Anthony Saunders

• New York University

We investigate the predictive power of loan spreads for forecasting business cycles, specifically focusing on more constrained, intermediary-reliant firms. We introduce a novel loan-market-based credit spread constructed using secondary corporate loan-market prices over the 1999 to 2023 period. Loan spreads significantly enhance the prediction of m...

We analyze depositor discipline using auctions of unsecured money market deposits of firms to banks. In each auction, only the firm observes the banks and their interest rate bids. We observe that deposit interest rate bids increase with bank risk. Conditional on the same interest rate bid and firm–bank relationship, depositors select less risky ba...

Studies find that during the 2007-2009 global financial crisis, loan spreads rose and corporate lending tightened, especially for foreign borrowers (a flight-home effect). We find that banks in countries with explicit deposit insurance (DI) made smaller reductions in total lending and foreign lending, experienced smaller increases in loan spreads,...

Corporate borrowing has substantially changed over the last two decades. In this article, we investigate changes in borrowing of US publicly listed firms along trends in five key areas: ( a) the funding mix of firms and the importance of balance-sheet versus off-balance-sheet borrowing; ( b) the costs of corporate borrowing; ( c) trends in nonprice...

The multinational syndicated loan market has crossed the $7 trillion threshold. Prior literature argues that weak borrower country's creditor rights is the main limiting factor to cross‐border lending. We find that lender country's creditor rights can partly substitute for weak borrower creditor rights if a lender is from a better creditor rights c...

A unique but mostly unexplored feature of banks in debt markets is that they can either self-issue or use third-party underwriters. We analyze the importance of information sharing concerns, the need for certification and the value of underwriter distribution networks in two debt underwriting frameworks: the bank choice of self-underwriting versus...

We find that chief executive officers and chief financial officers exert significant individual effects on bank risk. Manager transitions, including transitions generated by plausibly exogenous manager departures, lead to abnormally large changes in bank risk. We demonstrate that the effects of managers on bank risk are sizable and manager-specific...

We present a pricing model of bank bailout insurance guarantees against tail risk and empirical evidence that provides a rational explanation why big bank equities “underperform” relative to small banks during normal times while they “overperform” during crises. A new measure accounting for left-tail risk protection against losses conditional on a...

We document a 24% decline in loan issuances in the UK syndicated loan market after the Brexit vote relative to a set of comparable loan markets. The decline in lending is driven by a pervasive reduction in demand by UK firms. Changes in GDP forecast around the Brexit vote explain about 61% of the decline in lending. We do not find evidence, however...

Considerable debate surrounds how the US government's TARP bailout intervention has affected the risk-taking and moral hazard behavior of U.S. banks around the global financial crisis. We examine this issue with a focus on lottery behavior introducing MAX/MIN as a new measure of lotteryness in banking to capture the loss protection from bank bailou...

We examine the impact on a firm when it is forced to switch its bank relationship from one branch to another branch of the same bank, and how the firm’s information opacity (as proxied by the frequency with which the firm provides financial statements to the bank) moderates the consequences of relationship loss. We find the effect depends on the re...

We investigate the extent to which the scheduled release of macroeconomic indicators affects the acquirer's value in Mergers and Acquisitions (M&As). We find that M&As announced on days of the release of key macroeconomic indicators (i.e. indicator days) realize higher announcement period risk-adjusted returns compared to counterparts announced on...

One of the most dramatic trends in banking since the 1980s has been the secular movement away from core banking and interest generating activities towards enhanced reliance on non-interest-generating activities that focus largely on fees and trading profits. In this paper, we draw on a dataset covering nearly a million quarterly observations on mor...

Monetary policy influences a wide range of Mergers and Acquisitions (M&A) outcomes. First, an increase in the federal funds rate predicts a negative market reaction to M&A announcements, an increase in the likelihood of deal withdrawal, and significant financing challenges for the acquirer in the post-acquisition phase. Second, M&As announced durin...

This paper investigates whether monitoring by bank lenders affects CEO incentives of borrowing firms. We find that an increase in bank monitoring incentives significantly reduce the sensitivity of CEO wealth to stock return volatility (Vega). The results are more profound when bank lenders are more powerful and reputable and have a prior lending re...

Syndication increases the overlap of bank loan portfolios and makes them more vulnerable to contagious effects. We develop a novel measure of bank interconnectedness using syndicated corporate loan portfolios, overlap based on industry and region, and different weights such as equal weights, size and relationships. We find that interconnectedness i...

