The effects of bank market power in short-term and long-term firm credit availability and investment

Applied Economics Letters

Fernández

2018

Self Cite

This paper analyses the effects of non-performing loans (NPLs) on the cost of capital, and on lending and liquidity supply, for a sample of 225 Eurozone banks over the period 2002Q1-2016Q4. Our results demonstrate that NPLs increase the cost of capital, which reduces both lending supply and liquidity creation. This phenomenon is comparatively more significant for periphery county banks than for core country banks.

“…Carbó-Valverde, Mansilla-Fernández, and Rodríguez-Fernández (2017) demonstrate that the degree of competition is a determinant of the lending supply.…”

mentioning

confidence: 92%

Disentangling the transmission channel NPLs-cost of capital-lending supply

Applied Economics Letters

Fernández

2018

Self Cite

“…The computation of the marginal costs ( ) necessary to compute the Lerner index is based on the following transcendental logarithmic costs function (see Birchwood et al, 2017;Carbó et al, 2017) This table provides the regression results of the effects of NPLs on the cost of capital. The dependent variable is the cost of capital (rit) defined by investors' required return on bank equity which is computed as the return of the risk-free asset plus βit times equity risk premium (ERPt).…”

Section: A2 Calculating the Marginal Costsmentioning

confidence: 99%

Non-Performing Loans, Cost of Capital, and Lending Supply: Lessons from the Eurozone Banking Crisis

Mansilla-Fernández

2018

SSRN Journal

This paper develops a theoretical model as a foundation of empirical analysis of the transmission channel of non-performing loans (NPLs) on bank cost of capital, credit and liquidity creation in the Eurozone. Empirical results confirm the model's predictions and suggest that holding non-performing loans increases the cost of capital for banks in the short-term and the long-term. Moreover, the increased cost of capital reduces credit and liquidity creation, and the more so the less capitalized is the bank. This phenomenon is found to be economically more significant for European periphery country banks than for core country banks. The identification of the transmission channel is robust to the Granger predictability test.creation to the bank's cost of capital, which means that the lending volume granted by banks endowed with relatively higher levels of capital is less affected by changes in investors' required return on bank equity holdings.Importantly, taking into consideration that European periphery country banks accumulated comparatively greater levels of NPLs than European core country banks, we estimate separately the transmission channel for both 'Europes'. We find that this phenomenon is economically more significant for banks operating in the Eurozone periphery countries than for those in the Eurozone core countries.The robustness of our results is validated by repeating the experiment for a sub-sample of German banks. Note the reader that German banks were commonly considered to be the safest ones in the Eurozone, because they held the lowest levels of NPLs compared to banks in other countries, and Germany has been more immune from macro/crisis shocks. Since we obtain qualitatively similar estimates for German banks, we draw the conclusion that our results are not driven by hidden common factors. Finally, the Granger predictability test confirms the uniqueness of the direction of the transmission channel. These results confirm the theoretical foundations of the transmission channel under investigation.

The dynamic effects of non-performing loans on banks’ cost of capital and lending supply in the Eurozone

Fernández

2020

Empirica

Self Cite

This paper analyses the transmission channel from non-performing loans (NPLs) to the cost of capital, credit provision and liquidity creation in the banks of the Eurozone. The empirical results suggest that holdings of non-performing loans increase both the long-and short-term cost of capital for banks. Moreover, the less capitalized the bank, the greater the reduction in credit provision and liquidity creation due to the increased cost of capital. This phenomenon is found to be more economically significant for European periphery country banks than for core country banks. The identification of the transmission channel is robust to the Granger predictability test.