Enforcement actions on banks and the structure of loan syndicates

Regulatory enforcement actions for non-compliance with laws and regulations may have adverse reputational effects for punished banks acting as lead arrangers in loan syndicates, thereby disincentivizing participants from co-financing and forcing the lead arrangers to increase their own shares of the loans. Our empirical evidence based on hand-collected enforcement action data enacted from 2001 through 2010 in the U.S. and on matched syndicated loan-level data strongly supports this conjecture. The required share increases by lead arrangers can be mitigated by extending loan guarantees, performance pricing provisions, and covenants.