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Senior debt and market discipline: Evidence from bank-to-bank loans

Bill Francis, Iftekhar Hasan (), LiuLing Liu and Haizhi Wang

Journal of Banking & Finance, 2019, vol. 98, issue C, 170-182

Abstract: We empirically investigate whether taking senior bank loans would enhance market discipline and control risk-taking among borrowing banks. Controlling for endogeneity concern arising from borrowing bank self-select into taking senior bank debt, we document that both the spreads and covenants in loan contracts are sensitive to bank risk variables. Our analysis also reveals that borrowing banks reduce their risk exposure after their first issuance of senior bank debt. We also find that lending banks significantly increase their collaboration with borrowing banks and increase their presence in the home markets of borrowing banks.

Keywords: Market discipline; Private monitoring; Bank senior debt; Bank-to-bank loans (search for similar items in EconPapers)
JEL-codes: G21 G28 F34 F65 (search for similar items in EconPapers)
Date: 2019
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