R&R Review of Financial Studies
We document three facts about nonbank lending in the syndicated loan market. First, nonbank lending is more than twice as cyclical as bank lending. Second, declines in nonbank lending explain most of the declines in syndicated lending during the Great Recession and COVID-19 crisis. Third, cyclicality in nonbank lending is matched by cyclicality in nonbank funding flows. The higher nonbank cyclicality is not explained by either the health or monitoring ability of banks, nor by bank-borrower relationships. Instead, it appears to be driven by nonbank funding instability. We highlight frictions in CLOs and mutual funds that contribute to this instability.
We challenge theories that lead arrangers retain shares of syndicated loans to overcome information asymmetries. Lead arrangers frequently sell their entire loan stake – in over 50% of term and 70% of institutional loans. These sell-offs usually occur days after origination, with lead arrangers retaining no other borrower exposure in 37% of sell-off cases. Counter to theories, sold loans perform better than retained loans. Our results imply that information asymmetries could be lower than commonly assumed or mitigated by alternative mechanisms such as underwriting risk. We also provide guidance for Dealscan users on how to approximate loan ownership after origination.