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on Banking |
| By: | Sergio Mayordomo (Banco de España); Antonio Moreno (University of Navarra); Steven Ongena (University of Zurich, Swiss Finance Institute, KU Leuven, and CEPR); María Rodríguez-Moreno (Banco de España) |
| Abstract: | Little is known about the drivers and effectiveness of personal as opposed to real loan guarantees provided by firms. This paper studies a dataset of 477,209 loan contracts granted over the 2006-2014 period by one Spanish financial institution consisting of several distinguishable organisational units. While personal guarantees are mostly driven by the economic environment as reflected in firm and bank conditions, real guarantees are mostly explained by loan characteristics. In response to higher capital requirements imposed by the European authorities in 2011, personal guarantee requirements increased significantly more than their real counterparts. Our results imply that personal guarantees can discipline firms in their risk-taking, but their overuse can limit this positive effect and damage their performance. |
| Keywords: | banks, asymmetric information, real guarantees, personal guarantees, risk-taking, capital requirements |
| JEL: | D43 E32 G21 G32 |
| Date: | 2017–05 |
| URL: | http://d.repec.org/n?u=RePEc:bde:wpaper:1715&r=ban |
| By: | Gambacorta, Leonardo; Schiaffi, Stefano; van Rixtel, Adrian |
| Abstract: | This paper investigates the foreign funding mix of globally active banks. Using BIS international banking statistics for a panel of 12 advanced economies, we detect a structural break in international bank funding at the onset of the global financial crisis. In their post-break business model, banks rely less on cross-border liabilities and, instead, tap funds from outside their jurisdictions by making more active use of their subsidiaries and branches, as well as inter-office accounts within the same banking group. |
| Keywords: | bank funding; International Banks; structural reform initiatives |
| JEL: | C32 F65 G21 |
| Date: | 2017–04 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:11957&r=ban |
| By: | Gabriel Jiménez; Steven Ongena; José-Luis Peydró; Jesús Saurina |
| Abstract: | We analyze the impact of balance-sheet strength on credit availability. Bank balance sheets are weak in crisis times, but so are those of firms, and credit demand is then also weak. For identification, we exploit an administrative dataset of loan applications matched with bank and firm variables covering Spain from 2002 to 2010. Bank balance-sheet strength determines the granting of loan applications only in crisis times, while firm balance-sheet strength – notably leverage – determines strongly this granting in both good and crisis times. Our findings underscore the importance of the strength of corporate balance sheets over credit supply for credit availability. |
| Keywords: | firm balance-sheet channel, credit demand, bank lending channel, credit supply, business cycle, credit crunch, leverage |
| JEL: | E44 G01 G21 G28 G32 |
| Date: | 2017–05 |
| URL: | http://d.repec.org/n?u=RePEc:bge:wpaper:966&r=ban |
| By: | Robert McKeown (Queen's University) |
| Abstract: | I compare returns to scale in the U.S. and Canadian banking system from 1996 to 2015. I estimate a parametric trans-log cost function and, for robustness, an inputoriented distance function. I do this in a way that is commensurate with the limitations of these models. Among the ten largest commercial banks, I find evidence for small but statistically significant increasing returns to scale (RTS). This reflects the descriptive data that offers little evidence for extremely large scale economies. Comparatively, I find constant RTS for the Canadian banks. They paid fewer costs per asset, particularly lower labour costs and legal penalties. Comparing income statement items, I find that, despite higher firm concentration in Canada, the U.S. banks had higher net interest margin rate, paid a lower rate of interest on funds, and had higher credit losses per financial assets. If the U.S. banking system is more competitive, this questions whether an increase in bank competition will create a net positive outcome for society. |
| Keywords: | Bank, Commercial Banks, Financial Intermediaries, Retail Bank, Canada, Canadian |
| JEL: | G21 L89 |
| Date: | 2017–04 |
| URL: | http://d.repec.org/n?u=RePEc:qed:wpaper:1382&r=ban |
| By: | Perignon, Christophe; Thesmar, David; Vuillemey, Guillaume |
| Abstract: | We empirically explore the fragility of wholesale funding of banks, using transaction level data on short-term, unsecured certificates of deposits in the European market. We do not observe any market-wide freeze during the 2008-2014 period. Yet, many banks suddenly experience funding dry-ups. Dry-ups predict, but do not cause, future deterioration of bank performance. Furthermore, in periods of market stress, banks with high future performance tend to increase reliance on wholesale funding. Thus, we fail to find evidence consistent with classical adverse selection models of funding market freezes. Our evidence is in line with theories highlighting heterogeneity between informed and uninformed lenders. |
