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

More documents

Recommendations

Info

4 Impact of state guaranteed bonds on bank lending, funding and profitability performance In regard to state guarantees, there is some consistency between this framework and the framework relating to the influence of capital regulation on capital structure. Namely, there may exist some element of 'moral hazard' insofar as banks may be motivated to hold smaller capital buffers in the knowledge that missed SG bond payments are covered by state guarantors. However, banks may also be aware that missing SG bond payments would signal that they are ailing, causing the cost of raising funds to increase, meaning that they may hold additional capital buffers to guard themselves against this possibility. Table 23 summarises the predictions of the capital regulation and capital buffers view. Gropp and Heider (2009) note that the empirical corporate finance literature has converged on this limited set of variables that are reliably related to leverage. Table 23: Predicted effects of explanatory variables on leverage: capital regulation view vs. buffer view Total earning assets-total assets ratio 106 Predicted effects Capital regulation Buffer - + Profits - + Log (size) + +/- Dividends - + Risk - - Source: Adapted from Gropp and Heider (2009) Empirical strategy Given the background above, the equation below describes the leverage model, augmented to capture state guarantees. log (LEVERAGE)it 1 log (TOTAL EARNING-TO-TOTAL ASSETS)it-1 2 log (PROFITS)it-1 3 log (SIZE)it-1 5 DIVIDENDit-1 6 GUARANTEEDit-1 7 GUARANTEED YEARit t t*i vi it (8) For each bank, i, in country of risk, j, in year, t: LEVERAGEit is measured by 1-(total equity/total assets) TOTAL EARNING-TO-TOTAL ASSETSit-1 is given by the ratio of total earning assets to total assets PROFITSit-1 is the sum of pre-tax profits and total interest expenses as a proportion of total assets SIZEit-1 is measured by total assets DIVIDENDit-1 is an indicator variable for whether or not the bank issued a dividend GUARANTEEDit 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
4 Impact of state guaranteed bonds on bank lending, funding and profitability performance Tt is a vector of time dummies Tt*i is a vector of country-time interaction effects vi is a bank-specific error term it is an idiosyncratic error term Time and country effects account for unobserved heterogeneity at the country level and across time that may be correlated with state guarantees. Time and country interaction effects are used to capture time-varying country effects that may be correlated with state guarantees. And, due to the presence of heteroscedasticity and autocorrelation (indicated by diagnostic tests) and the possibility of contemporaneous correlation, a fixed effects model with Driscoll-Kraay standard errors that are robust to the abovementioned forms of dependence is used. Impacts Table 25 (columns 1 and 2) show the results of the main leverage model. All coefficients are statistically significant at less than the 1% level aside from profits. Banks’ leverage depends positively on size, and negatively on the ratio of total earning assets to total assets and dividends. The models also explain variation in the data relatively well, with an adjusted R 2 of 0.4. We observe participation in state guarantee schemes (i.e., GUARANTEEDit=1 as opposed to GUARANTEEDit=0) is associated with lower leverage. Specifically, banks that issued bonds with state guarantees are likely to be 0.2% less levered than comparable banks that did not issue state guaranteed bonds. Moreover, banks that utilised state guarantees more intensively, i.e., through the issuance of a larger volume of state guarantees, were even less levered. A proportionate increase in state guaranteed bonds relative to total equity and liabilities of 1% was associated with a 3.4% decrease in market leverage. This effect was significant beyond the 99% level. Overall, banks that take up state guarantees are likely to be less levered. Under the regulated capital view, it may be that participation in state guarantee schemes were implicitly conditional on banks being more cautious, as reflected in levels of market leverage. Under the capital buffers view, these banks may have signalled to the market that they are "ailing banks" through participation in state guarantee schemes, in the terminology used above. Therefore, they face higher costs of capital than other banks and hold larger capital buffers to insure against the need to access capital markets. To test for the robustness of the main results, a number of alternative specifications were estimated, as shown in Table 24, columns 3-8. A measure of asset risk was added to the main specifications. This is motivated by the following reasons. Under the regulatory view, regulators may require riskier banks to hold more capital on a discretionary basis. Omitting risk from our main leverage model, therefore, may lead to spurious significance of the remaining variables. However, we see that the main results are robust to the inclusion of a measure of asset risk. 107
Page 2 and 3:
Economic Papers are written by the
Page 4 and 5:
Wherever possible London Economics
Page 6 and 7:
Contents Page Annex 4 Results of di
Page 8 and 9:
Tables, Figures & boxes Page Table
Page 10 and 11:
Glossary vi Glossary BGN Bloomberg
Page 12 and 13:
Executive summary Member States (Cy
Page 14 and 15:
1 Introduction 1 Introduction 1.1
Page 16 and 17:
1 Introduction 1.4 Research questi
Page 18 and 19:
1 Introduction analysis of the lat
Page 20 and 21:
2 Overview of state guarantee sche
Page 22 and 23:
Page 24 and 25:
Page 26 and 27:
Page 28 and 29:
Page 30 and 31:
Page 32 and 33:
3 Issuing costs of state guarantee
Page 34 and 35:
Page 36 and 37:
Page 38 and 39:
Page 40 and 41:
Page 42 and 43:
Page 44 and 45:
Page 46 and 47:
Page 48 and 49:
Page 50 and 51:
Page 52 and 53:
Page 54 and 55:
Page 56 and 57:
Page 58 and 59:
Page 60 and 61: 3 Issuing costs of state guarantee
Page 86 and 87: 4 Impact of state guaranteed bonds
Page 90 and 91: 86 4 Impact of state guaranteed bo
Page 116 and 117: 5 Key empirical findings and polic
Page 118 and 119: References Acharya V.V. and Sundara
Page 120 and 121: Lando, D. (1997). 'Modeling Bonds a
Page 122 and 123: Annex 1 Eligibility criteria for st
Page 140 and 141: Annex 2 Comparison of SG and non-SG
Page 142 and 143: Annex 2 Comparison of SG and non-SG
Page 144 and 145: Annex 3 Analysis of missing issuin
Page 156 and 157: Annex 3 Analysis of missing issuing
Page 158 and 159: Annex 3 Analysis of missing issuing
Page 160 and 161:
Annex 4 of diagnostic tests of issu
Page 162 and 163:
Annex 4 of issuing cost model Figur
Page 164 and 165:
Annex 5 -over model Annex 5 Results
Page 166 and 167:
Annex 5 -over model Figure 25: Anal
Page 168 and 169:
Annex 6 Availability of bank data A
Page 170 and 171:
Annex 6 Availability of bank data T
Page 172 and 173:
Page 174 and 175:
Page 176 and 177:
Annex 7 Linking Bloomberg and Banks
Page 178 and 179:
Annex 8 Investigation of estimation
show all

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

Create successful ePaper yourself

Delete template?

Save as template?