Relationship Banking

This paper examines critical aspects of international banking law, focusing on the banker-customer relationship, defenses in SWIFT fraud cases, and the structure of syndicated loan agreements. The study provides an in-depth analysis of the ambiguity surrounding terms like "banker," "banking business," and "customer," offering insights into the evolving nature of these relationships in banking law. It also explores the legal defenses available to banks in fraud cases involving SWIFT transactions, such as fraud committed by external hackers, recipient banks' knowledge of fraud, and abnormal circumstances. Lastly, the paper delves into the mechanics of syndicated loan transactions, evaluating the roles and liabilities of the lead manager, agent bank, and lending members. The analysis concludes by providing a comprehensive view of how international banking institutions navigate these complex legal frameworks.

Empirical evidence suggests that even those firms presumably most in need of monitoringintensive financing (young, small, and innovative firms) have a multitude of bank lenders, where one may be special in the sense of relationship lending. However, theory does not tell us a lot about the economic rationale for relationship lending in the context of multiple bank financing. To fill this gap, we analyze the optimal debt structure in a model that allows for multiple but asymmetric bank financing. The optimal debt structure balances the risk of lender coordination failure from multiple lending and the bargaining power of a pivotal relationship bank. We show that firms with low expected cash-flows or low interim liquidation values of assets prefer asymmetric financing, while firms with high expected cash-flow or high interim liquidation values of assets tend to finance without a relationship bank.

William Lang, and Jacob Paroush for their helpful comments. The authors gratefully acknowledge the support of Cathy Lemieux, and research assistance of Gulcin Afres, Sreedhar Bharath, Danny Chang, Yonca Ertimur, Gijoon Hong, Victoria Ivashina, Ahmet Karagozoglu, Elena Smirnova, Anand Srinivasan, and Jack Wozek. The opinions expressed in this paper are those of the authors, and do not necessarily represent those of the Federal Reserve Banks or the Federal Reserve System. Finally, the authors would like to thank two anonymous referees and the editor Mark Flannery for their helpful comments. The Role of Bank Advisors in Mergers and Acquisitions This paper looks at the role of commercial banks and investment banks as financial advisors. In their role as lenders and advisors, banks can be viewed as serving a certification function. However, banks acting as both lenders and advisors face a potential conflict of interest that may mitigate or offset any certification effect. Overall, we fin...

Bank credit has evolved from the traditional relationship banking model to an originateto-distribute model. We show that the borrowers whose loans are sold in the secondary market underperform their peers by about 9% per year (risk-adjusted) over the threeyear period following the initial sale of their loans. Therefore, either banks are originating and selling loans of lower quality borrowers based on unobservable private information (adverse selection), and/or loan sales lead to diminished bank monitoring that affects borrowers negatively (moral hazard). We propose regulatory restrictions on loan sales, increased disclosure, and a loan trading exchange/clearinghouse as mechanisms to alleviate these problems.

Following Miles and Snow's Business Strategy (BS) topology, we find that banks impose relatively higher loan spreads for the firms that follow an Innovation-Oriented Business Strategy (IOBS). We further document that IOBS is positively associated with corporate risk measures such as variances in equity returns and returns on assets. Overall, our findings suggest that banks charge a higher cost of debt in anticipation of borrowers' payback riskiness from an IOBS.

