Syndication, Interconnectedness, and Systemic Risk

50 Pages Posted: 19 Nov 2009 Last revised: 18 Dec 2017

See all articles by Jian Cai

Jian Cai

Washington University in St. Louis

Frederik Eidam

ZEW – Leibniz Centre for European Economic Research

Anthony Saunders

New York University - Leonard N. Stern School of Business

Sascha Steffen

Frankfurt School of Finance & Management

Date Written: December 12, 2017

Abstract

Syndication increases the overlap of bank loan portfolios and makes them more vulnerable to contagious effects. We develop a novel measure of bank interconnectedness using syndicated corporate loan portfolios, overlap based on industry and region, and different weights such as equal weights, size and relationships. We find that interconnectedness is driven mainly by bank diversification, less by bank size or overall loan market size. Interconnectedness is positively correlated with different bank-level systemic risk measures including SRISK, DIP and CoVaR, and such a positive correlation mainly arises from an elevated effect of interconnectedness on systemic risk during recessions. Overall, our results highlight that institution-level risk reduction through diversification ignores the negative externalities of an interconnected financial system.

Keywords: Interconnectedness, networks, syndicated loans, systemic risk

JEL Classification: G20, G21

Suggested Citation

Cai, Jian and Eidam, Frederik and Saunders, Anthony and Steffen, Sascha, Syndication, Interconnectedness, and Systemic Risk (December 12, 2017). Available at SSRN: https://ssrn.com/abstract=1508642 or http://dx.doi.org/10.2139/ssrn.1508642

Jian Cai

Washington University in St. Louis ( email )

Frederik Eidam

ZEW – Leibniz Centre for European Economic Research ( email )

L 7,1
Mannheim, 68161
Germany
+496211235330 (Phone)

Anthony Saunders

New York University - Leonard N. Stern School of Business ( email )

44 West 4th Street
9-190, MEC
New York, NY 10012-1126
United States
212-998-0711 (Phone)
212-995-4220 (Fax)

Sascha Steffen (Contact Author)

Frankfurt School of Finance & Management ( email )

Adickesallee
32-34
Frankfurt, 60322
Germany
16097326929 (Phone)

HOME PAGE: http://www.sascha-steffen.de

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