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

4 Impact of state guaranteed bonds on bank lending, funding and profitability performance
Figure 20: Credit growth and bank lending standards
82
Bank credit to private nonfinancial sector
-5 0 5 10
-5 0 5 10
Euro Area
2003 2004 2005 2006 2007 2008 2009
UK
2003 2004 2005 2006 2007 2008 2009
-20 0 20 40 60
-20 0 20 40 60
Bank lending standards
Bank credit to private nonfinancial sector Bank lending standards
Note: 1 Bank lending standards (net percentage change, a positive number indicates tightening of standards. Net percentage change
refers to the difference between the percentage of banks that tightened standards and the percentage of banks that eased standards.)
2
Bank credit to private nonfinancial sector (year-on-year percent changes through June 2009.)
Source: IMF (2009): Haver Analytics and national sources
However, Figure 20 also shows that despite a tightening of credit conditions, lending standards of
banks in the Euro area and the UK were loosening by the end of 2008, which is consistent with
banks seeking to extend more loans than they previously were.
The present study analyses trends in lending and other balance sheet variables in greater detail.
Firstly, through consideration of the period October 2008 to December 2010, which includes more
recent data than was available at the time of previous studies, we are able to analyse responses of
balance sheet variables to state guarantees that may be emerging with a time lag.
Secondly, by focusing on individual bank data as opposed to aggregates, we distinguish
developments in the balance sheets of banks participating and not participating in state guarantee
schemes.
And thirdly, we use a difference-in-differences framework that allows us to isolate the impact of
state guarantees and control for other policies and changes in market conditions that may have
affected both participating and non-participating banks.
The following sections present an analysis of the effects state guarantees on bank lending,
leverage and profitability.
Section 4.3 provides a descriptive analysis of the impact of the issue of guaranteed bonds on
banks' performance.
Section 4.4 presents the statistical methodology generically, as applied to credit extension.