Upper Devonian continental and subaqueous sedimentary rocks and bimodal volcanic rocks of the Boyd Volcanic Complex of the south coast of New South Wales were deposited in a rapidly subsiding, 330°-trending, transtensional basin. Structural analysis of synvolcanic and synsedimentary deformational structures indicate that basin formation is related to a 330°-orientated subhorizontal σ1 and a 060°-orientated subhorizontal σ3, which account for the development of the observed intrusion and fracture orientations. Rhyolitic, basaltic and associated clastic dykes are preferentially intruded along extensional 330°-trending fractures, subordinately along sinistral, transtensional 010°-trending fractures and along 290°-trending fractures. One of the implications of such a palaeotectonic reconstruction is that the so called north-trending Eden-Comerong-Yalwal Late Devonian rift does not represent a simple, single palaeobasin entity, but is presently a north-trending alignment of exposures of sedimentary and volcanic rocks probably emplaced in different basins or sub-basins, mildly folded during the Carboniferous Kanimblan compression (which also formed the north-trending Budawang synclinorium) and then extended to the east by the Tasman Sea opening during the Jurassic. The development of scattered, rapidly subsiding, basins characterised by bimodal volcanism during the Late Devonian throughout the Lachlan Fold Belt, can be interpreted in terms of extensional collapse of a forming mountain belt contemporaneous with a sharp decrease of compressional stress after the Middle Devonian Tabberabberan orogenic event. This would promote a reorientation of σ3 and transition from a compressional to a transtensional tectonic environment, which could also favour block rotation and formation of release basins.

We use the near-collapse of the Norwegian banking system during the period 1988-91 to measure the impact of bank distress announcements on the stock prices of firms maintaining a relationship with a distressed bank. We find that although banks experienced large and permanent downward revisions in their equity value during the event period, firms maintaining relationships with these banks faced only small and temporary changes, on average, in stock price. In other words, the aggregate impact of bank distress on listed firms in Norway appears small. Our results stand in contrast to studies that document large welfare declines to similar borrowers after crises hit Japan and other East Asian countries. We hypothesize that because banks in Norway are precluded from maintaining significant ownership control over loan customers, Norwegian firms were freer to choose financing from sources other than their distressed banks. We provide cross-sectional evidence to support this hypothesis.

We highlight the implications of combining underwriting services and lending for the choice of underwriters and for competition in the underwriting business. We show that cross-selling can increase underwriters' incentives, and we explain three phenomena: first, that cross-selling is important for universal banks to enter the investment banking business; second, that cross-selling is particularly attractive for highly leveraged borrowers; third, that less-than-market rates are no prerequisite for cross-selling to benefit a bank's clients. In our model, cross-selling reduces rents in the underwriting business. JEL Classification: G21, G24, D49 "Perhaps it was not such a bright idea to offer credit to investment-banking clients at lessthan-market rates-even though this has been a chief calling card over the past few years for those commercial banks that wanted to get into the juicy business of investment banking. After all, it is precisely the riskiest borrowers, those who have trouble borrowing elsewhere, that are most likely to take up aspiring investment banks on their offers of credit." (The Economist, "Thanks a bundle," August 24, 2002) * We are grateful to Martin Hellwig, Marco Pagano (the editor) and especially to an anonymous referee for very helpful comments. We also thank participants of seminars at Max Planck Institute

The purpose of this study was to examine the role of relational commitment on customer behavioural intentions in Kenya's banking sector. The basic research question examined was whether or not customer commitment in service relationships always leads to favourable customer behavioural intentions, as the study was the first to examine the nature of both relationship commitment and customers behavioural intentions and the inter-relationships between them within the financial services sector of a developing country such as Kenya. Thus, utilizing a descriptive survey research design and adapted measures of relational commitment and behavioural intentions on a sample of 334 bank account holders from 43 commercial bank branches in Mombasa, Kenya, the study provides empirical evidence of multi-dimensional nature of relational commitment and its positive and significant predictive impact on favourable customer behavioural intentions with respect to customer loyalty to the bank, re-purch...

This study examines the role of information asymmetry in the choice between rights issue and private equity placement from an important emerging market-India. In the post IPO scenario, Indian firms issue equity mainly through private placements as well as rights issues and followon public offers are negligible. We argue that problems associated with information asymmetry trickles down to all levels of equity issues. The outcome of this empirical exercise shows only those firms facing lesser information problems choose rights issue of equity. Private placements are chosen by firms facing higher information problems to circumvent information costs. The results remain invariant even after segregating the qualified institutional placements from private equity placement as the firms with information disadvantage choose to place equity privately.

