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Interconnected bank networks: Shock amplifiers or absorbers in the financial system?

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  • Ren, Jing
  • Tang, Le

Abstract

We develop a novel measure of bank interconnectedness, based on their co-lending activities in the syndicated loan market, to examine how a bank's interconnectedness affects the risk of other banks and systemic market risk. Using syndicated loan data from the top 100 U.S. banks from 1995 to 2011, our empirical analysis shows that higher levels of interconnectedness among banks increase individual bank risk and elevate systemic risk, especially during the global financial crisis. This effect is not observed under normal economic conditions. Additionally, by using Lehman Brothers' bankruptcy as a natural experiment, we find that banks connected to Lehman contribute significantly more to systemic risk than those not connected. This evidence supports causality rather than mere correlation.

Suggested Citation

  • Ren, Jing & Tang, Le, 2025. "Interconnected bank networks: Shock amplifiers or absorbers in the financial system?," International Review of Economics & Finance, Elsevier, vol. 99(C).
    • Handle: RePEc:eee:reveco:v:99:y:2025:i:c:s105905602500142x
    DOI: 10.1016/j.iref.2025.103979
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    More about this item

    Keywords

    Systemic risk; Interconnectedness; Syndicated loan market;
    All these keywords.

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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