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

We study the interplay between non-price loan terms and competition in credit markets. We exploit a regulatory shock to regulated banks' ability to offer favorable non-price terms, particularly covenant-lite loans. We find that borrowers trade-off increased covenants and lower interest rates from regulated banks, with covenant-lite loans and higher rates from non-banks. This non-price competition alters market structure: less covenant-sensitive borrowers remain with regulated lenders, and financially weaker borrowers switch to shadow banks or leave the leveraged lending market. As a result, banks' market share declines. Our findings on borrower behavior and loan terms align with a stylized equilibrium model.