Since the beginning of 2020, COVID-19 has prompted a surge in economic uncertainty, causing interruptions in business supply chains and revenues that now threaten the survival of companies. Companies struggling to meet their fixed expenses and existing obligations respond by increasing the demand for loans, but banks are inclined to reduce the supply. In our new paper “Bank Lending during the COVID-19 Pandemic,” we examine how the COVID-19 crisis affects the pricing and structure of large corporate loans in the global syndicated loan market.

Overall we consider more than 4,000 loans granted from 77 banks to 820 firms in 28 different countries. Our examination concerns the 2019-2020 period, therefore contrasting the year of the pandemic with the year before. To capture the effect of the COVID-19 crisis, we consider a measure reflecting the “concerns” of lenders and borrowers about COVID-19 by looking at transcripts of quarterly conference calls held by each individual lender and borrower.[1] By employing this measure, we distinguish the effect on loan prices stemming from the impact of the COVID-19 crisis on lenders as opposed to its impact on borrowers. The former reflects the overall credit risk arising from the lender’s total lending operations and overall funding constraints; therefore, the measure captures a lending bank’s risk aversion and ability to supply credit, the factors that shape bank loan supply. The impact of COVID-19 crisis on the borrower reflects demand-side forces related to the borrowing firm’s credit risk and ability to repay the loan.

Our results show that the cost of syndicated loans is higher for lenders and borrowers that are affected more by the COVID-19 crisis. We attribute this increase to supply-side (primarily) and demand-side (secondarily) forces, as loan prices respond to both lender and borrower concerns. Specifically, the loan prices rise by approximately 6.6 percent in response to a growing impact of the COVID-19 crisis on a lender, while the equivalent increase attributed to the borrower amounts to 3 percent. Practically, greater impact of the COVID-19 crisis , higher are the interest payment for the borrowing firms. For loans of average size and duration, firms face additional interest of $5.16 million and $2.37 million as a direct effect of the COVID-19 crisis on lender and borrower respectively.

To limit the spread of the COVID-19, governments adopted various containment and closure policies. Naturally, these restrictions and the consequent pause in economic activity increased the demand for credit by businesses as they struggled to meet their routine expenses. They potentially reduced the supply of loans because banks have become reluctant to lend to less creditworthy borrowers. We find that this dynamic is reflected in the cost of credit, as more stringent measures are associated with higher loan prices, confirming the disruptions caused by the pandemic to economic activity. These disruptions triggered complementary responses by monetary-policy authorities to ensure a smooth flow of credit to the struggling businesses. For example, central banks embarked on a massive effort to lower borrowing costs and stimulate bank lending. Among the measures adopted were the lowering of interest rates and the emergency purchase of public and private sector securities. According to our findings, these measures were only able to limit the hike in loan prices resulting from the COVID-19 crisis impact on a borrower.

To understand what type of lenders and borrowers are mainly affected by the COVID-19 crisis, we look at their financial health and performance. We find that loans are more expensive when granted from larger, better-capitalized but less-profitable banks. However, for larger and non-financially constrained borrowers that rely more on equity financing, the aggravating effect of the pandemic is less potent, if at all present. This is the case especially for firms listed on multiple stock exchanges, as these firms benefit from greater financing flexibility. We further find that certain country traits act as a counter-force to the exacerbating effects of the pandemic. Firms headquartered in countries with a strong institutional environment, such as stronger property rights and protection for creditors, can attract institutional investors and therefore receive less expensive loans.

Our study raises the question of whether borrowers can do anything to mitigate the adverse effects of the pandemic. We identify two strategies. The first is resorting to banks with which they have repeatedly interacted; these relationship loans are granted at a lower cost relative to non-relationship ones. From a similar perspective, borrowing from bank subsidiaries operating in the borrowers’ countries eases the adverse effects stemming from the COVID-19 crisis .

Finally, we document that the effect of the COVID-19 crisis goes beyond the price terms of syndicated loan deals. Due to its growing impact on lenders, loans are granted from broader syndicates where the loan share is divided fairly equally among them. Although this tactic usually leads to lower loan prices in normal times, during the COVID-19 crisis it prompts higher prices, as syndicate members require additional compensation to deal with banks affected by the virus.

In sum, growing impact of the COVID-19 crisis is associated with an increase in bank loan prices, which is exacerbated by the various containment policies at the national level. Moreover, central bank actions have been only partially successful in mitigating the adverse effects of the pandemic. Importantly, the current crisis exerts an asymmetric effect on loan prices, which is contingent on bank and firm financial health and performance, the presence of lending relationships, and the degree of institutional quality in the borrowers’ countries.

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[1] For more information see “Hassan, T. A., Hollander, S., van Lent, L., and Tahoun, A. (2020). Firm-Level Exposure to Epidemic Diseases: Covid-19, SARS, and H1N1. (No. w26971). National Bureau of Economic Research.”

This post comes to us from professors Iftekhar Hasan at Fordham University, Panagiotis N. Politsidis at the Audencia Business School, and Zenu Sharma at St. John’s University. It is based on their recent paper, “Bank Lending during the COVID-19 Pandemic,” available here.