TY - JOUR
T1 - The transformation of banking
T2 - tying loan interest rates to borrowers' CDS spreads
AU - Ivanov, Ivan T.
AU - Santos, João A. C.
AU - Vo, Thu
PY - 2016/6/1
Y1 - 2016/6/1
N2 - We investigate how the introduction of market-based pricing, the practice of tying loan interest rates to credit default swaps, has affected bank financing. We find that market-based pricing is associated with lower interest rates, both at origination and during the life of the loan. Our results also indicate that banks simplify the covenant structure of market-based pricing loans, suggesting that the decline in the cost of bank debt is explained, at least in part, by a reduction in monitoring costs. Market-based pricing, therefore, besides reducing the cost of bank debt, may also have adverse consequences resulting from the decline in bank monitoring.
AB - We investigate how the introduction of market-based pricing, the practice of tying loan interest rates to credit default swaps, has affected bank financing. We find that market-based pricing is associated with lower interest rates, both at origination and during the life of the loan. Our results also indicate that banks simplify the covenant structure of market-based pricing loans, suggesting that the decline in the cost of bank debt is explained, at least in part, by a reduction in monitoring costs. Market-based pricing, therefore, besides reducing the cost of bank debt, may also have adverse consequences resulting from the decline in bank monitoring.
KW - CDS spreads
KW - Loan covenants
KW - Loan spreads
KW - Market-based pricing
UR - http://www.scopus.com/inward/record.url?scp=84964833044&partnerID=8YFLogxK
U2 - 10.1016/j.jcorpfin.2016.01.005
DO - 10.1016/j.jcorpfin.2016.01.005
M3 - Article
AN - SCOPUS:84964833044
SN - 0929-1199
VL - 38
SP - 150
EP - 165
JO - Journal of Corporate Finance
JF - Journal of Corporate Finance
ER -