It Takes More than Two to Tango: Understanding the Dynamics behind Multiple Bank Lending and its Implications

In this paper we investigate the matching process between banks and large borrowers that switch from single to multiple bank lending relationships in the corporate loan market. Using a unique dataset on all large credit exposures (about 214,000) of all Israeli commercial banks in the period between 2005 and 2015, we highlight the systemic externalities of micro-prudential regulation. We find, inter alia, that regulatory limits on credit exposures aimed at limiting an individual bank's concentration risk lead large borrowers to turn to multiple lending. This increases the level of asset commonality among banks, and the systemic risk arising from this indirect contagion channel. We find that large borrowers are more likely to establish a new lending relationship with big banks and with the banks that are familiar with the borrower's business profile, whether through existing loans to a group of borrowers to which the borrower belongs, or through acquaintance with the industry in which the borrower operates. Furthermore, we find that borrowers tend to establish a new lending relationship with banks whose asset portfolio is correlated with that of their original lender. This result may possibly be related to the tendency of banks to become more similar in their credit portfolios in order to benefit from a "too many to fail" implicit guarantee