Vasso Ioannidou, Steven Ongena, José-Luis Peydró, Monetary policy, risk-taking and pricing: Evidence from a quasi-natural experiment, Review of Finance, Vol. 19 (1), 2015. (Journal Article)
We study the risk-taking channel of monetary policy in Bolivia, a dollarized country where monetary changes are transmitted exogenously from the USA. We find that a lower policy rate spurs the granting of riskier loans, to borrowers with worse credit histories, lower ex-ante internal ratings, and weaker ex-post performance (acutely so when the rate subsequently increases). Effects are stronger for small firms borrowing from multiple banks. To uniquely identify risk-taking, we assess collateral coverage,expected returns, and risk premia of the newly granted riskier loans, finding that their returns and premia are actually lower, especially at banks suffering from agency problems. |
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Adam Geršl, Petr Jakubik, Dorota Kowalczyk, Steven Ongena, José Luis Peydró, Monetary conditions and banks' behaviour in the Czech Republic, Open Economies Review, Vol. 26 (3), 2015. (Journal Article)
This paper examines the impact of monetary conditions on the risk-taking behaviour of banks in the Czech Republic by analysing the comprehensive credit register of the Czech National Bank. Our duration analysis indicates that expansionary monetary conditions promote risk-taking among banks. At the same time, a lower interest rate during the life of a loan reduces its riskiness. While seeking to assess the association between banks’ appetite for risk and the short-term interest rate we answer a set of questions related to the difference between higher liquidity versus credit risk and the effect of the policy rate conditioned on bank and borrower characteristics |
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Steven Ongena, The Perennial Challenge to Counter Too-Big-to-Fail in Banking, In: Conference on Financial Stability and Macro-Prudential Policy. 2015. (Conference Presentation)
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Karim Bensalem, Islamische und konventionelle Finanzprodukte im Vergleich, University of Zurich, Faculty of Economics, Business Administration and Information Technology, 2015. (Bachelor's Thesis)
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Steven Ongena, Household Inequality, Corporate Capital Structure and Entrepreneurial Dynamism, In: American Economic Association, 2015 Annual Meeting. 2015. (Conference Presentation)
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Steven Ongena, Shusen Qi, Fengming Qin, Impact of foreign bank presence on foreign direct investment in China, China & World Economy, Vol. 23 (4), 2015. (Journal Article)
We analyze the impact of foreign bank presence on foreign direct investment in China. Our estimates demonstrate that foreign direct investment across regions in China is increasing in the existing network of regional branches of foreign banks, which itself is driven (and therefore instrumented) by the timing of the regional phasing out of the local limits for foreign banks on local currency business. This effect of foreign bank presence is particularly strong for foreign direct investment in those sectors in the region when banks are locally present that come from source countries where these specific sectors are importantly represented. |
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Elena Carletti, Philipp Hartmann, Steven Ongena, The economic impact of merger control legislation, International Review of Law and Economics, Vol. 42 (6), 2015. (Journal Article)
We investigate the impact of legislative reforms in merger control legislation in nineteen industrial countries between 1987 and 2004. We find that strengthening merger control decreases the stock prices of non-financial firms, while increasing those of banks. Cross sectional regressions show that the discretion embedded in the supervisory control of bank mergers is a major determinant of the positive bank stock returns. One explanation is that merger control introduces “checks and balances” that mitigates the potential abuse and wasteful enforcement of supervisory control in the banking sector. |
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Felicia Zanoni, The Impact of CDS on Financial Stability - An Analysis on the Basis of Three Case Studies, University of Zurich, Faculty of Economics, Business Administration and Information Technology, 2015. (Bachelor's Thesis)
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Hans Degryse, Vasso Ioannidou, Steven Ongena, Bank-firm relationships: A review of the implications for firms and banks in normal and crisis times, In: The Economics of Interfirm Networks, Springer, Berlin, p. 177 - 189, 2015. (Book Chapter)
Banks are important providers of external finance to firms. In order to solve asymmetric information problems, firms and banks often engage in bank-firm relationships. Relationship banking occurs when a bank and a borrower enter multiple mutual interactions and both parties invest in obtaining some counterparty specific information, binding bank and firm, to a certain degree, to each other. This chapter starts with a discussion of reasons for having exclusive versus non-exclusive relationships. It provides a concise overview on the determinants of the number and intensity of bank-firm relationships, and reviews how relationship banking generates costs and benefits for both banks and firms. We show that on average bank-firm relationships generate value for both. The costs and benefits of bank-firm relationships, however, vary substantially with whether an economy is in normal or crisis times. |
