Strategic Response to Supervisory Coverage:

Evidence from the Syndicated Loan Market∗

Ivan T. Ivanov† Ben Ranish‡ James Wang§

July 2017

Abstract

We study banks’ syndicated lending around an unexpected change in the coverage of amajor supervisory program. Our identification relies on the program change differen-tially affecting otherwise similar syndicated deals. Overall, we find that lending shiftsto reduce the program’s oversight of the riskiest loans. However, we show that thisresult is driven by larger and more leveraged US banks. In contrast, smaller banks– with potentially less internal risk management expertise – take steps to maintainsupervisory coverage of their lending. Our paper has implications for the design ofsupervisory programs, highlighting the importance of disclosure to regulators.

∗We thank Greg Nini, Mitchell Berlin, Phil Dybvig, Matthew Gustafson, Ralf Meisenzahl, Edison Yu,seminar participants at the 2017 Federal Reserve System Applied Micro Conference, The CongressionalResearch Service, Federal Reserve Board, the WashU Corporate Finance Conference, and the 2016 QuantFestfor helpful comments. We thank John Colwell, Robert Cote, and Jaime Jo Perry for helpful discussions onthe SNC Reviews. The views stated herein are those of the authors and are not necessarily the views of theFederal Reserve Board or the Federal Reserve System.†Federal Reserve Board, 20th Street and Constitution Avenue NW, Washington, DC 20551; 202-452-2987;

ivan.t.ivanov@frb.gov.‡Federal Reserve Board, 20th Street and Constitution Avenue NW, Washington, DC 20551; 202-973-6964;

ben.ranish@frb.gov.§Federal Reserve Board, 20th Street and Constitution Avenue NW, Washington, DC 20551; 202-974-7095;

james.z.wang@frb.gov.

1 Introduction

Supervisory programs impose costs on banks, yet they may provide banks with significant

benefits. For instance, bank supervisors may provide banks with valuable risk management

expertise. Consistent with this idea, recent research suggests that supervisory attention im-

proves bank performance (e.g. Hirtle, Kovner, and Plosser (2016), Rezende and Wu (2014),

Delis, Staikouras, and Tsoumas (2016), Kandrac and Schlusche (2017), Eisenbach, Lucca,

and Townsend (2017)). However, if banks perceive costs exceeding these benefits, they may

attempt to avoid oversight. This potentially reduces the effectiveness of supervision.

We empirically assess this tradeoff by studying bank lending around an unexpected

change in the coverage of a major syndicated loan supervisory program – the Shared Na-

tional Credit (SNC) Program.1 We find that the largest and most leveraged lenders shift

their lending to reduce oversight of the riskiest deals. Smaller banks, in contrast, shift their

lending in order to maintain their supervisory program coverage. This is consistent with

smaller lenders perceiving positive net benefits from program participation, potentially due

to their more limited credit risk expertise.

In mid 1998, due to the rapid growth of the syndicated lending market, federal regulators

sought to reduce the burden on bank examiners by excluding SNC deals shared by only two

supervised lenders.2 Two lender deals comprised about 22% of the deals in the Program,

but only roughly 5.5% of aggregate commitments size.3

This coverage change gave banks an opportunity to shield deals from SNC oversight by

reducing the number of supervised lenders on a deal to two. We establish that this reduction

in the number of lenders is considerably more feasible for three-lender deals than for deals

1The SNC Program accounted for roughly $2 trillion in outstanding wholesale credit during our periodof study.

2SNC Program coverage is dependent on the number of supervised unaffiliated lenders on a deal. Fromthis point onwards, when we refer to “N lender” deals, we mean syndicated deals with exactly N supervisedunaffiliated lenders.

3During this time period, the SNC Program examined the vast majority of syndicated deals, placingsubstantial burden on supervisory resources. Our understanding of SNC procedures during this time periodis based on discussions with a former SNC Program coordinator and review of program reports.

1

with even just four lenders. Therefore, we expect that negotiations driven by the coverage

change come disproportionately from the population of three-lender deals.4 We then iden-

tify banks’ responses to supervisory oversight with a difference-in-difference estimator which

compares changes in the populations of three- and four-lender deals before and after the

program change.

Our setting helps address the usual challenges of establishing the causal effects of bank

supervision. Changes in supervision often have lengthy public comment periods and are an-

ticipated well in advance. This makes it difficult to establish the appropriate period of time

over which to evaluate policy changes. In our setting, SNC participants were notified with-

out warning of the change only seven months prior to the data collection stage of the 1999

exam. In addition it is usually challenging to find a plausibly exogenous treatment group,

as supervisory actions or programs are typically targeted at financially weaker institutions

or loan exposures (see, e.g. Kiser, Prager, and Scott (2016)). In our setting, the change

in SNC coverage unintentionally “treated” three-lender deals with a viable opportunity to

exit the Program. We show that the “treated” three-lender and “control” four-lender deals

were similar along a number of key dimensions prior to the change. Therefore, it is likely

that outcomes for three- and four-lender deals over our sample period would have followed

similar trends absent the changes in SNC coverage.

We find that three-lender deals exit the SNC Program at a relatively higher rate in the

three years following the change in coverage. The four to five percentage point (or 15%) in-

crease in three-lender deal exit relative to four-lender deal exit rate we find is consistent with

banks restructing deals to avoid oversight. As there may be considerable costs to rapidly

renegotiating deals after the change, the reduction in the three-lender deal population sug-

gests a lower bound on the fraction of deals where banks perceive negative net benefits of

SNC oversight. The increase in the three-lender deal exit rate is statistically significant and

stable across a set of specifications which increasingly relax the strict parallel trends assump-

4It is difficult to construct a reliable deal population using Dealscan, as deal terminations are not observed,and it is challenging to distinguish between renegotiations and new originations (see, Roberts (2015)).

2

tion of our base difference-in-differences specification. We also show a relative decline in the

rate of new three-lender deal originations following the change in coverage.

The increase in three-lender deal exits is much larger within the population of lower rated

“non-pass” credits, where the likely costs of supervisory scrutiny are greater. Using four sep-

arate measures of deal quality, we show that the relative credit quality of three-lender deals

improved significantly following the change in SNC coverage.

We argue that the net benefit to banks of SNC Program oversight should vary across

lenders. Small lenders may be at an informational disadvantage relative to larger lenders

with greater credit risk expertise and may therefore benefit more from supervision.5 In con-

trast, lenders with higher leverage may face a higher likelihood of severe supervisory action

as a result of the SNC Program. When we split our sample by the characteristics of the

syndicate participants, we find that the increase in the exit rates of three-lender deals is

concentrated within deals dominated by larger and more leveraged US lenders. We find no

evidence that the smallest or least leveraged banks, or foreign lenders, are systematically

(re)negotiating deals in order to avoid supervision.6

On the contrary, small lenders may not attempt to shield syndicated lending from SNC

oversight if they view such oversight as beneficial. In fact, small lenders may shift their

syndicated lending away from two-lender deals after the change in coverage into deals that

are still covered by the SNC Program. We find results consistent with such a shift. For

small banks, each additional two-lender deal held before the coverage change predicts that

the bank holds roughly one additional SNC deal after the coverage change. We do not find

this pattern for larger lenders, consistent with our prior results suggesting that it is the

larger lenders that attempt to avoid supervision. Nonetheless, as larger lenders dominate

the market for syndicated loans, strategic avoidance of supervision is more prevalent in the

aggregate.

5In addition, small lenders’ aggregate SNC Program costs may not be high enough to warrant a policyof strategic renegotiation.

6Supervision of foreign lenders is a function of both the bank’s primary home regulator as well as theirUS regulator.

3

We provide several tests of the robustness of our results. First, we use a combination of

both four and five lender syndicated deals as our control group. This trades off a more fully

captured “treatment” of three lender deals against the use of a less similar control group.

Our results are not affected significantly. Next, we consider the possibility that the exit of

three-lender deals could be related to possible disproportionate exit of “opaque” deals in a

weakening economy. To rule this out, we allow trends in exit rates to vary with two proxies

for deal opacity found in the literature: the public/private status of the borrowing company

as well as the share of the deal held by the lead bank (see, e.g., Sufi (2007)). Our results are

not affected significantly by these additional controls.

Our work is related to the literature on the optimal design of bank supervision and regula-

tion. We show evidence that supervisory programs which allow room for strategic avoidance

may be less effective and unintentionally distort the provision of credit. While prior research

supports a strong role for public disclosure in bank oversight (see Barth, Caprio Jr., and

Levine (2004), Beck, Demirguc-Kunt, and Levine (2006)), our findings highlight the benefits

of disclosure to regulators and comprehensive monitoring of the activity of regulated entities.

