Abstract
We conjecture that lenders' decisions to provide liquidity are affected by the extent to which they internalize any spillover effects of negative shocks. We show that lenders with a large share of loans outstanding in an industry are more likely to provide liquidity to industries in distress. High-market-share lenders' propensity to provide liquidity is higher when negative spillovers are expected to be stronger, such as in industries in which fire sales are more likely to ensue. Lenders with a large share of outstanding loans are also more likely to provide liquidity to customers and suppliers of industries in distress, especially when the disruption of supply chains is expected to be more costly. Our results provide a novel channel, unrelated to market power, explaining why concentration in the credit market may favor financial stability.