Download presentation

The crisis as a wake-up call
Do banks increase screening and
monitoring during a financial crisis?
Ralph de Haas (EBRD)
Neeltje van Horen (De Nederlandsche Bank)
15th Dubrovnik Economic Conference
24-26 June 2009
Outline

Introduction

Main hypothesis

Data

Empirical strategy

Results

Conclusions
Outline

Introduction

Main hypothesis

Data

Empirical strategy

Results

Conclusions
Introduction
2008: new syndicated lending down by 41%
Total syndicated lending (billion US$)
1,600
1,400
1,200
1,000
800
600
400
200
0
Crisis
Introduction
•
Crisis: increased uncertainty about borrower quality
•
Banks sharply reduced lending to new borrowers
•
Reducing credit to existing clients is costly:
•
Previous gathering of proprietary information (Rajan 1992)
•
Acceptance of short-term losses in anticipation of long-term profitable
relationships (Boot, 1990)

Was lending decreased across the board or did
banks also step up efforts to pick better customers
and monitor them more carefully?

If so: did this impact certain borrowers in particular?
Introduction: contribution to literature
1.
Literature on impact of crises on bank behavior

Considerable evidence on impact of crises on amount of bank lending (e.g. Calomiris and
Wilson, 2004; Ivashina and Sharfstein, 2008; De Haas and Van Lelyveld, 2009)

2.
But not much empirical evidence on the underlying strategies of banks
Growing literature on structure of syndicated lending
Others looked at the structure of lending syndicates to analyze how banks deal with:

asymmetric information (Dennis and Mullineaux, 2000; Sufi, 2007)

weak creditor rights (Esty and Megginson, 2003)

risk of strategic defaults (Preece and Mullineaux, 2003)

cultural differences (Giannetti and Yafeh, 2008)
We look at the structure of lending syndicates to analyze how banks deal with a
financial crisis and the associated increase in uncertainty about borrower quality
Introduction: why syndicated lending?
•
Large market used by a wide variety of firms
(publicly listed and private, rated and unrated) in a
large number of countries
•
Hybrid character: combination of public financing
and traditional bank lending
•
Detailed loan information is publicly available
(which allows us to control for loan and borrower
characteristics)
•
Most importantly: structure of syndicate provides
information about bank behavior during a crisis
Introduction: syndicated lending
•
A syndicated loan is a loan jointly provided by at least two
lenders to a single borrowing firm
•
Typically a syndicate consists of two tiers of ‘banks’:
1.
2.
Arranging banks

Senior tier who negotiate the lending terms with borrower

Mandated by the borrower to structure, organize and market the loan

Responsible for ex ante due diligence/screening and ex post monitoring
Participating banks

•
Junior tier who buy a portion of the loan. Not involved in loan organization
The structure of lending syndicates varies substantially:

(Relative) number of arrangers and participants

Share of the loan that arrangers retain (i.e. not sell down)

Concentration of the syndicate
Introduction: a stylized lending syndicate
Introduction: a stylized lending syndicate
Outline

Introduction

Main hypothesis

Data

Empirical strategy

Results

Conclusions
Main hypothesis
•
Screening and monitoring reduces credit risk (Allen, 1990; Broecker,
1990)
•
Crisis: screening and monitoring more beneficial as proportion
of borrowers with high default probability increases
•
Syndicate: arrangers screen and monitor on behalf of
participants
•
Because the arrangers sell most of the loan, their incentives to
screen and monitor – which is costly – are diluted
•
Participants can prevent arrangers from shirking by forcing
them to increase the part of the loan they retain (cf. Holmström and
Tirole, 1997)
•
Need to prevent shirking more urgent during crisis
Main hypothesis
•
•
We expect that during the crisis:
1.
Arrangers retain a larger share of each loan to convince
participants that they properly screen and monitor
2.
The number of arrangers remains stable or increases and
the number of participants remains stable or decreases
3.
Syndicates become more concentrated
4.
The above holds in particular for loans where agency
problems are severe
Without increased screening and monitoring we
would expect less, but similarly structured loans
Increased monitoring
Outline

Introduction

Hypothesis

Data

Empirical strategy

Results

Conclusions
Data
Detailed info on 21,343 syndicated loans to private borrowers in 65 countries
•
Source: Dealogic Loan Analytics
•
All loans signed between January 2005 and April 2009
•
Information about

