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 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.
4 Impact of state guaranteed bonds on bank lending, funding and profitability performance Sections 4.4.2-4.4.3 present the estimation results of the impact of state guarantees on bank lending and leverage. Section 4.5 provides conclusions. We begin with a description of data and measurement below. 4.2 Data and measurement As per chapter 3, two sources were used to collect information at the bond-level, bank-level and wholesale funding market-level: BankScope® provided bank-level data, including financial statements, ratings and other information for listed and non-listed banks. Bank data were collected in order to analyse the impact of the issuance of SG bonds on bank performance, credit extension and access to wholesale funding, among other bank outcomes. Bloomberg® provided bond- and market-level data, and complemented BankScope with bank-level data for listed banks. Bond-level data were gathered to measure bond issuing costs and their determinants. And, market-level data were collected to provide marketlevel information on factors influencing bank outcomes and bond issuing costs. In addition to the main data sources used, information contained in various central bank, government and other reports were used to compile a database of the features of state guarantee schemes. The primary use for this database was to identify non-SG bonds that would have been eligible for a state guarantee to form the counterfactual group of banks or comparison group against which to compare the performance of banks having issued SG bonds. In short the control group consists of banks that were eligible to issue SG bonds but did not do so why the “treated” group consists of banks that issued SG bonds. Using as a control group the banks that could have issued SG bonds rather than the whole population of banks that did not issue SG bonds is more appropriate to assess the impact of issuing bonds and any relative competitive advantage that may have arisen as a result of the issue of SG bonds “Treated” and control group differ mainly in that one group benefited from a “treatment”, namely the guarantee of their bond issues. The remainder of this section considers bank data and measurement in depth in relation to bank outcomes. 4.2.1 Bank outcomes For the study of the impact of state guarantees on bank performance, the following key bank outcomes are considered: (i) credit extension, (ii) funding outcomes, (iii) bank performance and (iv) leverage. The variables chosen for this analysis are summarised in Table 14. 16 16 We note at this stage that the use of balance sheet variables proxies for the underlying economic concepts of interest. 83
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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 2 Comparison of SG and non-SG
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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 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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