Drivers of Bank Lending: New Evidence from the Crisis

247 Pages·2015·3.259 MB·English

by  Hartmut Brinkmeyer (auth.)

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Herausgegeben von/edited by
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Herausgeberrat/Editorial Council:
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Universität St. Gallen Universität Kassel
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European Business School Universität Witten-Herdecke
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RWTH Aachen
Prof. Dr. Burkhard Schwenker
Prof. Dr. Karl-Werner Hansmann Roland Berger Strategy Consultants
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Prof. Dr. Alfred Kötzle
Europa-Universität Viadrina
Frankfurt/Oder
Hartmut Brinkmeyer
Drivers of Bank Lending
New Evidence from the Crisis
With a foreword by Prof. Dr. Christoph J. Börner
Hartmut Brinkmeyer
Düsseldorf, Germany
Dissertation Heinrich-Heine-Universität Düsseldorf D61 / 2014
ISBN 978-3-658-07174-5 ISBN 978-3-658-07175-2 (eBook)
DOI 10.1007/978-3-658-07175-2
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Foreword V

FOREWORD
The recent financial crisis hook the banking system to its very foundations. While the
most acute phase of the crisis seems to be over, very challenging questions remain
unanswered. In their capacity as financial intermediaries, banks both generate profits
and contribute to social welfare by taking risks. Yet when the crisis revealed that
there may be strong incentives for them to go too far, they were forced to reduce
their risky positions in a very short space of time. This in turn, however, may result in
less social welfare, particularly in the context of banks' lending business. Lending is
the most significant source of both income and risk for the banking sector, but it is
also the one outcome of financial intermediation that carries the greatest social
importance. A number of studies have already analyzed the lending behavior of
banks during the crisis. However, only a few studies examine the characteristics of
banks and how they influence the supply of bank loans. Evidence for European
banks in particular is very scant.
Hartmut Brinkmeyer's dissertation contributes to this field of research not only on a
general level, but also with respect to individual euro area countries. His analysis
provides a wealth of detailed results. One broad finding is that significant
relationships exist between lending and bank characteristics. In particular, the level
and nature of influence differs between countries and between times of crisis and
normal times. While great care must – as always – be taken when interpreting these
results, they clearly deliver a profound insight into the lending behavior of European
banks. The findings of the study are the fruit of a well-founded theoretical framework.
To develop hypotheses, the author applies a wide range of theoretical approaches to
the transmission of monetary policy, nevertheless focusing primarily on the “new view
of the bank lending channel”. This modern theoretical approach is tested against a
proprietary set of data. The econometrical design deploys a number of remarkably
innovative ideas. First, the author implements a bank-specific, self-chosen target
capital ratio in which the capital structure of a bank is driven not only by general
regulatory rules, but by internal considerations as well. This approach enables
management decisions to be introduced in a sophisticated and realistic way. Second,
the study adopts a very convincing approach to the disentanglement of loan supply
and loan demand.
VI Foreword
While some of the findings may line up with expectations, others are surprising
indeed. The study explicitly urges academic and practical discussion; and I am
convinced that it will have a place in the ongoing discussion of how banks acted in
the crisis. My hope is therefore that this dissertation receives the attention it deserves.

Düsseldorf, April 2014
Christoph J. Börner
Acknowledgements VII
ACKNOWLEDGEMENTS
An undertaking such as writing a dissertation is a great challenge. Thinking of some
hard times I had while working on it, I can definitely confirm that. At the same time,
however, it has also been a very satisfying task, because I had the opportunity to
work on a subject that I am truly interested in. This was one of the best sources of
inspiration and motivation I could possibly have and that gave me the stamina and
discipline required to pursue and successfully accomplish the present work.
All this would not have been possible without support of some people who I would
like to acknowledge here.

First and foremost, I would like to express my profound gratitude to my thesis
supervisor Professor Christoph J. Börner who accepted me as his doctoral candidate.
I very much appreciate his style, his constructive guidance and his stimulation which
made it easy for me to keep going. It has been a real pleasure to work under his
supervision. I also want to thank Professor Ulrike Neyer who agreed to take the role
as co-supervisor. Her unpretentious and enthusiastic nature is truly admirable.

My employer, Roland Berger Strategy Consultants, gave me the opportunity to take
time off for my dissertation. During that time I received support in many different ways.
Hence I would like to express my gratitude to the partner team of the CC Financial
Services for nominating me for the company's PhD program and to Christian Krys for
organizing it as well as for a great number of helpful pieces of advice. Thanks also to
my colleagues Dirk Thiele and Süleyman Ertan for their support in accessing the
required data.

Finally, I want to thank those whose contribution was less related to content but even
more valuable and special: my family and especially my wife, Anne. Writing a
dissertation is not always easy. Without your support, encouragement and
understanding this undertaking would not have been possible and I would have never
come this far.

