the 1987-2010 period that capture the effect of the 2008 financial crisis. In addition, this study analyzes the relationship among banks’ capital, borrowers’ loan-amount, banks’ credit risk- taking, and examines that if banks with low capital level are more sensitive to borrowers’ cash flow than banks with high capital.
The main contribution of this paper is using of syndicated loan data and hence addition of many loan-specific and bank-specific characteristics as determinants of banks’ credit risk, which attempts to investigate whether banks exploit their information advantage over bank-dependent borrowers. That is, this study proposes models and derives testable hypotheses to test the theory of bank capital (Diamond and Rajan) [
The remainder of the project organized as follows. Section 2 reviews the theoretical and empirical literatures on the relationship among banks’ capital level, lending behavior and credit risk. Sections 3 and 4 propose the hypotheses, empirical specification and data used in this study. Finally, section 5 outlines the empirical results and implications.
Some empirical studies are related to the impacts of banks’ capital level on it borrowers reimburse. In assessing the impact of a bank’s capital level on borrowers’ refinancing rate, Diamond and Rajan [
Alternatively, Santos and Winton [
From the perspective of bank reputation and lending incentives, Boot et al. [
The correlation between bank capital and lending rates may be driven by some other variables that affect both independently. Santos and Winton [
Despite the large number of research efforts attempting to elucidate the determinants of loan spread and credit risk-taking, evidences still remain inconclusive.
Based upon the above discuss of the variation in supervision environment, and the differences in protection necessary to examine the links among banks’ capital, borrowers’ bank-dependence, banks’ credit risk-taking. This study presents the following general proposition.
In assessing the impact of a bank’s capital level on borrowers’ refinancing rate, Diamond and Rajan [
Based upon the above discuss, this study proposes models and derives testable hypotheses, attempted to investigate whether banks exploit their information advantage over bank-dependent borrowers to test the theory of bank capital (Diamond and Rajan) [
where
To test the robustness and determine whether other controlled variables might impact of bank capital on risk- taking, this study considers additional controlling variables for lending bank and loan and bank-specific cha- racteristics, and proposes the following hypotheses:
where
・ Loan Restrictions, which include three dummy variables equal to one if the loan is senior
・ Loans maturity
・ Loans amount
・ Loans purposes, which include two dummy variables equal to one if the loan taken out for working capital purposes
・ Type of loan
・ Syndicate arrangers
・ Relationship of borrowers with lead arranger
・ Bank’s total assets
・ Subordinated debt
・ Bank’s liquidity
This study constructs a data set containing 17,030 syndication loans from the U.S. banking for the period 1987- 2010. The data after 2011 will not affect the results of the study. The data used in this study came from several data sources, including as follows:
・ The Loan Pricing Corporation’s Dealscan database (LPC), which includes business loans to identify the corporations that borrowed from banks and when they did so. Furthermore, the Dealscan database also provides information on: individual loans, including loan’s spread over Libor, maturity, seniority status, purpose and type. On the side of borrowers’ information, including its sector of activity, and its legal status (private or public firm), and the lending syndicate, as well as the identity and role of the banks in the loan syndicate.
・ Compustat, which includes corporations’ balance sheet. Given that Compustat is dominated by publicly-held firms, this study has to exclude loans to private-held firms from the sample.
・ BankScope database, which provides data of balance sheet and income statement of publicly banks in thousands of US dollars.
The estimation formed by Equations (1)-(4) is carried out by ordinay least square (OLS) estimation to obtain consistent parameter estimates, as the use of pairwise regression to eliminate or reduce estimation bias. In addition, to keep away from collinearity problem on controlled variables, the study conducts pearson correlation analysis to examine the presence of collinearity and excludes variables with collinearity. Furthermore, in order to provide a robust empirical result in this study, generalized method of moment (GMM; Gambacorta and Mistrulli) [
This study constructs a data set containing 17,030 syndication loans from the U.S. banking for the period 1987- 2010. To get a relatively homogenous sample of banks, this study bounds the variables at 0.01%. In addition, this study also drops the missing values for corporations that did not report their total capital ratio. For at least two consecutive years is deleted from the data set for these firms. Thus, the multiple regression estimation carried out by 4828 valid observations.
