European Central Bank working paper finds loan syndication primarily reflects banks’ risk constraints and borrower risk

The European Central Bank published Working Paper Series No 3149 on why banks choose between bilateral and syndicated corporate lending, concluding that syndication is mainly a risk-management tool rather than a simple function of loan size or a market for the most reputable borrowers. The authors note the paper does not represent the ECB’s views. Using matched euro area credit register data (AnaCredit) and syndicated-loan data (DealScan) for September 2018 to June 2023, the paper finds banks are more likely to syndicate when their risk-bearing capacity is weaker and screening and monitoring are costlier, and when borrowers are riskier. A one standard deviation decrease in bank capital ratios (6.3 percentage points) is associated with a doubling in syndication likelihood, while lower bank industry specialization and higher borrower probability of default also raise syndication propensity, with these effects strengthening for larger loans. After syndicating, the same factors are linked to lower lead-arranger retained shares. Syndicated loans are priced higher than comparable bilateral loans, with spreads about 57 basis points higher on average and more sensitive to borrower risk, and the results do not support the hypothesis that syndicated borrowing increases the likelihood of later first-time bond issuance.