Ebook Foreign banks in syndicated loan markets
Foreign bank activity has increased dramatically in recent years as barriers to foreign bank entry and activity have largely broken down. In many countries foreign banks are responsible for a large fraction of bank lending (Clarke, Cull, Peria, and Sanchez 2003). Foreign banks are particularly active in the syndicated loan markets. In our sample of twenty four European countries, a foreign bank acts as the lead arranger in about one third of all deals and participates as lead arranger together with domestic banks in another forty percent of all deals. Consequently less than one third of all deals are domestically arranged without at least one foreign lead arranger. Moreover, foreign bank underwriting of syndicated loans is found throughout the European markets, in small countries as well as the largest countries with the most sophisticated domestic financial systems. Our objective is to gain an understanding of why the share of foreign banks in syndicated loan markets is so high. Our motivation is that the standard explanations in the literature for foreign bank activity are not always consistent with the levels and patterns of foreign bank participation in syndicated loan markets.
The syndicated loan market provides a good laboratory to examine foreign banking activity because it is large and has many cross border features. In this market firms can go to either domestic or foreign banks (or a consortium of both) that will syndicate a loan to buyers in any market. We will use detailed data on syndicated loans, including interest rates, from Dealscan. We match the loan data with information about the borrowing firms from Amadeus. Thus, our data set includes detailed information on lenders and borrowers throughout Europe for the period 1995 - 2007. Furthermore, by focusing on Europe, we have a sample of many countries with both large and small financial markets.
Although syndicated loans are often viewed as a hybrid with characteristics of bank loans and public debt, they are closer to bank debt because of the role of the lead arranger (Dennis and Mullineaux 2000 and Sufi 2007). The lead arranger drafts the loan terms, monitors compliance and typically holds the largest share of the loan. Of course, the fact that the loan is syndicated and that only a part of it is likely to remain on the balance sheet of the arranger creates pricing incentives that might be different than in other debt markets (Harjoto, Mullineaux, and Yi 2006). However, our interest is not the comparison of syndicated loans to other sources of financing but in the activities of foreign arrangers in the syndicated loan market and differences in their market role across large and small financial systems.
The literature on foreign banks emphasizes the disadvantages faced by foreign banks. Foreign banks have less local, market or firm specific information (so called ’soft’ information) than their domestic counterparts and must also overcome cultural and bureaucratic barriers in the host country (see Khanna and Palepu 1999, Buch 2003, Petersen and Rajan 2002; Mian 2006). Given the costs imposed by these barriers, the literature provides some specific reasons why foreign bank entry takes place. First, foreign banks tend to follow their customers abroad when they undertake FDI or enter the foreign markets (Buch and Golder 2001). When the foreign bank serves existing customers from their home country, informational and cultural barriers are basically not present. Second, foreign banks might have a technological advantages (e.g. in form of a better monitoring technology) over domestic banks and thus operate more efficiently. Foreign bank entry occurs because the technological advantages out weigh the informational disadvantages.
The first motive for foreign banking activity (follow-your-customer) is unlikely to account for the large share of foreign banking activity that we observe in the syndicated loan data. The second motive (the technology advantage over domestic banks) might be present in small or less developed financial systems. Small financial markets suffer from diseconomies of scale (Bossone and Long 2001, Andritzky 2007) and may be unable to provide the range of services found in major financial centers from sophisticated equity markets to the competitive provision of banking services. The disadvantages from market size provide a motive for foreign bank entry into these markets. In large developed financial markets, it is however unlikely that foreign banks have a technological advantage over their domestic counterparts. So it remains unclear what motives drive foreign banking activity in large developed financial markets.
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