N | Min | Max | Mean | Std. Dev. | |
---|---|---|---|---|---|
Panel A: Variables of Loan-specific characteristics | |||||
NPL ratio Impaired Loans/Gross Loans - % | 4828 | 0.000 | 83.814 | 1.897 | 4.589 |
Loan amount (LAMOUNT) | 17,030 | 1.50E+05 | 2.40E+10 | 9.66E+08 | 1.90E+09 |
Loan Restrictions-SENIOR | 17,030 | 0.000 | 1.000 | 0.997 | 0.056 |
Loan Restrictions-SECURED | 17,030 | 0.000 | 1.000 | 0.594 | 0.491 |
Loan Restrictions-GUARANTOR | 17,030 | 0.000 | 1.000 | 0.118 | 0.323 |
Loan maturity (LMATURITY) | 17,030 | 0.083 | 60.000 | 4.626 | 2.263 |
Loan purposes (WORKCAPITAL) | 17,030 | 0.000 | 1.000 | 0.076 | 0.264 |
Loan purposes (CORPORPOSES) | 17,030 | 0.000 | 1.000 | 0.490 | 0.500 |
Type of loan (TYPELOAN) | 17,030 | 0.000 | 1.000 | 0.770 | 0.421 |
LEADBANKERS | 17,030 | 0.000 | 1.000 | 0.260 | 0.439 |
RELATIONSHIP | 17,029 | 0.000 | 1.000 | 0.743 | 0.437 |
Panel B: Variables of Bank-Specific Characteristics | |||||
Bank's capital (t-1) Equity/Total Assets - % | 6348 | 0.058 | 99.660 | 9.701 | 11.847 |
LASSETS | 6404 | 2.27E+00 | 7.60E+08 | 1.03E+07 | 5.17E+07 |
SUBDEBT | 5316 | 0.000 | 0.216 | 0.018 | 0.021 |
LIQUIDITY | 5958 | 0.000 | 0.995 | 0.030 | 0.044 |
tions are non-diversification, senior, secured, and have some guarantor, it implies that the banks are risk-sensi- tive and need more protection in order to reduce its credit risk. The mean maturity of syndication loan is 4.626 years. The purposes of syndication loan are most repay corporate existing debt and for its working capital. The type of syndication loan is a line of credit or a term loan, but not a renewal of an existing loan. The bank is almost as syndicate arrangers and the borrowers have relationship with lead arrangers.
On the impact of capital level on banking lending credit risk (NPL %) in the U.S during 1987-2010,
Y | P | L | X1 | X2 | X3 | X4 | X5 | X6 | X7 | X8 | X9 | Z1 | Z2 | Z3 | |
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Y | 1 | ||||||||||||||
P | 0.062*** | 1 | |||||||||||||
L | 0.125*** | −0.154*** | 1 | ||||||||||||
X1 | 0.007 | 0.021 | 0.048*** | 1 | |||||||||||
X2 | −0.104*** | 0.087*** | −0.265*** | 0.041*** | 1 | ||||||||||
X3 | −0.001 | 0.001 | 0.045*** | 0.025 | −0.008 | 1 | |||||||||
X4 | −0.038** | 0.098*** | −0.163*** | −0.086*** | 0.338*** | −0.068*** | 1 | ||||||||
X5 | 0.000 | −0.046*** | −0.005 | 0.009 | −0.015 | 0.063*** | −0.027* | 1 | |||||||
X6 | −0.021 | 0.106*** | 0.029* | 0.065*** | 0.187*** | 0.022 | 0.108*** | −0.096*** | 1 | ||||||
X7 | −0.043*** | 0.022 | −0.126*** | 0.053*** | 0.156*** | 0.008 | 0.346*** | −0.024 | 0.149*** | 1 | |||||
X8 | 0.050*** | −0.097*** | −0.028* | 0.004 | −0.014 | −0.032** | −0.025 | −0.012 | −0.121*** | −0.016 | 1 | ||||
X9 | −0.037** | 0.011 | −0.195*** | −0.017 | 0.211*** | 0.007 | 0.168*** | −0.106*** | 0.025 | 0.106*** | 0.056*** | 1 | |||
Z1 | −0.021 | −0.102*** | 0.014 | −0.016 | −0.055*** | 0.053*** | −0.004 | −0.012 | −0.012 | 0.017 | −0.013 | −0.008 | 1 | ||
Z2 | −0.031** | 0.083*** | 0.002 | −0.018 | −0.064*** | −0.041*** | −0.047*** | −0.033** | −0.015 | 0.008 | 0.005 | −0.008 | −0.003 | 1 | |
Z3 | 0.281*** | −0.157*** | 0.096*** | −0.010 | −0.038** | 0.025 | 0.000 | 0.035** | −0.089*** | −0.045*** | 0.252*** | −0.031** | 0.014 | −0.102*** | 1 |
