Completing the European Banking Union: Capital Cost Consequences for Credit Providers and Corporate Borrowers
Michael Koetter, Thomas Krause, Eleonora Sfrappini, Lena Tonzer
European Economic Review,
September
2022
Abstract
The bank recovery and resolution directive (BRRD) regulates the bail-in hierarchy to resolve distressed banks in the European Union (EU). Using the staggered BRRD implementation across 15 member states, we identify banks’ capital cost responses and subsequent pass-through to borrowers towards surprise elements due to national transposition details. Average bank capital costs increase heterogeneously across countries with strongest funding cost hikes observed for banks located in GIIPS and non-EMU countries. Only banks in core E(M)U countries that exhibit higher funding costs increase credit spreads for corporate borrowers and contract credit supply. Tighter credit conditions are only passed on to more levered and less profitable firms. On balance, the national implementation of BRRD appears to have strengthened financial system resilience without a pervasive hike in borrowing costs.
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The Cleansing Effect of Banking Crises
Reint E. Gropp, Steven Ongena, Jörg Rocholl, Vahid Saadi
Economic Inquiry,
No. 3,
2022
Abstract
We assess the cleansing effects of the 2008–2009 financial crisis. U.S. regions with higher levels of supervisory forbearance on distressed banks see less restructuring in the real sector: fewer establishments, firms, and jobs are lost when more distressed banks remain in business. In these regions, the banking sector has been less healthy for several years after the crisis. Regions with less forbearance experience higher productivity growth after the crisis with more firm entries, job creation, and employment, wages, patents, and output growth. Forbearance is greater for state-chartered banks and in regions with weaker banking competition and more independent banks.
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A Note of Caution on Quantifying Banks' Recapitalization Effects
Felix Noth, Kirsten Schmidt, Lena Tonzer
Journal of Money, Credit and Banking,
No. 4,
2022
Abstract
Unconventional monetary policy measures like asset purchase programs aim to reduce certain securities' yield and alter financial institutions' investment behavior. These measures increase the institutions' market value of securities and add to their equity positions. We show that the extent of this recapitalization effect crucially depends on the securities' accounting and valuation methods, country-level regulation, and maturity structure. We argue that future research needs to consider these factors when quantifying banks' recapitalization effects and consequent changes in banks' lending decisions to the real sector.
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Climate Change-Related Regulatory Risks and Bank Lending
Isabella Müller, Eleonora Sfrappini
ECB Working Paper,
No. 2670,
2022
Abstract
We identify the effect of climate change-related regulatory risks on credit real-location. Our evidence suggests that effects depend borrower's region. Following an increase in salience of regulatory risks, banks reallocate credit to US firms that could be negatively impacted by regulatory interventions. Conversely, in Europe, banks lend more to firms that could benefit from environmental regulation. The effect is moderated by banks' own loan portfolio composition. Banks with a portfolio tilted towards firms that could be negatively a affected by environmental policies increasingly support these firms. Overall, our results indicate that financial implications of regulation associated with climate change appear to be the main drivers of banks' behavior.
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The Impact of Overconfident Customers on Supplier Firm Risks
Yiwei Fang, Iftekhar Hasan, Chih-Yung Lin, Jiong Sun
Journal of Economic Behavior and Organization,
May
2022
Abstract
Research has shown that firms with overconfident chief executive officers (CEOs) tend to overinvest and are exposed to high risks due to unrealistically optimistic estimates of their firms’ future performance. This study finds evidence that overconfident CEOs also affect suppliers’ risk taking. Specifically, serving overconfident customers can lead to high supplier risks, measured by stock volatility, idiosyncratic risk, and market risk. The effects are pronounced when customers aggressively invest in research and development (R&D). Our results are robust after addressing self-selection bias and using different CEO overconfidence measures. We also document some real effects of customer CEO overconfidence on suppliers.
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The Real Effects of Universal Banking: Does Access to the Public Debt Market Matter?
