3 Issuing costs of state guaranteed bonds - Financial Risk and ...

4 Impact of state guaranteed bonds on bank lending, funding and profitability performance
Overall, these studies suggest the prominence of variables capturing general conditions in the
banking sector and bank-specific variables, especially relating to bank capital in a model of lending.
In essence, the structure of the lending model is a reduced form of:
a demand of banks loans which depends on the state of the economy and borrowing costs
as represented by the long-term interest rate
a supply of loans which depends on the intermediation and maturity transformations
margins, i.e. the difference between long-term rates and short rates representing various
short-term funding sources (wholesale market, central bank) and the volume of funds
available to the bank to lend out. In addition to these factors, the size of its impaired
portfolio is assumed to affect negatively a bank’s willingness to lend, ceteris paribus, as
the larger the impaired portfolio the greater the need to rebuild the balance sheet. This
broad characterisation of the supply of loans builds on the recent emphasis in the
literature of the a reformulated lending channel for the transmission of monetary policy
which recognises that bank lending is not simply reacting passively the variations in
deposits but is actively managed by banks which can rely on wholesale markets to meet
their funding needs (see, for example Disaytat (2010)).
The equation shown in the next section is simply a reduced form of these demand and supply
equation.
This background motivates the inclusion of the following controls in the specification for
estimating the impact of state guarantees on lending.
Empirical strategy
The main empirical specification considered is based on the following difference-in-differences
model for participating and non-participating banks over the period 2005-2010.
LENDINGit 1 GUARANTEEDit-1 2 GUARANTEE YEARit 3 BANK RATINGit 4 it-1
5 jt 6 -TERM)jt 7 -TERM)jt 8
INTERBANK RATEt 9 t it-1 t t*i + vi it
(7)
For each bank, i, in country of risk, j, in year, t:
LENDINGit is measured by net loans
GUARANTEEDit-1 is whether or not the bank participated in a state guarantee scheme
GUARANTEE YEARit indicates the first year in which the bank participated in a state
guarantee scheme
BANK RATINGit is a categorical variable ranging from AAA to B+
RESERVESit-1 is reserves for impaired loans as a proportion of total liabilities and equity
REAL GDPit is real gross domestic product of the country
INTEREST RATE (LONG-TERM)jt is the interest rate on the 10-year government bond of the
Member State
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