For example, continued reporting of two lender deals to supervisors could have disciplined

banks’ renegotiations of syndicated deals.

Our paper also contributes to the literature on the effect of supervision on bank risk-

taking and lending. This strand of work finds that supervision and regulatory enforce-

ment actions are associated with large reductions in bank risk-taking (Delis, Staikouras, and

Tsoumas (2016), Delis and Staikouras (2011), Hirtle, Kovner, and Plosser (2016), Ongena,

Popov, and Udell (2013), Rezende and Wu (2014), Kandrac and Schlusche (2017), Gopalan,

Kalda, and Manela (2016)). However, supervision does not appear to reduce bank profitabil-

ity (Hirtle, Kovner, and Plosser (2016), Rezende and Wu (2014)). Our work suggests that

strategic avoidance of supervision undertaken by many banks may reduce its impact. In

contrast, we also provide evidence that some banks, particularly small banks, may actually

prefer to receive some supervisory oversight.

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2 Institutional Background

2.1 The SNC Program

The Shared National Credit (SNC) Program is an inter-agency agreement among the

three main Federal banking regulators – the Board of Governors of the Federal Reserve

System (FRS), the Federal Deposit Insurance Corporation (FDIC), and the Office of the

Comptroller of the Currency (OCC) – to monitor the credit risk of syndicated bank loans

in a uniform and efficient manner.7 The program, which has been in existence since 1977,

currently requires that supervised institutions report all syndicated loan deals exceeding $20

million that are held by three or more supervised institutions as of the end of each calendar

year. Deals are identified as sets of syndicated credit facilities which are originated at the

same time, to the same borrower, through the same lead bank. Since SNC coverage depends

on the number of supervised unaffiliated lenders on a deal, in the rest of the paper when we

refer to “N-lender deals” we count only the deal’s supervised unaffiliated lenders.

In the spring of each year, examiners from the three regulatory agencies select a sample

of loans from the entire SNC loan portfolio for review. This sample consists of the vast

majority of SNC loans during our period of study, and non-investment grade loans are most

likely to be sampled.8 Banks have a few weeks to update records for the selected loans before

the reviews begin in May. In addition, prior to 2004, the SNC Program included a re-review

of a small number of problematic loans in November of each year.9

During SNC reviews, an interagency team of two to three examiners thoroughly reviews

each sampled loan and then assigns it across five regulatory rating categories: pass, special

mention, substandard, doubtful, and loss. Following the rating process, banks are notified

7SNC Program description and guidelines dated May 5, 1998:https://www.occ.gov/news-issuances/bulletins/1998/bulletin-1998-21.html.

8For example, see 2014 SNC review report:http://www.federalreserve.gov/newsevents/press/bcreg/bcreg20141107a1.pdf. In more recent years, theProgram has selected less than 40% of the entire SNC portfolio for review (see, e.g., Gustafson, Ivanov,and Meisenzahl (2016)).

9More recently, in 2015, the SNC became a semi-annual review.

5

of the ratings (and may request clarifications or appeal the SNC rating decision). This

may alert lenders to loans or portfolios that require more active monitoring. Low ratings

from supervisors impose costs on lenders. Loans rated special mention are subject to closer

scrutiny by regulators in subsequent exams. Ratings of substandard, doubtful, and loss

increase required loan loss reserves and reduce supervisors’ measures of the banks’ asset

quality.10 The examiners’ ratings are then compared with the ratings that were assigned to

the loan by the lead bank in the syndicate using the same regulatory rating scale. If the

bank faces a large volume of downgrades, a matter-requiring-attention (MRA) or matter-

requireing-immediate-attention (MRIA) letter may be issued by the regulators requiring the

bank to undertake actions that could hamper profitability such as adopting more conservative

lending practices. The bank may also receive a lower CAMELS (or CAMEO) rating for poor

(risk) management practices (and lower asset quality). A low CAMELS rating subjects

banks to greater regulatory scrutiny and could even subject the bank to prompt corrective

actions (PCA) under the FDI Act.11

Bank assets not subject to SNC exams may still be examined either as part of an annual

review (at small and community banks) or as part of the ongoing supervisory process. Even

so, additional regulatory scrutiny by a team focused on examining large and complex deals

increases the probability that supervisors find deficiencies. Furthermore, these other non-

SNC reviews are generally more “top down” in nature and less likely to involve detailed

review of individual loans.12

2.2 Costs Associated with the SNC Program

This section provides a simple and rough estimate of the primary cost associated with the

SNC Program for the typical supervised US bank – the temporary loss of capital related to

10Federal Reserve commercial bank examination manual, Sec 2060.1 p1:http://www.federalreserve.gov/boarddocs/supmanual/cbem/cbem.pdf

11https://www.fdic.gov/regulations/laws/rules/2000-4500.html12In the late 1990s and the early 2000s, banks participating in the syndicated loan market were also

subject to “full scope” bank exams conducted by the FRS and the OCC. Our conversations with a formerSNC coordinator indicate that individual loans were not commonly scrutinized in these general exams.

6

increases in allowances for loan losses resulting from the review. Additionally, there are costs

related to administration of the SNC Program (i.e. compliance costs) and costs associated

with supervisory actions resulting from the review that may hamper banks’ profitability.

As further described in Appendix A, we use banks’ internal credit ratings as of May 1997

to estimate the increase in banks’ classified assets resulting from the May 1998 SNC review.

The increase in classified assets corresponds to an increase in supervisor’s expectations of

the banks’ loan losses. In response, banks generally increase their loss reserves, resulting in a

temporary reduction in capital. Greater increases in classified assets are generally predicted

for deals that were assigned worse ratings by the bank.13

Using these estimates of the increases in classified assets associated with the past SNC

review, we find that the median three-lender SNC deal in 1998 has an 11bp expected increase

in loan loss reserves in the following year’s review. For the 90th and 95th percentiles of such

deals, the expected increase is 48bp and 239bp respectively. To convert this into a cost to

the banks, we assume that loss reserve levels are impacted for two years and that banks’

marginal rate of return on equity capital was 10% in the late 1990s.14

With these assumptions, we calculate the expected cost of the SNC Program as the

product of the marginal return of equity capital, the expected increase in loan loss reserves,

and the number of years that loan loss reserves are impacted. We find that the expected cost

of SNC review works out to roughly 2bp for the median three-lender deal, or about 9bp and

45bp for deals at the 90th and 95th percentiles respectively. In dollar terms, the median,

90th, and 95th percentile of such costs for three-lender deal commitments would be roughly

$1,500, $22,000, and $55,000 respectively. Thus, while SNC may not represent much of the

total costs of intermediation on the typical deal, these costs could be significant for higher

risk deals.

13Facilities with the very worst assigned ratings are an exception, as the extent to which the supervisor’srating can be worse is limited.

14The average return on bank equity during this period was about 15%.See https://fred.stlouisfed.org/series/USROE

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2.3 The 1999 Rule Change

Syndicated lending volume grew significantly through the 1990s despite limited supervi-

sory resources. Federal banking agencies became interested in reducing this growing burden

in a way that did not result in losing coverage of the largest syndicated deals. A compromise,

resulting from interagency discussions that began in mid-1996, was to restrict SNC report-

ing to only those deals syndicated between three or more supervised unaffiliated lenders.

Previously deals between two supervised lenders were also included in SNC reporting. This

change in coverage was an effective way to focus supervisory resources on the larger banks,

which hold larger and more complex deals. For example, in 1997, roughly 10 percent of the

banks where loan reviews were conducted held only two-lender syndicated deals while deals

at these banks accounted for just over 0.1 percent of syndicated lending commitments. A

final recommendation supporting the rule change was made by SNC program coordinators

and approved by senior officers at the Federal agencies at the end of January of 1998. The

change was only made public in May 1998, leaving banks about seven months to incorporate

the rule change before end-of-year syndicated deal holdings were reported for the 1999 SNC

review.15 The coverage change left the $20 million threshold for SNC inclusion unchanged.16

Figure 1 presents a timeline of the change in reporting requirements.

3 Sample Description

Our analyses are based primarily on a supervisory data set which includes the entire

SNC portfolio. These data span from 1993 through the present, but we restrict most of our

analysis to the years surrounding the change in SNC coverage, 1997 through 2001.17 SNC

15SNC Program description and guidelines date May 5, 1998:https://www.occ.gov/news-issuances/bulletins/1998/bulletin-1998-21.html

16It is difficult to use the $20 million deal amount theshold to study SNC avoidance as this thresholdhas not changed, and syndicated deal amounts tend to be concentrated heavily in increments of $5 or $10million.

