Bank Relationships, Business Cycles, and Financial Crises

Non-technical summaryIn the wake of the global financial crisis there have been renewed efforts to rethink the regulatory framework of the banking system. Such efforts rest on the assumption that banks with stronger capital and liquidity buffers are more resilient to financial shocks. Stronger banks should also be less likely to curtail credit during times of stress. In this paper, we use highly disaggregated data on international bank lending to examine the link between balance sheet strength and the supply of bank credit. We focus on the syndicated loan market, a large international corporate credit market in which loans are extended by groups of banks rather than individual banks. Our sample comprises more than 800 banks from 55 countries that lent to borrowers in 48 countries during 2006-10.Our main contribution is to take a novel look at what constitutes a strong bank balance sheet. In doing so, we draw heavily on recent proposals for bank regulation under the Basel III framework. In particular, we compute a complex measure of structural liquidity (the 'net stable funding ratio') that helps gauge the stability of a bank's funding sources relative to the market liquidity profile of its assets. But we also use traditional variables of bank health that capture bank's dependence on non-deposit (or market) funding. These indicators of balance sheet strength, measured before the crisis, reflect banks' vulnerability to the financial market shocks that took place during 2007-08.We find that banks that were more dependent on market funding reduced their supply of syndicated loans more than other banks. However, bank capital played a cushioning role: bettercapitalized banks that were exposed to the financial market shocks decreased their supply of loans less than other banks. The only measure of capital that delivers this result is similar to the simple leverage ratio proposed under the Basel III framework. By contrast, the traditional Tier 1 and total regulatory capital ratios from the Basel II framework are less useful for distinguishing which banks were better able to sustain lending. These results underscore the importance of bank capital for the recovery of credit after crises.We conclude that banks with stronger balance sheets were better able to perform their intermediation function during the recent crisis. We examine the role of bank balance sheet strength in the transmission of financial sector shocks to the real economy. Using data from the syndicated loan market, we exploit variation in banks' reliance on wholesale funding and their structural liquidity positions in 2007Q2 to estimate the impact of exposure to market freezes during 2007-08 on the supply of bank credit.We find that banks with strong balance sheets were better able to maintain lending during the crisis. In particular, banks that were ex ante more dependent on market funding and had lower structural liquidity reduced the supply of credit more than other banks. However, higher levels of better-quality capital mitigated this effect. Our result...

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“…van Horen (2012, 2013), Giannetti and Laeven (2012a, b), and Hale (2012). 14 See Data Appendix for details.…”

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confidence: 99%

Balance Sheet Strength and Bank Lending During the Global Financial Crisis

Kapan

Minoiu

2013

SSRN Journal

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“…Hale (2012) shows that bank linkages are less likely to form if a country is experiencing a recession or a banking crisis. Clearly, these conditions can also affect exports as well as imports.…”

Section: Endogeneity Concerns and Other Robustness Testsmentioning

confidence: 99%

Bank Linkages and International Trade

et al. 2013

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. The opinions expressed in this publication are those of the authors and do not necessarily reflect the views of the Inter-American Development Bank, its Board of Directors, or the countries they represent. Terms of use: Documents inThe unauthorized commercial use of Bank documents is prohibited and may be punishable under the Bank's policies and/or applicable laws.Copyright © Inter-American Development Bank. This working paper may be reproduced for any non-commercial purpose. It may also be reproduced in any academic journal indexed by the American Economic Association's EconLit, with previous consent by the Inter-American Development Bank (IDB), provided that the IDB is credited and that the author(s) receive no income from the publication. This paper shows that bank linkages have a positive effect on international trade. A global banking network (GBN) is constructed at the bank level, using individual syndicated loan data from Loan Analytics for [1990][1991][1992][1993][1994][1995][1996][1997][1998][1999][2000][2001][2002][2003][2004][2005][2006][2007]. Network distance between bank pairs is computed and aggregated to country pairs as a measure of bank linkages between countries. Data on bilateral trade from IMF DOTS are used as the subject of the analysis and data on bilateral bank lending from BIS locational data are used to control for financial integration and financial flows. Using a gravity approach to modeling trade with country-pair and year fixed effects, the paper finds that new connections between banks in a given country-pair lead to an increase in trade flow in the following year, even after controlling for the stock and flow of bank lending between the two countries. It is conjectured that the mechanism for this effect is that bank linkages reduce export risk, and four sets of results that support this conjecture are presented. Cataloging-in-PublicationJEL Classification: F10, F15, F34, F36

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“…Had the crisis taken place later, it could have resulted in collapse even with governments intervening. Similarly to fires removing fuel, the amount of connections dropped sharply with the crisis [112,119]. Subsequently, however, governments have gone ahead with new agreements to force a quick globalization.…”

Section: Boc Systems Beyond the Limits To Growthmentioning

confidence: 99%

Ecological Econophysics for Degrowth

Pueyo

2014

Sustainability

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This paper outlines a synthesis of ecological economics with econophysics and other complexity approaches to economics. Arguably, the resulting "ecological econophysics" will be scientifically sounder than mainstream economics and much better suited to addressing a major challenge of our times: the development of democratically-based policies to reduce economic throughput to an environmentally sustainable level without triggering economic crises and without excluding part of the world's population, i.e., to implement degrowth. Degrowth will need major structural changes, which leads us to question whether there are limits to the malleability of the economic system's architecture. A fundamental limit will be encountered if, as suggested by the physics of complexity, long-lasting complex systems always occur midway between an ordered and a disordered state. There is much evidence that this hypothesis holds and that the current economic system satisfies this condition. However, this does not mean that the problems posed by this system should be unavoidable. Ecological econophysics gives clues to identifying alternative economic systems that would also function between order and chaos, but which would have radically different implications for environmental sustainability and social justice.

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Bank Relationships, Business Cycles, and Financial Crises

Cited by 55 publications

References 6 publications

Balance Sheet Strength and Bank Lending During the Global Financial Crisis

Balance Sheet Strength and Bank Lending During the Global Financial Crisis

Bank Linkages and International Trade

Ecological Econophysics for Degrowth

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