Global Systemically Important Bank Classification and its Impact on Private Debt Structure

Following the classification of large U.S. financial institutions as Global Systemically Important Banks (G-SIBs), I investigate how they respond to stringent requirements imposed both by the Basel Committee on Banking Supervision (BCBS) and the Financial Stability Board (FSB), mainly on the aspect of bank lending. I find that, compared to the level prior to the designation, G-SIBs tend to demand tighter loan covenants — specifically, the number of financial covenants, prepayment covenants, and dividend restrictions — to combat the uncertainty about the future state. The increase in the number of covenants is more pronounced among G-SIBs that do not satisfy the capitalization level requirements. Loan size bore by each lead lender is reduced in the period following the classification while maturity does not show significant changes, after controlling for bank/borrower characteristics. The evidence suggests that the new regulation leads banks to institute enhanced measures in an effort to better monitor the borrower’s financials in a more comprehensive fashion, as well as secure repayment if applicable.