Banks play a role in the corporate governance of firms in addition to acting as debt financiers around the world. Banks can have additional control over the borrowing firms by representation on its board of directors or being a shareholder through direct equity stakes or indirectly through holdings by the bank’s fund management divisions. We investigate the effects of these bank-firm connections on the global syndicated loan market. We find that banks are more likely to act as lead arrangers in loans for firms where banks have control rights. Additionally, we find that banks charge higher interest rate spreads and face less credit risk after origination when they lend to these closely connected firms. Our findings suggest that the influence of banks over firms ’ governance seems to accrue mostly to the banks ' benefit. JEL classification: G21, G32

Are universal banks better underwriters? evidence from the last days of the glass-steagall act by Dario Focarelli,

The revaluation of collateralized debt obligations (CDOs) plays a significant role in the ongoing 2007-2009 credit crisis. Starting in August 2007, a large amount of initially AAA rated CDO securities are substantially downgraded, some directly to junk grade. This paper explores two structural sources of CDO mispricing: modeling difficulty and data limitation. Simulating the frailty correlated default model of Duffie, Eckner, Horel, and Saita (2008), we show that CDO mis-pricing can be partly attributed to model misspecifications, as well as limited availability of historical data on CDO collateral assets. This simulation result is consistent with empirical evidence on historical performance of a sample of 279 CDOs. The frailty model estimated with adequate historical data would have reduced the amount of AAA rated CDO securities by 12 % on average. The frailty model has predictive power for the subsequent downgrading of AAA rated CDO tranches. Our study addresses practical issues on financial innovations and provides guidance for corresponding risk management. We thank for remarks from Andrew Carverhill, Wing Suen and seminar participants at the university

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Management University. It has been accepted for inclusion in Research Collection BNP Paribas Hedge Fund Centre by an authorized administrator of

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