Contributions published at Banking (Steven Ongena)

Could more severe economic loss in the 2008/09 financial crisis lead to higher COVID-19 case death rates at the state level in the US? To empirically verify this question, this paper uses a COVID-19 data set of all states in the US from March to May in 2020, together with data from multiple sources on financial crisis severity and other economic and demographic indicators. Main results can be summarized into three aspects: First, in the initial stage of the pandemic, larger decline in GDP growth and increase in debt growth during the 2008 financial crisis fostered higher COVID-19 case fatality rates among US states. Second, this paper verifies that the 2008 economic crisis affected COVID-19 case death rates through cutting expenditures in the public healthcare systems, especially on the number of curative beds. Third, rising adult obesity rates in the US amplified negative effects of the 2008 financial recession on COVID-19 case fatality rates. To conclude, findings in this paper suggest that the impact of financial instability may be underestimated if its effect on the public health sector in the long term is neglected. Coordinated efforts are needed to strengthen the financial system while ensuring adequate funding to buffer the healthcare systems from unanticipated and exogenous shocks in the future. I

We examine whether the relationship between managerial risk-taking incentives and bank risk is sensitive to the underlying macroeconomic conditions. We find that risk-taking incentives provided to bank executives are associated with higher bank riskiness during economic downturns. We attribute this finding to the increase in moral hazard during macroeconomic downturns when the perceived probability of future bailouts and government guarantees rises. This association is particularly strong for larger banks, banks that maintain lower capital ratios and banks that are managed by more powerful Chief Executive Officers (CEOs). Our findings highlight the importance of the interaction between managerial incentives and the macroeconomic environment. Boards and regulators may find it useful to consider the countercyclical nature of the relationship between risk-taking incentives and bank riskiness when designing managerial compensation.

This master’s thesis explores the opportunities real estate mezzanine financing o↵ers investors and borrowers through marketplace lending in Switzerland. To answer the research question, existing studies on marketplace lending were analysed, and a quantitative analysis was completed using data from the largest Swiss marketplace lending platform. The results indicate that using mezzanine financing through the alternative intermediary marketplace lending platforms creates new opportunities for investors and borrowers that are not available with traditional banks. On this basis, using this alternative option and optimising its results is advised.

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The growing presence of sustainable banking and its steady trend of popularity is a good indicator of it possibly becoming a huge factor of success in the financial sector. Previous research has focused on the correlation of sustainability and performance in the banking sector, but as of today they haven’t reached a consensus on this matter. So far, little research has been conducted on the relationship between sustainable banking and a banks efficiency. This thesis will analyse the sustainability level of banks and its correlation with an efficiency ratio (ER). The results show a weakly negative correlation between the sustainability scores, calculated using a updated version of the framework by Avrampou et al. (2019), and the efficiency ratio. This is a point that speaks for the implementation and expansion of sustainability practices in Banks. It should be noted that this study did run into some problems with the significance due to the small sample size and that the results need to be interpreted accordingly.

What is the role market- and bank-based debt play in the climate transition process? We present evidence that bond markets price the risk that assets held by fossil fuel firms strand, while banks in the syndicated loan market seemingly do not price this risk much. Consequently, to fulfill their financing needs fossil fuel firms increasingly rely less on bonds and more on loans. We can interpret the within-firm bond-to-loan substitution along stranding risk as a contraction in the supply of bond versus bank funding. Within the banking sector especially the big banks are willing to provide cheaper and more financing to fossil fuel firms.

Initial coin offerings (ICOs) have emerged as a method for new ventures to raise capital by selling tokens to investors. This thesis investigates the success factors of 237 ICOs launched before March 2018. This thesis contributes to research on ICOs by presenting characteristics that influence ICO success. The results show a significant relationship between ICOs in Switzerland and the total amount of funds raised during the ICO. Furthermore, the evidence suggests that ventures with venture capital backing or more team members are related to raising more funds during the ICO. Additionally, a longer duration of the ICO is related to raising a lower percentage of the hard cap. The results highlight the relationship between company characteristics and the total amount of funds raised during the ICO. The thesis discusses the results in the context of past research, offers implications for practice and identifies avenues for further research.

Green bonds represent a modern financial tool which has raised global awareness on more environmentally friendly methods to finance the fight against climate change. Understanding how the proceeds are used to finance sustainable project, this thesis studies a data set of 1,795 green bonds issued by a total of 54 countries. Using linear regression, this paper examines the impact of macroeconomic indicators on the level of greenness of issued green bonds in the period from 2008 to 2021. The results reveal that a higher unemployment rate has a positive effect on green scores. Higher consumer prices, producer prices and government bond yields have a negative effect on green scores. Finally, the analysis shows no evidence of correlation between green scores and gross domestic product, consumer confidence, equity market returns and M3 money supply

Do targeted macroprudential measures impact non-targeted sectors too? We investigate the compositional changes in the supply of credit by Swiss banks, exploiting their differential exposure to the activation in 2013 of the countercyclical capital buffer (CCyB) which targeted banks’ exposure to residential mortgages. We find that the additional capital requirements resulting from the activation of the CCyB cause higher growth in banks’ commercial lending. While banks are lending more to all types of businesses, including bigger corporate customers in the syndicated loan market, the new macroprudential policy benefits smaller and riskier businesses the most. However, the interest rates and other costs of obtaining credit for these firms rise as well.

