DP12423 Shock Propagation and Banking Structure

Author(s): Mariassunta Giannetti, Farzad Saidi
Publication Date: November 2017
Keyword(s): bank concentration, externalities, fire sales, Supply Chains, syndicated loans
JEL(s): E23, E32, E44, G20, G21, L14
Programme Areas: Financial Economics
Link to this Page: www.cepr.org/active/publications/discussion_papers/dp.php?dpno=12423

We conjecture that lenders' decisions to provide liquidity are affected by the extent to which they internalize negative spillovers. We show that lenders with a large share of loans outstanding in an industry provide liquidity to industries in distress when spillovers are expected to be strong, because fire sales are likely to ensue. Lenders with a large share of outstanding loans also provide liquidity to customers and suppliers of industries in distress, especially when the disruption of supply chains is expected to be costly. Our results suggest a novel channel explaining why credit concentration may favor financial stability.