Loan syndication under Basel II: How do firm credit ratings affect the cost of credit?

Iftekhar Hasan, Suk-Joong Kim (), Panagiotis Politsidis and Eliza Wu

Journal of International Financial Markets, Institutions and Money, 2021, vol. 72, issue C

Abstract: This paper investigates how syndicated lenders react to borrowers’ rating changes under heterogeneous conditions and different regulatory regimes. Our findings suggest that corporate downgrades that increase capital requirements for lending banks under the Basel II framework are associated with increased loan spreads and deteriorating non-price loan terms relative to downgrades that do not affect capital requirements. Ratings exert an asymmetric impact on loan spreads, as these remain unresponsive to rating upgrades, even when the latter are associated with a reduction in risk weights for corporate loans. The increase in firm borrowing costs is mitigated in the presence of previous bank-firm lending relationships and for borrowers with relatively strong performance, high cash flows and low leverage.

Keywords: Corporate credit ratings; Cost of credit; Ratings-contingent regulation; Capital requirements; Basel II (search for similar items in EconPapers)
JEL-codes: G21 G24 G28 G32 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Working Paper: Loan syndication under Basel II: How do firm credit ratings affect the cost of credit? (2021)
Working Paper: Loan syndication under Basel II: How do firm credit ratings affect the cost of credit? (2021)
Working Paper: Loan syndication under Basel II: How firm credit ratings affect the cost of credit? (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:intfin:v:72:y:2021:i:c:s1042443121000500

DOI: 10.1016/j.intfin.2021.101331

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