We show that firm demand-side factors are strong drivers of procyclical refinancing behavior over the credit cycle using novel data from the Shared National Credit program. Firms are more likely to refinance early when credit conditions are good to keep the effective maturity of their loans long and hedge against having to refinance in tight credit conditions. High credit quality firms are better able to hedge, making their refinancing propensity more sensitive to credit cycles than less creditworthy firms. There is a strong relationship between refinancing a loan, and subsequent growth in capital expenditure, especially when a loan is refinanced early.

This paper investigates banks’ incentive to bias the risk estimates they report to regulators. Within loan syndicates, we find that banks with less capital report lower risk estimates. Consistent with an effort to mitigate capital requirements, the sensitivity to capital is robust to bank fixed effects and greater for large, risky, and opaque credits. Also, low-capital banks’ risk estimates have less explanatory power than those of high-capital banks with regard to loan prices, indicating that their estimates incorporate less information. Our results suggest banks underreport risk in response to capital constraints and highlight the perils of regulation premised on self-reporting. Received September 21, 2016; editorial decision September 18, 2017 by Editor Philip Strahan.

We investigate the U.S. experience with macroprudential policies by studying the interagency guidance on leveraged lending. We find that the guidance primarily impacted large, closely supervised banks, but only after supervisors issued important clarifications. It also triggered a migration of leveraged lending to nonbanks. While we do not find that nonbanks use more lax lending policies than banks, we unveil important evidence that nonbanks increased bank borrowing following the guidance, possibly to finance their growing leveraged lending. The guidance was effective at reducing banks’ leveraged lending activity, but it is less clear whether it accomplished its broader goal of reducing the risk that these loans pose for the stability of the financial system. Our findings highlight the importance of supervisory monitoring for macroprudential policy goals, and the challenge that the revolving door of risk poses to the effectiveness of macroprudential regulations.