Credit Market Spillovers: Evidence from a Syndicated Loan Market Network
46 Pages Posted: 3 Nov 2017
Date Written: May 19, 2017
A large theoretical literature emphasizes the importance of financial networks, but empirical studies remain scarce. We exploit the overlapping bank portfolio structure of syndicated loans to construct a financial network and characterize quantitatively its evolution over time. A spatial autoregressive model provides an ideal methodological framework to estimate a linear interaction function, a frequently used building block of theoretical network models. We provide evidence of economically large spillovers in loan rates from peers' decisions during normal times that vanish in a large recession. These findings are consistent with learning externality models, where reliance on private signals rises during recessions. Counterfactual experiments confirm the quantitative importance of spillovers on lending rates.
Keywords: Syndicated loan market, financial networks, spillovers, cost of lending, spatial autoregression, linear interaction function.
JEL Classification: G01, G21
Suggested Citation: Suggested Citation