The transformation of banking: Tying loan interest rates to borrowers' CDS spreads

Ivan T. Ivanov, Joao Santos and Thu Vo

Journal of Corporate Finance, 2016, vol. 38, issue C, 150-165

Abstract: We investigate how the introduction of market-based pricing, the practice of tying loan interest rates to credit default swaps, has affected bank financing. We find that market-based pricing is associated with lower interest rates, both at origination and during the life of the loan. Our results also indicate that banks simplify the covenant structure of market-based pricing loans, suggesting that the decline in the cost of bank debt is explained, at least in part, by a reduction in monitoring costs. Market-based pricing, therefore, besides reducing the cost of bank debt, may also have adverse consequences resulting from the decline in bank monitoring.

Keywords: Market-based pricing; Loan spreads; Loan covenants; CDS spreads (search for similar items in EconPapers)
JEL-codes: G1 G21 G30 (search for similar items in EconPapers)
Date: 2016
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (12)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:corfin:v:38:y:2016:i:c:p:150-165

DOI: 10.1016/j.jcorpfin.2016.01.005

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