Systemic Risk-Taking at Banks: Evidence from the Pricing of Syndicated Loans
52 Pages Posted: 12 Feb 2016 Last revised: 26 Nov 2016
Date Written: July 19, 2016
Public guarantees extended during systemic crises can affect the relative pricing of risks in the financial system. Studying the market for syndicated loans, we find that banks require lower compensation for aggregate risk than for idiosyncratic risk, consistent with systemic risk-taking due to guarantees. The underpricing of aggregate risk is concentrated among banks that benefit more from exposure to public guarantees and disappears for non-bank lenders not protected by these guarantees. Estimates from loan spread regressions imply a sizeable guarantee that is passed onto borrowers, but also distortions in the economy’s capital allocation.
Keywords: Public guarantees, Too-many-to-fail, Systemic risk-taking, Loan pricing
JEL Classification: G21, G32
Suggested Citation: Suggested Citation