Seminar: Law, Liquidity & Lending

This paper analyses the lending behavior of EU based banks in the syndicated loan market from the introduction of the Euro until the onset of the Global Financial Crisis to understand the impact of law and power (status) on lending. We show that access to liquidity is key for explaining lending in good and in bad times. Liquidity is defined as the ability to shift or realize at will assets into legal tender (or cash). Both private and public entities can extend liquidity, but in the last instance only the state through its central bank can offer legal tender without limits. Indeed, the ECB’s liquidity managementthrough its collateral policyhas played a key role in fostering convergence in EU bank lending and has mitigated the fallout from the crisis. In contrast, private liquidity channels, as expressed in the number of connections among banks and the willingness to extend revolver loans to borrowers, greatly increased during boom times but weresubstantially cut back in crisis. The paper employs the Legal Theory of Finance (LTF) to explain the evolution of syndicated loan markets in good and in bad times.