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We provide an explanation for the procyclical variation in the concentration of aggregate bank lending. When bank loan returns have a systematic factor, the failure of one bank conveys adverse information about this systematic factor and increases the cost of borrowing for the surviving banks. Such information contagion is thus costly to bank owners. Given their limited liability, profit-maximizing banks herd ex-ante and undertake correlated investments to increase the likelihood of jointdoi:10.2139/ssrn.442860 fatcat:xmdox4773rge3mjg6qxrqym76q