Conference for helpful comments and suggestions. The analysis expressed herein does not necessarily reflect the views of the Federal Reserve Bank of New York or the Federal Reserve We use a large matched sample of individual loans, borrowers, and banks to investigate whether bank financial health affects terms of lending, holding constant proxies for borrower risk and information costs. In particular, we focus on measuring effects of borrower and bank characteristics on loan interest rates; we also investigate implications of borrower and bank characteristics for indirect measures of credit availability. Our principal findings are six. First, even after controlling for borrower risk and information costs, the cost of borrowing from low-capital banks is higher than the cost of borrowing from well-capitalized banks. Second, this cost difference is traceable to borrowers for which information costs and incentive problems are a priori important. Third, weak bank effects on the cost of funds are higher in periods of rising interest rates. Fourth, estimated weak bank effects remain even after controlling for unobserved heterogeneity in the matching of borrowers and banks. Fifth, weak bank effects are quantitatively important only for high-information-cost

A number of studies suggest that banks involved in mergers and acquisitions tend to reallocate their loan portfolio generating welfare effects for borrowers of the just-merged institutions. Gains from bank mergers may be offset by increases in market power and negative informational effects on the availability of credit of borrowers that depend on relationship-based lending. On the other hand, other borrowers may benefit if bank mergers increase efficiency and credit capacity and they can extract some of the gains. We test these hypotheses employing a large sample of privately owned firms and analyze if their credit availability is affected by the involvement of one or more of their lenders in a merger or an acquisition. Following the literature on investment and financing constraints, we also test whether banking consolidation affects the investment-cash flow sensitivity of borrowers of banks that have merged. Finally, we focus on the effects of bank mergers and acquisitions on firms that should be more sensitive to disruptions in credit markets i.e. those that are small, rely on few banks, have high observed credit risk. JEL Classification: G21, G34.

In a partial-equilibrium model, removing a binding constraint creates value. However, in general equilibrium, the stakes of other parties in maintaining the constraint must be examined. In financial deregulation, the fear is that expanding the scope and geographic reach of very large institutions might unblock opportunities to build market power from informational advantages and size-related safety-net subsidies. This paper reviews and extends event-study evidence about the distribution of the benefits and costs of relaxing longstanding geographic and product-line restrictions on U.S. financial institutions. The evidence indicates that the new financial freedoms may have redistributed rather than created value. Event returns are positive for some sectors of the financial industry and negative for others. Perhaps surprisingly, where customer event returns have been investigated, they prove negative.

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International Settlements, and from time to time by other economists, and are published by the Bank. The papers are on subjects of topical interest and are technical in character. The views expressed in them are those of their authors and not necessarily the views of the BIS. © Bank for International Settlements 1998

Albany seminar participants for their helpful comments. The Valuation Effects of Bank Loan Ratings in The Presence of Multiple Monitors Studies have shown that when two information providers or outside auditors exist, the value provided by the second one will be decreased by the actions of the first. Capitalizing on the highly similar functions performed by banks and rating agencies, this paper examines the informational value of the credit ratings of bank loans. Further, it provides evidence on whether rating agencies duplicate the certifying and monitoring roles played by banks. The significant market reaction to negative credit rating announcements found suggests that these rating actions convey information to the capital market beyond that provided via the bank loan approval and renewal process. 2

The paper analyzes the information and agency cost effects of bank equity stakes in a universal banking system where banks can also be shareholders in borrowing firms. We test the agency and signaling hypotheses explaining the bank motivations for holding equity of borrowing firms in the Spanish market and we analyze the share abnormal returns around the announcements of bank equity holdings. The results are more consistent with the signaling explanation because the announcements of bank equity stakes only have a positive information effect when the bank increases its debt in the firm. A simple theoretical model consistent with the empirical results is developed.

This study investigates the relationship between the borrowing firm’s abnormal loan announcement return and the lending bank’s monitoring ability. We use new, well-specified proxies for the bank’s monitoring ability to isolate and examine the effect of superior monitoring on the value added to the borrower. A number of recent studies have suggested that bank loan relationships, and hence the related monitoring services, no longer matter. In contrast to these studies we find a strong positive relationship between our proxies and the borrowing firm’s abnormal return in the 1995 to 1999 period, suggesting that superior monitoring banks add more value to the borrower. Corresponding author: Fax DOES THE BANK’S MONITORING ABILITY MATTER? There is an extensive empirical literature on the positive abnormal announcement return realised by borrowers of bank loans (James (1987)). This positive market reaction reflects the value added to the borrowing firm by the announced bank loan. 1 Given that other financing announcements (e.g. public issues of debt and equity) are associated with a negative or