17We include three years following the the change, but only two prior to the change, as credit ratingsassigned by lead banks are available only from 1997 onwards.

8

data include the identities and deal share for the full set of lenders on each deal including

the identity of each lender’s ultimate parent company and primary federal regulator (if any).

In addition, data include characteristics of each deal, such as loan facility utilization (if the

facility includes a credit line), maturity, purpose, the type of loan, the identity and industry

of the borrower, and the facility-level credit ratings assigned by both the lead bank and

the SNC examiners (whenever the loan is selected for SNC examination). For an additional

source of information on borrower credit quality, we merge in S&P long-term issuer ratings

from Compustat and CapitalIQ.

Table I provides statistics describing the set of deals in the SNC database from 1997

through 2001. Panel A shows the number of deals, borrowers, and lenders that are repre-

sented within the SNC. The number of unique borrowers increases by an average of about

five percent per year, excluding a sharp decline in 1999 which occurs primarily due to the

exclusion of borrowers that have only deals with two supervised lenders. In contrast, the

number of unique lenders increases by approximately 16% per year. This trend reflects the

entry of asset managers to the syndicated loan market. However, at no point in our sample

period does the share of aggregate commitments held by unsupervised lenders exceeds 10%.

Panel B of Table I provides characteristics of SNC deals over this time period. Total

commitment amount in the SNC increases from approximately $1.4 trillion in 1997 to $2.0

trillion in 2001. Prior to the change in SNC reporting requirements in 1998, the 10th and 90th

percentile of SNC deal size was $30 million and $500 million respectively. The median deal

size increases over the period primarily due to the exclusion of generally smaller two-lender

deals. The exclusion of two-lender deals also explains the decrease in the average share of

commitments held by syndicate leads from 1998 to 1999.

Throughout the period, almost all SNC lending is to domestic borrowers and is made

by lenders regulated by the Federal Reserve System (FRS) or Office of Comptroller of the

Currency (OCC). The share of lending by purpose is fairly stable over the sample period.

In contrast, the share of SNC deal commitments utilized increases significantly from about

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29% in 1997 to 37% in 2001.

Panel C shows that default rates rose over our sample period. This aligns with a down-

ward trend in the credit quality of SNC borrowers, whether measured by classified assets (a

weighted proportion of assets classified as substandard, doubtful, or loss), the rate at which

SNC deals are downgraded by examiners, or imputed credit quality (described in the Ap-

pendix A). The standard deviation of imputed credit quality increases significantly as well,

reflecting a disproportionate increase in the share of poorly-rated SNC deals.

4 Identification Strategy

Lenders renegotiate, retire, and originate deals for many reasons. We isolate the impact

of supervision on lending by comparing two similar groups of syndicated deals, deals with

three and four supervised unaffiliated lenders (“three-lender” deals and “four-lender” deals),

that were unintentionally but differentially affected by the change in SNC coverage. The

change in coverage represented an opportunity to remove deals from SNC through changing

the number of lenders on the deal to two. We first establish that three- and four-lender deals

were similar prior to the change in SNC coverage. We next show that the (re)negotiation

required to make this change was far more feasible for three-lender deals than for deals with

four or more lenders. This was an unintended effect of the coverage change. This similarity

combined with the difference in opportunity to remove deals from SNC coverage, allows

us to identify the causal impact of the coverage change through a difference-in-differences

framework.

Table II provides summary statistics showing that three- and four-lender deals are similar

across a number of dimensions including credit quality, foreign exposure, supervision, and

maturity. Figure 2 provides a histogram of the size of two-, three-, and four-lender deals

prior to the rule change. Four-lender deals tend to be slightly larger, but Figure 2 shows that

there is still substantial overlap in size between three- and four-lender deals. The literature

10

has shown syndicate size to be related to not only diversification motives, but also the degree

of borrower informational asymmetry (Sufi (2007), Lee and Mullineaux (2004), Dennis and

Mullineaux (2000), Jones, Lang, and Nigro (2005), Ivashina (2009)) as well as credit and

liquidity risk (Gatev and Strahan (2009)). Therefore, several of our regression specifications

control for unobserved trends tied to deal size. In Section 5 we show that our results are

robust to this and other sets of controls that we introduce to weaken the strict assumption

that three and four-lender loan outcomes should follow parallel trends in the absence of the

change in SNC coverage.

The change in SNC coverage provides lenders with an opportunity to shield deals from

SNC to the extent that deals can be renegotiated as two-lender deals. Syndicated deals are

renegotiated frequently (see, e.g., Roberts and Sufi (2009), Roberts (2015), Denis and Wang

(2014)), and while a significant number of renegotiations are linked to covenant violations

(see, Smith and Warner (1979); Smith (1993)), the majority occur outside of technical default

and are intended to affect borrower financial flexibility or accomodate changes in borrower

investment opportunities (see, Roberts and Sufi (2009); Nini, Smith, and Sufi (2009); Gilson

and Warner (1998)). Renegotiations often involve a change in the lenders on a deal. For

example, 34% of the three-lender deals in 1997 that survived through 1998 experienced a

change in one or more of the lenders on the deal over the course of the year. We therefore

expect that the opportunity to affect the number of lenders exists for many deals. Further-

more, we expect that it is easier to negotiate a deal from three lenders to two than from

four lenders to two lenders. First, there is a higher coordination cost of structuring and

negotiating deals with larger syndicates (see, Lee and Mullineaux (2004)). Second, renego-

tiating a larger deal into one with two lenders requires taking on additional exposure for the

remaining lenders.

Empirically, the frequency of conversions suggests that it is easier to restructure three-

lender deals into two-lender deals than it is to convert four- or more lender deals into two-

lender deals. Panel A of Table III shows unconditional transition probabilities between

11

syndicates with different numbers of supervised lenders prior to the rule change. The rows

represent the syndicate’s size at time T and the columns represent the size of the same deals

in the following year, T + 1. Prior to the rule change, three-lender deals were approximately

four and a half times more likely than four-lender deals to be renegotiated into two-lender

deals.

In Panel B of Table III, we build on this result using an OLS regression of the prob-

ability of transitioning to a two-lender deal in the following year. We include indicators

for syndicate size in the current year in addition to numerous other deal characteristics.

This regression similarly shows that three-lender deals are significantly more likely to tran-

sition into two-lender deals than deals with greater numbers of lenders are. In addition, the

coefficient estimates of the control variables are largely consistent with expectations. For

example, larger deals are less likely to transition to two-lender deals, while maturing deals

(that usually require renegotiation) and deals where one or more supervised lenders have a

small deal share (which is easier to reallocate) are more likely to transition to two-lender

deals. However, the presence of only three lenders on the deal is by far the most significant

predictor of transitioning into a two lender deal.

Of course, some deals with more than three lenders can become two-lender deals. To the

extent this is true, our estimates capture only part of the full causal effects of the change

in SNC coverage. To capture the treatment effect more fully, Section 6 presents additional

tests in which we expand the “control” group to also include five-lender deals, which appear

yet more difficult to convert to two-lender deals. The tradeoff of including five-lender deals

in the control group is that these are less similar to three-lender deals.

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5 Results

5.1 Program Coverage and Deal Renegotiation

By excluding two-lender deals from the Program, the change in SNC coverage gave lenders

a feasible opportunity to shield some three-lenders deals from review through deal renego-

tiation and origination. If lenders renegotiate a significant number of three-lender deals to

avoid the SNC, we should expect to see a relative decline in the population of three-lender

deals around the change in coverage.

The top panel of Figure 3 presents the difference between the year-over-year growth rate

of the number of three- and four-lender deals. The dashed line in the figure is negative for

1999 and 2000, indicating that three-lender deals grew at lower rates than four-lender deals

after the rule change. However, the dashed line is an imperfect measure of the actions banks

take to reduce their exposure to the SNC. For example, it could be that a large number of

three-lender deals become five-lender deals, and therefore remain in the SNC. In this case,

the growth rate of three-lender deals may be low, yet it does not reflect avoidance of the

SNC.

