Syndication, Interconnectedness, and Systemic Risk

Syndication increases the overlap of bank loan portfolios and makes them more vulnerable to contagious effects. We develop a novel measure of bank interconnectedness using syndicated corporate loans. Interconnectedness is positively related to both bank size and diversification; diversification, however, matters more than size. We find that interconnectedness is positively correlated with various bank-level systemic risk measures including SRISK, CoVaR, and DIP, and such a positive correlation mainly arises from an elevated effect of interconnectedness on systemic risk during recessions. Using a market-level measure of systemic risk, CATFIN, we also find that interconnectedness increases aggregate systemic risk during recessions. We further find that an aggregate higher level of interconnectedness among banks increases systematic risk (that is, beta) in the financial sector.

Steffen, Sascha, Jian Cai and Anthony Saunders (2016), Syndication, Interconnectedness, and Systemic Risk,