Bank bias in Europe: effects on systemic risk and growth

Langfield, Sam; Pagano, Marco

doi:10.1093/epolic/eiv019

Cited by 203 publications

(135 citation statements)

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“…1 A first example is banks, which expand their business with high levels of debt during good times (Adrian and Shin, 2010;Gersbach and Rochet, 2014;Langfield and Pagano, 2015). Another example is housing finance, where increasingly large mortgages are granted during a housing boom (Almeida et al, 2006).…”

Section: Introductionmentioning

confidence: 99%

Regulating the financial cycle: An integrated approach with a leverage ratio

Schoenmaker

Wierts

2015

Economics Letters

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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. Terms of use: Documents in AbstractWe propose a regulatory approach for restricting debt financing as an amplification mechanism across the financial system. A small stylised model illustrates the trade-off between static and time varying limits on leverage in dampening the financial cycle. The policy section proposes its application to highly leveraged entities and activities across the financial system. Whereas the traditional view on regulation focuses on capital as a buffer against exogenous risks, our approach focuses instead on debt financing, endogenous feedback mechanisms and resource allocation. It explicitly addresses the boundary problem in entity-based financial regulation and provides a motivation for substantially lower levels of leverage -and thereby higher capital buffers -than in the traditional approach.

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Section: Introductionmentioning

confidence: 99%

Regulating the financial cycle: An integrated approach with a leverage ratio

Schoenmaker

Wierts

2015

Economics Letters

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“…However, market-oriented systems are found to be more resilient during a financial crisis when the banking sector's shock absorbing capacity is impaired. Langfield and Pagano (2015) examine this effect of financial structure in European countries on their stability and growth. They find that an increase in the banking sector relative to equity and private bond markets is associated with more systemic risk and hence lower stability.…”

Section: Financial Structure and Macroeconomic Volatilitymentioning

confidence: 99%

“…Since the 1990s, the European banking sector has grown significantly larger (relative to GDP) than those of other jurisdictions, particularly the United States (see Graph 1) 2 . This has made the financial structures of the majority of European countries strongly bank-based, with bank lending playing a significantly larger role in corporate sector funding than market issuance of debt and equity securities (Langfield and Pagano, 2015). In addition, corporate bond and equity market capitalisation in the EU is relatively underdeveloped compared to other jurisdictions (see Graphs 2 and 3)…”

Section: Introductionmentioning

confidence: 99%

Financial Structure and Macroeconomic Volatility: A Panel Data Analysis

Bezooijen

Bikker

2017

SSRN Journal

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In 2015, the European Commission (EC) launched its action plan for the creation of a European Capital Markets Union. The EC aims to return the European economy to sustainable growth and to enhance its shock absorbing capacity by reducing the reliance on bank finance and stimulating financial deepening and cross-border integration of Europe's capital markets. Financial diversification and integrated European capital markets are expected to improve risk sharing among households, supporting economic stability. However, the economic literature reveals a lack of theoretical and empirical consensus on the superiority of either a bank-based or a market-based financial system in promoting growth or reducing macroeconomic volatility. This paper is the first to include bond markets in its financial structure indicators, besides stock markets and bank lending. Using panel data on 55 countries between 1975 and 2014 and three different measures of financial structure, we investigate the effect of the structure of the financial system on the volatility of output and investment growth as well as their cyclical components. We do not find evidence that market-based financial structures dampen volatility of output or overall investment. Increase of the stock market size relative to that of the banking sector has a significant positive effect on the business cycle volatility of investments.

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“…The role of securities trading by banks has assumed significant importance in the modern financial system (Langfield and Pagano, 2014). Commercial banks today hold a significant amount of securities in their asset portfolios (e.g., 20% in the US and 19% in Germany).…”

Section: Introductionmentioning

confidence: 99%

Securities Trading by Banks and Credit Supply: Micro-Evidence

et al. 2015

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Reproduction permitted only if source is stated.ISBN 978-3-95729-1 -(Printversion) Non-technical summary Research questionThe role of securities trading by banks has assumed significant importance in the modern financial system. Commercial banks today hold a significant amount of securities in their asset portfolio.In the aftermath of the recent financial crisis, there is considerable debate both in academic and policy circles about the implications of security trading by banks' for credit supply and securities markets. A recurrent argument has been that securities trading activities by banks in the crisis have led to a reduction in credit supply. Moreover, there have been several policy initiatives to impose some restrictions on banks' trading activities as there are claims that weak banks take excessive risk through securities trading (Volcker rule in USA, the Liikanen Report in the European Union and the Vickers Report in the UK).However, empirical analysis is scant due to the lack of comprehensive micro datasets. ContributionIn this paper, we empirically analyze securities trading by banks, and the associated spillovers to the supply of credit to the real sector. We use the German securities' register that contains information on investments made by German banks at the security level as well as the German credit register with information on the credit given by German banks to each firm. The main testable hypothesis, which we examine is that banks with trading expertise will increase their investments in securities during the crisis, especially in those securities that had a (larger) drop in price, to profit from the trading opportunities, thereby withdrawing funds from lending. ResultsWe find that, during the crisis, banks with trading expertise increase their overall investments in securities, especially in those that had a larger price drop. The quantitative effects are largest for trading banks with higher capital and in securities with lower rating and longer maturity. In fact, there are no differential effects for triple-A securities. Moreover, banks with trading expertise reduce their overall supply of credit in crisis times -i.e., for the same borrower at the same time, trading banks reduce lending relative to other banks. The credit reduction is stronger for trading banks with higher capital and is binding at the firm level. All these differential effects for trading banks are not present outside the crisis period. The use of detailed micro data allows us to control for a number of characteristics that deal with several other interpretations, which makes our results robust. Our results suggest that during a crisis, security-trading activities can crowd out lending. However, at the same time, we also find that banks buy securities that have a larger drop in price, especially in long-term and low rated securities, in turn acting as risk absorbers. Nichttechnische Zusammenfassung Forschungsfrage AbstractWe analyze securities trading by banks and the associated spillovers to the supply of credit. Empir...

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Bank bias in Europe: effects on systemic risk and growth

Cited by 203 publications

References 74 publications

Regulating the financial cycle: An integrated approach with a leverage ratio

Regulating the financial cycle: An integrated approach with a leverage ratio

Financial Structure and Macroeconomic Volatility: A Panel Data Analysis

Securities Trading by Banks and Credit Supply: Micro-Evidence

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