"What's the Use of Having a Reputation If You Can't Ruin It Every Now and Then?" Regulatory Enforcement Actions on Banks and the Structure of Loan Syndicates

A decrease in the reputation of a loan syndicate's lead arranger, caused by a regulatory enforcement action for non-compliance with laws and regulations, disincentivizes potential syndicate participants from co-financing the loan. We formally argue that in such cases, the lead arranger must increase his share of the loan in order to make the loan sufficiently attractive to potential participants. We provide strong empirical evidence to support our theoretical argument, using the full sample of enforcement actions enacted on U.S. banks from 2000 through 2010 as well as syndicated loan-level data.