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

4 Impact of state guaranteed bonds on bank lending, funding and profitability performance
Firstly, for participating banks, the difference in bank outcomes is considered pre- and postparticipation.
For instance, Swedbank AB received state guarantees over 2008 and 2009. In 2007,
pre-participation, it extended €129m of credit based in net loans. And in 2010, post-participation,
it extended €133m of credit. Therefore, the difference in credit extension for Swedbank was €4m.
Secondly, for non-participating banks, the difference in banks outcomes is considered over the
same time period as for participating banks. For example, for apoBank AG, the difference in net
loans between 2008 and 2010 was €0.33m.
Finally, the difference-in-differences of net loans for participating and non-participating banks are
compared. For Swedbank AB and apoBank AG, their difference-in-differences of net loans was
€3.67m.
The benefit of the difference-in-differences approach is that many unobservable and/or nonmeasurable
differences that affect participating and non-participating bank outcomes are
controlled for.
Differences in bank characteristics that affect bank outcomes are taken into account through
considering differences in bank outcomes over time. For instance, size, e.g., in terms of a strong
local deposit base, may explain a large proportion of the difference in the level of credit (i.e., the
stock of loans) extended by Swedbank AB and apoBank AG. However, it is unlikely to explain much
of the change in credit extension undertaken by Swedbank AB and apoBank AG over 2008 and
2010. 18
Additionally, by considering participating and non-participating banks over the same time period,
economic conditions affecting both groups equally are accounted for. For instance, the banking
sector may have experienced a post-financial crisis recovery in 2010 leading to improved bank
outcomes for all banks. Continuing with the example of Swedbank AB and apoBank AG, net loans
may have grown by an average of €0.2m for both banks due to the recovery effect. Given other
determinants of bank outcomes that are observed and can be measured, which may amount to
€3m, the outstanding difference-in-differences of €0.67m (€4m - €3m - €0.33m) can therefore be
viewed as the average impact of a state guarantee on bank outcomes in our sample of 2 banks.
The outstanding concern regarding the difference-in-differences approach is the impact of timevarying
factors on the difference-in-differences of bank outcomes. For instance, in terms of our
example above, if Swedbank AB grew more than apoBank AG over the period 2008-2010 then part
of the €0.67m difference-in-differences in net loans would be due to this change in relative size
instead of use/non-use of state guarantees. To account for changes in size, the main difference-indifferences
results are re-estimated with interactions between independent variables and bank
outcome variables.
Finally, the limitation of the difference-in-differences approach is the impact of time-varying
factors that influence difference-in-differences of bank outcomes that are unobserved or
unaccounted for.
18 Moreover, to account for size explicitly, we also consider difference-in-differences in percentage terms. That is, a €4m expansion in
credit extension for Swedbank AB represents a 3.1% increase and a €0.33m expansion in credit extension for apoBank AG
represents a 1.4% increase, and therefore a difference-in-differences of 1.7%.
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