Bank Specialization and the Design of Loan Contracts

We study bank specialization in lending in the U.S. corporate loan market. We document that banks specialize in lending to specific industries. Specialization is persistent over time and common across industries. Using detailed information on syndicated loans, we show that the typical loan contract between a bank specialized in an industry and a firm in the same industry has less restrictive financial covenants and no higher spreads. These results are not explained by relationship lending, high industry market shares, or geographical proximity, and are robust to using default shocks on lenders' loan portfolios as a source of variation in banks' self-assessment of screening abilities. Overall, our evidence suggests that banks specialize in lending because of information advantages in monitoring specific industries. Furthermore, the laxer contract terms offered by specialized banks could provide an explanation for recent evidence that firms cannot easily substitute credit granted by specialized banks.