The Value of Bank Lending

Using a novel data set of realized syndicated loan cash flows and a risk‐adjustment methodology adapted from the private equity literature, I provide a measure of risk‐adjusted returns for bank loan cash flows. Banks, on average, generate 180 basis points in gross risk‐adjusted returns and add $75 million of value annually to their loan portfolios. Banks earn higher returns when they lend to financially constrained borrowers, and the risk‐adjusted performance of bank loan portfolios exhibits persistence. However, banks require higher risk‐adjusted returns when facing their own financing frictions, and shareholders earn nearly zero net risk‐adjusted returns once bank staff are compensated for their lending effort. Overall, these findings suggest that banks provide valuable services to mitigate borrowers' financing frictions, and the present value of loan cash flows pays for the costs of providing these services.