This paper analyses the effects that public credit guarantees have on SME business activity and investment. We focus the study on the main regional mutual guarantee institution in the Spanish Region of Madrid, covering two distinct stages of the economic cycle and credit environments: first, the full range of the country's financial crisis with credit constraints (2009-2011), and later, the recovery stage with credit expansion (2012-2015). Using propensity score matching based on economic activity and company size, we show that guarantees allow for the relaxation of credit constraints, driving turnover and investment during both recession and growth. We also find that mutual guarantee schemes constituted a greater stimulus for firms during contraction; thus, they can act as countercyclical policies. Moreover, although guarantees had a substantial effect on all small companies (those with fewer than 50 employees), they had the greatest impact on microenterprises (those with fewer than 10 employees). We show the activities for which guarantees constitute a greater boost, which may inform public-policy designs for specific types of business.

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This paper studies the relation between average growth and growth volatility. To do so a two period model is built which focuses on how firms choose their debt portfolio maturity. Due to imperfect enforceability problems, we show that contracts financing long term investments are biased towards short-term debt. This can generate maturity mismatches between assets and liabilities and lead to liquidity crises. Then it is shown that the relation between average growth and growth volatility is more likely to be negative in developing countries while it is more likely to be positive in developed economies. We therefore invalidate the idea that volatility is the price for rapid growth in emerging market countries. This framework also allows us to assess the impact of foreign direct investment (FDI) and financial opening (FO). We show that FDI has stabilizing effects in developing economies while FO has destabilizing effects. On the contrary in developed economies FO has stabilizing effects.

We derive empirical implications from a theoretical model of bank–borrower relationships. The interest‐rate mark‐ups of banks are predicted to follow a life‐cycle pattern over the age of the borrowing firms. Because of endogenous bank monitoring by competing banks, borrowing firms initially face a low mark‐up, and thereafter an increasing mark‐up as a result of informational lock‐in, until it falls for older firms when the lock‐in is resolved. By applying a large sample of predominantly small unlisted firms and a new measure of asymmetric information, we find that firms with significant asymmetric‐information problems have a more pronounced life‐cycle pattern of interest‐rate mark‐ups. Additionally, we examine the effects of concentrated banking markets on interest‐rate mark‐ups. The results indicate that the life cycle of mark‐ups is mainly driven by asymmetric‐information problems and not by concentration. However, we find evidence that bank market concentration matters for older ...

The Japanese "main bank system" figures prominently in the recent literature on "relationship banking." By most accounts, the main bank epitomizes relationship finance: traditionally, every large Japanese firm had one, and that bank monitored the firm, participated in its governance, acted as the delegated monitor for other creditors, and rescued the firm if it fell into financial distress. Yet all this has begun to change, continue these accounts. Japan deregulated its financial markets in the 1980s, and many firms abandoned their relational lender for market finance. As the main banks then lost their ability to the constrain firms-as relationship banking unraveled-the firms gambled in the stock and real estate bubbles, the bubbles burst, and the firms threw the country into recession. Using financial and governance data from 1980 through 1994, we show that none of this is true. The accounts of the Japanese main bank instead represent fables, stories we collectively recite because they so conveniently illustrate the theories and models we hope to develop. Whether during the 1980s boom or the 1990s recession, they bore no resemblance to any aspect of Japanese corporate finance or governance.

, "Evolving credit markets and business cycle dynamics" Conference (European University Institute). Luigi Guiso also thanks the EEC and MURST for financial support. Luigi Zingales also thanks the Center for Security Prices and the Stigler Center at the University of Chicago for financial support. The views expressed herein are those of the authors and not necessarily those of the National Bureau of Economic Research.

We show that firms with illiquid stock pay higher syndicated loan spreads. This result is invariant to multiple measurements of stock illiquidity, and is robust to a wide set of cross-sectional loan and firm features, firm and year fixed effects. This result also holds using matched difference-indifferences at an exogenous reduction in the minimum tick size of major United States exchanges and using a two-stage least squares estimator. Stock illiquidity is, moreover, shown to diminish the benefit to the loan recipient of a lending relationship. A rationale for these findings is that stock market illiquidity impairs the bargaining power of corporate borrowers, in the loan spread negotiating procedure, as it raises the cost of alternatively issuing equity. Our findings, thus, indicate that relative bargaining power plays a systematic role in determining syndicated loan spreads.

