Do Banks Compete on Non-Price Terms? Evidence from Loan Covenants
70 Pages Posted: 6 Nov 2018 Last revised: 20 Sep 2021
Date Written: November 5, 2018
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: Suggested Citation