Is unsystematic risk priced in bank loan contracts?

We demonstrate that a firm's unsystematic risk is positively related to its cost of bank debt. A borrower's unsystematic risk needs to be costly monitored by the lender and some of this cost is included in the bank contract. A one SD increase in unsystematic risk results in a 14.0-19.5% increase in the cost of the loan, or 24-34 basis points for the median loan. Our results complement recent literature about the relevance of unsystematic risk and its effect on the cost of capital of corporations.