Given our finding that over time lead banks are retaining a smaller and smaller portion of the credits they originate (especially in the case of term loans), a natural question to ask is, Who buys these credits?
We start by investigating whether, as the lead banks have lowered the share of credits they retain at origination, other banks have increased the share of credit they hold as syndicate participants.
As the chart shows, although the market share of credit lines retained by lead banks decreased through the 1990s and increased through the 2000s, the total market share held by all banks (both lead and syndicate-participant banks) remains fairly stable, at an average of 92 percent during the pre-crisis sample period.
As we can see from the right panel of Chart 6, the decline in the lead banks' aggregate retained share was accompanied by an even bigger decline in the share of the term loans acquired by other banks.
Of the $47 billion in term loans originated in 1988, banks, including lead banks and syndicate-participant banks, retained on their balance sheet 88.6 percent of the amount of credit.
Thus, for credit lines, syndicate-participant banks tended to offset the actions of the lead banks at origination, and they tended to hold the credit lines to maturity (or at least for three years).
Prior research reviewed earlier indicates that lead banks acquire private information about borrowers through processing transactions, investment in learning about relationship customers, as well as from confidential data provided by the borrowers.
In the context of our focus on conflicts of interest between lead banks and syndicate participants, performance pricing addresses the latter's fears of being exploited by the lead bank in two related ways.
Table III reports the results of estimations of the percentage syndicated using a change in the borrowers' Altman's Z scores as the measure of the lead banks' private information about borrowers.
The focus of this paper is on the evolution of ex post credit quality as a proxy for the private information held by lead banks. In particular, we must be able to demonstrate that lead banks do not use their private information to take advantage of member banks by syndicating larger proportions of low-quality loans.
We create samples of loans with S&P senior debt ratings, allowing us to use changes in these ratings as an alternative ex post proxy for private information in setting up tests for exploitative behavior by lead banks. At the time of issuance, bond ratings are first assigned by rating agencies to public debt and are reviewed sporadically.
This finding is also consistent with what we reported earlier using ZSCORECHG and supportive of the main message of this paper that lead banks act as information certifiers by syndicating a larger proportion of loans subsequently upgraded or not downgraded.