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Is Borrowing from Banks More Expensive than Borrowing from the Market?

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  • Schwert, Michael

    (Ohio State University)

Abstract

This paper investigates the pricing of bank loans relative to the borrower's existing public bonds. After accounting for seniority, banks earn an economically large premium relative to the market price of credit risk. To quantify the premium, I apply a structural model that accounts for priority structure, prices the firm's bonds, and matches expected losses given default and secondary market bid-ask spreads. In a sample of secured term loans to non-investment-grade firms, banks earn an average rate premium of 143 bps, equal to 43% of the all-in-drawn spread. This paper provides novel evidence of firms' willingness to pay for the special qualities of bank loans.

Suggested Citation

  • Schwert, Michael, 2018. "Is Borrowing from Banks More Expensive than Borrowing from the Market?," Working Paper Series 2017-23, Ohio State University, Charles A. Dice Center for Research in Financial Economics.
    • Handle: RePEc:ecl:ohidic:2017-23
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    Citations

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    Cited by:

    1. Darmouni, Olivier & Geisecke, Oliver & Rodnyanky, Alexander, 2019. "The Bond Lending Channel of Monetary Policy," MPRA Paper 95141, University Library of Munich, Germany.
    2. Alexandridis, George & Chen, Zhong & Zeng, Yeqin, 2021. "Financial hedging and corporate investment," Journal of Corporate Finance, Elsevier, vol. 67(C).
    3. Dempsey, Kyle P., 2020. "Macroprudential capital requirements with non-bank finance," Working Paper Series 2415, European Central Bank.
    4. Wang, Olivier, 2020. "Banks, low interest rates, and monetary policy transmission," Working Paper Series 2492, European Central Bank.

    More about this item

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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