Journal of Corporate Finance Vol. 38 2016
The transformation of banking: Tying loan interest rates to borrowers' CDS spreads
Abstract
We investigate how the introduction of market-based pricing, the practice of tying loan interest rates to credit default swaps, has affected bank financing. We find that market-based pricing is associated with lower interest rates, both at origination and during the life of the loan. Our results also indicate that banks simplify the covenant structure of market-based pricing loans, suggesting that the decline in the cost of bank debt is explained, at least in part, by a reduction in monitoring costs. Market-based pricing, therefore, besides reducing the cost of bank debt, may also have adverse consequences resulting from the decline in bank monitoring.
- DOI
- 10.1016/j.jcorpfin.2016.01.005
- Volume
- 38
- Pages
- 150-165
- Language
- en
- Sources
- bibtex:phds-export.bib crossref openalex