Does Capital Market Scrutiny Discourage Banks from Accommodating Distressed Borrowers?
55 Pages Posted: 13 Jan 2022 Last revised: 3 Jul 2023
Date Written: September 22, 2022
Abstract
To encourage banks to accommodate distressed borrowers during the Covid-19 pandemic, regulators redacted loan modification activity from each bank’s public regulatory filings so that banks could modify loans free from capital market scrutiny. This study examines whether capital market scrutiny does in fact discourage banks from making loan modifications, as posited by bank regulators. To test this question we exploit the fact that the SEC still required public banks to disclose the modifications, meaning that the type of bank that faces the most capital market scrutiny (public banks) had to disclose loan modifications, while the type of bank that faces the least capital market scrutiny (private banks) faced even less scrutiny of loan modifications due to lack of disclosure. Using a measure of the extent to which banks delay collection of loan payments, which we find to be highly correlated with actual modification activity disclosed by public banks, we do not find evidence of significant differences in loan modification activity between public and private banks during the pandemic. Prior to the pandemic we also do not find evidence of a difference in modification activity between these two groups, as measured by troubled debt restructurings. Overall, the results are not consistent with the idea that suppressing information about loan modifications encourages additional modification activity.
Keywords: banking, lending, troubled debt restructurings, loan modifications, COVID, pandemic, disclosure
JEL Classification: M41, M48, G21
Suggested Citation: Suggested Citation