Shock Propagation and Banking Structure

46 Pages Posted: 26 Nov 2016 Last revised: 3 Jun 2017

Mariassunta Giannetti

Stockholm School of Economics; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI); Swedish House of Finance

Farzad Saidi

Stockholm School of Economics; Centre for Economic Policy Research (CEPR)

Date Written: June 3, 2017

Abstract

We conjecture that lenders' decisions to provide liquidity are affected by the extent to which they internalize any spillover effects of negative shocks. We show that lenders with a large share of loans outstanding in an industry are more likely to provide liquidity to industries in distress. High-market-share lenders' propensity to provide liquidity is higher when negative spillovers are expected to be stronger, such as in industries in which fire sales are more likely to ensue. Lenders with a large share of outstanding loans are also more likely to provide liquidity to customers and suppliers of industries in distress, especially when the disruption of supply chains is expected to be more costly. Our results provide a novel channel, unrelated to market power, explaining why concentration in the credit market may favor financial stability.

Keywords: syndicated loans, bank concentration, supply chains, fire sales, externalities

JEL Classification: E23, E32, E44, G20, G21, L14

Suggested Citation

Giannetti, Mariassunta and Saidi, Farzad, Shock Propagation and Banking Structure (June 3, 2017). Available at SSRN: https://ssrn.com/abstract=2875331 or http://dx.doi.org/10.2139/ssrn.2875331

Mariassunta Giannetti (Contact Author)

Stockholm School of Economics ( email )

P.O. Box 6501
Sveavagen 65
SE-113 83 Stockholm
Sweden
+46 8 736 9607 (Phone)
+46 8 312 327 (Fax)

HOME PAGE: http://sites.google.com/site/mariassuntagiannetti/Home

Centre for Economic Policy Research (CEPR)

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

European Corporate Governance Institute (ECGI)

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

HOME PAGE: http://www.ecgi.org

Swedish House of Finance ( email )

Drottninggatan 98
111 60 Stockholm
Sweden

Farzad Saidi

Stockholm School of Economics ( email )

Stockholm
Sweden

HOME PAGE: http://www.farzadsaidi.com

Centre for Economic Policy Research (CEPR) ( email )

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

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