Düsseldorf, June 2014 Hartmut Brinkmeyer
Table of Contents IX
TABLE OF CONTENTS
LIST OF FIGURES .................................................................................................. XIII(cid:3)
LIST OF TABLES .................................................................................................... XV(cid:3)
LIST OF NOTATIONS AND ABBREVIATIONS .................................................... XVII(cid:3)
1.(cid:3) Introduction ....................................................................................................... 1(cid:3)
1.1.(cid:3) Motivation ..................................................................................................... 1(cid:3)
1.2.(cid:3) Research questions and contribution ........................................................... 2(cid:3)
1.3.(cid:3) Scope and limitations ................................................................................... 4(cid:3)
1.4.(cid:3) Organization of the research ........................................................................ 5(cid:3)
2.(cid:3) Transmission channels of monetary policy .................................................... 7(cid:3)
2.1.(cid:3) The money view ........................................................................................... 7(cid:3)
2.2.(cid:3) The credit view ........................................................................................... 10(cid:3)
2.2.1.(cid:3) The balance sheet channel ................................................................... 11(cid:3)
2.2.2.(cid:3) The bank lending channel – Overview .................................................. 13(cid:3)
3.(cid:3) The bank lending channel in detail ................................................................ 18(cid:3)
3.1.(cid:3) Structure and elements of the bank lending channel.................................. 18(cid:3)
3.1.1.(cid:3) Condition 1: The central bank must be able to affect the supply
scheme of bank loans ............................................................................ 22(cid:3)
3.1.1.1.(cid:3) Subcondition 1: No complete adjustment to adverse monetary
policy shocks by the sale of securities/liquid assets ........................ 23(cid:3)
3.1.1.2.(cid:3) Subcondition 2: No access to non-deposit forms of funding
without additional cost ..................................................................... 24(cid:3)
3.1.1.3.(cid:3) Subcondition 3: Banks must not be capital constrained ................. 26(cid:3)
3.1.2.(cid:3) Condition 2: Publicly issued debt and non-bank intermediated loans
must not be perfect substitutes for bank loans ....................................... 28(cid:3)
3.1.3.(cid:3) Condition 3: Prices must not adjust instantaneously ............................. 32(cid:3)
3.2.(cid:3) Conclusion ................................................................................................. 34
X Table of Contents
4.(cid:3) A new view: Implications of financial innovation for bank lending ............ 35(cid:3)
4.1.(cid:3) The bank lending channel revisited ............................................................ 35(cid:3)
4.2.(cid:3) Toward a conceptualization of the new view .............................................. 40(cid:3)
5.(cid:3) Bank lending against the background of the recent crises ......................... 44(cid:3)
5.1.(cid:3) The loss spiral ............................................................................................ 45(cid:3)
5.2.(cid:3) The margin spiral or leverage cycle ............................................................ 50(cid:3)
5.3.(cid:3) Conclusion ................................................................................................. 52(cid:3)
6.(cid:3) Review of empirical evidence on bank lending and its implications .......... 55(cid:3)
6.1.(cid:3) Remarks on the difference between the US and the euro area .................. 56(cid:3)
6.2.(cid:3) Empirical evidence from the US ................................................................. 58(cid:3)
6.2.1.(cid:3) US evidence based on aggregate data ................................................. 58(cid:3)
6.2.2.(cid:3) US evidence based on data from individual banks ............................... 59(cid:3)
6.2.3.(cid:3) Conclusion ............................................................................................ 67(cid:3)
6.3.(cid:3) Evidence from the euro area ...................................................................... 68(cid:3)
6.3.1.(cid:3) Euro area evidence from before the crisis ............................................ 69(cid:3)
6.3.2.(cid:3) Euro area evidence in the wake of the crisis ......................................... 73(cid:3)
6.3.3.(cid:3) Conclusion ............................................................................................ 76(cid:3)
6.4.(cid:3) Implications of theoretical framework for interpretation of empirical
evidence ....................................................................................................... 77(cid:3)
7.(cid:3) Empirical analysis – approach ....................................................................... 82(cid:3)
7.1.(cid:3) Research hypotheses ................................................................................. 82(cid:3)
7.1.1.(cid:3) General hypotheses .............................................................................. 83(cid:3)
7.1.2.(cid:3) Hypotheses involving the context of the recent crisis ............................ 85(cid:3)
7.2.(cid:3) Overall empirical strategy and approach .................................................... 89(cid:3)
7.3.(cid:3) Empirical model .......................................................................................... 91(cid:3)
7.3.1.(cid:3) Derivation of a model of bank behavior ................................................. 91(cid:3)
7.3.2.(cid:3) Introduction of the empirical model ....................................................... 96(cid:3)
7.4.(cid:3) Data ............................................................................................................ 98(cid:3)
7.4.1.(cid:3) Data sources ......................................................................................... 98(cid:3)
7.4.2.(cid:3) Target capital estimation ..................................................................... 110(cid:3)