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Bank Loans, Bonds, and Information Monopolies across the Business Cycle




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    • Santos is from the Federal Reserve Bank of New York, and Winton is from Carlson School of Management, University of Minnesota. The authors thank Allen Berger, Arnoud Boot, Mark Carey, Gabriella Chiesa, Murray Frank, Anne Gron, John Ham, Chris James, Ross Levine, Robert Marquez, Mitchell Petersen, Amiyatosh Purnanandam, Enrichetta Ravina, Claire Rosenfeld, Bryan Routledge, David Smith, Annette Vissing-Jorgensen; participants at 2006 FIRS Meetings, the 2006 AFA Meetings, the 2005 Federal Reserve Bank of Chicago Bank Structure Conference, the 2005 New York City Area Conference on Financial Intermediation, the 2005 DIW/JFI/Federal Reserve Bank of Philadelphia Conference on Bank Relationships, Credit Extension, and the Macroeconomy; and seminar participants at American University, Göteborg University, Indiana University, Michigan State University, Northwestern University, the Stockholm School of Economics, Tulane University, the University of Iowa, the University of Minnesota, Universidade Católica Portuguesa-Lisbon, Instituto Superior de Economia e Gestão, Universidade dos Açores, the Federal Reserve Banks of Chicago and New York, and the Federal Reserve Board of Governors for valuable comments. The authors also thank Kristin Wilson, Chris Metli and Kyle Lewis for outstanding research assistance. The views stated herein are those of the authors and are not necessarily those of the Federal Reserve Bank of New York, or the Federal Reserve System.


Theory suggests that banks' private information about borrowers lets them hold up borrowers for higher interest rates. Since hold-up power increases with borrower risk, banks with exploitable information should be able to raise their rates in recessions by more than is justified by borrower risk alone. We test this hypothesis by comparing the pricing of loans for bank-dependent borrowers with the pricing of loans for borrowers with access to public debt markets, controlling for risk factors. Loan spreads rise in recessions, but firms with public debt market access pay lower spreads and their spreads rise significantly less in recessions.