An Analysis On The Formation Mechanism Of Interest Rate In Emerging Syndicated Loan Markets

Chinese banking industry going global through the syndicated loan is a long-term strategic under the Belt and Road Initiative,which not only output capital but also meet the demand of global development changing pattern.Commercial banks going global through the syndicated loan can not only provide financial support for manufacturing enterprises going global,but also as the carrier of RMB internationalization.There are more than sixty countries along the Belt and Road,most of them are emerging markets.Due to the lack of the development of the financial market and the application of financial market instruments and derivatives,most of the emerging market countries’ social financing structure is indirect financing channels.Although the proportion of direct financing in these countries has increased in recent years,the level of direct financing is still lower than the developed countries,such as Europe and America.The syndicated loan is an important channel of indirect financing for the enterprises from the domestic market and the international market.However,the firms in these emerging markets always face financing constraints.This article analysis the formation mechanism of interest rate in emerging syndicated loan markets.Based on the empirical results,we provide suggestions for China’s commercial banks going global.Based on the information asymmetry theory,our paper analysis the formation mechanism of syndicated loan interest rate in emerging markets from the perspectives of political risk,foreign banks,and foreign currency domination.The empirical result shows: first,the political risk is an important factor of syndicated loan pricing in emerging markets.When the borrower’s countries political risk increases a unit standard deviation,interest rates of syndicated loan will increase 56.335 bps.However,the political risk is not a factor of syndicated loan pricing in the developed countries.Second,foreign banks participation in lead banks will significantly reduce the interest rate of syndicated loan in emerging markets.Whether the lead arranger of the syndicated loan is combined foreign banks and local banks,or lead arranger is foreign banks only,it will significantly reduce the interest rate of syndicated loan.The result comes from the competitiveness of lead banks.We also find that home currency domination and bank size tends to increase the spread of foreign banks’ loan.Third,syndicated loans denominated in foreign currency are associated with lower loan spreads than loans denominated in local currency.The results are robust to the inclusion of loan controls,year fixed effects,borrower fixed effects or interactions of borrower and year fixed effects.By dealing with the endogenous choice of currency,we show the results are invariant to a two-stage procedure.In addition,the findings of foreign currency effects are insensitive to the adjustment of forward exchange rates,indicating considerable deviations from covered interest rate parity(CIP).We further investigate the underlying mechanisms of the foreign currency effect.The empirical results show that the advantage of lending in the home currency,the financial frictions of market segmentation,quality of local financial institutions and capital control affect the foreign currency effect.We show that the pricing differentials were pronounced in the global financial crisis.According to our empirical results,we discuss the implications of the formation mechanism of interest rate in emerging syndicated loan markets for Chinese commercial banks.First,there more than sixty developing countries along the Belt and Road,these countries not only have different development level of the economic and financial,but also different political risk.The political risk of developing countries needs Chinese financial institutions pay attention when going global.The political risk can be managed by the political risk premium in the syndicated loan pricing.Second,Chinese financial institutions can transfer credit risk and reduce the constraint of currency mismatch in emerging market syndicated through the application of RMB.It not only output RMB assets,but promote RMB internationalization.Third,in order to improve Chinese commercial banks competitiveness in the syndicated loan market,our government can through cultivating the domestic banking industry competitive environment to improve our banking competitiveness.Because of the main advantages of commercial banks in the international credit market are risk management and pricing technology,our country can promote the competitiveness of commercial banks by fostering a more competitive market environment.