Note: Y is the NPL ratio (Impaired Loan/Gross Loan); P is the ratio of bank’s equity capital to total assets (Bank’s capital Equity/Total Assets); L is the syndication loan amount (LAMOUNT); X1 is a dummy variable that whether it is senior (SENIOR); X2 is a dummy variable that whether it is secured (SECURED); X3 is a dummy variable that whether it has a guarantor (GUARANTOR); X4 is the loan maturity in years (LMATURITY); X5 is a dummy variable that whether the loan taken out for working capital purposes (WORKCAPITAL); X6 is a dummy variable that whether the loan taken out for corporate purposes (CORPORPOSES); X7 is a dummy variable that whether it is a term loan (TYPELOAN); X8 is the number of lead arrangers in the syndicate (LEADBANKERS); X9 is a dummy variable that whether the firm borrowed from the same lead arranger in the three prior to the current loan (RELATIONSHIP). ***indicates the significance of the traditional t-test at the 1% level; **indicates significance at the 5% level; and *indicates significance at the 10% level.
Dependent variable: NPL Impaired Loans/Gross Loans (%) | Coefficient | OLS | GMM |
---|---|---|---|
t-statistic | t-statistic | ||
(Constant) | −16.643 | −9.425*** | −3.493*** |
Bank’s capital (t − 1) Equity/Total Assets - % | 1.596 | 9.097*** | 2.748*** |
Loan amount (LAMOUNT) | 0.795 | 9.049*** | 3.415*** |
Capital (t − 1) * Loan-Amount | −0.064 | −7.349*** | −2.247** |
Adj-R2 | 0.132 | ||
Observation | 4597 |
Note: ***indicates the significance of the traditional t-test at the 1% level; **indicates significance at the 5% level; and *indicates significance at the 10% level.
banks with lower capital level charge higher lending spread for borrowers with fewer cash flows, hence obtain higher return of assets, but lower lending credit risk-taking. In addition, the interaction effects of capital and loan-amount on banks’ lending credit risk is positive, the coefficient is −0.064 and signification at 5%. The adjusted R2 is 13.2%. In addition, in terms of statistical significance, the results of OLS and GMM reached the consistency. The results meet the expectation of hypothesis 1 and theory of information monopoly rents from bank-dependent borrowers (Sharpe; Rajan) [
On the impact of capital level on banking credit risk-taking (NPL %) controlling for the state of the loan- specific characteristics in the U.S syndicated loan for the period 1987-2010,
The coefficients of the control variables, i.e., Loan purposes (WORKCAPITAL), LEADBANKERS, and RE- LATIONSHIP, are all significantly positive, indicating that the banking lending credit risk would be affected by the loan for working capital purpose, the number of lead arrangers in the syndicate, and the relationship between borrowers and lead arranger. In addition, the coefficients of control variables, i.e., Loan purposes (CORP- ORPOSE) and Loan restrictions (SECURED), are found to be negatively related to the banking lending credit risk, a finding which the loan purpose for corporate purpose and the loan with secured restriction act as effective roles on the reduction of the banking lending credit risk.
