Liquidity Risk and Syndicate Structure
We offer a new explanation of loan syndicate structure based on banks' comparative advantage in managing systematic liquidity risk. When a syndicated loan to a rated borrower has systematic liquidity risk, the fraction of passive participant lenders that are banks is about 8% higher than for loans without liquidity risk. In contrast, liquidity risk does not explain the share of banks as lead lenders. Using a new measure of ex-ante liquidity risk exposure, we find further evidence that syndicate participants specialize in liquidity-risk management while lead banks manage lending relationships. Links from transactions deposits to liquidity exposure are about 50% larger at participant banks than at lead arrangers.
We thank seminar participants at Boston College, the Federal Reserve Bank of New York, the University of Michigan, and Simon Fraser University. The views expressed herein are those of the author(s) and do not necessarily reflect the views of the National Bureau of Economic Research.