Discussion Paper Details

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Title: Shock Propagation and Banking Structure

Author(s): Mariassunta Giannetti and Farzad Saidi

Publication Date: November 2017

Keyword(s): bank concentration, externalities, fire sales, Supply Chains and syndicated loans

Programme Area(s): Financial Economics

Abstract: 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.

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Bibliographic Reference

Giannetti, M and Saidi, F. 2017. 'Shock Propagation and Banking Structure'. London, Centre for Economic Policy Research.