This paper investigates trading patterns in target and acquirer firms prior to public announcement of M&A deals, a corporate event in which group based co-offence has been anecdotally documented. Our analysis differentiates whether such trading is primarily conducted by hedge funds with short-term investment horizons as opposed to other short horiz...

We analyze pricing differences between U.S. and European syndicated loans over the 1992–2014 period. We explicitly distinguish credit lines from term loans. For credit lines, U.S. borrowers pay significantly higher spreads, but lower fees, resulting in similar total costs of borrowing in both markets. Credit line usage is more cyclical in the Unite...

We find that banks with capital and liquidity constraints are more likely to use credit risk transfer (CRT) instruments, including the credit derivative and the secondary loan markets. Relationship lenders and lead syndicate lenders are more likely to hold loans on their balance-sheets regardless of borrowers' riskiness. Finally, we find a separati...

More than 80% of U.S. syndicated loans contain at least one fee type and contracts typically specify a menu of spreads and fee types. We test the predictions of existing theories on the main purposes of fees and provide supporting evidence that: (1) fees are used to price options embedded in loan contracts such as the drawdown option for credit lin...

This study assesses whether the implementation of Regulation Fair Disclosure (Reg FD) has affected the quantity and quality of information in credit markets. We find that, after Reg FD, borrowing from new lenders was associated with a higher loan spread. We also document that, after Reg FD, (1) borrowers became more dependent on relationship lendin...

Tracing the SEC ban on the short selling of financial stocks in September 2008, this paper investigates whether such selling activity before the 2008 short ban reflected financial companies’ risk exposure in the subprime crisis. Evidence suggests that short sellers sold short stocks that had the greatest asset and insolvency risk exposures, and tha...

Banks distribute corporate debt by selling their reputation as underwriters to investors in debt markets. Nevertheless, a little explored area is the certification role of banks in placing their own bond debt. In particular, the bank-specific alternative choice of self-underwriting versus the exclusive use of third-party underwriting. Moreover, ban...

We investigate the role of executive-specific attributes (or ‘styles’) in explaining bank business models beyond pay-per-performance incentives. We decompose the variation in business models and document that the ‘style’ of members of a bank’s top management team is reflected in key bank policy choices. Manager styles far outrank executive compensa...

Do banks use credit default swap hedging to substitute for loan sales? By tracking banks’ lending exposures and CDS positions on individual firms, we find that banks use CDS hedging to complement rather than to substitute for loan sales. Consequently, bank loan sales are higher for firms that are actively traded in the CDS market. In addition, we f...

Two large financial institutions recently settled allegations of selective disclosure of private information from supply-side analysts to hedge fund clients. These allegations lead us to explore two research questions: How widespread is this transfer of private information between analysts and hedge funds? Is there evidence that hedge funds trade a...

The optimum scope of bank activities is central to many proposals for banking system reform. For example, a core component of the Dodd-Frank Act (2010) and regulatory proposals in the UK and the EU has been the concept of “ring-fencing” – i.e., restricting banks’ activities to their core retail and wholesale financial intermediation functions. It i...

The authors are the Max L. Heine and John M. Schiff Professors of Finance, Stern School of Business, NYU. This is an updated and revised paper from the authors report on "An Analysis and Critique of the BIS Proposal on Capital Adequacy and Ratings," (submitted to the BIS and published in the Journal of Banking & Finance, Vol. 25, #1, January, 2001)...

Recent research finds that poorer individuals make financial mistakes when the decisions are difficult and rare. We examine who makes financial mistakes involving decisions that are easier and more frequent – specifically, the inadvertent failure to pay monthly credit card balances when sufficient funds are available. On the one hand poorer individ...

This paper examines the dynamic allocation of control rights in private debt contracts of firms that repeatedly borrow in the syndicated loan market using a hand-collected sample of loans extended to U.S. firms during the 1996 to 2010 period. Following covenant violations, subsequent new loans carry 18bps higher spreads and include more and tighter...

The regulatory system has taken 150 years to develop in the US. Even today it is far from unified with four supervisory “agencies” overseeing banking organizations, i.e., 50 State Regulatory bodies, the OCC, the FDIC and the Federal Reserve, with a wide variety of individual and often overlapping powers such as in examination and supervision. The E...

Fees are an important part of the total cost of corporate borrowing. More than 80% of US syndicated loans contain at least one fee type and payments from fees can easily exceed interest payments. We find that the scope of relationship benefits extend beyond spreads, in particular, relationship loans are associated with lower upfront fees and lower...

