Foreign Exchange Risk, Global Financial Crisis, and Loan Risk Premium: Analysis of International Lending by US Banks

Abstract

This paper investigates the determinants of the risk premium of international syndicated corporate loans utilizing extensive syndicate deal database, DealScan, and provides a unique empirical analysis over the test duration from January 2000 to December 2008, including the period of the global financial crisis in 2007-2008. This paper not only examines the macroeconomic and microeconomic determinants of loan risk premiums, but also inspects how exchange rate volatility and the global financial crisis affected the loan risk premium in international lending. The findings of this paper are summarized as following: (i) foreign exchange risk increased loan risk premium of international syndicated corporate loans, (ii) the global financial crisis increased loan risk premiums, (iii) countty and macroeconomic factors had appropriate effects on loan risk premiums based on their characteristics, and (iv) borrowing firm and contract factors such as loan size, loan maturity, loan purposes, and borrower's business sector also had appropriate effects on the risk premium based on their characteristics.