The Role of Networks in Loan Syndicate Markets

Several large, well-connected banks jointly underwrite the vast majority of syndicated loans. Although syndication reduces risk by spreading large loans across multiple banks and may benefit borrowers, the process may also facilitate collusive pricing. Disentangling these two effects requires a network view of loan syndicates as traditional measures of market concentration do not capture the collaborative nature of syndication. We find that well-connected banks offer 5- to 15-basis-point-lower loan rates. Well-connected lenders leverage their network position to structure larger, more dispersed syndicates with fewer coarrangers, allowing them to earn higher fee income and reduce their loan risk exposure. We address potential selection biases by exploiting the stickiness in firm-bank relationships and the transfer of credit relationships around forced mergers during the 2007–2009 financial crisis. Using new supervisory data on borrowers’ loan repayment and on-site inspections, we find little evidence that connectedness is related to superior monitoring or performance. Our findings suggest that connectivity is instrumental in lowering loan prices rather than facilitating collusive pricing. This paper was accepted by Kay Giesecke, finance. Supplemental Material: The online appendix and data files are available at https://doi.org/10.1287/mnsc.2024.06313 .