Post crisis, bank loan spreads increased and have remained elevated despite central bank actions, low LIBOR rates and observed Treasury yields. Using large syndicated loan dataset, this paper estimates that a one percentage point to GDP increase in government deficits increases spreads by around nine basis points on average. This is consistent with partial crowding out. Weaker country risk ratings, larger loan size also increase spreads. Finally, the paper provides evidence that US deficit spending results in a crowding out of around one-half in loan markets and have some crowding out of loans in other markets.

Post crisis, bank loan spreads increased and have remained elevated despite central bank actions, low LIBOR rates and observed Treasury yields. Using large syndicated loan dataset, this paper estimates that a one percentage point to GDP increase in government deficits increases spreads by around nine basis points on average. This is consistent with partial crowding out. Weaker country risk ratings, larger loan size also increase spreads. Finally, the paper provides evidence that US deficit spending results in a crowding out of around one-half in loan markets and have some crowding out of loans in other markets.

This paper examines the relation between the corporate life cycle and lending spreads. Using a sample of 20,307 firm-loan observations spanning 5,076 publicly traded U.S. firms, we find that lending spreads follow a U-shape pattern across the life cycle phases. This pattern is in addition to the variation explained by typical controls. In a multivariate analysis, we find that firms in the introduction and decline phases pay lending spreads that are greater than firms in the mature phase (differences of 6 percent and 12 percent, respectively). We explore omitted variables bias and instrumental variable estimation in robustness testing and find that the U-shape pattern persists. Our findings are consistent with theoretical predictions regarding the relationship between the corporate life cycle and various lending risks.

Examining bank behavior around Federal Reserve stress tests, we find that stress test banks increase capital ratios at the starting point for annual stress testing significantly more than nonstress test banks. These trends are completely reversed (and economically significant) in the other quarters. Further, the differences between stress test and non-stress test banks seen in stress test years do not occur in 2010, when the Fed did not conduct a stress test. Results show that, as they enter the stress test, stress test banks lower dividends significantly more than non-stress test banks. Finally, stress test banks spend significantly more on lobbying than non-stress test banks. The results suggest that stress test banks may be managing financial performance and investing in political spending to improve their chances of passing stress tests.

This paper highlights the importance of bank-based finance for the innovation activity of UK firms. It identifies both theoretically and empirically how bank shocks affect firms' innovation. We develop a theoretical model, and test its predictions using a new matched bank-firm-patent dataset for the UK. We find that bank distress during the 2008 and 2011 crises negatively affected firms' innovation behavior. After carefully controlling for several potential biases in estimation we find that firms whose relationship banks were distressed not only patented less, but those patents were of lower technological value, less original and of lower quality. The negative effect is significantly larger in the case of small and medium size enterprises (SMEs). We also find that banks' specialization in financing innovation mitigates the impact of bank distress on innovation.

Purpose: Commitment in underpinning long‐term business relationships is well established.  Limited research exists involving relationships between SMEs and banks. The paper presents an instrument to assess such relationships and is evaluated for validity and reliability with reference to the Nigerian SME‐banking environment. Design/Methodology / Approach: Various scale sets from existing studies are combined to assess commitment and advocacy and repurchase intention.  Data was collected from 199 SMEs via interviews with owners or senior managers.  Analysis involved exploratory factor analysis to determine the underlying data structure, with internal reliability assessment. Findings: Commitment is based on two components; affective and calculative, whilst advocacy and repurchase intention converged into a single factor.  This SME‐bank relationship has some way to mature with the banks affording only modest financial support, although SMEs' commitment and levels of loyalty appear ...

