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Title: Systemic risk-taking at banks: Evidence from the pricing of syndicated loans

Author(s): Di Gong and Wolf Wagner

Publication Date: March 2016

Keyword(s): loan pricing, public guarantees, systemic risk-taking and too-many-to-fail

Programme Area(s): Financial Economics

Abstract: Public guarantees extended during systemic crises can affect the relative pricing of risks in the financial system. Studying the market for syndicated loans, we find that banks require lower compensation for aggregate risk than for idiosyncratic risk, consistent with systemic risk-taking due to guarantees. The underpricing of aggregate risk is concentrated among banks that benefit more from exposure to public guarantees and disappears for non-bank lenders not protected by these guarantees. Estimates from loan spread regressions imply a sizeable guarantee that is passed onto borrowers, but also distortions in the economy's capital allocation.

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Bibliographic Reference

Gong, D and Wagner, W. 2016. 'Systemic risk-taking at banks: Evidence from the pricing of syndicated loans'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=11150