Syndication, Interconnectedness, and Systemic Risk

50 Pages Posted: 16 Dec 2011

See all articles by Jian Cai

Jian Cai

Washington University in St. Louis

Anthony Saunders

New York University - Leonard N. Stern School of Business

Sascha Steffen

Frankfurt School of Finance & Management

Date Written: December 2011

Abstract

This paper studies the interconnectedness of banks in the syndicated loan market as a major source of systemic risk. We develop a set of novel measures to describe the "distance" (similarity) between two banks' syndicated loan portfolios and find that such distance explains how banks are interconnected in this market. As lead arrangers choose to work with those that have a similar focus in terms of lending expertise, there is a high propensity of bank lenders to concentrate syndicate partners rather than to diversify them. We find some evidence of potential benefits of this behavior as to lower costs of screening and monitoring, for example, higher shares of the loan taken by more connected lenders and lower loan spreads if syndicated lenders are more connected. Lastly, we find that the most heavily interconnected lenders in the syndicated loan market are also the greatest contributors to systemic risk, suggesting important negative externalities associated with the syndication process.

Suggested Citation

Cai, Jian and Saunders, Anthony and Steffen, Sascha, Syndication, Interconnectedness, and Systemic Risk (December 2011). NYU Working Paper No. 2451/31373, Available at SSRN: https://ssrn.com/abstract=1973475

Jian Cai (Contact Author)

Washington University in St. Louis ( email )

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

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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