Within the framework of the joint international conference on systemic financial risk, held by Bank of Israel and the CEPR (Centre for Economic Policy Research), the Bank of Israel is publishing research entitled:


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


The paper was written by Dr. Konstantin Kosenko and Noam Michelson of the Bank of Israel Research Department, and was presented at the Conference.


Within the framework of the ongoing monitoring of banks’ activity in Israel and the risks ascribed to them, this research examines one of the main channels through which financial system shocks develop and become systemic—the channel created as a result of the exposure of financial institutions (banks) to the same asset or group of similar assets (joint exposure). The research paper examines the process in which large borrowers move from a single bank relationship to multiple bank lending. That is, they begin to borrow from several banks instead of just one (though not as syndication transactions, which are not prevalent in Israel’s banking system).


The use of a unique database encompassing all the large credit exposures of the seven large commercial banks in Israel between 2005 and 2015, based on quarterly reports, enabled the researchers to identify the extraneous effects of microprudential regulatory approach. The researchers find that, among other things, regulatory limitations on credit exposures to a large borrower (or group of borrowers) did in fact act to reduce the concentration risk in banking corporations’ credit portfolios and bolstered their stability. However, the restrictions forced the large borrowers to raise credit from alternative sources (other banks, or in the capital market), and therefore the number of banks lending to each one of the large borrowers increased. This phenomenon increases the scope of overlapping assets among banks, and thus it is important to complement the microprudential approach with macroprudential tools as reflected in broader systemic examination of the effects of the phenomenon.


The research analyzes the incentives and preferences of both borrowers and lenders in the process in which a borrower that already receives credit from one bank applies to receive credit from an additional bank. The results show that a large borrower tends to interact with banks that have greater funding sources and with banks that have a prior acquaintance with its business profile. Such acquaintance derives from existing loans to other companies or borrowers that are part of the group of borrowers to which the borrower belongs, or from exposure to the borrower’s industry. Previous acquaintance with the borrower’s activities reduces the information asymmetry in the credit allocation process. The research even finds a high probability that a borrower will interact with a bank that has a relatively high extent of exposure with the previous lender. (This is measured, among other ways, by the comovement of the assets in the equity/bond market.) The research raises potential explanations for the “love for correlation” phenomenon by lenders, and raises the probability that it is related to a conscious decision by the banks to increase the similarity between their credit portfolios in order to enjoy the potential backing because they are “too many to fail”.


An analysis conducted at the Bank of Israel indicates that the common exposure of Israeli banks in the large borrowers’ industries has in fact declined in recent years, due to a contraction of the share of the large borrowers in the banks’ credit portfolio, but it remains significant.[1] As such, this research is important as it adds to the ongoing monitoring and analysis at the Bank of Israel on the issue.

[1]See Box 2 in the Financial Stability Report for the second half of 2017.​