States and local governments that stick with their individual banker when that person moves to a new firm enjoy lower borrowing costs than issuers who stick with the institution.
That's the conclusion from a
Following the underwriter to the new bank lowered an issuer's borrowing costs by an average of 19.5 basis points, or around $400,000 per issuer, the paper said. The savings are equivalent to a one-notch improvement in credit rating, the paper said.
Bankers with MBA degrees bring an additional 13.5 bps reduction in spreads.
"Even in the bond underwriting industry that's dominated by large financial institutions, human capital still plays an important role because bankers have their own knowledge and personal connections to investors," Boreyko said. A "relationship banker" brings an additional $1 million in additional bond purchases from the banker's investor network, she added.
"The main takeaway is that bankers' human capital is portable because market knowledge and the investor network follows the banker," Boreyko told the audience at Brookings. "This is very good news for bankers."
Bank employees across all markets change jobs on average every five years, according to Boreyko. In the muni market, banker turnover has rolled through the market in recent years after banks like
The controversial decision by Texas in 2021 to
Boreyko relied on The Bond Buyer's "people on the move" stories to track relocations, she said.
While a banker's "soft information" about an issuer helps lower borrowing costs — especially for unrated issuers who "lack public credit signals" — it's their investor network that really benefits the issuer, Boreyko said.
The paper suggests that "bankers serve as intermediaries who develop and maintain relationships on both sides of the market, facilitating the matching of borrowers with investors."
On average, investors "allocate about 4% more of their quarterly bond purchases to the bank that hires their relationship banker," the paper said.
The paper offers a "clean setting" that allows Boreyko to "observe when the banker leaves the bank and when local entities work with the same banker at two different banks," said Ivan Ivanoff of the Federal Reserve Bank of Chicago.
"It seems like a very strong finding but I want to see a little more," said Ivanoff, who co-authored a 2023 study on the Texas underwriting ban called, "Gas, Guns, and Governments: Financial Costs of Anti-ESG Policies."
"Being able to keep your banker saves you a lot more ... I want to know why that's the case," he said, questioning whether noncompete clauses, which are used by many underwriting firms, may complicate the picture.
Boreyko's conclusion that bankers are the "relationship holders" with mutual funds was questioned by Ivanoff, who called it "far fetched," as well as some audience members.
"Most of the bankers I've worked with can barely spell Vanguard, let along know how many bonds they own," said an audience member. "So I think it's definitely the underwriting desk and the sales people that are going to have the fund relationships."