On the impact of capital level on banking credit risk-taking (NPL%) controlling for the state of the bank-specific characteristics in the U.S syndicated loan for the period 1987-2010,
Dependent variable: NPL Impaired Loans/Gross Loans (%) | Coefficient | OLS | GMM |
---|---|---|---|
t-statistic | t-statistic | ||
(Constant) | −15.988 | −7.391*** | −3.429*** |
Bank's capital (t − 1) Equity/Total Assets - % | 1.611 | 9.235*** | 2.812*** |
Loan amount (LAMOUNT) | 0.783 | 8.788*** | 3.350*** |
Capital (t − 1) * Loan-Amount | −0.064 | −7.433*** | −2.296** |
Loan Restrictions-SENIOR | −0.093 | −0.074 | −0.160 |
Loan Restrictions-SECURED | −0.378 | −2.587*** | −2.242** |
Loan Restrictions-GUARANTOR | −0.091 | −0.539 | −0.598 |
Loan maturity (LMATURITY) | −0.034 | −0.930 | −0.615 |
Loan purposes (WORKCAPITAL) | 1.699 | 4.448*** | 2.157** |
Loan purposes (CORPORPOSES) | −0.597 | −4.442*** | −3.859*** |
Type of loan (TYPELOAN) | −0.216 | −1.234 | −1.042 |
LEADBANKERS | 0.710 | 4.989*** | 4.009*** |
RELATIONSHIP | 0.363 | 2.223** | 2.315** |
Adj-R2 | 0.149 | ||
Observation | 4597 |
Note: ***indicates the significance of the traditional t-test at the 1% level; **indicates significance at the 5% level; and *indicates significance at the 10% level.
Dependent variable: NPL Impaired Loans/Gross Loans (%) | Coefficient | OLS | GMM |
---|---|---|---|
t-statistic | t-statistic | ||
(Constant) | −6.016 | −7.227*** | −4.616*** |
Bank's capital (t − 1) Equity/Total Assets - % | 0.648 | 6.735*** | 4.495*** |
Loan amount (LAMOUNT) | 0.429 | 10.307*** | 6.401*** |
Capital (t − 1) * Loan-Amount | −0.039 | −7.923*** | −5.123*** |
LASSETS | −0.002 | −3.293*** | −4.603*** |
SUBDEBT | −1.502 | −0.674 | −0.480 |
LIQUIDITY | −5.014 | −4.020*** | −3.663*** |
Adj-R2 | 0.092 | ||
Observation | 3672 |
Note: ***indicates the significance of the traditional t-test at the 1% level; **indicates significance at the 5% level; and *indicates significance at the 10% level.
is positive correlation between the ratios of borrowers’ loan-amount and NPL (%), the coefficient is 0.429 and signification at 1%. The adjusted R2 is 9.2%. In addition, in terms of statistical significance, the results of OLS and GMM reached the consistency. The results meet the expectation of hypothesis 3 and
The coefficients of control variables, i.e., LASSETS and LIQUIDITY, are found to be negatively related to the banking lending credit risk, indicating that the bank size and liquidity have effects on lowering the banking lending credit risk.