We identify a group of lenders specializing in syndicating tradable loans (referred to as transactional lenders, “TLs”). We find that transactional lender-led loans (TL-led loans) are more likely to be resold into the secondary loan market and involve a greater number of non-bank institutional lenders than relationship lenders-led loans (RL-led loa...

Carey and Nini (2007) provide evidence that interest rate spreads on syndicated loans differed systematically between the European and the US market during the 1992 to 2002 period. Loan spreads in Europe are, on average, about 30 basis points smaller than in the US. We show that accounting for unused fees (AISU) fully explains the pricing puzzle fo...

This paper examines how the implementation of Regulation Fair Disclosure (Reg FD) affected credit markets. We show that after Reg FD, switching to non-relationship lenders was associated with higher costs of debt and borrowers were more dependent on relationship banking with lead lenders retaining a larger proportion of the loans they syndicated. I...

Using primary and secondary loan market data, we identify a group of lenders specializing in syndicating tradable loans (referred to as transactional loan originators, “TLOs”). We compare TLOs with relationship lenders (“RLs”) by examining the probability of loan resale, the institutional participation in TLO-led loans versus RL-led loans. In addit...

Financial Architecture, Systemic Risk and Universal Banking in the United States Relying on various underlying drivers, consolidation has been a fact of life in the wholesale financial services sector, resulting in fundamental changes in the financial architecture and public exposure to systemic risk. Moreover, financial sector reconfiguration has...

Are borrowers rewarded for repaying their loans? This paper investigates the consequences of covenant violations on subsequent loans to the same borrower using a hand-collected sample of US syndicated loans during the1996 to 2010 period. We find that covenant violations have substantial negative effects for borrowers in subsequent loans. Our result...

This paper investigates recent allegations regarding the misuse of private insider information by hedge funds prior to the public announcement of M&A deals. We analyze this issue by using a unique and comprehensive data set which allows us to analyze the trading pattern of hedge funds around corporate mergers and acquisitions in both the equity and...

This paper examines how the implementation of Regulation Fair Disclosure (Reg FD) affected credit markets. We argue that, although disclosing private information to lenders is exempt from Reg FD, this regulation imposed an additional disclosure risk on borrowers because this exemption was conditional upon creditors abiding by a confidentiality agre...

Banks are exposed to market risk, interest rate risk, credit risk, liquidity risk, and operational risk. For any bank, the measurement and management of risk is of the utmost importance. This article describes the widely used VAR method of risk measurement. Accurate risk measurement enables banks to develop a risk management strategy, using derivat...

The current crisis has underlined the crucial importance of this area. Leading researchers in the field Maureen O'Hara, Kose John, Raghuram Rajan, and Anthony Saunders discuss how they approach research in this volatile area.View Video: Frontiers of Research on Financial Institutions - Featured Panel.If video player is not visible, click here.

A classic book on credit risk management is updated to reflect the current economic crisis. Credit Risk Management In and Out of the Financial Crisis dissects the 2007-2008 credit crisis and provides solutions for professionals looking to better manage risk through modeling and new technology. This book is a complete update to Credit Risk Measureme...

This paper studies the interconnectedness of banks in the syndicatedloan market as a major source of systemic risk. We develop a set ofnovel measures to describe the "distance" (similarity) betweentwo banks' syndicated loan portfolios and find that such distanceexplains how banks are interconnected in this market. As lead arrangerschoose to work wi...

IntroductionThe Concept of Value at RiskCapital RequirementsTechnical Issues and ProblemsThe Portfolio Approach in CreditMetricsSummaryAppendix 9.1: Calculating the Forward Zero Curve for Loan ValuationAppendix 9.2: Estimating Unexpected Losses Using Extreme Value TheoryAppendix 9.3: The Simplified Two-Asset Subportfolio Solution to the N-Asset Por...

IntroductionThe Changing Nature of BankingReengineering Financial Institutions and MarketsSummaryAppendix 1.1: Ratings Comparisons for the Three Major Rating Agencies

IntroductionBursting of the Credit BubblePhase 1: Credit Crisis in the Mortgage MarketPhase 2: The Crisis Spreads?Liquidity RiskPhase 3: The Lehman Failure?Underwriting and Political Intervention RiskSummary

IntroductionCrisis InterventionLooking Forward: Restructuring PlansSummary

IntroductionThe Link between Loans and OptionsThe Moody's KMV ModelTesting the Accuracy of EDF™ ScoresCritiques of Moody's KMV EDF™ ScoresSummaryAppendix 4.1: Merton's Valuation ModelAppendix 4.2: Moody's KMV RiskCalc™

