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 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%. 94
Bank selection 4 Impact of state guaranteed bonds on bank lending, funding and profitability performance For the analysis of the impact of state guarantees on bank performance, only banks that issued bonds that were, or would have been eligible to be, state guaranteed are included. Therefore, the basis of the dataset of bank performance variables is the dataset of bond issues obtained via Bloomberg. In other words, all issuers behind the dataset of bond issues are included in the analysis of bank outcomes. Table 19 shows the number of banks issuing 0, 1, 2-4, and 5 bonds or more with a state guarantee. The table shows that the majority of banks that issued state guaranteed bond(s) issued a small number of those. Detailed information on the process followed for the selection of banks is presented in Annex 6. Table 19: Overall bank issuing activity by year of take-up of state guarantee and number of issues No state guarantee State guarantee Year No. banks Share No. banks 1 bond 2-4 bonds 5+ bonds Total Share No. banks Share No. banks Share No. banks Share 2008 21 61.76% 4 11.76% 3 8.82% 6 17.65% 34 100% 2009 125 59.52% 26 12.38% 39 18.57% 20 9.52% 210 100% 2010 108 54.54% 37 18.69% 40 20.20% 13 6.57% 198 100% Total 71 33.33% 42 19.72% 56 26.92% 44 20.66% 213 100% Source: Bloomberg and BankScope Main empirical specification The main empirical specification considered is based on the following fixed effects model for participating and non-participating banks over the period 2005-2010. it 1 GUARANTEEDit 2 GUARANTEE YEARit it t t*i + (6) vi it For each bank, i, in year, t: OUTCOMEit is the bank outcome of interest 19 GUARANTEEDit is whether or not the bank participated in a state guarantee scheme GUARANTEE SIZEit is the total volume of SG bonds issue by the bank expressed as a proportion of total liabilities + equity GUARANTEE YEARit indicates the first year in which the bank participated in a state guarantee scheme 19 Depending on the precise specification, this may be differences in the outcome of interest or logged differences with particularly independent variables also affected. 95
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Economic Papers are written by the
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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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3 Issuing costs of state guarantee
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Annex 3 Analysis of missing issuing
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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 5 -over model Figure 25: Anal
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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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