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Bank Capital Ratios, Competition and Loan Spreads

By Markus Fischer, Sascha Steffen and Jel-classification G


This paper empirically investigates whether or not banks charge higher loan spreads for having high capital ratios by using a dataset of all syndicated loans issued by public nonfinancial U.S. borrowers during the 1993 to 2007 period. We find convincing evidence that well-capitalized banks can indeed charge a ’spread premium’. We further investigate whether this result can be explained by banks holding-up their borrowers. Using various proxies for information asymmetry and competition, we cannot reject the hypothesis that all borrowers pay for banks having high capital ratios. In other words, this premium is not competed away even for the most transparent firms as well as in the most competitive lending environments

Topics: Capital Ratio, Competition, Loan Spreads
Year: 2010
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