Is there a relationship between bank monitoring models and the level of shadow economy? This paper develops a model of optimal lending technology to study the relationship between local underground economic activity and banks' lending choices. In turn, as the aggregate level of informality and tax evasion increase, it becomes more profitable for banks to screen and supervise borrowers using more costly in-depth monitoring technologies. A large dataset of regional Italian data confirms these conjectures.

In this paper we quantify the differences between market and regulatory assessments of bank portfolio risk, and thereby demonstrate that larger differences significantly reduce corporate lending rates. Specifically, to entice borrowers, banks reduce spreads by approximately 4.3% following a one standard deviation increase in our measure for bank asset-risk differences. This is equivalent to an interest income loss of USD 2.03 million on a loan of average size and duration. The separate effects of market and regulatory risk are much less potent. Our study reveals a disciplinary-competition effect in favor of corporate borrowers when there is information asymmetry between investors and bank regulators.

Financial theory indicates that low interest rates hamper credit risk and profitability, two interrelated components of banks' balance sheets. Using a simultaneous equations framework, we investigate the effects of euro area monetary easing on cooperative banks' performance depending on their commitment to relationship lending. First, we find no evidence of a risk-taking channel of monetary policy for consolidated cooperative banks. Further, the profitability of relationship-based cooperative banks is more severely hit in a low interest rate environment than that of consolidated cooperative banks. This raises issues about the middle-term durability of relationship lending when rates hold "low-for-long." Finally, non-cooperative banks and relationship-based cooperative banks both increase credit risk under accommodating monetary policy. However, we suggest that these similarities do not occur for the same reasons: while non-cooperative banks prioritize profitability through higher credit risk when interest rates fall, relationship-based cooperative banks instead increase their capital buffers to ensure credit access to their customers, which mainly comprise small businesses and high-risk firms.

Financial theory indicates that low interest rates hamper credit risk and profitability, two interrelated components of banks' balance sheets. Using a simultaneous equations framework, we investigate the effects of euro area monetary easing on cooperative banks' performance depending on their commitment to relationship lending. First, we find no evidence of a risk-taking channel of monetary policy for consolidated cooperative banks. Further, the profitability of relationship-based cooperative banks is more severely hit in a low interest rate environment than that of consolidated cooperative banks. This raises issues about the middle-term durability of relationship lending when rates hold "low-for-long". Finally, non-cooperative banks and relationship-based cooperative banks both increase credit risk under accommodating monetary policy. However, we suggest that these similarities do not occur for the same reasons: while non-cooperative banks prioritize profitability...

We propose that relationship bankers are able to benefit their clients even after they indicate distress. Relationship bankers continually learn about their clients to reduce the asymmetric information problem, reduce adverse selection risk and manage loan risk. We examine the consequences of corporate disclosure, namely profit warnings, as a negative information-releasing event during the normal course of business and evaluate the evolving nature of relationship banking before and after such an event. We show that lenders generally increase the cost of loans, loan security and reduce loan maturity after profit warnings. The average loan spread increases by 17-37 basis points holding all else constant. However, borrowing from relationship lenders lowers the loan spread by 17 basis points compared to borrowing from non-relationship lenders, implying that relationship lenders are able to benefit borrowers. Moreover, borrowers often choose to remain with their relationship bankers due to more favorable loan terms and the high costs of switching lenders. Ultimately, these borrowers end up reducing their default risk and improving their profitability after the profit warning. Our results remain robust even when we control for firms that did not issue profit warnings. We conclude that relationship bankers efficiently use client information to provide effective financial intermediation, even after distress.

A substantial literature has investigated the role of relationship lending in shielding borrowers from idiosyncratic shocks. Much less is known about how lending relationships and bank-specific characteristics affect the functioning of the credit market in an economywide crisis, when banks may find it difficult to perform the role of shock absorbers. We investigate how bank-specific characteristics (size, liquidity, capitalization, funding structure) and the bank-firm relationship have influenced interest rate setting since the collapse of Lehman Brothers. Unlike the existing literature, which has focused chiefly on the amount of credit granted during the crisis, we look at its cost. The data on a large sample of loans from Italian banks to non-financial firms suggest that close lending relationships kept firms more insulated from the financial crisis. Further, spreads increased by less for the customers of well-capitalized, liquid banks and those engaged mainly in traditional lending business.