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Martin Brown, Karolin Kirschenmann, Steven Ongena, Bank funding, securitization, and loan terms: evidence from foreign currency lending, Journal of Money, Credit and Banking, Vol. 46 (7), 2014. (Journal Article)
We examine how bank funding structure and securitization activities affect the currency denomination of business loans. We analyze a unique data set that includes information on the requested and granted loan currency for 99,490 loans granted to 57,464 firms by a Bulgarian bank. Our findings document that foreign currency lending is at least partially driven by bank eagerness to match the currency structure of assets with that of liabilities. Our results also show that loan currency, as well as loan amount and maturity, are adjusted to make loans eligible for securitization. |
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Steven Ongena, Discussion of Presbitero, Udell and Zazzaro, Journal of Money, Credit, and Banking, Vol. 46 (s1), 2014. (Journal Article)
The paper by Presbitero, Udell and Zazzaro (henceforth, PUZ) aims to investigate whether the financial crisis that in Italy really “hit” after Lehman Brothers in September 2008 actually led to a credit crunch there and which types of firms suffered most. PUZ start from the quarterly editions of a monthly survey of about 3,800 Italian manufacturing firms (by ISAE, now ISTAT) to analyze credit access by 3,623 firms between 2008:Q1 to 2009:Q3, i.e., 23,140 firm-quarter observations of which 12,734 came after Lehman. PUZ find suggestive evidence that there was a credit crunch in Italy post-Lehman, that firms in provinces with bank branches located further from their bank’s headquarter (i.e., with banks that are more functionally distant) suffered relatively more, and that in those provinces especially high-quality firms were affected. These findings are consistent with a home bias but not with a flight-to-quality interpretation. This nice paper by PUZ is truly thought-provoking as the home bias in banking that is documented is occurring within one country. But before pointing out a possible broader avenue for further investigation, I want to discuss a few limitations of this study (most of which the authors are also aware of and candidly highlight) and in this way also indicate more immediate directions for follow-up research. |
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Gabriel Jimenez, Steven Ongena, José Luis Peydró, Jesús Saurina, Hazardous times for monetary policy: What do twenty-three million bank loans say about the effects of monetary policy on credit risk?, Econometrica, Vol. 82 (2), 2014. (Journal Article)
We identify the effects of monetary policy on bank risk-taking with an exhaustive credit register containing loan contracts and applications since 1984. We separate the compositional changes in the credit supply from the demand, firm and bank balance-sheet channels by accounting for both observed and unobserved time-varying firm and bank heterogeneity through time*firm and time*bank fixed effects. A lower overnight interest rate induces lower capitalized banks to expand and prolong credit to riskier firms, and to lend to riskier new applicants, granting them loans that are larger and longer-term. A lower long-term rate, however, has smaller or no such effects. |
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Steven Ongena, Viorel Roscovan, Wei-Ling Song, Bas Werker, Banks and bonds: the impact of bank loan announcements on bond and equity prices, Journal of Financial Management, Markets and Institutions, Vol. 2 (2), 2014. (Journal Article)
We study the effect of bank loan announcements on the borrowing firms' bond and equity prices. Our sample consists of 896 loan deals signed between 1997 to 2003 involving 364 different US firms. We report the first comprehensive evidence that also firm bond prices react to bank loan announcements. Using a two-day event window, we find significant abnormal bond credit spreads reduction of 11 basis point spread (BPS) on average. The corresponding average stock price reaction is 26 BPS. While stock returns are unaffected by firm risk, bondholders of riskier firms are more sensitive to the loss given default which increases with bank borrowing. Such firms experience bond credit spread increases. Our analysis also provides an estimate of the net impact on firm value of bank loan announcements, between -5 BPS for riskier and smaller firms and 18 BPS for safer and larger companies. Collectively, the results indicate that the overall positive effect on equity value comes from two sources. First, bank certification reduces information asymmetry. Second, there is a transfer of bondholder's wealth to the shareholders as a result of claim dilution. |
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Martin Brown, Steven Ongena, Pinar Yeşin, Information asymmetry and foreign currency borrowing by small firms, Comparative Economic Studies, Vol. 56, 2014. (Journal Article)
