Borrower risk and the price and nonprice terms of bank loans
Banks are in the business of lending to risky and hard-to-value businesses. This paper show that both the price and non-price terms of bank loans reflect observable components of borrower risk. As expected, riskier borrowers -- smaller borrowers, borrowers with less cash, and borrowers that are harder for outside investors to value -- pay more for their loans. In addition, the non-price terms of loans are systematically related to pricing; small loans, loans that are secured, and loans with relatively short maturity carry higher interest rates than other loans, even after controlling for publicly available measures of risk. This suggests that banks use both the price and non-price terms of loans as complements in dealing with borrower risk. To validate this interpretation, I also show that observably riskier firms face tighter non-price terms in their loan contracts. Loans to small firms, firms with low ratings, and firms with little cash available to service debt, for example, are more likely to be small, to be secured by collateral, and to have a short contractual maturity. Larger and more profitable firms are able to borrow on better terms across all three of these non-price dimensions.
|Date of creation:||1999|
|Date of revision:|
|Contact details of provider:|| Postal: |
Web page: http://www.newyorkfed.org/
More information through EDIRC
|Order Information:|| Web: http://www.ny.frb.org/rmaghome/staff_rp/ Email: |
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Mark Carey & Mitch Post & Steven A. Sharpe, 1996.
"Does corporate lending by banks and finance companies differ? Evidence on specialization in private debt contracting,"
Finance and Economics Discussion Series
96-25, Board of Governors of the Federal Reserve System (U.S.).
- Mark Carey & Mitch Post & Steven A. Sharpe, 1998. "Does Corporate Lending by Banks and Finance Companies Differ? Evidence on Specialization in Private Debt Contracting," Journal of Finance, American Finance Association, vol. 53(3), pages 845-878, 06.
- Diamond, Douglas W & Dybvig, Philip H, 1983.
"Bank Runs, Deposit Insurance, and Liquidity,"
Journal of Political Economy,
University of Chicago Press, vol. 91(3), pages 401-19, June.
- John H. Boyd & Edward C. Prescott, 1985.
87, Federal Reserve Bank of Minneapolis.
- Barclay, Michael J & Smith, Clifford W, Jr, 1995. " The Priority Structure of Corporate Liabilities," Journal of Finance, American Finance Association, vol. 50(3), pages 899-917, July.
- Rajan, Raghuram & Winton, Andrew, 1995. " Covenants and Collateral as Incentives to Monitor," Journal of Finance, American Finance Association, vol. 50(4), pages 1113-46, September.
- Hamid Mehran & Robert A. Taggart & David Yermack, 1999. "CEO Ownership, Leasing, and Debt Financing," Financial Management, Financial Management Association, vol. 28(2), Summer.
- Leland, Hayne E & Pyle, David H, 1977.
"Informational Asymmetries, Financial Structure, and Financial Intermediation,"
Journal of Finance,
American Finance Association, vol. 32(2), pages 371-87, May.
- Hayne E. Leland and David H. Pyle., 1976. "Informational Asymmetries, Financial Structure, and Financial Intermediation," Research Program in Finance Working Papers 41, University of California at Berkeley.
- Berger, Allen N. & Udell, Gregory F., 1990.
"Collateral, loan quality and bank risk,"
Journal of Monetary Economics,
Elsevier, vol. 25(1), pages 21-42, January.
- Morgan, D.P., 1995.
"Bank Monitoring Mitigates Agency Problems: New Evidence Using the Financial Covenants in Bank Loan Commitments,"
95-12, Columbia - Graduate School of Business.
- Donald P. Morgan, 1993. "Bank monitoring mitigates agency problems: new evidence using the financial covenants in bank loan commitments," Research Working Paper 93-16, Federal Reserve Bank of Kansas City.
- Chan, Yuk-Shee & Kanatas, George, 1985. "Asymmetric Valuations and the Role of Collateral in Loan Agreements," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 17(1), pages 84-95, February.
- Ramakrishnan, Ram T S & Thakor, Anjan V, 1984. "Information Reliability and a Theory of Financial Intermediation," Review of Economic Studies, Wiley Blackwell, vol. 51(3), pages 415-32, July.
- Hubbard, R Glenn & Kuttner, Kenneth N & Palia, Darius N, 2002.
"Are There Bank Effects in Borrowers' Costs of Funds? Evidence from a Matched Sample of Borrowers and Banks,"
The Journal of Business,
University of Chicago Press, vol. 75(4), pages 559-81, October.
- R. Glenn Hubbard & Kenneth N. Kuttner & Darius N. Palia, 1999. "Are there "bank effects" in borrowers' costs of funds? Evidence from a matched sample of borrowers and banks," Staff Reports 78, Federal Reserve Bank of New York.
- Bryant, John, 1980. "A model of reserves, bank runs, and deposit insurance," Journal of Banking & Finance, Elsevier, vol. 4(4), pages 335-344, December.
- Berger, Allen N & Udell, Gregory F, 1995. "Relationship Lending and Lines of Credit in Small Firm Finance," The Journal of Business, University of Chicago Press, vol. 68(3), pages 351-81, July.
- David Besanko & Anjan V. Thakor, 2004.
"Competitive Equilibrium in the Credit Market under Asymmetric Information,"
- Besanko, David & Thakor, Anjan V., 1987. "Competitive equilibrium in the credit market under asymmetric information," Journal of Economic Theory, Elsevier, vol. 42(1), pages 167-182, June.
- Marc R. Saidenberg & Philip E. Strahan, 1999. "Are banks still important for financing large businesses?," Current Issues in Economics and Finance, Federal Reserve Bank of New York, vol. 5(Jul).
- Diamond, Douglas W, 1984. "Financial Intermediation and Delegated Monitoring," Review of Economic Studies, Wiley Blackwell, vol. 51(3), pages 393-414, July.
- Houston, Joel & James, Christopher, 1996. " Bank Information Monopolies and the Mix of Private and Public Debt Claims," Journal of Finance, American Finance Association, vol. 51(5), pages 1863-89, December.
- Allen, Franklin, 1990. "The market for information and the origin of financial intermediation," Journal of Financial Intermediation, Elsevier, vol. 1(1), pages 3-30, March.
- Bhattacharya Sudipto & Thakor Anjan V., 1993. "Contemporary Banking Theory," Journal of Financial Intermediation, Elsevier, vol. 3(1), pages 2-50, October.
- Petersen, Mitchell A & Rajan, Raghuram G, 1994. " The Benefits of Lending Relationships: Evidence from Small Business Data," Journal of Finance, American Finance Association, vol. 49(1), pages 3-37, March.
- Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June.
- Charles P. Himmelberg & Donald P. Morgan, 1995. "Is bank lending special?," Conference Series ; [Proceedings], Federal Reserve Bank of Boston, vol. 39, pages 15-44.
When requesting a correction, please mention this item's handle: RePEc:fip:fednsr:90. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Amy Farber)
If references are entirely missing, you can add them using this form.