| Keywords: | wholesale funding; market freeze; certificates of deposits |
| JEL: | G21 |
| Date: | 2017–02–27 |
| URL: | http://d.repec.org/n?u=RePEc:ebg:heccah:1144&r=ban |
| By: | Puriya Abbassi; Falk Bräuning; Falko Fecht; José-Luis Peydró |
| Abstract: | We analyze how financial crises affect international financial integration, exploiting euro-area proprietary interbank data, crisis and monetary shocks, and loan terms to the same borrower-day by domestic versus foreign lenders. Crisis shocks reduce the supply of cross-border liquidity, with stronger volume than pricing effects, thereby impairing international financial integration. On the extensive margin, there is flight to home—but independently of quality. On the intensive margin, however, GIPS-headquartered debtor banks suffer in the Lehman crisis, but effects are stronger in the sovereign-debt crisis, especially for riskier banks. Nonstandard monetary policy improves interbank liquidity, but without fostering strong cross-border financial re-integration. |
| Keywords: | financial integration, financial crises, cross-border lending, monetary policy, euro area sovereign crisis, liquidity |
| JEL: | E58 F30 G01 G21 G28 |
| Date: | 2017–04 |
| URL: | http://d.repec.org/n?u=RePEc:upf:upfgen:1566&r=ban |
| By: | Pierre-Richard Agénor; Luiz A. Pereira da Silva |
| Abstract: | The effects of capital requirements on risk-taking and welfare are studied in a stochastic overlapping generations model of endogenous growth with banking, limited liability, and government guarantees. Capital producers face a choice between a safe technology and a risky (but socially inefficient) technology, and bank risk-taking is endogenous. Setting the capital adequacy ratio above a structural threshold can eliminate the equilibrium with risky loans (and thus inefficient risk-taking), but numerical simulations show that this may entail a welfare loss. In addition, the optimal ratio may be too high in practice and may concomitantly require a broadening of the perimeter of regulation and a strengthening of financial supervision to prevent disintermediation and distortions in financial markets. |
| Keywords: | Capital Requirements, Bank risk-taking, Investment, Financial Stability, Economic Growth, Capital Goods, Financial Regulation, Financial Intermediaries, Financial Markets, risky investments, financial regulation, financial stability |
| JEL: | O41 G28 E44 |
| Date: | 2017–03 |
| URL: | http://d.repec.org/n?u=RePEc:idb:brikps:98078&r=ban |
| By: | Beck, Thorsten; De Jonghe, Olivier; Mulier, Klaas |
| Abstract: | We propose a new stock return-based methodology to measure three dimensions of banks' sectoral concentration (specialization, differentiation,, financial sector exposure). Using these measures for a broad cross-section of banks and countries between 2002 and 2012, we estimate both the short- and long-run relationship between banks' sectoral concentration and banks' performance and stability. We find that bank volatility and systemic risk exposure decrease with banks' sectoral specialization and increase with banks' sectoral differentiation and financial sector exposure. These effects are significantly stronger in the long-run. Moreover, there exists important time and cross- country variation, with effects generally stronger during systemic stress periods. |
| Keywords: | bank concentration; bank risk; differentiation; factor model; sectoral specialization; systemic stability |
| JEL: | G01 G21 G28 L5 |
| Date: | 2017–04 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:12009&r=ban |
| By: | Denderski, Piotr (University of Leicester); Paczos, Wojciech (Cardiff Business School) |
| Abstract: | We provide new evidence on the bank lending channel of monetary policy using bank-level data of 440 banks from eleven CEE transition economies between 1998 and 2012. Our findings are: i) banks adjust their loans to changes in host country’s monetary policy, ii) foreign-owned banks are less responsive to monetary policy of a host country than domestic-owned banks in both normal and crisis times, iii) foreign parent bank characteristics are irrelevant for the bank lending channel. We propose market segmentation hypothesis that can account for those facts better than the alternative, the internal market hypothesis. Foreign banks have a competitive advantage so that their loan portfolio adjusts less to changes in monetary policy. As a consequence, an increase in foreign penetration of the banking sector does not render monetary policy less effective. |
| Keywords: | banks, bank ownership, bank lending channel, monetary policy |
| JEL: | E44 E50 G21 |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:cdf:wpaper:2017/3&r=ban |
