The Impact of Mark-to-Market Accounting On Credit Supply

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We document the impact of mark-to-market accounting for originations in the syndicated lending market. Institutions with mark-to-market accounting increase originations to capture fees and make capital gains during booms. When secondary market prices fall sufficiently below par, as observed in the Great Recession and late 2015, new originations as well as existing loans face mark-to-market losses. Banks that syndicate more often with mark-to-market lenders respond by cutting originations and increasing loan spreads even in markets with low dependence on mark-to-market lenders, i.e., there is a spillover across markets. By contrast, banks with limited mark-to-market dependence maintain originations through the cycle. A one standard deviation increase in mark-to-market dependence accompanied by a drop in secondary market price of 10bp reduces aggregate bank originations by an extra 15%. We establish that this relationship is causal and independent of bank health.

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