We model how an information asymmetry between the lending bank and the applying firm about the currency structure of firm revenues may affect loan currency choice. Our framework features a trade-off between the lower cost of foreign currency debt and the costs of currency induced loan default. We show that under imperfect information about firm revenues more local earners choose foreign currency loans, as they do not bear the full cost of the corresponding credit risk. This result is consistent with recent evidence showing that information asymmetries may increase foreign currency borrowing by retail clients in the transition economies. |
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Hans Degryse, Adiana Paola Morales Acevedo, Steven Ongena, Competition in Banking, In: The Oxford Handbook of Banking, Oxford University Press, Oxford, p. 589 - 617, 2014. (Book Chapter)
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. |
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Lieven Baele, Moazzam Farooq, Steven Ongena, Of religion and redemption: evidence from default on islamic loans, Journal of Banking and Finance, Vol. 44, 2014. (Journal Article)
We compare default rates on conventional and Islamic loans using a comprehensive monthly dataset from Pakistan that follows more than 150,000 loans over the period 2006:04 to 2008:12. We find robust evidence that the default rate on Islamic loans is less than half the default rate on conventional loans. Islamic loans are less likely to default during Ramadan and in big cities if the share of votes to religious-political parties increases, suggesting that religion – either through individual piousness or network effects – may play a role in determining loan default. |
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Emilia Garcia, Book review of Fault Lines by Raghuram G. Rajan, Financial markets and portfolio management, Vol. 27 (4), 2013. (Journal Article)
Most people believe that the recent financial crisis had its roots in a boom in housing lending in the United States. After the dot-com bubble, the argument goes, the Federal Reserve Bank lowered the interest rates to stimulate corporate investment and recover from the downturn. As a side effect of low interest rates, mortgages became cheaper and Americans became attracted to the housing market. Credit for housing was provided by the sophisticated financial system of the United States, which allowed investors to purchase packages of mortgages from diversified geographical locations, and from individuals with different probabilities of default, according to their desired level of risk. As it turned out, these products caught the attention of investors from all over the world, who were attracted by their profitable returns and the implicit guarantees provided by the U.S. government to the issuing agencies and financial intermediaries. Therefore, housing credit was plentiful and, as a consequence, house prices in the United States rose. This in turn allowed mortgage borrowers to refinance their debts and avoid default. The party came to an end when interest rates increased and house prices fell, triggering a series of defaults in mortgages and driving values of the financial products near to zero, resulting in consequences with which we all are too familiar. |
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Emilia Garcia, Judit Montoriol-Garriga, Firms as liquidity providers: Evidence from the 2007–2008 financial crisis, Journal of Financial Economics, Vol. 190 (1), 2013. (Journal Article)
Using a supplier–client matched sample, we study the effect of the 2007–2008 financial crisis on between-firm liquidity provision. Consistent with a causal effect of a negative shock to bank credit, we find that firms with high precrisis liquidity levels increased the trade credit extended to other corporations and subsequently experienced better performance as compared with ex ante cash-poor firms. Trade credit taken by constrained firms increased during this period. These findings are consistent with firms providing liquidity insurance to their clients when bank credit is scarce and offer an important precautionary savings motive for accumulating cash reserves. |
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Chong Terrence Tai-Leung, Liping Lu, Steven Ongena, Does banking competition alleviate or worsen credit constraints faced by small and medium enterprises? Evidence from China, Journal of Banking and Finance, Vol. 37 (9), 2013. (Journal Article)
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Emilia Garcia, Contracts and returns in private equity investments, Journal of Financial Intermediation, Vol. 22 (2), 2013. (Journal Article)
We analyze the relationship between contracts and returns in private equity (PE) investments. Contractual control in the form of covenants tends to be employed to identify good deals. Better quality firms are more likely to have covenant-rich contracts, as they are less concerned by the constraints imposed by the covenants. PE investors appoint closer associates of the fund in deals that are performing poorly but tend to outsource board governance in better deals. Collectively, our evidence suggests that PE investors operate along two dimensions, choosing covenants and board seats differently, based on the ex ante quality of the company. |
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