In this paper, we gauge the degree of interconnectedness and quantify the linkages between global and other systemically important institutions, and the global financial system. We document that the two groups and the financial system become more interconnected during the global financial crisis when linkages across groups grow. In contrast, during tranquil times linkages within groups prevail. Global systemically important banks (G-SIBs) contribute most to system-wide distress but are also most exposed. There are more links coming from G-SIBs to other systemically important institutions (O-SIIs) than the other way around, confirming the role of G-SIBs as major risk transmitters in the financial system. The two groups and the global financial system tend to co-vary for periods up to 60 days Prior to their official designation as G-SIBs or O-SIIs, the prevalent news sentiment about these institutions (we measure with a textual analysis) was negative. Importantly, the systemic importance and exposure of G-SIBs and O-SIIs is perceived differently by the Financial Stability Board (FSB) and the European Banking Authority (EBA).

Small and micro enterprises are usually majority owned by entrepreneurs. Using a unique sample of loan applications from such firms, we study the role of owners’ gender in the credit decision of banks and the post-credit decision firm outcomes. We find that, ceteris paribus, female entrepreneurs are more prudent loan applicants, with both the probabilities to apply for credit and of firm default after the loan origination being smaller. However, the relatively more aggressive behavior of male applicants pays off in terms of higher average firm performance after the loan origination.

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Financial sanctions can have varying effects on different parts of the economy and population in a targeted country. This column analyses the effects of the sanctions imposed on Russia following the 2014 annexation of Crimea. It shows that that the real total revenue of larger firms declined sharply in the years following the sanctions, whereas the effects on small firms were negligible. It also documents that the real income of richer households declined by several percent, while poorer households enjoy rising real income over the same period. Thus, the sanctions could have had an unintended short-run effect of reducing income inequality.

What is the impact of stress tests on bank stock prices? To answer this question we study the impact of the publication of the EU-wide stress tests in 2014, 2016, 2018, and 2021 on the first and second moment of equity returns. First, the effect of the disclosure of stress tests on (cumulative) excess/abnormal returns is studied through a one-factor market model. Second, both returns and volatility of bank stock prices changes upon the disclosure of stress tests are investigated through a structural GARCH model. Results suggest that the publication of stress tests provides new information to markets. Banks performing poorly in stress tests experience, on average, a reduction in returns and an increase in volatility, while the reverse holds true for banks performing well. Banks performing moderately have rather a small effect on both mean and variance process. These results indicate that the publication of stress tests improves price discrimination between ’good’ and ’bad’ banks, which can be interpreted as a certification role of the stress tests in the stock market.

Investor demand, political movements, and regulatory changes have increased the focus on sustainable finance in recent years. This has led to the development of a new green market offering sustainable debt instruments, which has marked a volume of more than $1 trillion in 2021. This column investigates the effectiveness of two green lending instruments, green and sustainable loans, in terms of their impact on firms’ environmental, social, and governance profiles. It finds that firms which issue green loans improve their environmental performance but neglect their social performance, whereas issuing sustainable loans increases a firm’s overall ESG performance.

Russia’s invasion of Ukraine in February 2022 has provoked wide-ranging financial and economic sanctions from the US, Europe, and various other countries worldwide. This column assesses the economic effects of almost two decades of earlier sanctions on Russian firms to shed light on the impacts of this new wave of sanctions. Sanctions adversely affect firm performance in general, yet there is no clear impact on energy and oligarch-related firms. Evidence of preparedness for sanctions by these firms during the Crimea event in 2014 suggests one mechanism by which the impact of sanctions may be muted.

Many financial institutions have warned that the transition to a low-carbon economy could cause a major shock to fossil fuel valuation, with the potential for systemic risk. This paper discusses disclosure commitments and empirical evidence in order to gauge the exposure of bankstowards fossil fuel assets as well as the consequent implications for banks’ balance sheets and for financial stability.

Following Russia’s invasion of Ukraine on 24 February 2022, the US, Europe, and many other countries imposed new economic sanctions on Russia. This column assesses the economic effects of these sanctions using a structural vector auto-regression model of the Russian economy. The findings suggest that industrial production, consumption, and investment will all decline, and that Russian GDP will contract by -12.5% to -16.5% in 2022. Nevertheless, the Russian economy will continue to rely on its existing export model, which may be difficult to undermine, even with potential oil and gas embargoes.