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Regulators vs. markets: Are lending terms influenced by different perceptions of bank risk?

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  • Delis, Manthos D.
  • Kim, Suk-Joong
  • Politsidis, Panagiotis N.
  • Wu, Eliza

Abstract

In this paper we quantify the differences between market and regulatory assessments of bank portfolio risk, and thereby demonstrate that larger differences significantly reduce corporate lending rates. Specifically, to entice borrowers, banks reduce spreads by approximately 4.3% following a one standard deviation increase in our measure for bank asset-risk differences. This is equivalent to an interest income loss of USD 2.03 million on a loan of average size and duration. The separate effects of market and regulatory risk are much less potent. Our study reveals a disciplinary-competition effect in favor of corporate borrowers when there is information asymmetry between investors and bank regulators.

Suggested Citation

  • Delis, Manthos D. & Kim, Suk-Joong & Politsidis, Panagiotis N. & Wu, Eliza, 2021. "Regulators vs. markets: Are lending terms influenced by different perceptions of bank risk?," Journal of Banking & Finance, Elsevier, vol. 122(C).
    • Handle: RePEc:eee:jbfina:v:122:y:2021:i:c:s0378426620302521
    DOI: 10.1016/j.jbankfin.2020.105990
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    More about this item

    Keywords

    Bank portfolio risk; Markets vs. regulators; Syndicated loans; Cost of credit; Market discipline; Competition;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • G2 - Financial Economics - - Financial Institutions and Services

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