The Effect of Firm Subsidies on Credit Markets
Aleksandr Kazakov, Michael Koetter, Mirko Titze, Lena Tonzer
IWH Discussion Papers,
No. 24,
2022
Abstract
We use granular project-level information for the largest regional economic development program in German history to study whether government subsidies to firms affect the quantity and quality of bank lending. We combine the universe of recipient firms under the Improvement of Regional Economic Structures program (GRW) with their local banks during 1998-2019. The modalities of GRW subsidies to firms are determined at the EU level. Therefore, we use it to identify bank outcomes. Banks with relationships to more subsidized firms exhibit higher lending volumes without any significant differences in bank stability. Subsidized firms, in turn, borrow more indicating that banks facilitate regional economic development policies.
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Productivity, Managers’ Social Connections and the Financial Crisis
Iftekhar Hasan, Stefano Manfredonia
Journal of Banking and Finance,
August
2022
Abstract
This paper investigates whether managers’ personal connections help corporate productivity to recover after a negative economic shock. Leveraging the heterogeneity in the severity of the financial crisis across different sectors, the paper reports that (i) the financial crisis had a negative effect on within-firm productivity, (ii) the effect was long-lasting and persistent, supporting a productivity-hysteresis hypothesis, and (iii) managers’ personal connections allowed corporations to recover from this productivity slowdown. Among the possible mechanisms, we show that connected managers operating in affected sectors foster productivity recovery through higher input cost efficiency and better access to the credit market, as well as more efficient use of labour and capital.
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Das Potenzial von Bankkreditspreads für die Konjunkturprognose
Daniel Streitz
Wirtschaft im Wandel,
No. 2,
2022
Abstract
Prognosemodelle für die zukünftige wirtschaftliche Entwicklung verwenden häufig marktbasierte Indikatoren wie Spreads von Unternehmensanleihen, die den Risikoaufschlag gegenüber einem Referenzzins angeben. Anleihespreads bilden jedoch nur die Entwicklung von Risiken für Unternehmen ab, die regelmäßig Anleihen emittieren – im Durchschnitt größere, sichere Firmen. Neuartige Daten zu Bankkrediten, die im Sekundärmarkt gehandelt werden, erlauben auch die Konstruktion von Kreditspreads. Kreditmarktdaten umfassen ein breiteres Spektrum an Firmen, inklusive kleinerer Firmen, die stärker von Finanzmarktfriktionen betroffen sind. Tests zeigen, dass Kreditspreads tatsächlich mehr Informationen über wirtschaftliche Entwicklungen beinhalten als Anleihespreads und daher das Potenzial haben, Prognosemodelle zu verbessern.
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Ricardian Equivalence, Foreign Debt and Sovereign Default Risk
Stefan Eichler, Ju Hyun Pyun
Journal of Economic Behavior and Organization,
May
2022
Abstract
We study the impact of sovereign solvency on the private-public savings offset. Using data on 80 economies for 1989–2018, we find robust evidence for a U-shaped pattern in the private-public savings offset in sovereign credit ratings. While the 1:1 savings offset is observed at intermediate levels of sovereign solvency, fiscal deficits are not offset by private savings at extremely low and high levels of sovereign solvency. Particularly, the U-shaped pattern is more pronounced for countries with high levels of foreign ownership of government debt. The U-shaped pattern is an emerging market phenomenon; additionally, it is confirmed when considering foreign currency rating and external public debt, but not for domestic currency rating and domestic public debt. For considerable foreign ownership of sovereign bonds, sovereign default constitutes a net wealth gain for domestic consumers.
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Firm-level Employment, Labour Market Reforms, and Bank Distress
Ralph Setzer, Moritz Stieglitz
Journal of International Money and Finance,
February
2022
Abstract
We explore the impact of financial frictions on the employment effect of labour market reforms. Our study combines a new cross-country reform database on labour market reforms with matched firm-bank data for nine euro area countries over the period 1999 to 2013. While we find that labour market reforms are overall effective in increasing employment, restricted access to bank credit can undo up to half of medium to long-term employment gains at the firm-level. Entrepreneurs without sufficient access to credit cannot reap the full benefits of more flexible employment regulation.
