DP11150 Systemic risk-taking at banks: Evidence from the pricing of syndicated loans

Author(s): Di Gong, Wolf Wagner
Publication Date: March 2016
Keyword(s): loan pricing, public guarantees, systemic risk-taking, too-many-to-fail
JEL(s): G21, G32
Programme Areas: Financial Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=11150

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.