Abstract: We examine how cross-country differences in capital regulations shape the structure of global lending syndicates. Using globally syndicated loans extended by banks from 44 countries, we find that strictly regulated banks participate more in syndicates originated by lead lenders facing less stringent capital regulations. This finding is consistent with the explanation that strictly regulated banks seek risky deals outside the border and loosely regulated banks have an advantage to procure such deals. Accordingly, lending syndicates involving loosely regulated lead arrangers and strictly regulated participants extend loans to riskier borrowers, charge higher spreads, and incur higher default rates. The effect of regulatory differences is mitigated when participants are subject to higher accounting standards, and amplified when the participant and lead banks share prior syndicate relations. Finally, we show that global syndication exposes both participants and lead arrangers to greater systemic risk.
Authors: Janet Gao, Yeejin Jang
Date: August 21, 2019