Session 2 – Emilia Bonaccorsi di Patti presentation - UniCredit Group

Discussion: Bank lending during the
financial crisis of 2008
Emilia Bonaccorsi di Patti
Banca d’Italia
3rd UNICREDIT GROUP
CONFERENCE ON BANKING
AND FINANCE
The opinions expressed do not necessarily reflect those of the Banca
d’Italia, the Eurosystem or their staffs

What is the impact of the crisis on credit
availability?
• Debate on credit crunch in the US [Chari et al. Vs.
others]: some studies are starting to show that there
are negative credit supply effects from the crisis for
Spain, Germany, Italy…[older research on distress in
Japan, US, Korea, etc.]
• Identification is the key issue: difficult to solve,
especially with US data (not very much information
from micro data)
• Need to find some exogenous possibly heterogeneous
supply shock to banks not correlated with demand
shock link this to credit

This Paper in a Nutshell
• 38 banks, including investment banks and foreign
banks
• Look at syndicated loan issuances after Lehman
compared to pre-crisis (mid-2007) or crisis I (August
2007-July 2008)
IDENTIFICATION STRATEGY
1. Banks are differentiated by the importance of
deposits: more deposits, more stable funding
2. Banks that cosyndicated credit lines with Lehman
more exposed to liquidity shock

The Bottom Line
• There are supply effects on new syndicated loans due
to liquidity run on banks
• Robustness analysis supports the view that indeed it
is a supply effect rather than something coming from
demand drop only

Comments
• Nice paper, generally convincing evidence although not
conclusive
• The paper is stronger when it looks at the impact of the
Lehman shock on loan issuance by banks, it is less convincing
when it looks at the share of deposit funding
• Not sure that the relationship found between deposits and new
syndicated loans is a explained by a liquidity shock:
The determinant could be another, more persistent explanation based
on bank portfolio allocation: banks are recomposing their portfolios
towards more liquid assets, are deleveraging from riskier assets
Banks with more deposits might be those that had less leverage or less
risk
• Different policy conclusion
• Interpretation of current situation: Access to liquidity for
banks does not appear to be the determinant of current credit
dynamics

Senior Loan Officer Survey (FRB) – Medium and Large Banks
100
80
60
40
20
I-00
II-00
III-00
IV-00
I-01
II-01
III-01
IV-01
I-02
II-02
III-02
IV-02
I-03
II-03
III-03
IV-03
I-04
II-04
III-04
IV-04
I-05
II-05
III-05
IV-05
I-06
II-06
III-06
IV-06
I-07
II-07
III-07
IV-07
I-08
II-08
III-08
IV-08
I-09
II-09
III-09
IV-09
0
-20
-40
-60
-80
Net percentage of banks experiencing a demand increase
Net percentage of banks indicating a tightening of credit standards

OCTOBER 2007
“Almost all domestic banks and U.S. branches and agencies of foreign banks that
reported having tightened their lending standards and terms on C&I loans pointed to a
less favorable or more uncertain economic outlook as a reason for having done so.
Large majorities of both domestic and foreign respondents also cited decreased
liquidity in the secondary market and reduced tolerance for risk as reasons for a move
toward more-stringent lending policies. By contrast, relatively few respondents
indicated that concerns about their banks’ capital or liquidity positions had
contributed to the tightening of lending standards and terms.”
JULY 2008
“Very large majorities of domestic and foreign respondents pointed to a less favorable
or more uncertain economic outlook, their bank’s reduced tolerance for risk, and the
worsening of industry-specific problems as reasons for tightening their lending
standards and terms on C&I loans over the past three months. Roughly 65 percent of
foreign respondents —up from about 45 percent in the April survey—also noted that
concerns about their bank’s current or expected capital position had contributed to the
more-stringent lending policies over the past three months. In contrast, only about 25
percent of domestic respondents—down from about 35 percent in the April survey—
reported having tightened their lending standards because of concerns about their
bank’s current or expected capital position.”

OCTOBER 2008
“Almost all domestic and foreign respondents pointed to a less favorable or more
uncertain economic outlook as a reason for tightening their lending standards and
terms on C&I loans over the past three months. Large majorities of respondents
indicated that their bank’s reduced tolerance for risk and a worsening of industryspecific
problems were factors in their decision. Roughly 75 percent of foreign
respondents and about 40 percent of domestic respondents noted that a deterioration in
their bank’s current or expected capital position had contributed to the move toward
more stringent lending policies over the past three months..”
JANUARY 2009
“All domestic and foreign respondents pointed to a less favorable or more uncertain
economic outlook as a reason for tightening their lending standards and terms on C&I
loans over the past three months. Most respondents indicated that a worsening of
industry-specific problems and their bank's reduced tolerance for risk were also
important factors in their decision to tighten C&I lending policies. In contrast, only
about 25 percent of the domestic respondents that had tightened standards or terms
noted that a deterioration in their bank's current or expected capital position had
contributed to the change, in comparison with approximately 40 percent in the October
survey. High net percentages of foreign respondents gave as reasons for tightening
standards and terms on C&I loans decreased liquidity in the secondary market for C&I
loans and an increase in defaults by borrowers in public debt markets.”

More Comments
• Why not look at Crisis I versus Pre-crisis? Liquidity shocks
also in Crisis I [cannot use the Lehman shock but the deposit
story should hold], comparing result could help interpretation
• What about capital? In Crisis II more likely to have capital
structure weakness: how can we distinguish between liquidity
and capital constrained banks?
– The authors say that the decline in credit lines with longer maturities
was larger than other loans because they require banks to hold more
regulatory capital
• Foreign banks are important in the sample: how many there
are? They are probably funded by their parent: in other
countries evidence of significant internal capital markets, can
this affect results? Unfortunately the sample is very small

Open Issues
• Would like to see what has happened after November
2008 the collapse of certain markets is changing
again the intermediation model? The aggregate data
show that large US banks are increasing their holding
of liquid assets
• The syndicated loan market is a very special segment
of banks’ activity and a form of financing that only
very large firms use
– Firms that used syndicated loans in the past might have
shifted to other forms of financing
– Could this reflect substitutions between syndicated loans
and more liquid forms of financing? What are these
borrowers doing?

Conclusion
• I enjoyed reading the paper
• Consistent with some evidence from other countries
• The Lehman shock has been used by other studies
(Germany, Italy) we should think about temporary
versus more persistent shocks (drying up of
secondary markets, securitization, ecc.)
Need more research on the impact of bank funding
on credit conditions to large and small borrowers

Thank you