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

4 Impact of state guaranteed bonds on bank lending, funding and profitability performance
Interestingly, however, the inclusion of asset risk in the leverage model leads to the coefficient on
size to become insignificant. This suggests that size was proxying for the riskiness of bank assets,
which is the underlying driver of leverage.
Another robustness test, shown in Table 24, columns 5, was to add macroeconomic control
variables to the main empirical specifications. The signs and significance of the impact of state
guarantees variables are consistent with the main impacts in these results. Furthermore, the
majority of the macroeconomic variables operate in the expected directions. Leverage increases
with the long-term rate and the interbank rate, and decreases with the short-term rate. Somewhat
counter-intuitively though, the results show that leverage decreases with GDP growth and
increases with volatility, though the latter effect is small.
Finally, the main empirical specifications were re-estimated with banks' Tier 1 Capital as a
proportion of risk weighted assets as an alternative measure of leverage. The estimation results of
these models are provided in Table 24, columns 7-8. The signs and significance of the impact of
state guarantees variables are consistent with the results on the main impacts also.
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