Relationship between Banks’ Capital and Credit Risk-Taking through Syndicated Loan

Abstract

This paper aims to investigate whether banks exploit their information advantage over bank-de- pendent borrowers, analyzing the impact of capital level on banking credit risk-taking under syndication loans. By using a unique data composed of 4828 syndicated loan of publicity banks facilities from the U.S. for the period 1987-2010, we propose theoretical issues of the impact and effectiveness of banks’ credit risk-taking from the perspectives of borrowers’ bank dependent. The results show that there is positive correlation between the ratios of bank’s capital over its total assets and banks’ credit risk-taking. It implies that banks with lower capital level charge higher lending spread for borrowers with fewer cash flows; hence the banks would bear a lower probability of default.