Abstract
In this paper we document evidence of systemic risk taking from syndicated loan
pricing. Using U.S. syndicated loan data, we find that the borrower's idiosyncratic risk is positively priced whereas systematic risk is negatively related to loan spreads, controlling for firm, loan and bank specific variables. We argue that the underpricing of systematic risk relative to idiosyncratic risk suggests banks' preference for investing in systematic risk which increases interbank correlation and systemic risk of banks. We relate the incentive for systemic risk-taking to the "too-many-to-fail" guarantee. We further show that small and lowly correlated banks underprice systematic risk relative to big and more correlated
banks.
pricing. Using U.S. syndicated loan data, we find that the borrower's idiosyncratic risk is positively priced whereas systematic risk is negatively related to loan spreads, controlling for firm, loan and bank specific variables. We argue that the underpricing of systematic risk relative to idiosyncratic risk suggests banks' preference for investing in systematic risk which increases interbank correlation and systemic risk of banks. We relate the incentive for systemic risk-taking to the "too-many-to-fail" guarantee. We further show that small and lowly correlated banks underprice systematic risk relative to big and more correlated
banks.
Original language | English |
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Place of Publication | Tilburg |
Publisher | EBC |
Number of pages | 33 |
Volume | 2014-006 |
Publication status | Published - 24 Aug 2014 |
Publication series
Name | EBC Discussion Paper |
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Volume | 2014-006 |
Keywords
- Systemic risk-taking;
- loan pricing
- public guarantees
- too-many-to-fail
- syndicated loans