Systemic Risk, Credit Risk, and the Effect of Managerial Style in Syndicated Bank Loans

Abstract

When banks are confronted with systemic crises, some banks reduce the credit risk in their loan portfolios, whereas others exploit potential government bailouts and increase their internal credit risk in their loan portfolios. Using a connectedness sample method identifying managerial styles based on both asset and liability side positions, I find that asset innovators most aggressively reduce within-bank credit risk during financial crises, whereas liability innovators respond by increasing internal bank credit risk. In contrast, during non-crisis periods, the bank’s credit risk is positively related to its systemic risk exposure, indicating a baseline risk-taking proclivity. Results are robust to within-loan, GMM, and lead-lag analysis.