| By: | Nicholas Coleman; Ricardo Correa; Leo Feler; Jason Goldrosen |
| Abstract: | This paper studies the patterns of internal liquidity management and their effect on bank lending, using a novel branch-level dataset of Brazilian banks. Our results suggest that internal liquidity management increases during times of financial stress. Privately owned banks are most affected by a liquidity shock, and increase the level of internal funding to maintain their branch lending, while their government-owned competitors react strategically. Private and government banks increase the funding of branches in concentrated and riskier areas. This funding translates into more lending, as the sensitivity of lending to internal funding remains high after the liquidity shock. Altogether, this paper provides branch-level evidence of the way that banks ration internal liquidity, both in normal times and in times of stress, and the effect this has on bank lending. |
| Keywords: | Internal liquidity management ; Brazil ; Bank lending |
| JEL: | F32 G21 L21 O16 |
| Date: | 2017–05–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgif:1204&r=ban |
| By: | Paul Calem; Ricardo Correa; Seung Jung Lee |
| Abstract: | We analyze how two types of recently used prudential policies affected the supply of credit in the United States. First, we test whether the U.S. bank stress tests had any impact on the supply of mortgage credit. We find that the first Comprehensive Capital Analysis and Review (CCAR) stress test in 2011 had a negative effect on the share of jumbo mortgage originations and approval rates at stress-tested banks-banks with worse capital positions were impacted more negatively. Second, we analyze the impact of the 2013 Supervisory Guidance on Leveraged Lending and subsequent 2014 FAQ notice, which clarified expectations on the Guidance. We find that the share of speculative-grade term-loan originations decreased notably at regulated banks after the FAQ notice. |
| Keywords: | bank stress tests, CCAR, Home Mortgage Disclosure Act (HMDA) data, jumbo mortgages, leveraged lending, macroprudential policy, Shared National Credit (SNC) data, Interagency Guidance on Leveraged Lending, syndicated loan market |
| Date: | 2017–05 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:635&r=ban |
| By: | Esteban Gómez; Angélica Lizarazo; Juan Carlos Mendoza; Andrés Murcia Pabón |
| Abstract: | Macroprudential tools have been used around the world to counter potential risks and imbalances in the financial sector. Colombia is a good example of a country that has employed a variety of regulatory measures to manage systemic risks in the economy. The purpose of this paper is to evaluate the effectiveness of two such policies with a view to increasing systemic resilience and curbing excesses in the credit supply. The first measure, the countercyclical reserve requirement, was implemented in 2007 to control excessive credit growth. The second was the dynamic provisioning scheme for commercial loans, which was designed to establish a countercyclical buffer through loan loss provision requirements. To perform this analysis, a rich dataset based on loan-by-loan information for Colombian banks during the 2006-09 period is used. A fixed effects panel model is estimated using the characteristics of debtors, banks and the macroeconomy as control variables. In addition, a difference in differences estimation is performed to evaluate the policies' impact. The findings suggest that the dynamic provisions and the countercyclical reserve requirement had a negative effect on credit growth, and that this effect varies according to bank-specific characteristics. Results also suggest that the aggregate macroprudential policy stance in Colombia has worked effectively to stabilize credit cycles, with some preliminary evidence also pointing towards significant effects in reducing bank risk-taking. Moreover, evidence is found that macroprudential policies have worked as a complement to monetary policy, as both have a moderating effect on credit growth when tightened. |
| Keywords: | Macroprudential policies, reserve requirements, credit growth, dynamic provisioning, credit registry data |
| Date: | 2017–05 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:634&r=ban |
| By: | Md. Shahidul ISLAM; Shin-Ichi NISHIYAMA |
| Abstract: | Using the GMM estimator, this paper empirically studies the bank-specific, industry specific and macroeconomics specific determinants of non-performing loans of banks in the South Asian countries (Bangladesh, India, Nepal and Pakistan) for the period of 1997-2012. We found that moral hazard problems between the bank management and the depositors in addition to that between the bank management and the shareholders; and the adverse selection of borrowers by the bank significantly affect the bank credit risk. We also found evidence that bad management, cost inefficiency, income diversification, bank size, industry concentration ratio, inflation and GDP growth rate all significantly explain the levels of bank NPLs. Empirical results show a moderate degree of persistence of NPLs and a late-hit of the global financial crisis in the banking sector of the region. |
