Enforcement of banking regulation and the cost of borrowing

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Title: Enforcement of banking regulation and the cost of borrowing
Author: Deli, Yota ; Delis, Manthos D. ; Hasan, Iftekhar ; Liu, Liuling
Series: Journal of Banking and Finance
Series volume: 101
Series number: April
Year of publication: 2019
Publication date: 1.4.2019
Published in: Available also as Bank of Finland Research Discussion Papers 19/2018
Pages: 147-160
Publisher: Elsevier
Subject (yso): luotot; hinnoittelu; pankit; kustannukset; yritykset
Keywords: pankkivalvonta; sääntely
JEL: E44; E51; G21; G28
Other keywords: Bank supervision; Enforcement actions; Syndicated loans; Loan pricing
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.
Link: http://dx.doi.org/10.1016/j.jbankfin.2019.01.016


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