We study price formation on interbank markets. We develop a theoretical model by extending existing theories to explain observed facts that cannot be explained by these models. In particular, in our model we do not assume that banks use the interbank market only to close any funding gaps or surpluses, but allow them to be active as both lenders and depositors. We explain interest rate differentials through Bertrand competition with horizontally differentiated products. We show that there exists a Nash equilibrium in the model that allows all banks to meet their balance sheet constraints. The solution of the model takes the form of a simultaneous equation system where lending and deposit rates depend on each other. We estimate this equation system using three stage least squares. The simultaneity of loan and deposit rates is confirmed by several statistical tests, contradicting theories of portfolio separation between loans and deposits.

This paper reviews the background and current status of relationship banking in Japan. First, the composition and share of the banking sector in the total financial market are discussed along with the measures taken in the banking sector after the burst of the bubble economy. Second, relationship banking is defined with its merits and demerits. Third, the nature of relationship banking in Japan is argued. Finally, the effects of relationship banking are examined. The evidence from various theoretical and empirical studies has indicated that relationship banking reduces information asymmetry and risk, mitigates liquidity constraints and contributes as rescues in financial distress. However these benefits are often obtained by the firms at the cost of higher rents through higher lending interest rates.

L'Algérie ne peut espérer diversifier son économie tant qu'elle sous-estimera l'essor d'un système bancaire moderne privé, capable de jouer un rôle crucial dans le financement de l'activité économique et industrielle. C'est un préalable et une nécessité à toute politique de développement des PME. Si ces entreprises se financent essentiellement auprès des banques dans les économies avancées, il ressort qu'en Algérie, dont le système bancaire est largement dominé par des banques publiques, elles recourent le plus souvent à l'autofinancement, avant de solliciter en dernier ressort un apport bancaire qui n'est aucunement facile à obtenir. Ce resserrement des conditions de crédit pénalise l'essor de ces entités économiques créatrices de richesses et d'emplois. A cet effet, l'objectif principal de cet article est d'étudier la relation entre les entrepreneurs algériens et leurs banquiers : tenter de comprendre les fondements de l'ambiguïté qui caractérise cette relation, expliciter les causes du rationnement de crédit, et proposer une série de solutions de nature à réduire ce phénomène, notamment dans le cadre d'un financement bancaire relationnel.

This paper looks at the evolution of business banking relationships regarding the stability of the volume of trade between corporate clients and their banks. Ten cases of dyadic relationships were studied. For each relationship, we looked at the variations in trade volume both within calendar years (short periods of time) and throughout the duration of the relationship (long periods of time). Theses cases were compared in terms of their atmospheres (co-operation, accessibility, commitment, trust and conflict), the strength and the kind of bonds, and the existence (or not) of connected relationships. Both the bonds between clients and banks, and those to connected bank relationships seem to contribute to the stability of relationships. Also, there is no relation between the stability of a banking relationship and its atmosphere. Finally, ten factors were identified that can interfere with relationships for short periods of time: three factors concern the client (bargaining behaviour, power, and financial and economic situation), two factors concern the bank (personnel turnover and risk policy), and another two have to do with the transactions (cost, and financial and economic risk). Finally, three factors are 'external' to the relationships (connected relationships, market competitiveness, and sociopolitical/legal factors). Positive and negative impacts on relationships stability are discussed.

This paper explains the recent decline in bank asset quality using the notion of information reusability. Banks are viewed as information processors; they exist because of their advantage in extracting the surplus associated with the reusability of borrower-specific information. It is shown that a bank's incentive to screen loan applicants, and hence maintain the quality of its assets, depends on the surplus this screening can produce, which in turn depends on information reusability. Two recent changes in banks' operating environment are increased competitition and greater temporal volatility in borrower credit risks. The former has directly reduced banks' informational surplus while the latter has impaired information reusability. Hence screening expenditures have been reduced and the diminution of screening has lowered the quality of bank assets. It is also shown that an increase in deposit insurance premia has an effect similar to that of narrowing interest spreads and therefore will result in reduced asset screening and impaired asset quality.

