Lender Capital Management and Financial Covenant Strictness

ABSTRACT We provide evidence that lenders with lower regulatory capital issue loans financial covenant strictness, consistent such viewing borrower violations as costlier. This is because a violation may lead the lender to downgrade loan, which triggers accounting further reduces capital. Because of scrutiny, this true even if waives violation. find association concentrated in performance covenants rather than covenants. also relatively low amounts and shorter maturities, replacing protection stricter loan terms on other dimensions. Finally, we form management extends syndicate participant lenders, participants adequacy take smaller shares when arranger sets high strictness. Data Availability: are available from public sources cited text. JEL Classifications: G21; M40; M41.