The solid line addresses this shortcoming by focusing only on the part of the growth rate

due to new deals and deals that exit the SNC three-plus lender population entirely. We

define SNC exit here and throughout this paper to indicate deals that leave the SNC pop-

ulation under the new coverage rules, either through deal termination or renegotiation into

a deal with fewer than three lenders. We define “exit” in this way in order to be sure that

we measure changes in lending activity rather than changes in a definition.18 The difference

in the one-year-ahead growth rate of three- and four-lender deals due to new deals and deal

exits is approximately negative five percentage points in both 1999 and 2000. This suggests

that in aggregate, lending shifts out of the SNC in response to the change in coverage. There

does not appear to be a big difference in deal growth rates prior to 1999, consistent with the

18If we instead defined exit to mean that the deal no longer appeared in the SNC in the following year,then the exit rate on three-lender deals would rise mechanically following the change in coverage.

13

unexpected nature of the rule change.

The bottom panel of Figure 3 provides the difference in three- and four-lender deal growth

driven by new deals and exit rates separately. For example, in the first year after the rule

change, a lower origination rate for three-lender deals accounted for about a four percentage

point decline in the growth rate of three-lender deals relative to four-lender deals, whereas

a greater exit rate for three-lender deals accounts for about two percentage points of the

difference. This pattern changes in the following two years, when the slower growth rate of

the number of three-lender deals comes primarily from higher exit rates of three-lender deals.

The faster response of originations could relate to lenders’ greater flexibility in determining

terms at origination.

We next estimate difference-in-differences regressions comparing SNC exit rates across

three- and four-lender deals before and after the change in SNC coverage. Since it may take

time for lending to adapt to the coverage change, we use 1999 through 2001 as the “after”

period and 1997 and 1998 as the “before” period. We cluster the standard errors by lead

bank, which generally expands our confidence intervals. This accounts for arbitrary correla-

tions in the variables within deals originated by the same lead lender, which may specialize

in certain types of syndicated lending.

Table IV provides results for our SNC exit regressions. Column (1) includes only the

set of difference-in-differences variables — indicators for the “after” period, the “treated”

three-member deals, and the interaction of these two variables. Identification here requires

that three- and four-lender deal exit rates would have changed by the same amount if not for

the change in SNC coverage. The estimated coefficient on the interaction term in column (1)

shows that the difference between the exit rate of three and four-lender SNC deals increased

by about four percentage points after SNC program coverage changed (p-value of about

0.07). These exits generally reflect credit leaving the SNC program, as opposed to credit

shuffling around within the SNC program.19 Given that the total amount of three-lender

19For 88 percent of borrowers over the period 1999 through 2001, the exiting three lender deal was theironly SNC deal. Over 83 percent of such borrowers had no deals in SNC in the following year.

14

commitments was $96 billion in 1998, we estimate that approximately $4 billion per year

in three-lender commitments exited the SNC program in the years following the change in

reporting requirements.

The top panel of Figure 4 illustrates the data behind this basic difference-in-differences

specification. Exit rates for four-lender deals (as well as for larger deals) tend to decline

following the change in SNC coverage, while exit rates for three-lender deals do not follow

in this decline. As in Figure 3, elevated three-lender deal exit rates appear primarily in the

second year following the change in SNC coverage, which is the first full year that lenders

have to respond to the change in SNC coverage.

The remaining columns in Table IV address concerns that differences in deal exit rates

could be driven by factors affecting renegotiations other than the rule change (see, Roberts

and Sufi (2009); Roberts (2015)). In column (2), we include splines to control for deal ma-

turity and size. We view these as the potentially most critical controls, as deal exit should

clearly be driven by deal maturity, and deal size is the only deal characteristic that arguably

differs significantly between three and four-lender deals. In column (3), we interact the ma-

turity and deal size variables with the “after” indicator to control for possible trends in exit

rates associated with either of these variables. Column (4) adds controls for the minimum

deal share held by a supervised participant and the share of the deal held by non-banks,

both of which may relate to how easily a deal can be removed from SNC reporting.20 In

addition, we include the share of the deal held by the lead bank, the deal utilization rate,

credit quality, origination year, purpose and deal type, and the borrower’s industry. Column

(5) adds a lead bank fixed effect, which is also interacted with the “after” dummy. This

final specification controls for differences in the level or trend in exit rates across different

lead banks. This could be an important control if, for example, banks that disproportion-

ately held three lender deals were leaving the syndicated lending market over this period.

20If one lender has a small share of deal, other lenders need not bear much additional risk in the transitionto a two-lender deal. Similarly, if non-banks have a significant share of the deal, there may be a larger bodyof lenders willing to hold the share originally allocated to one of the supervised lenders.

15

Appendix A describes all of our variables in greater detail.

Across our specifications, our estimates indicate that the difference between the exit rate

of three- and four-lender SNC deals increased by about four to five percentage points after the

change. The stability of our estimates across varying set of controls gives us some confidence

that our results are not driven by omitted variation. Assuming that few four-lender deals

were renegotiated as two-lender deals, this result implies that banks responded to the rule

change by renegotiating or terminating about four to five percent of three-lender deals per

year. While this may not represent a large fraction of three-lender deals, some three-lender

deals may be difficult to renegotiate in a short time frame and, importantly, the incentive to

shield deals from SNC may not be uniformly strong for all lenders or deals.

The incentive to shield deals that were previously rated “non pass” from the SNC Pro-

gram may be significantly greater than the incentive to shield “pass” rated deals. Downgrades

applied to non-pass deals result in disproportionate reductions in the bank’s asset quality

measures and increases in loss reserves, and these deals are the most likely to receive heavy

scrutiny. In Table V, we repeat the regression in column (5) of Table IV separately for the

population of pass and non-pass deals. Within the population of non-pass deals, which rep-

resent roughly 10% of all deals, we find that three-lender deal exit rates increase by almost

17 percentage points, as compared to only about 4 percentage points for pass rated deals.

The disproportionate exit of lower quality three-lender deals affects the credit quality

of syndicated deals reviewed in the SNC Program. We now further explore the impact of

the coverage change on deal quality before studying how the coverage change affected the

lending of different types of lenders.

5.2 Program Coverage and Deal Quality

The SNC review frequently results in downgrades of banks’ loan risk ratings (see Ivanov

and Wang (2017)). Downgrades lead to potential increases in loan loss reserves and reduc-

tions in capital, and occur more frequently for lower credit quality deals. In addition, the

16

CAMELS ratings of banks that have a high fraction of low quality deals or downgrades may

suffer. Therefore, as suggested by Table V, lenders might focus efforts on keeping lower

quality deals out of the SNC Program. Since renegotiation or origination of deals outside

of SNC is most feasible for would be three-lender deals, we expect that the relative credit

quality of three-lender deals in the Program to rise after the change in coverage.

The middle and bottom panels of Figure 4 show a very simple test of this hypothesis.

The middle panel shows that even though the share of three-lender deals with pass ratings

is similar to that of four-lender deals in 1998, it is about three to four percentage points

higher after the change in coverage.21 The bottom panel shows that four-lender deals had

(imputed) credit quality about one quarter of a rating notch better than three-lender deals

prior to the coverage change. However, after the change, three-lender deals improved in

quality and had higher resulting credit quality.22

Table VI compares the credit quality of SNC deals using four different measures of credit

quality. All four regressions use controls similar to those in column (5) of Table IV, although

without controls for deal quality. In column (1), our dependent variable is a dummy variable

equal to one where the deal is assigned a Pass SNC rating. We find that three-lender deals

are 2.3 percentage points more likely to have a Pass SNC rating after the rule change. Sim-

ilarly, column (2) of our regression results indicate that the credit quality of the three-lender

deal population improved by about a third of a rating notch in terms of imputed S&P credit

ratings. In columns (3) and (4), our dependent variables are estimates of the increase in the

classified asset share (which drives loan loss reserves) and probability of loan downgrade.23

These represent expected costs associated with the examination of deals of different credit

quality. Consistent with previous results, we find that the expected increases in classified

asset share and the probability of loan downgrades also decrease for three-lender deals rela-

tive to four lender deals after the coverage change. Expected increases in loan loss reserves

21Over the period 1993 through 1996, the share of three and four lender deals rated pass is very similar;1997, where three-lender deals have a significantly higher pass share, is an outlier relative to previous years.

22Section 7 provides a description of imputed credit quality and our other variables.23These estimates are calibrated with pre-1998 data and described further in Appendix A.

17

on three-lender loans decline by about 13bp relative to a cross-sectional mean of 37bp, and

the probability of exam downgrade declines by about 56bp relative to a cross-sectional mean

of 2.8%. Similar to Table IV, these results do not change significantly when we reduce the

set of control variables.

5.3 Deal Renegotiation by Lender Type

The benefits of supervisory oversight and the costs associated with the SNC Program

vary across lenders. In this section of our analysis, we sort deals into groups with lenders

that are differently motivated to removing deals from the SNC.

