International bank lending and corporate debt structure

Focus

We explore how corporate borrowing is affected worldwide when banks come under pressure to reduce their lending. Starting with a cross-country data set for firms that depend on banks for their funding, we enhance the data on firms' capital structure using data on syndicated loans and bond. Then we ask if the borrowings of US firms from banks, non-bank lenders and bond markets change after the European Banking Authority increased its capital requirements for banks in 2011. We focus on two major types of bank lending: credit line commitments and bank loans.

Contribution

International bank lending tends to expand and contract both frequently and abruptly. In this paper, we study such fluctuations in detail, to investigate whether they lead to cuts in bank credit line commitments or term loans. Further, we explore if domestic credit markets cushion these shocks and, if so, what relative roles are played by their two main segments: the corporate bond and loan markets. The use of syndicated loan data allows us to explore the role of non-bank financial intermediaries in the loan market.  

Findings

As suggested by previous literature, we find that banks cut their international lending when faced with pressure to cut lending. Our first novel finding is to show that this contraction in international lending focuses more on credit lines, which dry up, than on bank term loans, which remain resilient. Firms secure credit lines from non-bank financial intermediaries, and do not increase bond issuance. Taken together, our results suggest that a diversified domestic loan market, including non-bank financial institutions, can help to cushion cuts in international lending.  

Abstract

Using a cross-country sample of bank-dependent public firms we study the international spillovers of a change in banking regulation on corporate borrowing. For identification we examine how US firms' liabilities vis-à-vis banks, non-bank lenders and bond markets evolve after an increase in capital requirements implemented by the European Banking Authority (EBA) in 2011. We find that US firms experience a reduction in credit lines but not in term loans from EU banks. In addition, US firms are able to compensate for the reduction in credit lines from EU banks by securing liquidity facilities from US non-bank financial institutions, without increasing borrowing from corporate bond markets. These results suggest that diversified domestic loan markets, with both banks and non-bank financial institutions providing loans to corporations, can help overcome cuts in cross-border bank funding.

JEL classification: G21, G32, F32, F34

Keywords: credit lines, term loans, bank capital requirements, firm-level data, non-bank financial intermediaries.