Abstract: This paper studies how lenders' ability to monitor collateral and mitigate frictions in collateralization affect credit outcomes. Exploiting law reforms that subject collateral monitoring to information asymmetries, I show that such reforms trigger credit reallocation from foreign to domestic lenders. Following the legal change, the moral hazard in monitoring collateral by foreign lenders increases. In response, foreign lenders decrease loan issuance and acceptance of movable collateral from treated firms, while increasing the use of covenants. The reallocation effects translate into a reduction in firms' employment and net income in the post-period. These results highlight the importance of friction associated with collateralization in shaping credit markets.
Abstract: This paper documents new facts on the modification of bank loans using Y-14 regu- latory data on C&I loans. We find that loan-level modifications of key contractual terms, such as interest and maturity, occur at least once for 41% of loans. Cross sectional dif- ferences in modifications are substantial and amplified by borrower distress. Relative to single-lender loans, syndicated loans are 1.5 times more likely to be modified and interest rate changes are twice as likely. Our findings call into question whether 1) creditor dis- persion makes loan modifications more challenging and 2) relationship lending between banks and small borrowers creates more scope for flexibility when firm-level conditions change.
Matthew Phillips, Massachusetts Institute of Technology
Regina Wittenberg-Moerman, Northwestern University
Tiange Ye, University of Southern California
Abstract: In contrast to prior research that focuses on the role of borrower fundamentals in explaining loan renegotiations, we examine non-fundamental renegotiations of loans traded on the secondary loan market. We exploit the semi-annual rebalancing of the Morningstar LSTA US Leveraged Loan 100 Index as an exogenous shock to the trading conditions in this market, which are critical to non-bank institutional lenders that largely rely on the secondary market for their liquidity needs. In line with improved loan liquidity and greater institutional demand arising from the index inclusions, we find that index-included loans achieve lower bid-ask spreads, higher prices, and greater mutual fund holdings. We further find that index-included loans experience significantly higher likelihood of interest rate-reducing renegotiations than index-excluded loans, consistent with non-bank lenders sharing with borrowers non-fundamental surplus driven by the index inclusion. We rule out explanations related to borrower fundamental by showing that non-traded loans included in the same package as index-included loans do not experience interest rate reducing renegotiations and by conducting placebo analyses that employ an artificial index inclusion threshold and the time period preceding the index origination. Overall, our findings provide novel evidence that non-fundamental forces, such as a loan's inclusion in a major index, can trigger loan renegotiation.
Discussant: Shohini Kundu, University of California-Los Angeles
Abstract: In this paper, we establish that universal banks reduce the efficacy of monetary policy. Expansion of banks into non-commercial banking activities provides them with additional revenue in periods of rising interest rates. This enables universal banks to maintain a higher credit supply, which in turn reduces the monetary policy pass-through to the economy. The higher credit supply in counties with more universal banks leads to lower unemployment rates. This channel is distinct from existing theories of monetary policy transmission, and the results are robust to monetary policy shocks. We find that the effect is asymmetrically concentrated in tightening monetary policy environments. The results shed new light on the implications of the Fed's regulation of universal banks on the transmission of monetary policy.
