Contributions published at Banking (Steven Ongena)

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With the onset of the financial crisis, disentangling the effects of loan demand and supply in contemporary banking research has become vital for a proper assessment of supply‐related banking shocks. These shocks may negatively affect the real economy through many channels, such as the lending channel of monetary policy transmission, the bank risk‐taking channel or the evaluation of macroprudential policy efficiency. All these rely on separating the two lending components. Empirical identification has largely relied on the use of demand‐related fixed effects, which has also been applied in several analyses within this symposium.

We study the impact of emotions on real-world decisions made by loan officers by analyzing the loan conditions of loans granted immediately after a bank branch robbery. We find significant differences between the conditions of loans granted after a robbery and changes in loan conditions that occur contemporaneously at unaffected branches. In general, loan officers seem to adopt so-called avoidance behavior. In accordance with the literature on posttraumatic stress, their avoidance behavior is halved within two weeks following the robbery and the effect further varies depending on the presence, or absence, of a firearm during the robbery.

Whether bank credit is suitable to finance innovation is a key question. Using a sample of 6422 small firms across 22 emerging economies, we find that a lack of access to credit stifles innovation, especially of the technologically "hard" type. This detrimental impact is stronger in localities or sectors with more dependence on external financing, but only holds for firms that are limited in alternative financing sources. The negative impact is further mitigated by better institutions. Foreign or transactional banks, or banks in more diversified banking markets are better in promoting firm innovation.

Firms with credit-default swaps (CDS) traded on their debt may face "empty creditors'' as hedged creditors have less incentive to participate in firm restructuring. We test for the existence of empty creditors by employing an exogenous change to the bankruptcy code in Germany, that effectively removes their potential impact on CDS firms. Using a unique dataset on bank-firm CDS net notional and credit exposures we find that the probability of default for firms with CDS traded on them drops when the effect of empty creditors is removed. This effect increases in the average CDS hedge position of a firm's creditors and in the concentration of the firm's debt. Further, we find that firms with longer credit relationships, with higher average collateral ratios of their debt, and financially safer firms are less affected by empty creditors. Banks that are not capital constrained, and that are liquidity constrained recognise the empty creditor effect to a larger extent. Furthermore, banks' business models affect the degree to which they recognise the empty creditor effect. Where banks that monitor their creditors less and that earn a smaller portion of their income from interest activities, recognise the empty creditor effect to a larger extent.

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How have financial markets reacted to the disclosure of the list of Other Systemically Important Institutions by the European Banking Authority? With an event study of bank stock prices, we document that the immediate reaction of the stock market is negative, suggesting that the included financial institutions are perceived to be less profitable because they are subject to tighter regulation. However, within a few days, investors change their perception in the case of both euro-zone and noneuro-zone banks, which can be attributed to their too-big-to-fail status. CDS spreads react similarly, increasing first before decreasing almost immediately thereafter. On the day of the event, abnormal returns are more negative for banks selected using supervisory judgement and for large banks. In the long run, the market reacts more positively in the case of financial institutions selected using discretionary information and those with a lower capitalization.

We investigate the effect of regulatory enforcement actions on banks' reputation by estimating the effect of non-compliance with laws and regulations among lead arrangers on the structure of syndicated loans. Consistent with a regulatory reputational stigma, a punished lead arranger increases her loan share to entice participants to continue to co-finance the loan. Consequently, when punished lead arranger initiates a new syndicated loan, then this loan tends to be more concentrated and co-funded by participants with previous collaboration with the lead arranger. However, the observed share increases by punished lead arrangers are seemingly mitigated by extending the loan guarantees, performance pricing provisions, and covenants.

We analyze how time-varying bank-specific capital requirements affect bank lending to the non-financial corporate sector as well as banks' balance sheet adjustments. To do so, we relate Pillar 2 capital requirements to a comprehensive corporate credit register coupled with bank and firm balance sheet data. Our analysis consists of three components. First, we investigate how capital requirements affect the supply of bank credit to the corporate sector, both on the intensive and extensive margin, as well as for different types of credit. Subsequently, we document how bank and firm characteristics as well as the stance of monetary policy impact the relationship between bank capital requirements and the supply of credit. Finally, we examine how time-varying bank-specific capital requirements affect banks' balance sheet composition.

