Modeling the Role of Networks in Loan Syndicate Markets
72 Pages Posted: 23 Dec 2018 Last revised: 27 Jul 2023
Date Written: July 25, 2023
Abstract
We analyze a stylized loan-auction model where competing banks internalize the tradeoff between gaining lead status and attracting participation in large syndicated loans. We show that successful syndicate leaders can sustain low lending rates by earning higher fee income and reducing syndication risk. Consistent with our model whereby networks affect bidding outcomes, we find that well-connected lenders form larger syndicates, use fewer co-arrangers, and offer lower rates. To address endogenous firm-bank matching, we exploit exogenous credit relationship transfers around bank mergers. Our findings help explain why the syndicated loan market remains competitive despite the rise in bank consolidations.
Keywords: Banking networks, syndicate structure, syndication risk, loan pricing
JEL Classification: L14, G21
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