The presence of venture capital in the ownership structure of U.S. firms going public has been associated with both improved long-term performance and lower underpricing at the time of the IPOs. In Japan, we find the long-run performance of venture capital-backed IPOs to be no better than that of other IPOs, with the exception of firms backed by foreign owned or independent venture capitalists. Many of the major venture capital firms in Japan are subsidiaries of securities firms that may face a conflict of interest when underwriting the venture capital-backed issue. When venture capital holdings are broken down by their institutional affiliation, we find that firms with venture backing from securities company subsidiaries do not perform significantly worse over a three-year time horizon than other IPOs. On the other hand, we find that IPOs in which the lead venture capitalist is also the lead underwriter have higher initial returns than other venture capital-backed IPOs. The latter result suggests that conflicts of interest influence the initial pricing, but not the long-term performance, of initial public offerings in Japan. Institutional Affiliation and the Role of Venture Capital: Evidence from Initial Public Offerings in Japan

Current practices of financial institutions in the US lack capability to differentiate-and accordingly underwrite-commercial energy efficiency investments from 'normal' real estate investments. This deficiency in underwriting on projects and features of their building systems appears to lead to increasing perceived risks of commercial lenders. Consequently, loans that arguably should be funded on their own merits are not funded or delayed, or suffer higher cost of borrowing. In order to improve current commercial underwriting practices, the objective of this study is to develop a protocol to accommodate financial decisions in favor of energy efficiency. Through a series of interviews with industry practitioners, this paper examines the process of commercial loan underwriting in light of suggesting changes using Target Value Design (TVD) that, in the end, will lead to establishing a TVD protocol for underwriters and their customers to use. This study argues that the TVD protocol can align work processes of various stakeholders better than is done in current practice. For validation, feedback from small, medium, and large banks was obtained. Future case studies will further test the applicability of the protocol. This is part 1 of a 2-part paper.

Current practices of financial institutions in the US lack capability to differentiate-and accordingly underwrite-commercial energy efficiency investments from 'normal' real estate investments. This deficiency in underwriting on projects and features of their building systems appears to lead to increasing perceived risks of commercial lenders. Consequently, loans that arguably should be funded on their own merits are not funded or delayed, or suffer higher cost of borrowing. In order to improve current commercial underwriting practices, the objective of this study is to develop a protocol to accommodate financial decisions in favor of energy efficiency. Through a series of interviews with industry practitioners, this paper examines the process of commercial loan underwriting in light of suggesting changes using Target Value Design (TVD) that, in the end, will lead to establishing a TVD protocol for underwriters and their customers to use. This study argues that the TVD protocol can align work processes of various stakeholders better than is done in current practice. For validation, feedback from small, medium, and large banks was obtained. Future case studies will further test the applicability of the protocol. This is part 1 of a 2-part paper.

This study analyzes the effect of information asymmetry on corporate cash holdings. Using various measures of information asymmetry, this study shows that companies that operate in environments with higher information asymmetry have smaller cash holdings. This study continues to find a negative relationship between information asymmetry and corporate cash holdings from a battery of sensitivity analyses, including the tests using different regression methods and the difference-indifference tests employing brokerage-firm merger and closure events. On the whole, the results support the monitoring cost hypothesis of cash holdings over the investment opportunities hypothesis.

The partial takedown phenomenon associated with bank loan commitments is examined in a dynamic context in which banks adjust commitment prices to client takedown behavior. The optimal takedown is an increasing function of client riskiness and a decreasing function of the time the client plans to remain with its present bank and the cost of switching to a new bank. Since the bank's learning is cumulative, the longer a client remains with its bank the smaller is the commitment price adjustment resulting from an aberrant takedown. The enhanced commitment price certainty, obtained with longevity of the client relationship, helps to explain client reluctance to switch banks. Since the optimal takedown is an increasing function of client riskiness under adaptive pricing, such pricing may serve the added purpose of providing information on client risk.

