Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/191616
Authors: 
Colonnello, Stefano
Koetter, Michael
Stieglitz, Moritz
Year of Publication: 
2019
Series/Report no.: 
IWH Discussion Papers No. 3/2019
Abstract: 
Theoretically, bank's loan monitoring activity hinges critically on its capitalisation. To proxy for monitoring intensity, we use changes in borrowers' investment following loan covenant violations, when creditors can intervene in the governance of the firm. Exploiting granular bank-firm relationships observed in the syndicated loan market, we document substantial heterogeneity in monitoring across banks and through time. Better capitalised banks are more lenient monitors that intervene less with covenant violators. Importantly, this hands-off approach is associated with improved borrowers' performance. Beyond enhancing financial resilience, regulation that requires banks to hold more capital may thus also mitigate the tightening of credit terms when firms experience shocks.
Subjects: 
bank monitoring
covenant violations
syndicated loans
business cycle
JEL: 
G21
G32
G33
G34
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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