Stefano Colonnello
Journal of Financial Services Research,
February
2022
Abstract
I analyze the impact of the formation of universal banks on corporate investment by looking at the gradual dismantling of the Glass-Steagall Act’s separation between commercial and investment banking. Using a sample of US firms and their relationship banks, I show that firms curtail debt issuance and investment after positive shocks to the underwriting capacity of their main bank. This result is driven by unrated firms and is strongest immediately after a shock. These findings suggest that universal banks may pay more attention to large firms providing more underwriting opportunities while exacerbating financial constraints of opaque firms, in line with a shift to a banking model based on transactional lending.
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Stress-ridden Finance and Growth Losses: Does Financial Development Break the Link?
Serafín Martínez-Jaramillo, Ricardo Montañez-Enríquez, Matias Ossandon Busch, Manuel Ramos-Francia, Anahí Rodríguez-Martínez, José Manuel Sánchez-Martínez
IWH Discussion Papers,
No. 3,
2022
Abstract
Does financial development shield countries from the pass-through of financial shocks to real outcomes? We evaluate this question by characterising the probability density of expected GDP growth conditional on financial stability indicators in a panel of 28 countries. Our robust results unveil a non-linear nexus between financial stability and expected GDP growth, depending on countries’ degree of financial development. While both domestic and global financial factors affect expected growth, the effect of global factors is moderated by financial development. This result highlights a previously unexplored channel trough which financial development can break the link between financial (in)stability and GDP growth.
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Aspects of the Political Economy of the European Banking Union
Lena Tonzer
PolEconFin Initiative,
2021
Abstract
The regulatory architecture of the financial system has significantly changed after the global financial crisis of 2008/09. In Europe, the introduction of the Single Rulebook has been a major change and provides the legal foundation for the European Banking Union (EBU). The Single Rulebook consists of a regulation, the Capital Requirements Regulation (CRR), and three main directives targeting capital regulation and compensation of managers, harmonization of deposit insurance schemes, as well as resolution and restructuring rules (Capital Requirements Directive (CRD IV), Deposit Guarantee Schemes Directive (DGSD), Bank Recovery and Resolution Directive (BRRD)).
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Globalisation in Europe: Consequences for the Business Environment and Future Patterns in Light of Covid-19
Sergio Inferrera
IWH-CompNet Discussion Papers,
No. 2,
2021
Abstract
In this paper, I study the consequences of globalisation, as measured by the involvement of firms in GVC, on the business environment. In particular, I focus on concentration and productivity, firstly by estimating robust elasticities and then isolating the exogenous component of the variation in the participation in GVC. To this aim, I exploit the distance between industries in terms of upstreamness and downstreamness along the supply chain. The evidences suggest that involvement in international supply chains is positively related to concentration at the sector level and positively associated with aggregate productivity, an effect that is driven by the firms at the top of the productivity distribution. Finally, I relate these findings to the current pandemic, going beyond the lack of official statistics and estimating GVC participation for 2020 at the country-level through real time world-seaborne trade data, providing evidences on the re-absorption of the Covid shock in several European economies.
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Consumer Defaults and Social Capital
Brian Clark, Iftekhar Hasan, Helen Lai, Feng Li, Akhtar Siddique
Journal of Financial Stability,
April
2021
Abstract
Using account level data from a credit bureau, we study the role that social capital plays in consumer default decisions. We find that borrowers in communities with greater social capital are significantly less likely to default on loans, even after adjusting for different levels of income and other characteristics such as credit scores. The results are strongest for potentially strategic defaults on mortgages; a one standard deviation increase in social capital reduces such defaults by 12.4 %. These results can be generalized to any mortgage default. Our results also indicate that the effect of social capital is most prominent among more creditworthy borrowers, suggesting that when given a choice, the social cost of defaulting is an important factor affecting default decisions. We find a similar impact of social capital on consumer defaults in other datasets with more detailed information on borrowers as well. Our results are robust to modeling and methodology choices, as well as controlling for other drivers of default such as wealth, income and amenities from homeownership. Our results suggest that increasing social capital via measures to build community cohesion such as promotion of owner-occupied home ownership may be one avenue to deter consumer default.
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