Dissertation/Thesis Abstract

Lending relationships and liquidity insurance value of bank credit lines: Evidence from loan spreads
by Maksimenko, Tatiana, Ph.D., City University of New York, 2013, 145; 3601933
Abstract (Summary)

Bank lending processes and lending relationships involve two aspects, the provision of liquidity via lines of credit and the production of information via monitoring. To access the existing credit line, a borrower must be in compliance with financial covenants. When violations occur, access becomes conditional upon the bank’s willingness to accommodate the customer. The bank values its reputation as an accommodating lender and views a decision regarding credit line access restrictions as a trade-off between reputational and financial capital. Since imposing restrictions on a more loyal borrower causes greater reputational damage, a bank’s “willingness” to accommodate increases in the strength of the relationship with its borrower. This is the first channel through which relationships have effect. To the extent that lending also involves monitoring, relationships allow a bank to build an exploitable information advantage. This is the second channel. Most credit lines are monitored, making it difficult to isolate the effects of these two channels. I identify commercial paper backup lines of credit as loans that provide liquidity, but do not involve information production and use them to construct two measures of relationship strength that capture the extent of bank’s willingness to provide liquidity (T-intensity ) and the bank’s information advantage (I-intensity ). To make sharper inferences concerning the effect of willingness, I control for a bank’s reliance on core deposits as a measure of “ability” to provide liquidity. I find that loan spreads decrease in T-intensity for firms without public equity. Thus, for such firms, credit lines have liquidity insurance value and it increases with relationship strength. I also find that loan spreads increase in I-intensity for all firms, suggesting that banks are successful at exploiting their information advantage (i.e. “holding up” borrowers). My findings imply that for relatively opaque borrowers, relationships have value even in the absence of private information production.

Indexing (document details)
Advisor: Allen, Linda
Commitee: Allen, Linda, Joyce, Theodore, Weintrop, Joseph
School: City University of New York
Department: Business
School Location: United States -- New York
Source: DAI-A 75/02(E), Dissertation Abstracts International
Subjects: Finance, Banking
Keywords: Bank, Credit, Lending relationships, Liquidity insurance, Loan
Publication Number: 3601933
ISBN: 978-1-303-53688-5
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