Borrower: country of incorporation, industry, credit rating

Loan terms: maturity, volume, currency, spread, fee structure, and loan purpose

Structure of syndicate: no. arrangers, no. participants, share held by each lender (only
for 20% of loans)
•
Keep only loans with complete and consistent information. Excluded
project finance loans, loans to (quasi-)government entities, loans where
an IFI is among syndicate members
•
Multiple tranches: loan variables are weighted averages of the tranches
Data: Syndicated lending pre-crisis (Jan 2005 - Sept
2007) versus during the crisis (Oct 2007 - April 2009)
Pre-Crisis
Crisis
No.
M ean
St.
Dev.
Syndicated loan characteristics
Volume (US$ million)
M aturity (years)
Loan is guaranteed
Loan is secured
Loan for refinancing purposes
Loan for acquisition purposes
Loan for general corporate purposes
20,950
20,286
21,343
20,953
21,343
21,343
21,343
460
4.41
0.04
0.15
0.25
0.15
0.49
1338
2.73
0.19
0.36
0.43
0.36
0.50
9,352
8,942
9,355
9,355
9,355
9,355
9,355
429
3.93
0.04
0.12
0.20
0.13
0.55
1403
2.89
0.20
0.33
0.40
0.33
0.50
0.07
0.00
0.02
0.00
0.00
0.00
0.00
Syndicate structure characteristics
Number of arrangers
Number of participants
Total share held by arrangers
Average share held by arrangers
Concentration: share of five largest lenders
Concentration: Herfindahl index
21,343
21,343
6,623
6,578
6,623
6,623
2.48
4.20
0.55
0.35
0.85
0.29
2.30
4.86
0.26
0.22
0.21
0.19
9,355
9,355
2,130
2,109
2,130
2,130
2.42
3.24
0.63
0.34
0.88
0.30
2.24
3.98
0.27
0.20
0.19
0.18
0.06
0.00
0.00
0.08
0.00
0.04
Borrower and lender characteristics
Borrower has credit rating
21,343 0.25
Borrowed at least once in 5 years prior to loan signing
21,343 0.49
Located in USA
21,343 0.40
Located in Japan
21,343 0.23
Located in emerging market
21,343 0.13
Average market share arrangers at time t-1
21,196 1.13
Rating of sovereign (numerical, D=1 & AAA=21) 21,343 16.15
0.43
0.50
0.49
0.42
0.34
0.97
3.44
9,355 0.21
9,355 0.60
9,355 0.37
9,355 0.27
9,355 0.16
9,235 1.13
9,355 16.05
0.41
0.49
0.48
0.45
0.36
0.99
3.67
0.00
0.00
0.00
0.00
0.00
0.97
0.02
M ean
St.
Dev.
T-test
No.
Data
Main changes in loan characteristics during crisis:

Loans become on average 7% smaller

Maturity drops by 6 months on average

Percentage of loans secured by collateral drops by a
fifth
Data
Changes in syndicate structure during crisis:

Mean number of arrangers unchanged; mean number of
participants declines from 4.2 to 3.2

Total share retained by arrangers increases by 15%

Syndicates more concentrated: share of five largest
lenders increases by 4% and the Herfindahl index by 3%
Data
Changes in borrower and lender characteristics:

Decline in the percentage of rated borrowers

Increase in the proportion of borrowers in emerging
markets (from 10% to 15%)

Mean ‘reputation of borrower’ (number of previous
loans the borrower raised successfully) decreases
during crisis

Mean ‘arranger reputation’ (market share in previous
year) decreases during crisis
Outline

Introduction

Hypothesis

Data

Empirical strategy

Results

Conclusions
Empirical strategy
•
Regress syndicate structure measures on crisis dummy
•
Include loan-specific and borrower specific control variables:
(1) loan volume
(5) maturity
(2) (un)rated
(6) (not) guaranteed
(3) loan purpose
(7) borrower and arranger reputation
(4) sovereign rating
(8) regional dummies
•
Control for participant liquidity
•
Separate regressions / interaction terms for loans with
above/below average expected information asymmetries
•
Dependent variables are either one-sided or two-sided
censored: Tobit
•
Standard errors clustered at borrower level
Outline

Introduction

Hypothesis

Data

Empirical strategy

Results

Conclusions
Results: basic regression results
Results
Basic results all point to a strategy of increased
screening and monitoring by lending syndicates:

Small increase in number of arrangers

Drop number of participants of 20% of pre-crisis mean

Total share of arrangers increased by about 16%

Average share held by each arranger increased by 5%

Stronger concentration of syndicate (increase of 5% for
share held by Top 5 and 10% for HHI)
Results: control variables
•
Rated companies: Less screening and monitoring
due to availability of public information
•
Borrowers with better reputation: Less screening
and monitoring
•
Arrangers with better reputation: Less screening
and monitoring
•
Secured loans: More screening and monitoring
Results
Results are robust to various regression techniques
and specifications:
•
Longer crisis period (August 2007 – April 2009)
•
Clustering by bank
•
Additional regressors (i.e. sectoral dummies)
•
OLS and Poisson (where relevant)
•
Controlling for liquidity of participants
Results: differentiated impact of crisis
Crisis has no differentiated impact on rated versus unrated
companies → screening and monitoring has become more
intense for both types of borrowers
Results: differentiated impact of crisis
During crisis loans to repeat borrowers are granted by less
concentrated syndicates → loans are perceived as less risky
and plagued by fewer agency problems
Results: differentiated impact of crisis
During crisis secured loans are granted by less concentrated
syndicates → secured loans are perceived as less risky and
plagued by fewer agency problems
Results: emerging markets
Results: financial firms
Results: moral hazard or adverse selection?
•
Results so far interpreted as a reflection of increased
need to contain moral hazard with regard to screening
and monitoring effort on part of arrangers
•
Arrangers need to signal to participants that they step
up screening and monitoring efforts during crisis
•
Alternative ‘agency’ interpretation is one of adverse
selection:

Arranger has private information not known to participant
and has incentive to syndicate out more of ‘bad’ loans

So increase in share held by arranger might reflect that
participants force arrangers to signal that arranger do not
sell off “bad” loans
Results: moral hazard or adverse selection?
These two effects can be disentangled (Sufi, 2007):
•
Previous lending relationships between borrower and
arranger capture information advantage of arranger
•
Moral hazard: arranger already knows the borrower
through previous deals, so less need for additional
screening and monitoring: → arranger needs to retain
less of loans to repeat borrowers
•
Adverse selection: arranger already knows the borrower
through previous deals, so needs to show to participant
that (s)he will not abuse it → arranger needs to retain
more of loans to repeat borrowers
Results
Change in syndicate structure is due to participants aiming to contain
moral hazard, not adverse selection
Outline

Introduction

Hypotheses

Data

Empirical strategy

Results

Conclusions
Conclusions
During the crisis banks did not indiscriminately reduce
their lending but stepped up screening and monitoring:


–
Especially for less reputable borrowers
–
Especially for borrowers in the financial sector
–
Especially for unsecured loans
–
Especially for unrated borrowers (in emerging markets rating
does not alleviate agency problems)
–
Especially in case of less reputable arrangers (in emerging
markets arranger reputation does not alleviate agency problems)
Future work: impact on borrowers
THANK YOU
Additional slides
Results driven by decrease in
participants’ liquidity during crisis?

Would not be an equilibrium outcome

We have information on whether the loan volume
has decreased during negotiations (likely first
step). During crisis, slight increase compared to
normal times but still < 1% of loans

We show that crisis impact on syndicate
structure is not homogenous but higher for loans
where agency problems can be expected to be
particularly severe

We explicitly control for participant liquidity
Controlling for participant liquidity
Crisis
Crisis*Participant Liquidity
Participant Liquidity
Observations
LR chi2
Log Likelihood
Mean Share Held By Arrangers
Herfindahl Index
0.019**
[0.033]
-0.011
[0.493]
0.016*
[0.085]
6,879
5,713.23
2,646.78
0.030***
[0.000]
-0.015
[0.325]
0.018**
[0.033]
6,879
4,485.74
3,622.50
Hypotheses
Diversification

Diversification across imperfectly correlated projects
decreases aggregate portfolio risk (Markowitz 1959;
Hart and Jaffee 1974)

Helps banks to reduce threat of insolvency and to act
as better delegated monitors (Boyd and Prescott 1986)

Well-diversified loan portfolio will make it easier to
convince depositors and other creditors to keep
funding banks during a crisis
Hypotheses
If this strategy is dominant we expect that:

all syndicate members (arrangers and participants)
have reacted to the crisis by spreading their lending
over a larger number of syndicated loans

each member will have reduced the average share of
each syndicated loan it retained or bought

all else equal, increase in number of arrangers and
participants per syndicate and less concentrated
syndicates
Hypotheses: diversification
Hypotheses: diversification