The transformation of banking: tying loan interest rates to borrowers' CDS spreads

Ivan T. Ivanov, João A. C. Santos, Thu Vo

Research output: Contribution to journalArticlepeer-review

7 Citations (Scopus)

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.

Original languageEnglish
Pages (from-to)150-165
Number of pages16
JournalJournal of Corporate Finance
Volume38
DOIs
Publication statusPublished - 1 Jun 2016

Keywords

  • CDS spreads
  • Loan covenants
  • Loan spreads
  • Market-based pricing

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