In our sample, an average of about 40% of a syndicated deal is held by foreign lenders.

It is not clear that these lenders face similar consequences of SNC examination. While the

Foreign Bank Supervision Enhancement Act of 1991 has made on-going supervision activities

such as full scope on-site bank exams more uniform between foreign and domestic institu-

tions,24 the costs of supervision programs are usually determined at the parent-company

level.25 This means that the cost of US oversight to foreign banks may be determined pri-

marily by their primary home regulator.

In Panel A of Table VII, we partition our sample by the fraction of the deal held by

domestic institutions using three thresholds (33%, 50%, and 66%). Within each partition,

we estimate our SNC exit regressions from column (5) of Table IV, which include our full

set of control variables. Only three-lender deals held mostly by domestic lenders experience

higher exit rates after the change in reporting requirements. We find no evidence of SNC

avoidance within deals held primarily by foreign lenders. Due to this result, we focus the

remainder of this section on those deals held only by US lenders.

Next, we look at whether deals dominated by larger SNC lenders are more likely to be

strategically renegotiated to avoid SNC. Smaller lenders, with less in-house credit risk ex-

24See https://fraser.stlouisfed.org/files/docs/publications/FRB/pages/1990-1994/33097 1990-1994.pdf25http://www.nortonrosefulbright.com/knowledge/technical-resources/banking-reform/supervision-of-

international-bank-branches—a-global-analysis/united-states.

18

pertise, may benefit more from the supervisory expertise offered through the review of loans.

In addition, for small SNC lenders, the aggregate costs imposed by the SNC Program may

not be large enough to warrant attention or strategic action.26

Panel B of Table VII presents our difference-in-differences specification from column (5)

of Table IV separately for deals in which more or less than half of the deal is held by super-

vised participants with more than either $10, $15, or $20 billion in SNC assets. We show

that the impact of the coverage change is positive and significant for deals held primarily by

institutions with more than $10 billion in SNC assets and virtually zero for those deals held

primarily by smaller SNC lenders. Our estimates are similar when defining large lenders

as those having more than $15 billion in SNC, but above that threshold, additional size

does not appear to matter. As only around two percent of US lenders have more than $10

billion in SNC commitments, yet represent the majority of US lenders’ commitments for the

majority of deals, these results suggest that strategic renegotiations are driven by a small

minority of lenders.

Finally, we look at whether deals dominated by highly leveraged SNC lenders are more

likely to be strategically renegotiated. Leveraged institutions may face greater supervisory

scrutiny and may be closer to binding capital requirements or adverse supervisory actions

such as MRA or MRIAs. Panel C of Table VII runs our difference-in-differences specification

from column (5) of Table IV over sets of deals held by more and less leveraged supervised

institutions. The impact on the exit rate of three-lender deals appears to decrease monoton-

ically as bank leverage falls (and leverage ratio rises). However, given that larger institutions

typically operate closer to the regulatory limits of capital ratios, it is difficult to separate

the effect of size and leverage.27

26For example, imagine a lender has a $1 billion SNC portfolio. Perhaps $10 to $50 million of this exposurecould be renegotiated to avoid SNC review, as it is not feasible to renegotiate most of the portfolio into two-lender deals. Of this amount, the expected increase in loan loss reserves resulting from the exam might beabout one percent, reducing capital by perhaps two years earlier than otherwise, and forgoing a 10% returnon equity. This lender’s maximum benefit would be approximately $10 to $50 million x 0.01 x 2 x 0.1 =$20,000 to $100,000, which may not be large enough to be a priority for the institution.

27In addition, the larger and more leveraged lenders could be the ones with greater exposure to the Russianfinancial crisis of 1998 as described in Chava and Purnandam (2011).

19

Table VII illustrates that deals held mostly by larger, leveraged, US lenders dispropor-

tionately leave SNC. Large lenders dominate the syndicated lending market, explaining why

the overall impact of the coverage change is to reduce SNC coverage, particularly for lower

quality deals. However, small lenders may prefer to remain in the SNC Program. Syndi-

cate lead lenders have little incentive to offer high quality deal participations to small banks,

which have limited capacity to participate in deals and thereby generate revenue for the lead.

Therefore, small banks’ relatively limited credit risk expertise puts them at a disadvantage.

Supervisory oversight reduces this informational asymmetry by providing small banks access

to credit risk experts who observe the entire syndicated loan market.

We cannot learn about very small lenders’ incentives by studying deal outcomes as few

SNC deals are majority held by small lenders. Instead, we look at how syndicated lending

activity shifts at the lender level. Lenders who wish to maintain their involvement with SNC

need to shift their syndicated lending from two-lender to three-plus lender deals after the

change in coverage. We cannot directly observe this shift, as we do not observe two-lender

deals after the change. However, if lenders attempt to shift from two to three-plus lender

deals, then we expect that the number of two-lender deals in 1998 should help predict three-

plus lender deals in 1999.

In Table VIII we test this by running a Feasible GLS regression of the number of (three-

plus lender) SNC deals held by each US bank in 1999 on the number of three-plus lender

SNC deals held by the bank in 1998 as well as the number of two-lender SNC deals held by

the bank in 1998.28 We interact the number of two-lender deals in 1998 with a dummy for

large SNC lenders (more than $10 billion in aggregate SNC deals in 1998) to allow large and

small lenders to engage differently in this deal shifting.

The results of this lender level regression are in Table VIII. For small banks, each

additional two-lender deal held before the coverage change predicts roughly an additional

28Residuals are far larger in magnitude for larger lenders, so we address the extreme heteroskedasticity byusing Feasible GLS instead of OLS, where results are driven almost entirely by the largest few lenders. FGLSresults in much lower regression weights for large syndicated lenders, but does not assign disproportionatelylarge weights to any set of lenders.

20

three-plus lender SNC deal after the coverage change; the coefficient of interest is insignif-

icantly different from one. This test supports the idea that small lenders might in general

prefer to have supervisory review of their syndicated lending. In contrast, for larger lenders,

having more two-lender deals in 1998 does not predict having less/greater three-lender deals

in 1999.

6 Robustness

6.1 Alternative Control Group

As discussed in Section 4, our difference-in-differences analysis uses four-lender deals as a

control group. We implicitly assume that lenders are unable to renegotiate four-lender deals

into two (or fewer) lender deals. To the extent that four-lender deals are renegotiable, and

thus “partially treated,” we underestimate the full impact of the change in SNC coverage. In

fact, Table III shows that even prior to the rule change four-lender deals transition to two-

lender deals with some small probability. To reduce any understatement of the treatment

effect, we run our a version of our regressions with five-lender deals included in the control

group. The drawback of this test is that five-lender deals are less similar to three-lender

deals, reducing our comfort in the parallel trends assumption underlying the difference-in-

differences estimation.

Specifically, column (1) of Table IX replicates the exit results from column (5) of Table

IV with the alternative definition of the control group. We estimate a very similar impact to

the one we found previously — a four percentage points increase in exit rates for three-lender

deals following the change in reporting requirements. Similarly, in columns (2) through (5)

of Table IX, we replicate the results of Table VI using the alternative control group and

find similar results. These findings are consistent with a treatment effect, specifically deal

renegotiation activity, that is concentrated in the population of three-lender deals.

21

6.2 Additional Controls for Deal Opacity

Borrower opacity increases the cost of gathering the information desired before entering

into a lending relationship. Therefore, we might expect greater opacity for deals with fewer

lenders. If, in addition, banks reduced their exposure to opaque borrowers as economic

conditions weakened, then lending trends related to deal opacity might offer an alternative

explanation for our findings. To address this concern, we adapt our regression to allow for

deals with different levels of opacity to experience different trends in deal exit rates and

quality. Following the literature (Sufi (2007)), we use both the share of the deal held by the

lead bank and an indicator variable for public status as our measures of opacity.29

Column (1) of Table X shows results from our set of SNC exit regressions using the

additional controls for deal opacity. Coefficients on the interactions of lead share and public

suggest that trends in SNC exit rates are not related to deal opacity over our sample period.

Similary, our estimates of SNC avoidance, based on the relative increase in the exit rate of

three-lender deals, change little from Table IV. However, the statistical significance of the

estimates weakens, as lead share is systematically higher for three-lender deals.

Columns (2) through (5) of Table X adds these controls for deal opacity to the regressions

of deal quality measures from Table VI. As above, trends in deal quality over our sample

period are not significantly related to deal opacity, and we find a similar improvement in the

relative quality of three-lender deals.

