DP12424 Credit Market Spillovers: Evidence from a Syndicated Loan Market Network

Author(s): Abhimanyu Gupta, Sotirios Kokas, Alexander Michaelides
Publication Date: November 2017
Keyword(s): Complexity, cost of lending, Financial Networks, spatial autoregression, Spillovers, syndicated loan market
JEL(s): G01, G21, L14
Programme Areas: Financial Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=12424

A large theoretical literature emphasizes the importance of financial networks, but empirical studies remain scarce. Due to overlapping bank portfolios, the syndicated loan market provides a natural setting to study financial networks. We exploit the tiered structure of syndicated loans to construct such a network and characterize quantitatively its evolution over time. A spatial autoregressive model provides an ideal methodological framework to estimate spillovers from this financial network to lending rates and quantities. We find that these spillovers are economically large, time-varying and can switch sign after major economic shocks. Moreover, we find that network complexity and uncertainty rise after a large negative shock. Counterfactual experiments confirm the quantitative importance of spillovers and network structure on lending rates and quantities and can be used to disentangle the effects arising from spillovers versus changes in network structure.