Syndication, interconnectedness, and systemic risk
New paper on interconnectedness of banks using large syndicated loans. Basic idea: Banks become more interconnected through syndicated loan participation which increased their systemic risk.
Abstract. Syndication increases the overlap of bank loan portfolios and makes them more vulnerable to contagious effects. We develop a novel measure of bank interconnectedness using syndicated corporate loan portfolios, overlap based on industry and region, and different weights such as equal weights, size and relationships. We find that interconnectedness is driven mainly by bank diversification, less by bank size or overall loan market size. Interconnectedness is positively correlated with different bank-level systemic risk measures including SRISK, DIP and CoVaR, and such a positive correlation mainly arises from an elevated effect of interconnectedness on systemic risk during recessions. Overall, our results highlight that institution-level risk reduction through diversification ignores the negative externalities of an interconnected financial system.
Jian Cai, Frederik Eidam, Anthony Saunders, Sascha Steffen, 2018, Syndication, interconnectedness, and systemic risk, Journal of Financial Stability, Volume 34, 2018, Pages 105-120.
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