7 Concluding Remarks

This paper studies banks’ response to a change in coverage of the primary supervisory

program (SNC) overseeing the syndicated loan market. We use a difference-in-differences

approach that relies on comparing three-lender deals – more “easily” renegotiated into two-

lender deals – with otherwise similar four-lender deals. On average, we find evidence that

29About 30% of deals in our sample are extended to public firms.

22

syndicated lending shifts out of the SNC as a result of the coverage change due to avoidance

incentives. Surviving three-lender deals are of higher quality, implying that the incentive to

avoid supervision is stronger for riskier deals where the potential costs of regulatory review

are greatest. We also show that avoidance is concentrated among deals held by larger, more

leveraged domestic lenders that may have higher SNC Program costs.

We also find evidence consistent with banks perceiving net benefits from supervision.

Smaller banks, with less sophisticated internal risk management practices and facing greater

informational asymmetries on syndicates with larger leads, shift their lending to remain

within the SNC. Our results are robust to a battery of additional tests including alternative

control samples, alternative measures of credit risk, and several sets of control variables.

Our research informs the design of supervisory programs, suggesting that banks do use

coverage criteria to shield risky practices from oversight. These results suggest benefits

of continued regulatory disclosure. Specifically, continued reporting of two lender deals

to supervisors could have disciplined banks’ renegotiations of syndicated deals. We also

highlight supervision’s role in mitigating informational asymmetries that may exist between

lenders. Our results suggest that this aspect of supervision is seen as beneficial by smaller

lenders.

23

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25

Appendix A - Variable Definitions

Lead Share is the share of the deal amount that is held by the lead bank(s) on the deal

syndicate. The lead bank is defined at the parent company level.

Min Share is the share of the deal amount that is held by the supervised topholder with

the smallest deal participation.

Nonbank Share is the share of the deal amount that is held by non-bank investors.

Deal Size Splines are cubic splines constructed from the deal commitment dollar amount

(in millions of USD).

Maturity Splines are cubic splines constructed from deal maturity (in months).

Utilization Ratio is the deal amount that has been utilized by the borrower divided by

the total deal commitment amount. This variable takes the value of one for deals with only

term loans.

Loan Type Shares is the share of each deal composed by term loans, revolvers, or other

loans.

Loan Purpose Shares is the share of each deal issued for working capital, refinanc-

ing/debt consolidation, or acquisition purposes.

Pass Rating is a dummy equal to one where the deal is rated 100% pass according to

the supervisory rating scale (see below).

Supervisory Rating Scale: This is a five grade scale defined as follows from best to

worst rating: 1) Pass—a loan facility defined to be in a good credit standing, 2) Special

Mention—a loan facility with some credit weaknesses that could result in deterioration of

loan repayment prospects, 3) Substandard—a loan facility with well-defined credit weak-

nesses that could result in some losses for the bank if these weaknesses are not corrected,

4) Doubtful—a loan facility with the problems described in the Substandard category with

additional deficiencies that make successful collection highly unlikely, and 5) Loss—a loan

facility that is considered non-collectable and should be charged-off. Both lead banks and

SNC examiners allocate deals across these five ratings, with weights across these categories

26

always adding up to one for each deal (e.g. a deal may be rated 80% pass, 10% special

mention, and 10% substandard).

SNCRatings: This is the rating distribution assigned to each deal by the set of three

SNC examiners under the supervisory rating scale (see above). Deals with positive allocation

to grades below special mention are sometimes referred to as criticized.

Lead Bank Internal Credit Ratings Categories: these are deal-level indicators for the

internal credit ratings grade a lead banks has assigned to a given deals under the internal

rating system of the respective lead bank.

Imputed Credit Quality: We convert external agency ratings from Standard and Poor’s

to a cardinal scale ranging from 0 (Default) to 21 (AAA). The imputed credit quality equals

the average Standard and Poor’s cardinal rating assigned to deals with the same lead bank

and lead bank internal rating (see above). For example, suppose that 50% of deals with

a rating of “4+” from lead bank X have contemporaneous Standard and Poor’s ratings as

follows: 20% A- (16), 20% BBB+ (15), and 10% BBB (14). Then, the imputed credit quality

for grade “4+” at bank X equals (20%∗16+20%∗15+10%∗14)/(20%+20%+10%) = 15.2.

Estimated Incr Reserves: Supervisory expectations for loan loss reserves are based on

examiners’ ratings and are required to be at least 100% of the deal amount rated loss, plus

50% of the amount rated doubtful, and 20% of the amount rated substandard (i.e. the

classified share of the asset). When examiner supervisory ratings are lower than the lead

banks’ internal ratings mapped to the supervisory scale, then increased loan loss reserves

typically result. We run a regression to predict the increase in loss reserves that result from

the 1997 SNC exam, using lead banks’ ratings (on the supervisory scale), plus a fixed effect

for the lead bank and external rating (or just lead bank if the rating appears for fewer than

100 deals). The fitted value of this regression is our estimate of write-downs that will result

from future SNC exams.

Probability of Downgrade: A deal is considered downgraded if at least some portion of

the deal receives a lower examiner rating (on the supervisory rating scale) than lead bank

27

rating (also on the supervisory rating scale). We run a regression to predict the probability of

downgrade in the 1997 SNC exam, using lead banks’ ratings (on the supervisory scale), plus

a fixed effect for the lead bank and external rating (or just lead bank if the rating appears

for fewer than 100 deals). The fitted value of this regression is our estimated probability of

downgrade in future SNC exams.

Lead Bank Fixed Effects: these are indicators for the different lead banks in our sam-

ple defined at the top holder level.

Industry Groups: these are borrower-level deal shares associated with each of the 24

industry groups defined in the SNC collection. In almost all cases each borrower is defined

by lead banks to belong to a single industry, and the industry deal share equals either zero

or one. In the rare case of different leads on the deal reporting the borrower to belong to

different industries, we define a fraction of the deal to belong to each industry (proportional

to the share of the deal that each lead bank has agented).

Y ear F ixed Effects: these are indicators for the year of each deal observation.

Origination Y ear F ixed Effects: these are indicators for the year of deal origination

for each deal observation.

28

Janu

ary

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—Su

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29

0.0

1.0

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3

20 80 140 200Deal Size ($ millions)

Two lenders Three lendersFour lenders

Figure 2: Deal Size Densities This figure separately plots the kernel density of the size (thetotal committed dollar amount) of two, three, and four lender deals in the 1998 SNC. Deals below$20 million in total commitments are not part of SNC.

30

SNC coveragechanges

-.1-.0

50

.05

.1D

iffer

ence

in th

ree

and

four

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er d

eal g

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1997 1998 1999 2000 2001

Total New and exiting deals

SNC coveragechanges

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-.04

-.02

0.0

2D

iffer

ence

in th

ree

and

four

lend

er d

eal g

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th

1997 1998 1999 2000 2001

New and exiting deals New dealsExiting deals

Figure 3: Difference in Three- and Four-Lender Deal Growth. This top plot shows thedifference in growth rates of the number of three- and four-lender deals. The solid line capturesonly the part of the difference in growth rates that is due to new SNC deals or exiting SNC deals(i.e. ignores deal growth due to changes in the number of lenders on deals remaining within SNC).This bottom plot decomposes this into the difference in growth rates attributed separately to newSNC deals and exiting SNC deals. Series in the bottom plot are de-meaned by their average overthe 1997-1998 (i.e. pre-reporting requirement change) period.

31

SNC coveragechanges

.3.3

5.4

.45

Dea

l exi

t rat

e

1997 1998 1999 2000 2001

Three-lender deals Four-lender deals

(a) SNC Deal Exit Rate

SNC coveragechanges

.8.8

5.9

.95

Pass

Rat

ed S

hare

1997 1998 1999 2000 2001

(b) Share Pass Rated

SNC coveragechanges

11.5

1212

.513

Impu

ted

Cred

it Q

ualit

y

1997 1998 1999 2000 2001

(c) Imputed Credit Quality

Figure 4: Trends in Outcomes for Three- and Four-Lender Deals. The top, middle, andbottom plots show the exit rates, pass rated share, and imputed credit quality rating respectively ofthree- and four-lender SNC deals over the period 1997 through 2001. The dotted lines in each plotindicate the average of the given variable before and after the change in SNC Program coverage.

32

Table I: Summary Statistics This table presents yearly statistics on the number of lenders anddeals by number of (supervised) lenders (Panel A), deal characteristics (Panel B), and credit quality(Panel C).

