Non-Bank Investors and Loan Renegotiations

We document that the structure of syndicates affects loan renegotiations. Lead banks with large retained shares have positive effects on renegotiations. In contrast, more diverse syndicates deter renegotiations, but only for credit lines. The former result can be explained with coordination theories. The puzzling effect of syndicate diversity in term loan renegotiations derives from the growth of collateralized loan obligations (CLOs) in the syndicated loan market and the coordination between these vehicles and lead banks. CLOs that have a relationship with the lead bank of the renegotiated loan are strong supporters of amount-increase renegotiations, arguably because this gives them access to attractive investments. Related CLOs fund not only their portion of the loan increase, but also the portion that was supposed to be funded by the lead bank. Our findings highlight the previously unrecognized role of the growing presence of non-bank lenders in corporate lending

Banks' Incentives and the Quality of Internal Risk Models

This paper investigates the incentives for banks to bias their internally generated risk estimates. We are able to estimate bank biases at the credit level by comparing bank-generated risk estimates within loan syndicates. The biases are positively correlated with measures of regulatory capital, even in the presence of bank fixed effects, consistent with an effort by low-capital banks to improve regulatory ratios. At the portfolio level, the difference in borrower probability of default is as large as 100 basis points, which can improve the typical loan portfolio's Tier 1 capital ratio by as much as 33 percent. Congruent with a regulatory motive, the sensitivity to capital is greater for larger, riskier, and more opaque credits. In addition, we find that low-capital banks' risk estimates have less explanatory power than those of high-capital banks with regard to the prices set on loans, indicating that low-capital banks not only have downward-biased risk estimates but that they also incorporate less information