Loan syndication under Basel II: How do firm credit ratings affect the cost of credit?

This paper investigates how syndicated lenders react to borrowers’ rating changes under heterogeneous conditions and different regulatory regimes. Our findings suggest that corporate downgrades increase capital requirements for lending banks the Basel II framework are associated with increased loan spreads deteriorating non-price terms relative do not affect requirements. Ratings exert an asymmetric impact on spreads, as these remain unresponsive upgrades, even when latter a reduction in risk weights loans. The firm borrowing costs is mitigated presence of previous bank-firm relationships borrowers relatively strong performance, high cash flows low leverage.