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Working Paper

How Do Lead Banks Use Their Private Information about Loan Quality in the Syndicated Loan Market?

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Little is known about how lead banks in the syndicated loan market use their private information about loan quality. We formulate and test two hypotheses, the Signaling Hypothesis and Sophisticated Syndicate Hypothesis. To measure private information, we use Shared National Credit (SNC) internal loan ratings, which we make comparable across banks using concordance tables. We find that favorable private information is associated with higher loan retention by lead banks for term loans, consistent with empirical domination of the Signaling Hypothesis, while neither hypothesis dominates for revolvers. Differences in syndicate structure at least partially explain this disparity.
Topics
Bank policy and regulation
06.30.2016ISSN 2573-7953 WP 16-16Revisions WP 16-16R, WP 16-16R2DOI 10.26509/frbc-wp-201616
Keywords lead bank, private information, loan sales, syndication
JEL Classification Codes G21, G28

Working Papers of the Federal Reserve Bank of Cleveland are preliminary materials circulated to stimulate discussion and critical comment on research in progress. They may not have been subject to the formal editorial review accorded official Federal Reserve Bank of Cleveland publications. The views expressed in this paper are those of the authors and do not represent the views of the Federal Reserve Bank of Cleveland or the Federal Reserve System.

Suggested Citation

Balasubramanyan, Lakshmi, Allen N. Berger, Christa H.S. Bouwman, and Matthew M. Koepke. 2016. “How Do Lead Banks Use Their Private Information about Loan Quality in the Syndicated Loan Market?” Federal Reserve Bank of Cleveland, Working Paper No. 16-16. https://doi.org/10.26509/frbc-wp-201616