Mind the Gap: The Difference Between U.S. and European Loan Rates
Tobias Berg, Anthony Saunders, Sascha Steffen, Daniel Streitz
Review of Financial Studies,
No. 3,
2017
Abstract
We analyze pricing differences between U.S. and European syndicated loans over the 1992–2014 period. We explicitly distinguish credit lines from term loans. For credit lines, U.S. borrowers pay significantly higher spreads, but lower fees, resulting in similar total costs of borrowing in both markets. Credit line usage is more cyclical in the United States, which provides a rationale for the pricing structure difference. For term loans, we analyze the channels of the cross-country loan price differential and document the importance of: the composition of term loan borrowers and the loan supply by institutional investors and foreign banks.
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Suppliers as Liquidity Insurers
Reint E. Gropp, Daniel Corsten, Panos Markou
IWH Discussion Papers,
No. 8,
2017
Abstract
We examine how financial constraints in portfolios of suppliers affect cash holdings at the level of the customer. Utilizing a data set of private and public French companies and their suppliers, we show that customers rely on their financially unconstrained suppliers to provide them with backup liquidity, and that they stockpile approximately 10% less cash than customers with constrained suppliers. This effect persisted during the global financial crisis, highlighting that suppliers may be viable insurers of liquidity even when financing from banks and other external channels is unavailable. We further show that customers with unconstrained suppliers also simultaneously receive more trade credit; that the reduction in cash holdings is greater for firms with stronger ties to their unconstrained suppliers; and that customers reduce their cash holdings following a significant relaxation in their suppliers’ financial constraints through an IPO. Taken together, the results provide important nuance regarding the implications of supplier portfolios and financial constraints on firm liquidity management.
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Banking Globalization, Local Lending, and Labor Market Effects: Micro-level Evidence from Brazil
Felix Noth, Matias Ossandon Busch
Abstract
This paper estimates the effect of a foreign funding shock to banks in Brazil after the collapse of Lehman Brothers in September 2008. Our robust results show that bank-specific shocks to Brazilian parent banks negatively affected lending by their individual branches and trigger real economic consequences in Brazilian municipalities: More affected regions face restrictions in aggregated credit and show weaker labor market performance in the aftermath which documents the transmission mechanism of the global financial crisis to local labor markets in emerging countries. The results represent relevant information for regulators concerned with the real effects of cross-border liquidity shocks.
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Internal Governance and Creditor Governance: Evidence from Credit Default Swaps
Stefano Colonnello
IWH Discussion Papers,
No. 6,
2017
Abstract
I study the relation between internal governance and creditor governance. A deterioration in creditor governance may increase the agency costs of debt and managerial opportunism at the expense of shareholders. I exploit the introduction of credit default swaps (CDS) as a negative shock to creditor governance. I provide evidence consistent with shareholders pushing for a substitution effect between internal governance and creditor governance. Following CDS introduction, CDS firms reduce managerial risk-taking incentives relative to other firms. At the same time, after the start of CDS trading, CDS firms increase managerial wealth-performance sensitivity, board independence, and CEO turnover performance-sensitivity relative to other firms.
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Banks Credit and Productivity Growth
Fadi Hassan, Filippo di Mauro, Gianmarco Ottaviano
ECB Working Paper,
No. 2008,
2017
Abstract
Financial institutions are key to allocate capital to its most productive uses. In order to examine the relationship between productivity and bank credit in the context of different financial market set-ups, we introduce a model of overlapping generations of entrepreneurs under complete and incomplete credit markets. Then, we exploit firm-level data for France, Germany and Italy to explore the relation between bank credit and productivity following the main derivations of the model. We estimate an extended set of elasticities of bank credit with respect to a series of productivity measures of firms. We focus not only on the elasticity between bank credit and productivity during the same year, but also on the elasticity between credit and future realised productivity. Our estimates show a clear Eurozone core-periphery divide, the elasticities between credit and productivity estimated in France and Germany are consistent with complete markets, whereas in Italy they are consistent with incomplete markets. The implication is that in Italy firms turn to be constrained in their long-term investments and bank credit is allocated less efficiently than in France and Germany. Hence capital misallocation by banks can be a key driver of the long-standing slow productivity growth that characterises Italy and other periphery countries.
