Bank Loan Maturity and Priority when Borrowers can Refinance

Douglas W. Diamond

CEPR Financial Markets Paper from European Science Foundation Network in Financial Markets, c/o C.E.P.R, 53--56 Great Sutton Street, London EC1V 0DG

Abstract: This paper describes a theory of how borrowers with private information about their future credit prospects choose seniority and maturity of bank loans and publicly issued bonds. The model implies that short-term bank loans will be senior to public long- term debt. With sufficient public debt, banks will not make concessions when restructuring their debt in response to a borrower's financial distress. Recent evidence on the debt restructuring activities of banks is interpreted in the context of the model.

Keywords: Debt Maturity; Priority; Bank Loan; Seniority (search for similar items in EconPapers)
Date: 1992-10
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