| Date: | 2016–09 |
| URL: | http://d.repec.org/n?u=RePEc:toh:dssraa:64&r=ban |
| By: | FERROUHI, El Mehdi |
| Abstract: | This paper aims to define the determinants of bank deposits in Morocco for the period 2003-2014 using panel data regression. Thus, we used deposits in Moroccan banks as dependent variables and twelve explanatory variables (banks’ size, logarithm of banks’ total assets ; bank’s capital to total assets ratio; external funding to total liabilities ratio; equity to total assets ratio; unemployment rate; inflation rate; growth rate of gross domestic product; foreign direct investment and financial crisis. Results obtained show that deposits are positively correlated with banks size, with both internal and external funding, with interest rate on deposits and with unemployment rate. |
| Keywords: | Deposits, Morocco, banks, panel data, bank-specific determinants, macroeconomic determinants |
| JEL: | G17 G21 G32 |
| Date: | 2017–04 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:79075&r=ban |
| By: | Buch, Claudia M.; Krause, Thomas; Tonzer, Lena |
| Abstract: | In Europe, the financial stability mandate generally rests at the national level. But there is an important exception. Since the establishment of the Banking Union in 2014, the European Central Bank (ECB) can impose stricter regulations than the national regulator. The precondition is that the ECB identifies systemic risks which are not adequately addressed by the macroprudential regulator at the national level. In this paper, we ask whether the drivers of systemic risk differ when applying a national versus a European perspective. We use market data for 80 listed euro-area banks to measure each bank's contribution to systemic risk (SRISK) at the national and the euro-area level. Our research delivers three main findings. First, on average, systemic risk increased during the financial crisis. The difference between systemic risk at the national and the euro-area level is not very large, but there is considerable heterogeneity across countries and banks. Second, an exploration of the drivers of systemic risk shows that a bank's contribution to systemic risk is positively related to its size and profitability. It decreases in a bank's share of loans to total assets. Third, the qualitative determinants of systemic risk are similar at the national and euro-area level, whereas the quantitative importance of some determinants differs. |
| Keywords: | systemic risk,bank regulation,Banking Union |
| JEL: | G01 G21 G28 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubdps:092017&r=ban |
| By: | Bruno, Brunella; D'Onofrio, Alexandra; Marino, Immacolata |
| Abstract: | We investigate bank lending patterns and their determinants in Europe and the United States over 2008-2014. Specifically, we relate bank characteristics prior to the financial crisis to their lending behaviour during and after the crisis period. Our analysis confirms the existence of a bank lending channel. This channel seems stronger in Europe than in the United States, especially if we look at corporate loans rather than at the whole loan portfolio. |
| Keywords: | bank lending channel; bank loans; corporate loans; crisis |
| JEL: | G01 G18 G21 |
| Date: | 2017–04 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:12002&r=ban |
| By: | Paul Pichler; Flora Lutz |
| Abstract: | We study banks' borrowing and investment decisions in an economy with pecuniary externalities and both aggregate and idiosyncratic liquidity risk. We show that private decisions by pro t-maximizing banks always result in socially inecient outcomes, but the nature of ineciency depends critically on the structure of liquidity risk. Overborrowing and overinvestment in risky assets arises only if idiosyncratic risk is suciently small. By contrast, if idiosyncratic risk is large, unregulated banks underborrow, underinvest and hold insucient liquidity reserves. A macroprudential regulator can restore constrained eciency by imposing countercyclical reserve requirements. Pigouvian taxes or bank capital requirements cannot achieve this objective. |
| JEL: | E44 E58 G21 G28 |
| Date: | 2017–04 |
| URL: | http://d.repec.org/n?u=RePEc:vie:viennp:1701&r=ban |
| By: | Puriya Abbassi; Falk Brauning; Falko Fecht; José-Luis Peydró |