IntroductionCredit Default SwapsCredit SecuritizationsFinancial Firms' Use of Credit DerivativesCDS Spreads and Rating Agency Rating SystemsSummaryAppendix 12.1: Pricing the CDS Spread with Counterparty Credit Risk Exposure

IntroductionWhat Is RAROC?RAROC, ROA, and RORACAlternative Forms of RAROCThe RAROC Denominator and CorrelationsRAROC and EVASummary

IntroductionModern Portfolio Theory (MPT): An OverviewApplying MPT to Nontraded Bonds and LoansEstimating Correlations across Nontraded AssetsMoody's KMV's Portfolio ManagerKamakura and Other Reduced Form ModelsSummary

IntroductionAcademic Models of LGDDisentangling LGD and PDMoody's KMV's Approach to LGD EstimationKamakura's Approach to LGD EstimationSummary

IntroductionThe 2006 Basel II PlanSummaryAppendix 13.1: Loan Rating Systems

IntroductionDeriving Risk-Neutral Probabilities of DefaultGeneralizing the Discrete Model of Risky Debt PricingThe Loss Intensity ProcessKamakura's Risk Information Services (KRIS)Determinants of Bond SpreadsSummaryAppendix 5.1: Understanding a Basic Intensity Process

IntroductionCredit Scoring SystemsMortality Rate SystemsArtificial Neural NetworksComparison of Default Probability Estimation ModelsSummary

IntroductionBack-Testing Credit Risk ModelsUsing the Algorithmics Mark-to-Future ModelStress Testing U.S. Banks in 2009Summary

Consolidation has been a fact of life in the wholesale financial services sector, resulting in fundamental change in the financial architecture and public exposure to systemic risk. The underlying drivers include advances in transactions and information technologies, regulatory changes, geographic shifts in growth opportunities, and the rapid evolu...

Using a new dataset of UK-syndicated loans, we document a significant loan cost disadvantage incurred by privately held firms. For identification, we use the distance of a firm's headquarters to London's capital markets as a plausibly exogenous variation in corporate structure (i.e., public/private) choice. We analyze the channels of the loan cost...

We investigate whether the introduction of fixed-price U.S. federal deposit insurance in 1933 increased the risk-taking of banks over the succeeding period. We examine 60 financial institutions and find that banks and trusts in general became more risky after the introduction of deposit insurance. However, a subset of well-performing banks appears...

We find that repeated borrowing from the same lender translates into a 10-17 bps lowering of loan spreads and that relationships are especially valuable when borrower transparency is low. These results hold using multiple approaches (propensity score matching, instrumental variables, and treatment effects model) that control for the endogeneity of...

*Corresponding Author. We thank an anonymous Canadian Financial Institution for providing us with their confidential consumer level credit card database. We also thank Ken Barrie of Wayto Consulting Inc. for Geographic Information System data matching of individual residences to postal codes, Bill Elliot for providing residential land title registr...

The objective of this paper is to analyze the joint behavior of underwriting spreads and initial returns on equity issues for a large sample of issues over a 21-year period. Traditional empirical approaches to the determination of these direct and indirect issuing costs view them as independent. Using a three-stage least squares approach, we find t...

This paper uses a new data set of daily secondary market prices of loans to analyze the specialness of banks as monitors. Consistent with a monitoring advantage of loans over bonds, we find the secondary loan market to be informationally more efficient than the secondary bond market prior to a loan default. Specifically, we find that secondary mark...

This paper investigates the short selling of financial company stocks around the time of the SEC September 2008 short-selling ban. More specifically, this paper examines whether this short selling, mainly by hedge funds and other types of sophisticated investors, was purely speculative or whether it was driven by rational behavior in response to a...

This paper investigates an important contemporary issue relating to the involvement of hedge funds in the syndicated loan market. In particular, we investigate the potential conflicts of interest that arise when hedge funds make syndicated loans and take short positions in the equity of borrowing firms. We find evidence consistent with the short-se...

We find that repeated borrowing from the same lender translates into a 10--17 bps lowering of loan spreads and that relationships are especially valuable when borrower transparency is low. These results hold using multiple approaches (propensity score matching, instrumental variables, and treatment effects model) that control for the endogeneity of...

We use loan-specific data to document a significant inverse relationship between a firm’s dividend payouts and the intensity of a firm’s reliance on bank loan financing. Banks limit dividend payouts to shareholders in order to protect the integrity of their senior claims on the firm’s assets. Moreover, dividend payouts decline in the presence of mo...