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Bank Loan Maturity and Priority when Borrowers can Refinance

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  • Douglas W Diamond

Abstract

This paper describes a theory of how borrowers with private information about their future credit prospects choose seniority and maturity of bank loans and publicly issued bonds. The model implies that short-term bank loans will be senior to public long- term debt. With sufficient public debt, banks will not make concessions when restructuring their debt in response to a borrower's financial distress. Recent evidence on the debt restructuring activities of banks is interpreted in the context of the model.

Suggested Citation

  • Douglas W Diamond, 1992. "Bank Loan Maturity and Priority when Borrowers can Refinance," CEPR Financial Markets Paper 0022, European Science Foundation Network in Financial Markets, c/o C.E.P.R, 33 Great Sutton Street, London EC1V 0DX..
    • Handle: RePEc:cpr:ceprfm:0022
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    Citations

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    Cited by:

    1. Wenlian Gao & Feifei Zhu & Kai Chen, 2023. "The role of bank lenders in firm leverage adjustments," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 46(1), pages 63-97, February.
    2. Luigi Guiso & Raoul Minetti, 2010. "The Structure of Multiple Credit Relationships: Evidence from U.S. Firms," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 42(6), pages 1037-1071, September.
    3. Longhofer, Stanley D. & Santos, Joao A. C., 2000. "The Importance of Bank Seniority for Relationship Lending," Journal of Financial Intermediation, Elsevier, vol. 9(1), pages 57-89, January.
    4. Gangopadhyay, Shubhashis & Mukhopadhyay, Bappaditya, 2002. "Multiple bank lending and seniority in claims," Journal of Economics and Business, Elsevier, vol. 54(1), pages 7-30.
    5. Guiso, Luigi & Minetti, Raoul, 2004. "Multiple Creditors and Information Rights: Theory and Evidence from US Firms," CEPR Discussion Papers 4278, C.E.P.R. Discussion Papers.
    6. Stanley D. Longhofer & Stephen R. Peters, 2000. "Protection for whom? creditor conflicts in bankruptcy," Working Papers (Old Series) 9909R, Federal Reserve Bank of Cleveland.
    7. Chen, Andrew H. & Hung, Mao-Wei & Mazumdar, Sumon C., 1995. "Loan covenants and corporate debt policy under bank regulations," Journal of Banking & Finance, Elsevier, vol. 19(8), pages 1419-1436, November.
    8. Demirguc-Kunt, Asli & Maksimovic, Vojislav, 1996. "Financial constraints, uses of funds, and firm growth : an international comparison," Policy Research Working Paper Series 1671, The World Bank.
    9. Douglas W. Diamond, 1994. "Corporate capital structure: the control roles of bank and public debt with taxes and costly bankruptcy," Economic Quarterly, Federal Reserve Bank of Richmond, issue Spr, pages 11-37.
    10. Andrew Winton, 1996. "Monitored finance, liquidity, and institutional investment choice," Working Papers (Old Series) 9616, Federal Reserve Bank of Cleveland.
    11. Stanley D. Longhofer, 1994. "Bankruptcy rules and debt contracting: on the relative efficiency of absolute priority, proportionate priority, and first-come, first-served rules," Working Papers (Old Series) 9415, Federal Reserve Bank of Cleveland.

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