Is Borrowing from Banks More Expensive than Borrowing from the Market?

This paper investigates the pricing of bank loans in a dataset of new loans to firms with outstanding bonds. After accounting for seniority, banks earn an economically large interest rate premium relative to the price of credit risk in the bond market. To quantify the bank premium, I apply a structural model that incorporates debt priority and prices corporate bonds accurately. The model matches expected loan recoveries conditional on default, but estimates loan spreads that are 240 basis points smaller, or 84% lower, than observed in the data. Separate analysis of secured bonds shows that seniority is priced  appropriately in the bond market, which suggests that the loan premium is special to banks. The revealed preference of rms implies that they place a high value on bank services other than the simple provision of debt capital.