Enforcement of banking regulation and the cost of borrowing

Yota Deli; Manthos D. Delis; Iftekhar Hasan; Liuling Liu

doi:10.1016/j.jbankfin.2019.01.016

Journal of Banking & Finance Vol. 101 2019

Enforcement of banking regulation and the cost of borrowing

Yota Deli¹; Manthos D. Delis²; Iftekhar Hasan^3,4,5; Liuling Liu⁶

¹ University College Dublin · ² Montpellier Business School · ³ Fordham University · ⁴ Bank of Finland · ⁵ University Bank · ⁶ Bowling Green State University

Abstract

We show that borrowing firms benefit substantially from important enforcement actions issued on U.S. banks for safety and soundness reasons. Using hand-collected data on such actions from the main three U.S. regulators and syndicated loan deals over the years 1997–2014, we find that enforcement actions decrease the total cost of borrowing by approximately 22 basis points (or $4.6 million interest for the average loan). We attribute our finding to a competition-reputation effect that works over and above the lower risk of punished banks post-enforcement and survives in a number of sensitivity tests. We also find that this effect persists for approximately four years post-enforcement.

DOI: 10.1016/j.jbankfin.2019.01.016
Volume: 101
Pages: 147-160
Language: en
Sources: openalex crossref bibtex:phds-export.bib

Enforcement of banking regulation and the cost of borrowing

Abstract

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