In Search for Yield? Survey-based Evidence on Bank Risk Taking
Journal of Economic Dynamics and Control,
Monetary policy can have an impact on economic and financial stability through the risk taking of banks. Falling interest rates might induce investment into risky activities. This paper provides evidence on the link between monetary policy and bank risk taking. We use a factor-augmented vector autoregressive model (FAVAR) for the US for the period 1997–2008. Besides standard macroeconomic indicators, we include factors summarizing information provided in the Federal Reserve’s Survey of Terms of Business Lending (STBL). These data provide information on banks׳ new loans as well as interest rates for different loan risk categories and different banking groups. We identify a risk-taking channel of monetary policy by distinguishing responses to monetary policy shocks across different types of banks and different loan risk categories. Following an expansionary monetary policy shock, small domestic banks increase their exposure to risk. Large domestic banks do not change their risk exposure. Foreign banks take on more risk only in the mid-2000s, when interest rates were ‘too low for too long’.
Financial Constraints of Private Firms and Bank Lending Behavior
Journal of Banking and Finance,
We investigate whether and how financial constraints of private firms depend on bank lending behavior. Bank lending behavior, especially its scale, scope and timing, is largely driven by bank business models which differ between privately owned and state-owned banks. Using a unique dataset on private small and medium-sized enterprises (SMEs) we find that an increase in relative borrowings from local state-owned banks significantly reduces firms’ financial constraints, while there is no such effect for privately owned banks. Improved credit availability and private information production are the main channels that explain our result. We also show that the lending behavior of local state-owned banks can be sustainable because it is less cyclical and neither leads to more risk taking nor underperformance.
Distance, Lending Relationships, and Competition
Journal of Finance,
We study the effect on loan conditions of geographical distance between firms, the lending bank, and all other banks in the vicinity. For our study, we employ detailed contract information from more than 15,000 bank loans to small firms comprising the entire loan portfolio of a large Belgian bank. We report the first comprehensive evidence on the occurrence of spatial price discrimination in bank lending. Loan rates decrease with the distance between the firm and the lending bank and increase with the distance between the firm and competing banks. Transportation costs cause the spatial price discrimination we observe.
The Impact of Technology and Regulation on the Geographical Scope of Banking
Oxford Review of Economic Policy,
We review how technological advances and changes in regulation may shape the (future) geographical scope of banking. We first review how both physical distance and the presence of borders currently affect bank lending conditions (loan pricing and credit availability) and market presence (branching and servicing). Next we discuss how technology and regulation have altered this impact and analyse the current state of the European banking sector. We discuss both theoretical contributions and empirical work and highlight open questions along the way. We draw three main lessons from the current theoretical and empirical literature: (i) bank lending to small businesses in Europe may be characterized both by (local) spatial pricing and resilient (regional and/or national) market segmentation; (ii) because of informational asymmetries in the retail market, bank mergers and acquisitions seem the optimal route of entering another market, long before cross-border servicing or direct entry are economically feasible; and (iii) current technological and regulatory developments may, to a large extent, remain impotent in further dismantling the various residual but mutually reinforcing frictions in the retail banking markets in Europe. We conclude the paper by offering pertinent policy recommendations based on these three lessons.
Relationship Lending within a Bank-Based System: Evidence from European Small Business Data
Journal of Financial Intermediation,
We investigate relationship lending using detailed contract information from nearly 18,000 bank loans to small Belgian firms operating within the continental European bank-based system. Specifically, we investigate the impact of different measures of relationship strength on price and nonprice terms of the loan contract. We test for the possibility of rent shifting by banks. The evidence shows two opposing effects. On the one hand, the loan rate increases with the duration of a bank–firm relationship. On the other hand, the scope of a relationship, defined as the purchase of other information-sensitive products from a bank, decreases the loan's interest rate substantially. Relationship duration and scope thus have opposite effects on loan rates, with the latter being more important. We also find that the collateral requirement is decreasing in the duration of the relationship and increasing in its scope.