Networks and Information in Credit Markets

A large literature emphasizes financial networks, but understanding how these networks influence lending decisions over the business cycle remains challenging. We exploit the overlapping bank portfolio structure of US syndicated loans to construct a financial network. Using techniques from spatial econometrics, we find large spillovers in lending conditions during good times, driven by commonality in banks' loan portfolio exposures. A standard deviation increase in peers' lending rates can increase a bank's lending rate by 17 basis points. However, these spillovers vanish in a large recession. We interpret these findings through a syndicate lending model where information spillovers driven by loan portfolio commonality dilute banks' incentives to produce private information on borrowers during good times.

Keywords: Financial networks, spillovers, cost of lending, syndicated loan market

JEL Classification: G21, C31

Suggested Citation: Suggested Citation

Gupta, Abhimanyu and Kokas, Sotirios and Michaelides, Alexander and Minetti, Raoul, Networks and Information in Credit Markets (May 19, 2017). Available at SSRN: https://ssrn.com/abstract=3063886 or http://dx.doi.org/10.2139/ssrn.3063886