Panel A: Number of Lenders

1997 1998 1999 2000 2001

Number of

Two (supervised) lender deals 1,486 1,631

Three ... 1,137 1,193 1,178 1,173 1,186

Four ... 773 818 834 888 893

Five ... 588 639 687 700 709

Six+ ... 2,655 3,076 3,317 3,568 3,564

Borrowers 5,873 6,506 5,365 5,610 5,643

Lenders 1,084 1,321 1,541 1,991 1,977

Supervised lenders 707 782 784 1,014 935

Panel B: Deal Characteristics

1997 1998 1999 2000 2001

Total commitments ($ billions) 1,425 1,724 1,806 1,932 2,033

Median deal size ($ millions) 83 92 125 130 134

10th percentile 29 30 40 41 40

90th percentile 430 500 600 650 650

Share of Commitments Held by

Syndicate leads 0.177 0.17 0.145 0.141 0.146

Domestic entities 0.477 0.508 0.524 0.541 0.538

Supervised entities 0.967 0.952 0.937 0.914 0.903

FRS supervised entities 0.609 0.561 0.538 0.514 0.514

OCC supervised entities 0.336 0.367 0.376 0.374 0.361

Share of Commitments

Utilized 0.294 0.322 0.343 0.359 0.373

Exiting SNC 0.347 0.347 0.286 0.308 0.297

Maturing in exam year 0.142 0.135 0.133 0.153 0.174

To US borrowers 0.98 0.968 0.958 0.956 0.955

Borrowed for working capital 0.406 0.413 0.415 0.43 0.404

Borrowed for financing 0.139 0.147 0.154 0.151 0.139

Borrowed for acquisitions 0.019 0.017 0.015 0.012 0.011

Panel C: Credit Quality and Conditions

1997 1998 1999 2000 2001

Moody’s default rate 0.009 0.016 0.028 0.037 0.051

Classified asset share 0.004 0.003 0.005 0.01 0.018

Share downgraded in SNC 0.01 0.014 0.021 0.027 0.038

Average imputed credit quality (2) 14.184 13.938 14.118 13.934 13.722

StDev imputed credit quality 2.981 2.949 3.229 3.349 3.449

33

Table II: Summary Statistics by Number of Supervised Lenders Sharing the Deal(1998 SNC exam). This table presents summary statistics similar to Table I, by the number ofsupervised lenders on the deal. Data covers deals in the 1998 SNC exam, the year immediatelybefore the change in SNC reporting requirements became effective.

Two Three Four Five Six+Number of

Deals 1,631 1,193 818 639 3,076Borrowers 1,551 1,156 790 618 2,743Lenders 358 381 378 395 1,133Supervised lenders 214 228 240 229 696

Total commitments ($ billions) 96 84 82 80 1,381Median deal size ($ millions) 40 51 70 99 22710th percentile 23 28 30 42 7590th percentile 100 125 155 200 1000Share of Commitments Held by

Syndicate leads 0.569 0.418 0.35 0.298 0.109Domestic entities 0.581 0.606 0.602 0.598 0.486Supervised entities 0.935 0.939 0.95 0.932 0.955FRS supervised entities 0.476 0.469 0.486 0.488 0.581OCC supervised entities 0.434 0.443 0.447 0.424 0.35Other supervised entities 0.025 0.028 0.018 0.02 0.023

Share of CommitmentsUtilized 0.448 0.486 0.404 0.42 0.292Exiting SNC 0.38 0.361 0.33 0.332Maturing in exam year 0.175 0.139 0.16 0.125 0.107Older than five years 0.151 0.159 0.123 0.154 0.084To US borrowers 0.953 0.961 0.952 0.974 0.97Borrowed for working capital 0.506 0.541 0.446 0.475 0.393Borrowed for financing 0.157 0.17 0.272 0.187 0.135Borrowed for acquisitions 0.068 0.044 0.033 0.053 0.009

Credit Quality and ConditionsClassified asset share 0.006 0.007 0.008 0.006 0.003Share downgraded in SNC 0.03 0.027 0.032 0.021 0.01Average imputed credit quality 13.037 12.979 12.900 13.270 14.137StDev imputed credit quality 3.275 3.065 3.243 3.085 2.858

34

Table III: Transitions Between the Number of (Supervised) Lenders, 1993-1997. PanelA of this table shows unconditional transition probabilities between syndicates with different num-bers of supervised lenders prior to the rule change. The rows represent the number of supervisedlenders at time T and the columns represent the number of supervised lenders for the same dealsin the following year, T + 1. In Panel B, we estimate an OLS regression of the probability oftransitioning to a two-lender deal in the following year (using sample from 1993 to 1997). Theregression includes indicators for the previous number of supervised lenders, and accounts for ahost of controls and fixed effects. All variables are defined in Appendix A. Standard errors arepresented in parentheses and statistical significance is denoted as follows: *p < 0.10, **p < 0.05,***p < 0.01.

Panel A: Lender Size

Lenders at T + 1

N 2 3 4 5 6+ Exit

Len

der

sat

T

2 1,323 0.5803 0.0462 0.0148 0.0057 0.0071 0.34583 1,035 0.0458 0.5623 0.0433 0.0162 0.0174 0.31494 728 0.0099 0.0583 0.5517 0.0451 0.0300 0.30515 511 0.0039 0.0153 0.0725 0.5131 0.0854 0.3098

Panel B: Lender Size

Transition to Two

Coeff. SEThree Lenders 0.079*** (0.006)Four Lenders 0.016*** (0.005)Five Lenders 0.002 (0.005)Log(Additional Lenders) −0.004 (0.003)Matures in Exam Y ear 0.012*** (0.004)Maturity −0.000 (0.000)Log(Deal Size) −0.005*** (0.002)Lead Share −0.003 (0.012)Min Share −0.174*** (0.027)Nonbank Share 0.001 (0.016)Utilization Ratio −0.008** (0.003)

Adjusted R-Squared 0.042Observations 15,263SNC Ratings Y ESDeal Purpose & Type FE Y ESIndustry FE Y ES

35

Table IV: Main Results: Deal Exit Each column represents coefficients from an OLS regressionof deal exit (defined as termination or transition to fewer than three lenders) on the indicatedvariables. Specification (1) contains the minimal set of variables required for difference-in-differencesidentification, while columns to the right incrementally introduce control variables. All variablesare defined in Appendix A. Standard errors are clustered at the lead bank level, and presented inparentheses. Statistical significance is denoted as follows: *p < 0.10, **p < 0.05, ***p < 0.01.

Deal Exit

(1) (2) (3) (4) (5)Treated (Three Lender) 0.028 0.004 0.002 0.026 0.018

(0.019) (0.019) (0.019) (0.021) (0.022)Treated X After 1998 0.042* 0.044* 0.045** 0.049** 0.050**

(0.023) (0.022) (0.023) (0.022) (0.022)Matures in Exam Y ear 0.169*** 0.125*** 0.055** 0.063***

(0.016) (0.022) (0.024) (0.024)Matures... X After 1998 0.072** 0.075** 0.070**

(0.032) (0.030) (0.030)Lead Share −0.080 −0.029

(0.064) (0.067)Min Share −0.249*** −0.170*

(0.088) (0.101)Nonbank Share 0.158*** 0.133**

(0.054) (0.063)Utilization Ratio 0.015 0.005

(0.016) (0.017)

Adjusted R-Squared 0.004 0.039 0.040 0.068 0.090Observations 9,811 9,811 9,811 9,811 9,811Year FE YES YES YES YES YESDeal Size & Maturity Splines NO YES YES YES YES...Interacted with After Dummy NO NO YES YES YESSNC Ratings NO NO NO YES YESOrigination Year FE NO NO NO YES YESDeal Purpose & Type FE NO NO NO YES YESIndustry FE NO NO NO YES YESLead Bank FE NO NO NO NO YES...Interacted with After Dummy NO NO NO NO YES

36

Table V: Deal Exit: For Pass and Non-Pass Deals Each column represents coefficients froman OLS regression of deal exit (defined as termination or transition to fewer than three lenders) onthe same control variables used in column (5) of Table IV. Column (1) restricts the sample to dealsrated “pass” in the previous SNC review, while column (2) instead uses the sample of “non-pass”rated SNC deals. All variables are defined in Appendix A. Standard errors are clustered at the leadbank level, and presented in parentheses. Statistical significance is denoted as follows: *p < 0.10,**p < 0.05, ***p < 0.01.

