Endogenous screening and the formation of loan syndicates

- A model about the formation of loan syndicates is developed.
- The ex-ante process of information acquisition affects syndication strategies.
- Similar screening costs foster collusion and higher interest rates.

This paper proposes a theoretical model that offers a rationale for the formation of lender syndicates. We argue that the ex-ante process of information acquisition may affect the strategies used to create syndicates. For large loans, the restrictions on lending impose a natural reason for syndication. We study medium-sized loans instead, where there is some room for competition since each financial institution has the ability to take the loan in full by itself. In this case, syndication would be the optimal choice only if their screening costs are similar. Otherwise, lenders would be compelled to compete, since a lower screening cost can create a comparative advantage in interest rates.