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Systemic Risk-Taking at Banks: Evidence from the Pricing of Syndicated Loans

52 Pages Posted: 12 Feb 2016 Last revised: 26 Nov 2016

Di Gong

University of International Business and Economics (UIBE) - School of Banking and Finance

Wolf Wagner

Erasmus University Rotterdam (EUR) - Rotterdam School of Management (RSM); Centre for Economic Policy Research (CEPR)

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Date Written: July 19, 2016

Abstract

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

Gong, Di and Wagner, Wolf, Systemic Risk-Taking at Banks: Evidence from the Pricing of Syndicated Loans (July 19, 2016). Available at SSRN: https://ssrn.com/abstract=2730990 or http://dx.doi.org/10.2139/ssrn.2730990

Di Gong (Contact Author)

University of International Business and Economics (UIBE) - School of Banking and Finance ( email )

No.10, Huixindong Street
Chaoyang District
Beijing, 100029
China

Wolf Wagner

Erasmus University Rotterdam (EUR) - Rotterdam School of Management (RSM) ( email )

P.O. Box 1738
Room T08-21
3000 DR Rotterdam, 3000 DR
Netherlands

Centre for Economic Policy Research (CEPR) ( email )

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

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