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How Do Lead Banks Use Their Private Information about Loan Quality in the Syndicated Loan Market?

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  • Lakshmi Balasubramanyan
  • Allen N. Berger
  • Matthew Koepke

Abstract

We formulate and test two opposing hypotheses about how lead banks in the syndicated loan market use private information about loan quality, the Signaling Hypothesis and Sophisticated Syndicate Hypothesis. We use Shared National Credit (SNC) internal loan ratings made comparable using concordance tables to measure private information. We find favorable private information is associated with higher lead bank loan retention and lower interest rate spreads for pure term loans, ceteris paribus, supporting the Signaling Hypothesis. Neither hypothesis dominates for pure revolvers. The data partially support two conjectures about the circumstances under which the two hypotheses are more likely to hold.

Suggested Citation

  • Lakshmi Balasubramanyan & Allen N. Berger & Matthew Koepke, 2017. "How Do Lead Banks Use Their Private Information about Loan Quality in the Syndicated Loan Market?," Working Papers 16-16R2, Federal Reserve Bank of Cleveland.
    • Handle: RePEc:fip:fedcwq:161602
    DOI: 10.26509/frbc-wp-201616r2
    Note: This is the second revision of this paper. First version June 2016. First revision January 2017.
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    4. Stijn Claessens & Andy Law & Teng Wang, 2018. "How do credit ratings affect bank lending under capital constraints?," BIS Working Papers 747, Bank for International Settlements.
    5. Kristian S. Blickle & Quirin Fleckenstein & Sebastian Hillenbrand & Anthony Saunders, 2020. "The Myth of the Lead Arranger’s Share," Staff Reports 922, Federal Reserve Bank of New York.
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    More about this item

    Keywords

    private information; loan sales; syndication; Lead bank;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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