Do Banks Compete on Non-Price Terms? Evidence from Loan Covenants

70 Pages Posted: 6 Nov 2018 Last revised: 20 Sep 2021

See all articles by Rustam Abuzov

Rustam Abuzov

University of Virginia - Darden School of Business

Christoph Herpfer

Emory University - Goizueta Business School

Roberto Steri

University of Luxembourg

Date Written: November 5, 2018

Abstract

We investigate the link between competition in credit markets and non-price loan terms, specifically financial covenants. We exploit regulation in the leveraged loan market as variation in banks' ability to offer covenant-lite loans. As regulated banks demand relatively more covenants, borrowers switch to unregulated lenders, or shadow banks, leading to a decline in aggregate banks' market share. Results are not driven by lower loan supply or changes in other loan terms, and reflect a relation between lax covenants and loan growth in the broader lending market. Our findings encourage regulators to internalize non-price competition between regulated and unregulated sectors.

Keywords: non-price competition, shadow banks, leveraged lending, covenants, syndicated loans, relationship lending

Suggested Citation

Abuzov, Rustam and Herpfer, Christoph and Steri, Roberto, Do Banks Compete on Non-Price Terms? Evidence from Loan Covenants (November 5, 2018). Available at SSRN: https://ssrn.com/abstract=3278993 or http://dx.doi.org/10.2139/ssrn.3278993

Rustam Abuzov

University of Virginia - Darden School of Business ( email )

P.O. Box 6550
Charlottesville, VA 22906-6550
United States

Christoph Herpfer (Contact Author)

Emory University - Goizueta Business School ( email )

1300 Clifton Road
Atlanta, GA 30322-2722
United States

Roberto Steri

University of Luxembourg ( email )

Kirchberg, 6, rue Richard Coudenhove-Kalergi
Luxembourg
Luxembourg

HOME PAGE: http://https://sites.google.com/site/robertosteripersonalpage/

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