We derive empirical implications from a stylized theoretical model of bankborrower relationships. Banks' interest rate markups are predicted to follow a life-cycle pattern over the borrowing firms' age. Due to endogenous bank monitoring by competing banks, borrowing firms initially face a low markup, thereafter an increasing markup due to informatonal lock-in until it falls for older firms when lock-in is resolved. By applying a large sample of small unlisted firms and a new measure of asymmetric information, we find that firms with significant asymmetric information problems have a more pronounced life-cycle pattern of interest rate markups. Additionally, we examine the effects of concentrated banking markets on interest markups. Results indicate that markups are mainly driven by asymmetric information problems and not by concentration. However, we find weak evidence that bank market concentration matters for old firms.

We investigate whether banks price drought risk in the interest rates charged to corporate borrowers. The results show that banks do charge drought‐affected borrowers higher loan spreads. The spread increase is most pronounced among food industry borrowers. Our findings are robust to alternative drought measures. We also document that lenders with more experience in lending to drought‐affected food borrowers charge a lower drought risk premium, and borrowers' credit rating of investment grade can act as a mitigating factor on drought risk effects. Our study highlights that externalities from local weather shocks are relevant to the private debt market.

We also thank Aleksandra Baros for valuable research assistance. Finally, we are grateful to Huasheng Gao for sharing governance data and to John Asker, Joan Farre-Mensa, and Alexander Ljungqvist for sharing the venture capital availability instrumental variable.

Rising internatio)nal bank finanicinig to developing lending has become less "indiscriminate" and more coulitries hIas fLueled a debate on the behavior of these responsive to host conditionis over time. Responsiveness claimils. The auithors analyze claimlls from seven homiie to the latter becomlies less "pro-cyclical" as expOSure (lender) couintries on ten host (borrower) countries in increases. Finallv, foreign bank lending reacts more to Latin America. Thev' find that banks transimiit shocks positive thani to negative host shocks and is not from their homIIe cotlitries and chaniges in their claims oil significanltly curtailed during crises. other coulitries spill over to individuial hosts. However, Thlis paper-a prodtict of Finance, Developmnent Researchi Group-is part of a larger effort in the grouip to stidy foreign banik lendiig. Copies of the paper are available free from the \Vorld Bank,

This paper analyses the development of bank long-term funding over the last 13 years in Europe, US and Japan. We collected information on banks' long-term debt issuance for the years 2000-2012. Our sample includes all bond issues by banks headquartered in Europe, United States and Japan. We document the impact of the subprime crisis and the subsequent sovereign crisis on the volume, frequency, nature of instrument and cost of bank debt issuance practices. In particular, systemic crises deeply impacted on the cost and availability of bank long-term funding, with different effects depending on the issue's main features and the issuing bank main business model characteristics. The macro conditions of the country in which banks operate starts to become relevant since 2011, at the onset of the EU sovereign debt crisis, though differences among nationalities are appreciated by the market even before. Indeed, markets did not fully appreciate the evaluation of credit risk made by rating agencies and did not price the bonds accordingly to their rating class.

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The paper examines the causal impact of bank-firm interlocking directorates on a firm’s access to credit. We exploit matched bank-firm panel data containing information on the firms' loans and on the governing bodies of both the banks and the firms. To identify the connection premium, we adopt a difference-in-differences strategy and exploit the exogenous break of connection that occurs when the bank is placed under special administration and its board members are removed. Specifically, we focus on banks that were placed under special administration and compare the loans of firms that lost the connection with those of the unconnected firms, chosen through propensity score matching among borrowers from the same banks. We find that the loss of connection is associated with a significant and large drop in the firms' granted loans, and in particular, in the credit lines that can be unilaterally modified by the lender in the short term. We also show that the advantages of the c...

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