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Sovereign Credit Risk Co-movements in the Eurozone: Simple Interdependence or Contagion?
Manuel Buchholz, Lena Tonzer
International Finance,
No. 3,
2016
Abstract
We investigate credit risk co-movements and contagion in the sovereign debt markets of 17 industrialized countries during the period 2008–2012. We use dynamic conditional correlations of sovereign credit default swap spreads to detect contagion. This approach allows us to separate contagion channels from the determinants of simple interdependence. The results show that, first, sovereign credit risk co-moves considerably, particularly among eurozone countries and during the sovereign debt crisis. Second, contagion varies across time and countries. Third, similarities in economic fundamentals, cross-country linkages in banking and common market sentiment constitute the main channels of contagion.
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On the Nonexclusivity of Loan Contracts: An Empirical Investigation
Hans Degryse, Vasso Ioannidou, Erik von Schedvin
Management Science,
No. 12,
2016
Abstract
We study how a bank's willingness to lend to a previously exclusive firm changes once the firm obtains a loan from another bank ("outside loan") and breaks an exclusive relationship. Using a difference-in-difference analysis and a setting where outside loans are observable, we document that an outside loan triggers a decrease in the initial bank's willingness to lend to the firm, i.e., outside loans are strategic substitutes. Consistent with concerns about coordination problems and higher indebtedness, we find that this reaction is more pronounced the larger the outside loan and it is muted if the initial bank's existing and future loans retain seniority and are protected with valuable collateral. Our results give a benevolent role to transparency enabling banks to mitigate adverse effects from outside loans. The resulting substitute behavior may also act as a stabilizing force in credit markets limiting positive comovements between lenders, decreasing the possibility of credit freezes and financial crises.
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European versus Anglo-Saxon Credit View: Evidence from the Eurozone Sovereign Debt Crisis
Marc Altdörfer, Carlos A. De las Salas Vega, Andre Guettler, Gunter Löffler
Abstract
We analyse whether different levels of country ties to Europe among the rating agencies Moody’s, S&P, and Fitch affect the assignment of sovereign credit ratings, using the Eurozone sovereign debt crisis of 2009-2012 as a natural laboratory. We find that Fitch, the rating agency among the “Big Three” with significantly stronger ties to Europe compared to its two more US-tied peers, assigned on average more favourable ratings to Eurozone issuers during the crisis. However, Fitch’s better ratings for Eurozone issuers seem to be neglected by investors as they rather follow the rating actions of Moody’s and S&P. Our results thus doubt the often proposed need for an independent European credit rating agency.
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Bank Response to Higher Capital Requirements: Evidence from a Quasi-natural Experiment
Reint E. Gropp, Thomas Mosk, Steven Ongena, Carlo Wix
Abstract
We study the impact of higher capital requirements on banks’ balance sheets and its transmission to the real economy. The 2011 EBA capital exercise provides an almost ideal quasi-natural experiment, which allows us to identify the effect of higher capital requirements using a difference-in-differences matching estimator. We find that treated banks increase their capital ratios not by raising their levels of equity, but by reducing their credit supply. We also show that this reduction in credit supply results in lower firm-, investment-, and sales growth for firms which obtain a larger share of their bank credit from the treated banks.
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Borrowers Under Water! Rare Disasters, Regional Banks, and Recovery Lending
Michael Koetter, Felix Noth, Oliver Rehbein
Abstract
We show that local banks provide corporate recovery lending to firms affected by ad-verse regional macro shocks. Banks that reside in counties unaffected by the natural disaster that we specify as macro shock increase lending to firms inside affected counties by 3%. Firms domiciled in flooded counties, in turn, increase corporate borrowing by 16% if they are connected to banks in unaffected counties. We find no indication that recovery lending entails excessive risk-taking or rent-seeking. However, within the group of shock-exposed banks, those without access to geographically more diversified interbank markets exhibit more credit risk and less equity capital.
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