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Why do banks syndicate loans?

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  • Katerina Simons

Abstract

Loan syndication, where a group of banks makes a loan jointly to a single borrower, offers several benefits. Syndication allows banks to diversify, expanding their lending to broader geographic areas and industries. Second, syndication allows banks that are constrained by their capital-asset ratios to participate in loans to larger borrowers. ; Despite these benefits, loan syndication could pose additional risks for the banking system, if the originating or lead banks withhold information about the borrower from participating banks, misleading them into making loans that are riskier than they thought. This study uses data on loan syndications to test the importance of various factors that motivate the participants. Despite a significant number of problem credits among the syndicated loans studied, it finds little evidence of opportunistic behavior by the lead banks in syndications. At the same time, it finds substantial support for the importance of bank regulation, in the form of capital requirements and lending limits, to the existence of the bank syndication market.

Suggested Citation

  • Katerina Simons, 1993. "Why do banks syndicate loans?," New England Economic Review, Federal Reserve Bank of Boston, issue Jan, pages 45-52.
    • Handle: RePEc:fip:fedbne:y:1993:i:jan:p:45-52
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    File URL: http://www.bostonfed.org/economic/neer/neer1993/neer193c.pdf
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    References listed on IDEAS

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    1. Mester, Loretta J., 1992. "Traditional and nontraditional banking: An information-theoretic approach," Journal of Banking & Finance, Elsevier, vol. 16(3), pages 545-566, June.
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