This emerged from recent research by Neeltje van Horen of De Nederlandsche Bank and Ralph de Haas of the European Bank for Reconstruction and Development. In an interview they comment on the outcome of their study of the international syndicated loans market. In this market, large loans of at least EUR 1 million are provided to companies by several banks joined together in a syndicate. The loans are not only provided to multinationals, but also to large and medium-sized enterprises.
In the wake of the crisis, the volume of cross-border syndicated loans plummeted 60% globally. How come?
‘If you compare the 2006-2007 pre-crisis volume with the volume a year after the Lehman Brothers demise, the drop is 58%. That figure, however, does not reflect the change in the total volume of all syndicated loans on a global scale, but only bears on the decline of international syndicated loans to companies. For instance, when Dutch multinational Philips gets a loan from a syndicate consisting of one Dutch and three foreign banks, we do not count the part provided by the Dutch-based bank. In our investigation we do not focus on the national market, but on the behaviour of banks with respect to cross-border loans in times of crisis.’
How important is this market?
‘For companies in search of international funding this market is vital. Two-thirds of total cross-border lending to emerging countries is effected via the syndicated loans market and for the United States this is 40%. Consequently, if this market collapses, it causes an enormous blow to the corporate sector.’
Which banks did you study?
‘We looked at the figures of 118 large players, both banks from the West and banks in emerging countries such as China and Brazil. Together they comprise some 95% of the syndicated market for companies. If you compare the 2006/7 and 2008/9 figures, it is completely evident that banks worldwide have zealously pruned their cross-border loans, though not everywhere to the same extent.
Are there any differences between banks?
‘We compared banks with a healthy funding position to banks with funding problems, owing for instance to heavy losses on subprime loans or steeply declining share prices. The difference is indeed huge. In times of crisis, the chance that a bank completely withdraws from a country is approximately 40%, but for banks with an average funding shock the chance is substantially higher, namely 47 to 51%. This makes sense, because they require far more capital to keep themselves afloat and therefore have to cut back drastically on lending.’
Has international lending been slashed throughout the world?
‘All banks, whether they have funding problems or not, by and large respond in the same way in times of crisis and cut syndicated loans to the corporate sector in other countries. But they do not en masse withdraw from a country to the same extent. There is no blind rush for the door. On the contrary, banks adopt a highly focused approach. What is relevant in this respect is the closeness of the bank to a specific country. Geographical nearness, a network of domestic banks to do business with and experience in a country are all weighed. Banks cut the most in lending in countries they are far removed from, both literally and figuratively.’
Do companies in some countries no longer have access to international loans?
‘In some countries that may be difficult. Our research has shown that in three countries the entire market for international syndicated loans was wiped away. Foreign banks left those countries en masse. In fourteen other countries the volume dropped 75-99%.’
But do you also take into account the arrival of new players?
‘No, these were not taken into account. But the group of 180 players covers almost the entire market (95%). The few new arrivals did not carry much weight. But of course they do count. By the way, we also observed that some players actually started investing. This is true, for instance, of Japanese banks, which used the crisis to increase their market share. And in some countries domestic banks filled up the void left by the retreating banks. This was particularly the case in China.’
What are the policy implications of your research?
‘Financial integration is a gradual process. The lesson to be learned by the corporate sector and policymakers of emerging countries is that continuity of international lending increases as a bank has closer ties with the country. The last-in-first-out principle applies. Banks that have only just arrived in a country will be the fist to leave it again once a crisis breaks out. In times of crisis, the corporate sector should therefore primarily turn to foreign banks that are at home in their country.'