Bank Misconduct: Reputational Implications for Loan Syndicate Structure
Abstract:
We investigate whether large monetary penalties for legal infringements by lead arrangers of syndicated loans result in an impaired reputation amongst their peers. In the syndicated loan market, where multiple lenders cooperate to jointly finance large loans, participating banks rely on the lead arranger’s diligence with respect to screening and monitoring. Lead banks can signal both adequate commitment and reasonable loan quality to participants by retaining a higher share of the loan themselves. We study whether bank misconduct hurts lead arrangers’ reputation in the sense that it has a bearing on retained loan shares. We find evidence that, following a large penalty for misconduct,
lead arrangers are required to hold higher stakes in the loans they originate. This reputational effect is stronger when asymmetric information with respect to the borrower is more severe, but weaker when leads negotiate loan terms that protect creditors in case of default. Our paper thus shows that bank misconduct is associated with impaired reputation, reflected in a higher required skin-inthe- game. Higher loan retention also seems to translate into higher exposures to individual loans, eroding the lead’s ability to diversify its loan portfolio. Our analysis furthermore suggests that penalized leads tend to co-lead loans with informed and strongly capitalized banks, presumably to reassure participants.
The seminar will be held in person.
Language: English
Supported by the Luxembourg National Research Fund (FNR) (2022/17573036)