Forward Guidance and Corporate Lending

We suggest that forward guidance, via publicly committing the central bank to future actions and creating associated expectations, fundamentally affects bank lending decisions independently of other forms of monetary policy. To test this hypothesis, we build a forward guidance measure based on the language used in the Federal Open Market Committee meetings and match this measure with syndicated loans. Our results show that expansionary forward guidance decreases corporate loan spreads and that this effect is stronger for well-capitalized banks lending to riskier firms. Forward guidance also affects nonprice lending terms, such as covenants, performance pricing provisions, and the loan syndicate structure. Additionally, banks tend to initiate new lending relationships with lower spreads after forward guidance issuance.

Confidentiality in loan credit agreements

PurposeThis study has two primary objectives. First, it analyzes the information content of confidentiality strictness in corporate loan credit agreements. Second, it examines how confidentiality strictness impacts covenant design, lending syndicate structure and loan pricing.Design/methodology/approachUsing a sample of 6,327 loan credit agreements originated by US public firms in the period of 1996–2017, this study measures the confidentiality strictness in loan contracts using textual analyses that capture the appearance of confidentiality-related words and the length of confidentiality provision. All regressions include relevant loan characteristics, firm-specific accounting variables, industry and year fixed effects. To address the endogeneity concern, the paper uses borrowing firms' rival cash holdings and R&D expenditures to instrument for confidentiality strictness in two-staged least square regressions.FindingsBorrowers which have higher R&D and operate in more competitive product markets have tighter confidentiality policies. Furthermore, this study reveals that confidentiality strictness is negatively associated with the imposition of financial covenants, especially performance covenants. Loan contracts for borrowers with stricter confidentiality on average have more relaxed covenant intensity, measured by the number of covenants. The study also shows that stricter confidentiality attracts finance companies, which have strong expertise in product markets of their parent firms, into the lending syndicate. However, confidentiality-conscious borrowers with higher degree of information asymmetry are subject to higher loan spreads.Originality/valueThis study provides the first examination of confidentiality policies in loan contracts and supports the idea that loan provisions are not simply made of “boilerplate” language. The results suggest that, for confidentiality-sensitive borrowers, the greater exposure to product market competition helps control managerial slack and substitute monitoring from financial markets.

On aspect of reducing bank risks of corporate loan

The article considers stagnation of lending by Russian commercial banks to corporate borrowers in the recent years. It has been proved that banks are more willing to invest their free credit resources in the financial sector, rather than the real sector of the economy, or place them on correspondent accounts and deposits with the Bank of Russia in the conditions of a continuing liquidity surplus, as well as taking into account the growth of overdue loan arrears. The necessity of stimulating measures at the micro-economic and macro-economic levels is justified. The basic condition for reducing credit risks is not only to improve the financial condition of borrowers and increase the profitability of their activities, but also to build a carefully verified, risk-oriented mechanism for reviewing loan applications. The elements of the new lending process are listed: updated mechanism for setting limits and risk profiles, mandatory participation in the approval of an underwriter’s application, using models in the analysis of transaction risk. The participants and main operations in the new lending process are illustrated. The stages of considering an application of a potential borrower for a loan are discussed in detail. Measures to support banks lending to the economy at the state level are also formulated, among which are: limiting the ability to invest borrowed funds in financial instruments, improving the legal framework for the practical large-scale development of mergers and acquisitions, developing a long-term concept of the investment process for using the internal resources of the country’s economy, foreseeing tax benefits, refinancing commercial banks on preferential terms for investment projects, expanding the practice of issuing government guarantees for bank loans, etc.

Russia will need to tighten corporate loan policies

Significance Debt restructuring was offered to good and bad companies alike. This indiscriminate approach delayed insolvency that would otherwise have overtaken 'zombie' companies. Impacts Permanent shifts in demand, value chains and consumer preferences will make it more difficult for banks to assess companies' credit quality. After last year's 2020 lending and restructuring spree, smaller banks may roll over rather than write off bad loans. The low number of new company registrations will, among other factors, deter recovery in the labour market this year.