| Abstract: | We analyze how financial crises affect international financial integration, exploiting euro-area proprietary interbank data, crisis and monetary shocks, and loan terms to the same borrower-day by domestic versus foreign lenders. Crisis shocks reduce the supply of cross-border liquidity, with stronger volume than pricing effects, thereby impairing international financial integration. On the extensive margin, there is flight to home—but independently of quality. On the intensive margin, however, GIPS-headquartered debtor banks suffer in the Lehman crisis, but effects are stronger in the sovereign-debt crisis, especially for riskier banks. Nonstandard monetary policy improves interbank liquidity, but without fostering strong cross-border financial re-integration. |
| Keywords: | financial integration, financial crises, cross-border lending, monetary policy, euro area sovereign crisis, liquidity |
| JEL: | E58 F30 G01 G21 G28 |
| Date: | 2017–05 |
| URL: | http://d.repec.org/n?u=RePEc:bge:wpaper:965&r=ban |
| By: | Bruno, Brunella; Nocera, Giacomo; Resti, Andrea Cesare |
| Abstract: | In this paper, we first explore the main drivers of the differences in RWAs across European banks. We also assess the impact of RWA-based capital regulation on bank's asset allocation in 2008-2014. We find that risk weights are affected by bank size, business models, and asset mix. We also find that the adoption of internal ratings-based approaches is an important driver of bank risk-weighted assets and that national segmentations explain a significant (albeit decreasing) share of the variability in risk weights. As for the impact on internal rating on banks' asset allocation, we uncover that banks using IRB approaches more extensively have reduced more (or increased less) their corporate loan portfolio. Such effect is somehow stronger for banks located in Euro periphery countries during the 2010-12 sovereign crisis. We do not find evidence, however, of a reallocation from corporate loans to government exposures, pointing to the fact that other motives prevail in explaining the banks' shift towards government bonds during the Euro sovereign crisis, including the "financial repression" channel. |
| Date: | 2017–04 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:12007&r=ban |
| By: | Mark Iarovyi (Bocconi University); sasson Bar Yosef (Hebrew University); Itzhak Venezia (Tel Aviv Yaffo Academic College) |
| Abstract: | Maturity mismatches (MMs) expose banks to interest rate risk and thus add to the uncertainty and ambiguity of their performance. Given the significance of interest rate risk for banking operations, we study to what extent higher MMs and the increased ambiguity concomitant with them contribute to investor disagreement proxied by trading volume in the banks' equity. We overcome infrequency and opacity of accounting disclosures, which obscure their economic usefulness and the accurate measurements of MMs, by resorting to implied MMs, computed as stock return sensitivities to interest rate changes. We find that implied MMs are positively associated with trading volume, and that the role of returns in this relationship is minimal or null. |
| Keywords: | Asset-liability mismatch, maturity mismatch, trading volume, investor disagreement |
| JEL: | G12 G14 G21 |
| Date: | 2017–04 |
| URL: | http://d.repec.org/n?u=RePEc:sek:iefpro:4507072&r=ban |
| By: | Cerasi, Vittoria; Deininger, Sebastian; Gambacorta, Leonardo; Oliviero, Tommaso |
| Abstract: | This paper assesses whether compensation practices for bank Chief Executive Officers (CEOs) changed after the Financial Stability Board (FSB) issued post-crisis guidelines on sound compensation. Banks in jurisdictions which implemented the FSB's Principles and Standards of Sound Compensation in national legislation changed their compensation policies more than other banks. Compensation in those jurisdictions is less linked to short-term profits and more linked to risks, with CEOs at riskier banks receiving less, by way of variable compensation, than those at less-risky peers. This was particularly true of investment banks and of banks which previously had weaker risk management, for example those that previously lacked a Chief Risk Officer. |
| Keywords: | Managerial compensation; Prudential regulation; risk-taking |
| JEL: | G21 G28 G32 |
| Date: | 2017–04 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:12008&r=ban |
| By: | José-Luis Peydró; Andrea Polo; Enrico Sette |
| Abstract: | The potency of the bank lending channel of monetary policy may be limited if banks rebalance their portfolios towards securities, e.g. to pursue risk-shifting or liquidity hoarding. To test for the bank lending and risk-taking (reach-for-yield) channels, we therefore analyze banks’ securities trading, in addition to credit supply, in turn allowing us to also study the empirical relevance of key financial frictions. For identification, since the creation of the euro, we exploit the security and credit application registers owned by the central bank of Italy. In crisis times, we find that, with softer monetary policy, less capitalized banks prefer buying securities rather than increasing credit supply (not due to lack of good loan applications), thereby impacting firm-level real outcomes. Moreover, more – not less – capitalized banks reach-for-yield, which is inconsistent with the risk-shifting hypothesis. Results suggest that the main drivers at work are access to liquidity and risk-bearing capacity, and not regulatory capital arbitrage. Finally, in pre-crisis times, when financial frictions are limited, less capitalized banks do not expand securities holdings over credit supply. |