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Aleksandr Kazakov, Michael Koetter, Mirko Titze, Lena Tonzer
Abstract
We study whether government subsidies can stimulate bank funding of marginal investment projects and the associated effect on financial stability. We do so by exploiting granular project-level information for the largest regional economic development programme in Germany since 1997: the Improvement of Regional Economic Structures programme (GRW). By combining the universe of subsidised firms to virtually all German local banks over the period 1998-2019, we test whether this large-scale transfer programme destabilised regional credit markets. Because GRW subsidies to firms are destabilised at the EU level, we can use it as an exogenous shock to identify bank responses. On average, firm subsidies do not affect bank lending, but reduce banks’ distance to default. Average effects conflate important bank-level heterogeneity though. Conditional on various bank traits, we show that well capitalised banks with more industry experience expand lending when being exposed to subsidised firms without exhibiting more risky financial profiles. Our results thus indicate that stable banks can act as an important facilitator of regional economic development policies. Against the backdrop of pervasive transfer payments to mitigate Covid-19 losses and in light of far-reaching transformation policies required to green the economy, our study bears important implications as to whether and which banks to incorporate into the design of transfer Programmes.
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Bank Concentration and Product Market Competition
Farzad Saidi, Daniel Streitz
Review of Financial Studies,
No. 10,
2021
Abstract
This paper documents a link between bank concentration and markups in nonfinancial sectors. We exploit concentration-increasing bank mergers and variation in banks’ market shares across industries and show that higher credit concentration is associated with higher markups and that high-market-share lenders charge lower loan rates. We argue that this is due to the greater incidence of competing firms sharing common lenders that induce less aggressive product market behavior among their borrowers, thereby internalizing potential adverse effects of higher rates. Consistent with our conjecture, the effect is stronger in industries with competition in strategic substitutes where negative product market externalities are greatest.
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Banking Globalization, Local Lending, and Labor Market Effects: Micro-level Evidence from Brazil
Felix Noth, Matias Ossandon Busch
Journal of Financial Stability,
October
2021
Abstract
Recent financial crises have prompted the interest in understanding how banking globalization interacts with domestic institutions in shaping foreign shocks’ transmission. This paper uses regional banking data from Brazil to show that a foreign funding shock to banks negatively affects lending by their regional branches. This effect increases in the presence of frictions in internal capital markets, which affect branches’ capacity to access funding from other regions via intra-bank linkages. These results also matter on an aggregate level, as municipality-level credit and job flows drop in exposed regions. Policies aiming to reduce the fragmented structure of regional banking markets could moderate the propagation of foreign shocks.
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Corporate Loan Spreads and Economic Activity
Anthony Saunders, Alessandro Spina, Sascha Steffen, Daniel Streitz
Abstract
We use secondary corporate loan-market prices to construct a novel loan-market-based credit spread. This measure has considerable predictive power for economic activity across macroeconomic outcomes in both the U.S. and Europe and captures unique information not contained in public market credit spreads. Loan-market borrowers are compositionally different and particularly sensitive to supply-side frictions as well as financial frictions that emanate from their own balance sheets. This evidence highlights the joint role of financial intermediary and borrower balance-sheet frictions in understanding macroeconomic developments and enriches our understanding of which type of financial frictions matter for the economy.
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The Impact of Risk-based Capital Rules for International Lending on Income Inequality: Global Evidence
Iftekhar Hasan, Gazi Hassan, Suk-Joong Kim, Eliza Wu
Economic Modelling,
May
2021
Abstract
This paper investigates the impact of international bank flows from G10 lender countries on income inequality in 74 borrower countries over 1999–2013. Specifically, we examine the role of international bank flows contingent upon the Basel 2 capital regulation and the level of financial market development in the borrower countries. First, we find that improvements in the borrower country risk weights due to rating upgrades under the Basel 2 framework significantly increase bank flows, leading to improvements in income inequality. Second, we find that the level of financial market development is also important. We report that a well-functioning financial market helps the poor access credit and thereby reduces inequality. Moreover, we employ threshold estimations to identify the thresholds for each of the financial development measures that borrower countries need to reach before realizing the potential reductions in income inequality from international bank financing.
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