Regulators vs. markets: Are lending terms influenced by different perceptions of bank risk?

Manthos Delis (), Suk-Joong Kim (), Panagiotis Politsidis and Eliza Wu

Journal of Banking & Finance, 2021, vol. 122, issue C

Abstract: In this paper we quantify the differences between market and regulatory assessments of bank portfolio risk, and thereby demonstrate that larger differences significantly reduce corporate lending rates. Specifically, to entice borrowers, banks reduce spreads by approximately 4.3% following a one standard deviation increase in our measure for bank asset-risk differences. This is equivalent to an interest income loss of USD 2.03 million on a loan of average size and duration. The separate effects of market and regulatory risk are much less potent. Our study reveals a disciplinary-competition effect in favor of corporate borrowers when there is information asymmetry between investors and bank regulators.

Keywords: Bank portfolio risk; Markets vs. regulators; Syndicated loans; Cost of credit; Market discipline; Competition (search for similar items in EconPapers)
JEL-codes: G2 G21 G33 G34 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

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Related works:
Working Paper: Regulators vs. markets: Are lending terms influenced by different perceptions of bank risk? (2021)
Working Paper: Regulators vs. markets: Are lending terms influenced by different perceptions of bank risk? (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:122:y:2021:i:c:s0378426620302521

DOI: 10.1016/j.jbankfin.2020.105990

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