Deal Exit

(1) (2)Pass Non-pass

Treated (Three Lender) 0.022 −0.084(0.024) (0.076)

Treated X After 1998 0.041* 0.168**(0.023) (0.080)

Matures in Exam Y ear 0.066** 0.069(0.028) (0.077)

Matures... X After 1998 0.075** −0.034(0.031) (0.100)

Lead Share −0.023 0.122(0.073) (0.200)

Min Share −0.164 0.449(0.109) (0.438)

Non−bank Share 0.167** 0.174(0.067) (0.173)

Nonbank Share 0.001 −0.058(0.017) (0.093)

Adjusted R-Squared 0.080 0.150Observations 8,977 834Year FE YES YESDeal Size & Maturity Splines YES YES...Interacted with After Dummy YES YESSNC Ratings YES YESOrigination Year FE YES YESDeal Purpose & Type FE YES YESIndustry FE YES YESLead Bank FE YES YES...Interacted with After Dummy YES YES

37

Table VI: Main Results: Deal Quality This table estimates regressions of measures of dealquality on the variables indicated in the table and controls. The measures of deal quality are (1)whether the deal has a pass rating (PassRating) (2) the imputed (cardinal) external credit ratingof the borrower (ImpQual), (3) the estimated increase in loss reserves resulting from the examtimes 100 (E(IncrReserves)), and (4) the estimated probability that the examiner downgradesthe deal times 100 (Prob(Downgrade)). All variables are defined in Appendix A. Standard errorsare clustered at the lead bank level, and presented in parentheses. Statistical significance is denotedas follows: *p < 0.10, **p < 0.05, ***p < 0.01.

Pass Rating Imp Qual E(IncrReserves) Prob(Downgrade)

Mean 0.898 12.116 0.369 2.801

Standard Deviation 3.108 0.968 5.320

(1) (2) (3) (4)Treated (Three Lender) 0.013 0.095 0.012 −0.016

(0.011) (0.124) (0.058) (0.300)Treated X After 1998 0.023** 0.343*** −0.127** −0.560**

(0.011) (0.129) (0.049) (0.266)Matures in Exam Y ear −0.038** −0.379** 0.202*** 1.071***

(0.016) (0.152) (0.061) (0.370)Matures... X After 1998 0.048* 0.496** −0.193** −0.843*

(0.025) (0.217) (0.078) (0.460)Lead Share −0.089** −0.955** 0.370*** 1.910**

(0.036) (0.421) (0.137) (0.820)Min Share 0.018 −0.036 0.121 0.136

(0.064) (0.779) (0.262) (1.321)Nonbank Share −0.326*** −4.080*** 1.274*** 6.982***

(0.048) (0.587) (0.187) (1.120)Utilization Ratio −0.146*** −1.282*** 0.387*** 2.152***

(0.012) (0.162) (0.048) (0.299)

Adjusted R-Squared 0.132 0.442 0.166 0.166Observations 10,072 8,326 8,086 8,086Lead, Min, Nonbank Share, Utilization YES YES YES YESYear FE YES YES YES YESDeal Size & Maturity Splines YES YES YES YES...Interacted with After Dummy YES YES YES YESOrigination Year FE YES YES YES YESDeal Purpose & Type FE YES YES YES YESIndustry FE YES YES YES YESLead Bank FE YES YES YES YES...Interacted with After Dummy YES YES YES YES

38

Table VII: Deal Exit: Partitions by Type of Lenders on Deal This table shows regressionresults that split the full sample in column (5) of Table IV. In Panel A, we partition deals based onwhether at most (or more than) 33%, 50%, or 66% of the deal is held by domestic institutions. InPanels B and C, we use the subsample of deals held only by domestic institutions. In Panel B, wepartition these deals by whether at least half of the deal commitment is held by SNC participantswith at least (or less than) $10, $15, or $20 billion in aggregate SNC commitments. In Panel C, wepartition these deals by whether at least half of the deal commitment is held by SNC participantswith leverage ratios below (or above) 7.0, 7.5, or 8.0%. All variables are defined in AppendixA. Standard errors are presented in parentheses and statistical significance is denoted as follows:*p < 0.10, **p < 0.05, ***p < 0.01.

Panel A: Domestic Share

Deal Exit

≤ 0.33 >0.33 ≤ 0.5 >0.5 ≤ 0.66 >0.66

(1) (2) (3) (4) (5) (6)

Treated (Three Lender) 0.029 0.012 0.036 0.015 0.029 0.012

(0.035) (0.025) (0.036) (0.025) (0.031) (0.026)

Treated X After 1998 0.002 0.057** 0.017 0.058** 0.022 0.067***

(0.040) (0.026) (0.035) (0.024) (0.031) (0.025)

Matures in Exam Y ear 0.030 0.081*** 0.055 0.081*** 0.025 0.109***

(0.056) (0.028) (0.048) (0.031) (0.039) (0.037)

Matures... X After 1998 0.143** 0.043 0.088 0.048 0.114** 0.024

(0.070) (0.034) (0.063) (0.037) (0.052) (0.043)

Adjusted R-Squared 0.116 0.085 0.096 0.089 0.092 0.092

Observations 2,158 7,653 3,308 6,503 4,275 5,536

Panel B: Lender Size

Deal Exit

<$10B >$10B <$15B >$15B <$20B >$20B

(1) (2) (3) (4) (5) (6)

Treated (Three Lender) 0.088 −0.015 0.048 0.008 0.021 0.002

(0.074) (0.047) (0.064) (0.043) (0.055) (0.051)

Treated X After 1998 −0.008 0.112** 0.005 0.084 0.073 0.079

(0.097) (0.046) (0.074) (0.051) (0.061) (0.053)

Matures in Exam Y ear 0.173 0.142** 0.135 0.144** 0.166** 0.084

(0.107) (0.068) (0.086) (0.071) (0.078) (0.083)

Matures... X After 1998 0.049 0.023 0.077 −0.006 0.068 0.038

(0.157) (0.084) (0.117) (0.089) (0.109) (0.100)

Adjusted R-Squared 0.152 0.085 0.127 0.088 0.116 0.093

Observations 731 2,113 1,068 1,776 1,306 1,538

39

Panel C: Lender Leverage

Deal Exit

<7.0% >7.0% <7.5% >7.5% <8.0% >8.0%

(1) (2) (3) (4) (5) (6)

Treated (Three Lender) 0.081 0.033 −0.010 0.047 0.008 0.043

(0.099) (0.043) (0.089) (0.051) (0.054) (0.072)

Treated X After 1998 0.245* 0.020 0.170** −0.007 0.100* 0.077

(0.144) (0.042) (0.072) (0.053) (0.052) (0.081)

Matures in Exam Y ear 0.065 0.143** 0.147 0.100 0.213** 0.029

(0.211) (0.066) (0.102) (0.070) (0.094) (0.077)

Matures... X After 1998 0.305 −0.018 0.102 −0.042 −0.049 0.127

(0.202) (0.081) (0.113) (0.095) (0.118) (0.107)

Adjusted R-Squared 0.122 0.102 0.090 0.107 0.110 0.097

Observations 446 2,817 1,231 2,032 2,126 1,137

40

Table VIII: Lending Shifts of Small and Large Banks This table shows the result of FeasibleGLS regressions of the number of three-plus lender SNC deals each US bank holds in 1999 (afterthe change in SNC coverage) on the number of deals that bank holds in 1998 interacted with adummy for large lenders (more than $10 billion in aggregate SNC commitments in 1998). At eachiteration of the FGLS procedure, the same set of control variables is used to estimate the errorvariance associated with the observation (bank). All variables are defined in Appendix A. Standarderrors are clustered at the lead bank level, and presented in parentheses. Statistical significance isdenoted as follows: *p < 0.10, **p < 0.05, ***p < 0.01.

(1) (2)# 3-lender deals in 1999

# 3-lender deals in 1998 1.214*** 1.212***(0.037) (0.033)

# 2-lender deals in 1998 1.240*** 1.139***(0.264) (0.256)

Large Lender 7.245 5.716(27.993) (24.924)

Large Lender × 2-lender deals in 1998 −1.895*** −1.824***(0.556) (0.586)

Log(Assets) 0.244**(0.097)

Constant −0.160 −1.981***(0.165) (0.589)

Adjusted R-Squared 0.965 0.966Observations 200 200

41

Tab

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Contr

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E(IncrReserves

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0.34

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12.1

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SY

ES

Dea

lP

urp

ose

&T

yp

eF

EY

ES

YE

SY

ES

YE

SY

ES

Indust

ryF

EY

ES

YE

SY

ES

YE

SY

ES

Lea

dB

ank

FE

YE

SY

ES

YE

SY

ES

YE

S...I

nte

ract

edw

ith

Aft

erD

um

my

YE

SY

ES

YE

SY

ES

YE

S

43