On the impact of capital level on banking credit risk-taking (NPL%) controlling for the state of the loan- specific and bank-specific characteristics in the U.S syndicated loan for the period 1987-2010,
Dependent variable: NPL Impaired Loans/Gross Loans (%) | Coefficient | OLS | GMM |
---|---|---|---|
t-statistic | t-statistic | ||
(Constant) | −5.131 | −5.350*** | −3.542*** |
Bank’s capital (t − 1) Equity/Total Assets % | 0.599 | 6.179*** | 3.937*** |
Loan amount (LAMOUNT) | 0.393 | 9.133*** | 5.322*** |
Capital (t − 1) * Loan-Amount | −0.036 | −7.334*** | −4.512*** |
Loan Restrictions-SENIOR | 0.000 | −0.001 | −0.001 |
Loan Restrictions-SECURED | −0.128 | −2.234** | −2.003** |
Loan Restrictions-GUARANTOR | −0.022 | −0.336 | −0.358 |
Loan maturity (LMATURITY) | −0.045 | −3.194*** | −2.948*** |
Loan purposes (WORKCAPITAL) | −0.014 | −0.094 | −0.095 |
Loan purposes (CORPORPOSES) | 0.132 | 2.496** | 2.556** |
Type of loan (TYPELOAN) | −0.064 | −0.944 | −0.920 |
LEADBANKERS | 0.077 | 1.336 | 1.370 |
RELATIONSHIP | 0.123 | 1.922* | 1.935* |
LASSETS | −0.002 | −3.322*** | −4.703*** |
SUBDEBT | −2.273 | −1.017 | −0.718 |
LIQUIDITY | −5.226 | −4.059*** | −3.839*** |
Adj-R2 | 0.097 | ||
Observation | 3672 |
Note: ***indicates the significance of the traditional t-test at the 1% level; **indicates significance at the 5% level; and *indicates significance at the 10% level.
cash flows. In addition, there is positive correlation between the ratios of borrowers’ loan-amount and NPL (%), the coefficient is 0.393 and signification at 1%. The adjusted R2 is 9.7%. In addition, in terms of statistical significance, the results of OLS and GMM reached the consistency. The results meet the expectation of hypothesis 4 and Tables 3-5. That is, controlling for the state of the loan-specific and bank-specific characteristics, there is a positive relationship between banks’ capital level and the banks’ credit risk-taking. The results are coincident with findings of the Boot et al. [
Our empirical results provide overall support for our primary hypothesis that banks with lower capital level charge higher lending spread for borrowers with fewer cash flows; hence, banks with low capital would obtain higher return and bear a lower probability of default. These findings strengthen the influence of the bank capital on the banking lending credit risk.
This study proposes theoretical issues of the impact and effectiveness of banks’ credit risk-taking from the perspectives of borrowers’ bank dependent. The banking sectors during the financial crisis caused by credit crunch also notice the importance of supervisiory mechanisms. Overall, one important task of this study is to explore the transitions of supervisory mechanism to the loan practices in baking sectors. The study contributions to the prior literatures are summarized as follows.
The study provides new insights resulting from supervisory mechanism prevalent in the U.S., and a total of 4828 samples of publicity banks over the 1987-2010 period that capture the effect of the 2008 financial crisis. In addition, the study analyzes the impact of capital regulation on banking credit risk-taking through its syndication lending activity. The objective of this study is attempted to investigate whether banks exploit their information advantage over bank-dependent borrowers, and propose models and derive testable hypotheses to test the theory of bank capital (Diamond and Rajan) [
On the impact of capital level on banking credit risk-taking, the results show that there is positive correlation between the ratios of bank’s capital over its total assets and credit risk-taking. It implies that compared to adequately capitalized banks, banks with lower capital level charge higher lending spread for borrowers with fewer cash flows; hence the banks would bear a lower probability of default and credit risk, but higher credit risk- taking for borrowers with strong cash flows. When controlling for the state of the bank- and loan-specific characteristics, the effects are the same and meet the expectation of hypothesis 1 - 4. In terms of statistical significance, the results of OLS and GMM reached the consistency. The results imply the importance of banks’ information monopoly rents from bank-dependent borrowers. The implications would be provided with policy implication to supervisory authority.
This work was financially supported by the National Science Council in Taiwan under NSC99-2410-H-027-005.
Shu LingLin,Wei PengChen,JunLu, (2015) Relationship between Banks’ Capital and Credit Risk-Taking through Syndicated Loan. Modern Economy,06,1297-1308. doi: 10.4236/me.2015.612123