Relationship lending and bank loan covenant violations

2021 ◽  
Author(s):  
Xu Chong Bo ◽  
Wenyi Li ◽  
Jing Shi ◽  
Yi Zheng ◽  
Qing Zhou
Keyword(s):  
Bank Loan ◽  
Relationship Lending ◽  
Covenant Violations

scholarly journals Reconsidering Creditor Governance In A Time Of Financial Alchemy

2020 ◽  
Vol 2020 (1) ◽  
Author(s):  
Jeremy McClane
Keyword(s):  
Corporate Governance ◽  
Financial Markets ◽  
Original Data ◽  
Relationship Lending ◽  
Important Class ◽  
Fiscal Discipline ◽  
Docu Ments ◽  
Primary Mechanism ◽  
Mortgage Backed Securities ◽  
Covenant Violations

For many years corporate lenders have been a crucial force in the boardroom, providing a check on management and con- tributing to firm governance. However, as this Article docu- ments, lenders’ influence has receded in recent years for a large and important class of corporate borrowers. The culprit is a familiar one in a less familiar guise: the sale of loans by origi- nating banks for securitization—like that which gained noto- riety with pre-financial crisis mortgage-backed securities, but now are deployed in the market for corporate loans. As this Ar- ticle points out, the shift from relationship lending to arms- length securitization has the potential to intensify moral haz- ard, leading banks to provide less monitoring for their highly securitized clients. Recent data supports this narrative of debt governance dereliction with potentially enormous conse- quences: it heralds the disappearance of an important source of fiscal discipline and governance at a moment when U.S. cor- porations carry more debt than at any time in history (totaling half of U.S. gross domestic product), and an economic crisis threatens to expose companies whose debt has been poorly managed. This Article presents a theoretical and empirical examina- tion of the dramatic change in creditor corporate governance and its implications. It shows how the diminishment of lend- ers’ role in governance is a predictable result of a confluence of forces in the financial markets, in particular, the use of struc- tured finance to securitize loans, which in turn has driven a lending market with diminishing checks on borrower profli- gacy. It also shows how this new market is weakening govern- ance norms in ways that are harmful to borrowing companies, lenders, and society as a whole. The Article makes two contributions to the literature. First, it empirically documents the decline of lenders’ corporate gov- ernance interventions, cataloging original data on all borrower loan covenant violations—a primary mechanism by which lenders intervene in governance—from 2008 through 2018. Second, although many scholars have written about lenders’ role in corporate governance and securitization separately, this Article brings the two together. It thereby adds a missing com- ponent to an important literature by showing how corporate governance and the financial system affect each other, and pro- posing solutions to bolster both.

scholarly journals The Potential for Biases in Resolving Loan Problems

2021 ◽  
Vol 10 (3) ◽  
pp. 57-66
Author(s):  
Richard Brody ◽  
Matias Sokolowski ◽  
Reilly White
Keyword(s):  
Financial Statements ◽  
Bank Loan ◽  
Future Research ◽  
Financial Reports ◽  
Course Of Action ◽  
Prior Literature ◽  
Loan Quality ◽  
Psychology Literature ◽  
Loan Officers ◽  
Covenant Violations

This paper describes how behavioral biases influence the resolution of financial covenant violations. Prior literature documents that violation waivers are common; however, there is a lack of discussion on the determinants that lead loan officers to waive covenant violations. We rely on the escalation of commitment bias (or the sunk cost phenomenon) to discuss how loan officers may become attached to a selected course of action and fail to incorporate new information, increasing the likelihood of covenant waivers. We explain the implications of this bias on bank financial reports by detailing how accounting links loan quality to bank financial statements. We further draw on the psychology literature to offer potential solutions to mitigate overcommitment in the context of loan officers. Future research can examine the extent to which loan officers knowingly or unknowingly steer away from rational decision-making. This study has practical implications as users of bank financial reports, including investors, auditors, examiners, and bank managers, learn about processes and challenges on how accounting mechanics link bank loan portfolios to financial statements.