| Keywords: | monetary policy, securities, loan applications, bank capital, reach-for-yield, held to maturity, available for sale, trading book, haircuts, regulatory arbitrage, sovereign debt |
| JEL: | E51 E52 E58 G01 G21 |
| Date: | 2017–04 |
| URL: | http://d.repec.org/n?u=RePEc:bge:wpaper:964&r=ban |
| By: | Robert McKeown (Queen's University) |
| Abstract: | Using a new data set from the Office of the Superintendent of Financial Institutions, I conduct an in-depth study on cost efficiency and returns to scale (RTS) in Canadian banking. I estimate a transcendental log cost function for the six largest Canadian commercial banks which account for approximately 90 percent of chartered bank assets over the 1996-2011 sample period. The minimal amount of firm entry and exit simplifies many difficulties in the analysis, and the panel dynamic ordinary least squares estimator (PDOLS) provides less biased results than the fixed-effect OLS. Departing from previous studies in banking, I calculate whether the estimated cost function satisfies the microeconomic properties of a monotonicity and price concavity. To my knowledge, this is the first paper to find evidence of constant RTS among the Canadian banks. The result is robust to a number of different asset and price specifications. Furthermore, there is little evidence to suggest cost inefficiencies among the large Canadian banks. This is true whether the Greene (2005) true fixed effects ML estimator is estimated or a distribution-free approach is measured. Combining these two results, the large Canadian banks managed costs efficiently and minimized costs from 1996 to 2011. |
| Keywords: | Bank, Commercial Banks, Financial Intermediaries, Retail Bank, Canada, Canadian |
| JEL: | G21 L89 |
| Date: | 2017–04 |
| URL: | http://d.repec.org/n?u=RePEc:qed:wpaper:1380&r=ban |
| By: | Georgescu, Oana-Maria; Gross, Marco; Kapp, Daniel; Kok, Christoffer |
| Abstract: | Stress tests have been increasingly used in recent years by regulators to foster confidence in the banking sector by not only increasing its resilience via mandatory capital increases but also by enhancing transparency to allow investors to better discriminate between banks. In this study, using an event study approach, we explore how market participants reacted to the 2014 Comprehensive Assessment and the 2016 EBA EU-wide stress test. The results show that stress test disclosures revealed new information that was priced by the markets. We also provide evidence that the publication of stress test results enhanced price discrimination as the impact on bank CDS spreads and equity prices tended to be stronger for the weaker performing banks in the stress test. Finally, we provide some evidence that also sovereign funding costs were affected in the aftermath of the stress test publications. The results provide insights into the effects and usefulness of stress test-related disclosures. JEL Classification: G14, G18, G21 |
| Keywords: | bank stress tests, disclosure, event study |
| Date: | 2017–05 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20172054&r=ban |
| By: | Tamara Vovchak |
| Abstract: | This paper provides evidence about the transmission of banking sector problems to the real sector, and examines the impact of bank credit supply frictions on firm performance. I exploit differences in the composition of banks' liabilities structure during the financial crisis of 2007-2009 as a source of exogenous variation in the availability of bank credit to nonfinancial firms, in order to identify the causal relationship between bank credit supply and firm performance, measured by firms' stock returns. My evidence indicates that banking relationships are important for firms. Firms whose banks relied more on core deposit financing had a lower decline in bank credit during the crisis than those whose banks were mainly financed by noncore sources of funding. I document a positive relationship between changes in bank credit and firms' stock returns during the crisis: a one standard deviation decline in bank credit to a firm causes a stock return reduction of 3.5 percentage points, while firms that had lending relationships with healthier banks had a lower decline in bank credit and thereby lower reductions in their stock returns during the crisis. |
| Keywords: | bank credit; bank liquidity shock; financial crisis; relationship lending; firm financial constraints; firm performance; |
| JEL: | E44 G21 G32 L25 |
| Date: | 2017–03 |
| URL: | http://d.repec.org/n?u=RePEc:cer:papers:wp584&r=ban |