Do Banks Compete on Non-Price Terms? Evidence from Loan Covenants

We investigate the link between competition in credit markets and non-price loan terms, specifically financial covenants. We exploit regulation in the leveraged loan market as variation in banks' ability to offer covenant-lite loans. As regulated banks demand relatively more covenants, borrowers switch to unregulated lenders, or shadow banks, leading to a decline in aggregate banks' market share. Results are not driven by lower loan supply or changes in other loan terms, and reflect a relation between lax covenants and loan growth in the broader lending market. Our findings encourage regulators to internalize non-price competition between regulated and unregulated sectors.