Does Political Risk Affect Loan Pricing? Evidence from Syndicated Loan Market

Abstract

Abstract:

Chinese commercial banks and other financial institutions that reach out overseas in response to "the Belt and Road Initiative" can not only meet the urgent funding demand by outbound Chinese manufacturing enterprises, but also function as a strategic carrier of export capital. However, the complexity of the international political situation is a major challenge Chinese banking industry has to face in the process of going global. This paper tests the relationship between political risk and syndicated loan pricing based on syndicated loans led by Chinese financial institutions from 1996 to 2014. The empirical results show that political risk is one of syndicated loan pricing factors in developing countries. The spread of syndicated loan increases 56.335 basis points when political risk increases one unit standard deviation in developing countries. However, political risk premium is not significant in the pricing of syndicated loans in developing countries. Further researches indicate that when providing syndicated loan to developing countries, Chinese state-owned banks or non-bank financial institutions require higher political risk premium and when providing syndicated loan to developed countries, only state-owned Chinese banks require political risk premium.

Key words: political risk, syndicated loan, risk premium

Jiang Tao, Wu Weixing, Gong Di. Does Political Risk Affect Loan Pricing? Evidence from Syndicated Loan Market[J]. , 2017, 29(9): 3-14.

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