This paper provides evidence on the strategic lending decisions made by banks facing a negative funding shock. Using bank-firm level credit data, we show that banks reallocate credit within their domestic loan portfolio in at least three different ways. First, banks reallocate to sectors where they have high sector presence. Second, they also reallocate to sectors in which they are heavily specialized. Third, they reallocate credit towards low-risk firms. These reallocation effects are economically large. A standard deviation improvement in sector presence, sector specialization or firm risk reduces the transmission of the funding shock to credit supply by 22, 8 and 10%, respectively.

We analyze how banks’ allocations of mortgage credit across regions change when an online platform enables them to offer to regions where they have no branches, staff or legacy. Unique data from an online platform with offers from different banks to each mortgage application yield three novel findings. First, banks offer more and cheaper credit to borrowers in less competitive offline markets. Second, banks offer more credit to more distant locations, where house prices appear less over-heated, and past price growth is less correlated with that in their existing portfolio. Third, over time offers become more automated, lowering operational costs.

Effective environmental policy should consider the behaviour of financiers of polluting firms. In 2013 the EU Emissions Trading System implemented a reform, which translated to higher compliance costs for producers. This column discusses that, in contrast with possible program intentions, loan spreads fell on average by 25% starting in 2013, and this dynamic partly undermined the expected reduction in CO2 emissions. It identifies a key role of permits storage in driving the fall in loan spreads for affected firms.

Entrepreneurship is a key driver of economic activity, so entrepreneurial activity is one of the central points of focus for policymakers and academics. Using information on fiscal transfers in Poland, this column documents beneficial effects of local government funding as a mechanism to alleviate entrepreneurial constraints and spur firm formation. In addition, the observed impact of transfers is stronger in regions with higher political competition and accountability, and in regions with more positive historical attitudes toward entrepreneurial activity.

We analyse the recent policy decisions made by the ECB and the national authorities related to capital, liquidity, and shareholders’ remuneration aimed at promoting credit supply from the banking sector to the coronavirus-afflicted economy. We forecast the impact of the regulatory decisions based on the empirical literature, discuss the factors that reduce the banks’ incentives to expand loan portfolios and develop policy suggestions intended to mitigate the effect of these factors.

Although policy uncertainty has drawn regulators’ attention in the aftermath of the global financial crisis, little is known on how to alleviate its adverse effects. In this paper, we examine the role of political connections in mitigating the detrimental impact of policy uncertainty on banks. Our estimates show that banks are more cautious when facing policy uncertainty, but that the effect is partially alleviated when banks are politically connected. For an increase of one standard deviation in policy uncertainty, connected banks maintain a loss provision to loan volume ratio that is almost seven percent lower compared to their unconnected peers. These findings are robust to a geographical regression discontinuity setting, as well as to a placebo test. Lastly, the mitigating role of political connections is driven mainly by smaller banks and periods of stricter banking regulations.

Recessions are periods of low opportunity costs for time and resources, and hence can facilitate a productivity-enhancing reallocation of resources and improve productivity growth. However, recessions can also slow productivity growth by intensifying credit frictions, for instance, through the accumulation of legacy assets in the banking sector. This column investigates the interaction between these two channels in the recent banking crisis and shows that US regions with more restructuring of inefficient banks during the post-Global Crisis recession experienced higher productivity growth in the real sector in subsequent years.

Recently, the debate around potential changes to financial intermediation with the introduction of new technology or FinTech has gained pace. Using data on bank responses to household mortgage applications through a Swiss web platform, this column contributes to the debate by showing how online platforms can allow smaller banks to expand to areas beyond their branch network. It finds enormous potential for web platforms to shake up local lending competition, open up new ways for geographical diversification, and facilitate automation of lending decisions.