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

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

MPRA Paper from University Library of Munich, Germany

Abstract: This paper investigates how 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; rating-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: 2020-06
New Economics Papers: this item is included in nep-ban and nep-rmg
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https://mpra.ub.uni-muenchen.de/102796/1/MPRA_paper_102796.pdf original version (application/pdf)
https://mpra.ub.uni-muenchen.de/106678/9/MPRA_paper_106678.pdf revised version (application/pdf)

Related works:
Working Paper: Loan syndication under Basel II: How do firm credit ratings affect the cost of credit? (2021)
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