Tram Vu

Why Do Banks Syndicate Loans? New Empirical Evidence

This paper explores the risk-selling versus informational roles of a lead banks decision to syndicate a loan. It investigates whether this decision conveys private information which may in turn affect the loan price. The results support both the risk-selling and information-selling hypotheses in the presence of an endogenous syndicate decision. Syndications force the lead banks to convey ex ante private information to potential syndicate members, who accept lower loan yields as a result. Meanwhile, the lead banks may try to recover their information-selling costs by charging higher commitment fees; these may outweigh the benefits of reduced yields to potential borrowers.

Credit Unions, Market Discipline, and the Australian Deposit Guarantee

This paper examines market discipline of Australian credit unions, and the impacts of the global financial crisis and the 2008 deposit guarantee scheme. The prior literature has focused on the market discipline of banks rather than credit unions. Using a unique sample of 204 Australian credit unions, we find market discipline of credit unions prior to 2008. During the global financial crisis, market discipline weakened, which is inconsistent with the wake-up call effect documented in the prior literature. Following the introduction of the 2008 guarantee, depositors were no longer reacting to credit union risk-taking, so no market discipline was observed after the guarantee. Even after the guarantee coverage was reduced to AUD 250,000 depositors were still not sensitive to credit union risk-taking.

The additional cost of hedging in foreign currency loans

Foreign currency denominated loans (FCDLs) are an important part of corporate funding as well as an operational risk management tool. We show that domestic borrowers use FCDLs to hedge their foreign exchange risk exposure. FCDLs are found to carry an interest rate premium over domestic currency loans after controlling for borrower characteristics, loan characteristics, and macroeconomic conditions. We argue that borrowers are willing to pay this premium since the marginal benefit of FCDLs as a natural hedge outweighs the marginal cost. From a lender’s perspective, this premium reflects a compensation for additional foreign exchange risk exposure and intensified monitoring efforts. These results are robust to endogeneity-corrected estimations. JEL Classification: G21, G32

Drought Risk in Private Debt Contracts

This study investigates the effect of climate change risk – proxied by Palmer Drought Severity Index (PDSI) – on private debt contracts. We raise a very simple yet important question: Do banks include drought risk in their pricing model of business loan contracts? The result indicates that banks indeed do take into account drought risk in their pricing model. Intuitively, the effect is most pronounced among food industry borrowers where drought has a direct impact. We find that for food industry borrowers, banks increase loan spreads by 6 basis points for every one-step increase of drought level in the 12 months prior to the loan commencement. The magnitude of this effect drops to 2 basis points for non-food borrowers. We also report that covenant intensity increases for borrowers in the food industry when the drought level is higher in the 12 months before loan origination. These results point towards drought risk being viewed as a systematic risk by credit providers. It adds a new dimension to credit risk evaluation and attracts a price premium whose magnitude is stronger for food industry borrowers.

Australian Foreign Currency Loans: Hedging or Arbitrage?

Foreign currency denominated loans (FCDLs) are an important part of corporate funding as well as an operational risk management tool. We show that Australian borrowers use FCDLs to hedge their foreign exchange risk exposure. FCDLs are found to carry an interest rate premium over domestic currency loans after controlling for borrower characteristics, loan characteristics and macroeconomic conditions. We argue that borrowers are willing to pay this premium since the marginal benefit of FCDLs as a natural hedge outweighs the marginal cost. From a lenders perspective, this premium reflects a compensation for additional foreign exchange risk exposure and intensified monitoring efforts. These results are robust to endogeneity-corrected estimations.

The informational content of oil and natural gas prices in energy fund performance

This paper explores whether the informational content of oil and gas prices has an impact on energy mutual fund returns. We first re-visit the relationship between oil and gas prices and energy index returns; our findings confirm that better energy index performance is associated with oil and gas price increases. Using the Fama and MacBeth (1973) two-stage regressions, we find that the information contained in oil and gas prices also plays a significant role in explaining energy mutual fund returns, making these an alternative investment to direct energy stock investments.