Contributions published at Banking (Steven Ongena)

We investigate if corruption impedes firm growth through limiting access to bank credit. Our estimates demonstrate that access to credit tightens when a firm is more frequently involved in bribery practices, and that bribery (most likely) causes this loss of access. We also find that the detrimental impact is mainly driven by supply-side rather than by demand-side factors, and that the loss of access is particularly strong when there are fewer foreign banks in the vicinity of the firm or if competition is either very low or very high in the local banking market. Finally, the bribery-driven increase in financing obstacle significantly impedes future firm growth.

We assess the effect of securitization activity on relative credit quality employing a uniquely detailed dataset from the euro-denominated syndicated loan market. We find that at issuance, based on observable characteristics, banks do not seem to select and securitize loans of lower credit quality. Following securitization, the credit quality of borrowers whose loans are securitized deteriorates more than those in the control group. We find that poorer performance by borrowers of securitized loans seems to be connected to banks’ reduced monitoring incentives. Our results are supported by two additional methodologies and robust to controlling for predetermined borrower-lender matching.

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We study the effects of the 1971 deregulation of UK banking on firms’ financial and investment policies. The deregulation was a turning point in the evolution of firm-bank relationships during the twentieth century. Indeed, for more than 80 years prior to deregulation most firms had had a relationship with only one bank: this was no longer the case from 1971 on. Deregulation and intensifying competition in the banking sector spurred firms-in local markets with many banks already active-to increase leverage and to invest more in research and development. Bank debt similarly expanded while trade credit contracted.

How do financial markets react 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. However, within a few days investors change their perception, both in the case of euro zone and non-euro zone banks. CDS spreads react similarly, increasing first before decreasing almost immediately thereafter. Abnormal returns are more negative for large, traditionally-focused or state-owned banks, and in countries with less competitive banking markets or lower fiscal capacity. In addition, the quantitative or qualitative approach by which O-SIIs are selected, as well as the existence and level of the capital buffers imposed on them, have a significant impact on both the short and long run market reaction.

Who gains from inter-corporate credit? To answer this question we measure the impact of the announcements of inter-corporate loans in China on the stock prices of the firms involved. We find that the average abnormal return for the issuers of inter-corporate loans is significantly negative, whereas it is positive for the receivers. Firms issuing inter-group loans may be perceived by investors to have run out of worthwhile projects to finance, although the loans may bring benefits to these firms through the high interest revenues involved. Firms receiving these inter-group loans are being certified as creditworthy borrowers, although the cost on these loans may be high. Issuance of intra-group loans on the other hand may signal the propping up of financially distressed subsidiaries and their resultant expropriation in the future and the firms granting and receiving such loans will be assessed accordingly. Subsequent investment and firm performance confirms these immediate valuations as overall accurate.

Do borrowers demand less credit from banks with weak balance sheet positions? To answer this question we use novel bank-specific survey data matched with confidential balance sheet information on a large set of euro area banks. We find that, following a conventional monetary policy shock, bank balance sheet strength influences not only credit supply but also credit demand. The resilience of lenders plays an important role for firms when selecting whom to borrow from. We also assess the impact on credit origination of unconventional monetary policies using survey responses on the exposure of individual banks to quantitative easing and negative interest rate policies. We find that both policies do stimulate loan supply even after fully controlling for bank-specific demand, borrower quality, and balance sheet strength.

What is the impact of negative interest rates on bank lending and risk-taking? To answer this question we study the changes in lending policies using both the Euro area Bank Lending Survey and the Spanish Credit Register. Banks whose net interest income is adversely affected by negative rates are concurrently lowly capitalized, take less risk and adjust loan terms and conditions to shore up their risk weighted assets and capitalization. These banks also increase non-interest charges more. But, importantly, we find no differences in banks’ credit supply or standard setting, neither in the Euro area nor in Spain. These findings suggest that negative rates do not necessarily contract the supply of credit and that the so-called “reversal rate” may not have been reached yet.

This book studies the interaction between traditional and modern banking and the economic benefits and costs of this new financial ecosystem, by relying on recent empirical research in banking and finance and exploring the effects of increased financial sophistication on a particular dimension of the loan contract.

What role does prudential regulation play in the prevention of banking crises? Before the financial crisis there were important national differences in the implementation of the EU framework for capital regulation. This article suggests that these differences had important implications for the resilience of banks during the crisis and that, generally, banks that were subject to less stringent prudential regulation before the crisis were more likely to require some form of public support when the crisis came.

Die kulturelle Identität der Manager kann einen Einfluss darauf haben, wie ein Unternehmen sich finanziert. Das zeigt eine neue Studie, welche die Finanzierungsstruktur von Unternehmen in Norditalien untersucht.

Most regulators grant contingent convertible bonds the status of equity. The theory, however, suggests that these securities can distort banks’ incentives to issue new equity. Using a model and European data, this column shows that banks with lower risk are more likely to issue CoCos compared to their riskier counterparts. In line with Basel III, banks are expected to raise equity prior to CoCo conversion, which makes the bonds an expensive source of capital. The design of CoCos should be revised if they are to enjoy equity-like treatment.

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We review the data, econometric techniques, and estimates with respect to two recent and salient developments in the banking industry, i.e., securitization and globalization. The traditional banking market has become wider in its business models, through securitization, and in its geographical dispersion, through global operations. Both developments have brought new challenges for our understanding of basic questions in banking. Questions such as what determines credit flows or what are the channels of transmission for monetary policy have been addressed through this new optic. Our review establishes that access to micro data has enabled researchers to arrive at ever-better identified and more reliable estimates. These are interesting times in empirical banking research.

This chapter combines recent findings from the empirical banking literature with established insights from studies of banking competition and regulation. It starts with a concise overview and assessment of the different methodological approaches taken to address banking competition. While market structure indicators are readily available, they may not be overly informative about the competitive conditions in banking markets. The literature has focused to date on “non-market structure” indicators such as the Panzar-Rosse H-statistic, the Lerner index, and the Boone indicator. The chapter then structures a discussion on the empirical findings based upon a framework that finds its roots in the different theories of financial intermediation. Many other specific approaches to infer banking competition are discussed, in particular, the impact that regulation and information-sharing between banks may have on banking competition.

Using a unique data set of business loan applications to a single bank from individuals who are majority owners of small firms, we study how bank credit origination or denial affects individuals' income. The bank cutoff rule based on the applicants' credit score creates a sharp discontinuity in the decision to originate loans or not. We show that loan origination increases recipients' income five years onward by more than 10% compared to denied applicants. The effect is more pronounced in rural and low-income areas. Our results suggest an important role for banks` credit decisions on the distribution of income.

We study the impact of higher capital requirements on banks’ balance sheets and its transmission to the real economy. The 2011 EBA capital exercise is an almost ideal quasi-natural experiment to identify this impact with a difference-in-differences matching estimator. We find that treated banks increase their capital ratios by reducing their risk-weighted assets and - consistent with debt overhang - not by raising their levels of equity. Banks reduce lending to corporate and retail customers, resulting in lower asset-, investment- and sales growth for firms obtaining a larger share of their bank credit from the treated banks.