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

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4 Impact of state guaranteed bonds on bank lending, funding and profitability performance Table 22: Estimation results of lending model Variable Volatility (VOLit) Year of state guarantee (GUARANTEE YEARit) Additional controls (not displayed) Difference-in-differences (din-d) model 1 Log D-in-d model Log d-in-d model for healthy banks Log d-in-d model for ailing banks (1) (2) (3) (4) (5) (6) (7) (8) (9) -1.322e+06* (675,557) -9.87e+6*** (1.834e+06) -992,730* (553,198) -5.689e+06* (3.342e+06) -0.00668*** (0.000798) -0.0387* (0.0224) -0.0563*** (0.00189) -0.0194 (0.0184) -0.0564*** (0.00190) -0.0837*** (0.00299) -0.0832*** (0.00283) 0.00142 (0.00158) -0.00871*** (0.00282) 104 104 -0.0252 (0.0216) -0.00881 (0.0150) 0.00722 (0.0150) -0.0602*** (0.0144) Year dummies (Tt) Y Y Y Y Y Y Y Y Y Year-country dummies (Tt*i) Number of observations (SG-to-non-SG bank-years) Y Y Y Y Y Y Y Y Y 642 (480:162) 642 (480:162) 638 (475:163) 638 (475:163) 638 (475:163) 312 (233:79) 312 (233:79) 326 (243:83) Adjusted-R 2 0.218 0.212 0.549 0.548 0.550 0.461 0.459 0.720 0.724 Note: Variables not in logged terms in difference-in-differences models (1) and (2) -0.0459*** (0.0140) 326 (243:83)
4 Impact of state guaranteed bonds on bank lending, funding and profitability performance 4.4.3 Impact of state guarantees on leverage Background This section investigates the impact of state guarantees on bank capital structure, and specifically, the impact of state guarantees on bank leverage ratios. The motivation for this analysis is based on the notion that leverage ratios provide an insight into the risk-taking behaviour of banks, and therefore, if there exists a relationship between participation in state guarantee schemes and leverage ratios, we might be able to make inferences about the influence of state guarantees on bank risk-taking. The theoretical foundation regarding the relationship capital structure (e.g., leverage ratios) and bank decision-making (e.g. on risk) is the Modigliani-Miller irrelevance proposition (1958). This states that in perfectly competitive capital markets and given certain other assumptions, returns to alternative forms of capital are equal and therefore capital structure should have no bearing on bank decision-making. With this as the point of departure, theoretical work since the Modigliani-Miller irrelevance proposition has elaborated reasons why there might be a relationship between capital structure and bank decision-making. One set of theories accounts for capital regulation, namely, that banks are required to hold a minimum amount of capital in order to mitigate moral hazard that might arise due to deposit insurance, among other reasons (e.g. Berger et al., 1995, Miller, 1995, and Santos 1995). Given that there is a cost associated to holding capital and the constraint of capital regulations such as Basel II, these theories predict that banks would all hold close to the minimum required by capital regulations. In the context of the present study, state guarantees may increase moral hazard and therefore we may expect to see larger leverage ratios for participating banks than nonparticipating banks, all else equal. Another body of work (e.g. Ayuso et al., 2004 and Peura and Keppo, 2006) adds that there may be a rationale for banks to hold additional capital as a buffer against falling below threshold set by capital regulations. This is due to the costs associated with raising funds at short notice (e.g. through an equity issue). However, due to the presence of asymmetric information, investors are unaware of the rationale behind an institution's equity issue. On the one hand, a "healthy" bank may require equity to expand its activities, which would yield positive future returns on equity. But, on the other hand, an "ailing" bank may yield negative future returns on equity. Within this framework, signals that may discriminate healthy from ailing banks indicate the costs banks may face in raising funds at short notice. These signals include whether the bank pays dividends, has relatively high profits, high market-to-book ratios (proxied by total earning assets to total assets), etc. A priori, this framework does not provide insight as to the influence of bank size on capital buffers. This is because it may be that well-known (large) banks face less costs of raising funds at short notice, that is, being well-known alleviates the asymmetric information problem. Or, it may be that more complex (large) banks face greater asymmetric information problems and therefore face more costs of raising funds. 105
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Wherever possible London Economics
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Contents Page Annex 4 Results of di
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Tables, Figures & boxes Page Table
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Glossary vi Glossary BGN Bloomberg
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Executive summary Member States (Cy
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1 Introduction 1 Introduction 1.1
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1 Introduction 1.4 Research questi
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1 Introduction analysis of the lat
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2 Overview of state guarantee sche
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Annex 3 Analysis of missing issuing
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Annex 4 of diagnostic tests of issu
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Annex 4 of issuing cost model Figur
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Annex 5 -over model Annex 5 Results
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Annex 5 -over model Figure 25: Anal
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Annex 6 Availability of bank data A
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Annex 6 Availability of bank data T
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Annex 7 Linking Bloomberg and Banks
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Annex 8 Investigation of estimation
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