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Regulators vs. markets: Do differences in their bank risk perceptions affect lending terms?

Author

Listed:
  • Delis, Manthos
  • Kim, Suk-Joong
  • Politsidis, Panagiotis
  • Wu, Eliza

Abstract

We quantify the differences between market and regulatory assessments of bank portfolio risk, showing that larger differences significantly reduce corporate lending rates. Specifically, to entice borrowers, banks reduce spreads by approximately 4.1% following a one standard deviation increase in our measure for bank asset-risk differences. This amounts to an interest income loss of USD 1.95 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 & Kim, Suk-Joong & Politsidis, Panagiotis & Wu, Eliza, 2020. "Regulators vs. markets: Do differences in their bank risk perceptions affect lending terms?," MPRA Paper 98548, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:98548
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    File URL: https://mpra.ub.uni-muenchen.de/98548/1/MPRA_paper_98548.pdf
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    More about this item

    Keywords

    bank portfolio risk; markets vs. regulators; syndicated loans; cost of credit; market discipline; competition;

    JEL classification:

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

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