Affiliated Banker on Board and Conservative Accounting

2014 ◽  
Vol 89 (5) ◽  
pp. 1703-1728 ◽  
Author(s):  
David H. Erkens ◽  
K. R. Subramanyam ◽  
Jieying Zhang
Keyword(s):  
Information Asymmetry ◽  
Private Information ◽  
Data Availability ◽  
Relationship Lending ◽  
Conservative Accounting ◽  
Per Se ◽  
Board Representation ◽  
Covenant Violations ◽  
Unobservable Factors ◽  
Jel Classifications

ABSTRACT We examine the effect of lender monitoring through board representation, which we label “affiliated banker on board” (AFB) on conservative accounting. We hypothesize that monitoring reduces lenders' demand for conservatism-facilitated control transfers through debt covenants by reducing the information asymmetry that underlies the agency problem of debt. Consistent with our hypothesis, we find that AFB firms have markedly lower conservative accounting than non-AFB firms. This result is robust to a battery of tests that account for bias from both observable and unobservable factors. We also find additional evidence to support key elements of our hypothesis. First, an examination of the relation between borrower-unfavorable renegotiations and covenant violations suggests that board representation allows lenders to renegotiate in a timelier manner based on private information. Second, an examination of the relation between covenant intensity and conservative accounting suggests that board representation decreases lenders' reliance on conservatism-facilitated control transfers. Finally, an analysis that uses relationship lending as an alternative proxy of lender monitoring suggests that it is lender monitoring, and not AFB per se, that reduces demand for conservative accounting. JEL Classifications: G3; G21; M41 Data Availability: All data are publicly available from sources identified in the text.

scholarly journals The Impact of Relationship Lending on Bank Loan Process for Korean SMEs

2021 ◽  
Vol 50 (5) ◽  
pp. 521-556
Author(s):  
Soo-Young Hwang ◽  
Jung-Jin Lee ◽  
Yong-Deok Kim
Keyword(s):  
Interest Rate ◽  
Bank Loan ◽  
Decision Making Process ◽  
Relationship Lending ◽  
Credit Constraint ◽  
Small Business Finance ◽  
Lower Interest Rate ◽  
Main Bank ◽  
Loan Approval ◽  
The Impact

We investigate the effects of the bank-firm relationships on the decision making process regarding loan application, loan approval, and loan interest rate. To do this, we use data from 2016, and 2017 Surveys of Korea Small Business Finance conducted by Industrial Bank of Korea. We found that a more intense bank-firm relationship increases the likelihood of loan approval. Also, SMEs borrowing from lower number of banks and with more concentrated loans in main bank seem to obtain credit from main bank at lower interest rate than others. But applying for a loan is not related to the bank-firm relationship. This findings suggest that a close bank-firm relationship can reduce information asymmetry problem and alleviate SMEs’ credit constraint. Also bank-firm relationships seem to be important in determining the loan interest rate. As a relsult, our findings support that relationship lending has a beneficial effect on the supply side of the Korean SME credit market.

Discretionary Accruals in Italian Private Firms and Non-Linear Bank Loan Granting

2017 ◽  
pp. 83-99
Author(s):  
Elisabetta Mafrolla ◽  
Viola Nobili
Keyword(s):  
Financial Reporting ◽  
Banking System ◽  
Regulatory System ◽  
Discretionary Accruals ◽  
Bank Loans ◽  
Bank Loan ◽  
Banking Union ◽  
Private Firms ◽  
European Banking Union

This paper investigates whether and at what extent private firms reduce the quality of their accruals in order to signal a better portrait to the bank and obtain new or larger bank loans. We measure earnings discretionary accruals of a sample of Italian private firms, testing whether new and larger bank loans are associated with a higher (lower) quality of earnings in borrowers' financial reporting. We study bank loan levels and changes and how they impact discretionary accruals and found that, surprisingly, private firms' discretionary accruals are systematically positively affected by an increase in bank loans, although they are negatively affected by the credit worthiness rating assigned to the borrowers. We find that the monitoring role of the banking system with regard to the adoption of discretionary accruals is effective only when the loan is very large. This paper may have implications for policy-makers as it contributes to the understanding of the shortcomings of the banking regulatory system. This is an extremely relevant issue since the excessive amount of non-performing loans held by Italian banks recently threatened the stability of the European Banking Union as a whole.

Biases in estimating bank loan default probabilities

2005 ◽  
Vol 7 (4) ◽  
pp. 75-102 ◽  
Author(s):  
Thomas Mählmann
Keyword(s):  
Bank Loan ◽  
Loan Default

Evidence of Risk-Shifting from Debt Covenant Violations

2009 ◽  
Author(s):  
Beatriz Mariano
Keyword(s):  
Risk Shifting ◽  
Debt Covenant ◽  
Covenant Violations
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