Danilo V. Mascia

Did Basel II Affect Credit Growth to Corporate Borrowers During the Crisis

The introduction of the risk-sensitive capital Accord, commonly known as Basel II, raised concerns among practitioners about possible increases in the procyclicality of capital charges during downturns. Based on a sample consisting of yearly observations for the period 2007–2012 and related to 76 countries, we test whether—throughout this period of financial distress—banks implementing Basel II reduce corporate lending growth more than banks adopting the first of the Basel Accords. Furthermore, we also test whether Basel II differently affects the growth of corporate loans according to bank size. Our analysis shows that banks, in general, that have complied with Basel II have not apparently reduced the growth of corporate loans. Interestingly, however, we find that the very largest banks decreased corporate lending growth by more than 3 % during the observed period, thus providing evidence of the above mentioned procyclicality issue affecting larger banks.

The Funding Strategies of European Banks: A Discussion

The financial turmoil occurred during the last decade has heavily affected the stability of the financial systems and the European economy. Indeed, the implications generated by the crises on the real economy, along with the important regulatory changes affecting banks, have surely had an impact on the behaviour of European banks in regards to their approach towards funding. The analysis of aggregated data for the last ten years confirms the widespread view in the literature that, at least for the largest European economies, retail deposits have acquired an increasing importance in terms of main funding instrument available to the credit institutions. Indeed, banks have progressively replaced wholesale funding in favour of deposits. Moreover, our analysis highlights a decline in the volume of bonds issued by the financial institutions over the last few years.

The Funding Strategies of Italian Banks: The Importance of Bonds

The analysis of the funding strategies adopted by the Italian banks over the last ten years confirms the trends observed for the banks operating in the major European countries. Indeed, since late 2012 deposits have been steadily growing, the weight of bonds, compared to the liabilities, has sharply declined. We find that, after a peak of 11% reached in 2011, at the end of 2016 the share of households’ wealth invested in banks’ bonds was around 3.3% only. Furthermore, until 2007 banks were used to place the majority of their bonds to households. After a steady decline throughout the years, at the end of 2016 only 25% of bank bonds appeared to be in retail investors’ portfolios. Overall, this underscores the key role played by the banks in guiding households’ investments decisions.

The Different Types of Bonds Issued by Italian Banks: An Overview

In this Chapter we provide a description regarding the characteristics of the bonds issued by Italian banks, as well as the rules governing the issuance of debt instruments. By employing data from a comprehensive database including 9,160 outstanding bonds, we show that banks, in Italy, typically issue plain vanilla bonds. Moreover, provided that the majority of bonds are unlisted, we infer that banks in Italy have been historically used to place their debt securities to retail customers directly at their branches. Finally, using real examples of debt securities currently held by retail investors, we illustrate some innovative structures of bank bonds. The complexity behind these structures suggests that retail investors are probably unaware of the implicit risks of the bonds, because they normally tend to buy (upon trust) what the bank proposes.

The Bail-in Effect: How the Cost of Funding Through Bonds has Changed After the Introduction of the BRRD

By employing data from a unique hand-collected dataset, in this Chapter we show that, since the adoption of the BRRD in the European Union, Italian banks—probably motivated by the need to increase the appeal of their bail-inable debt instruments—have been forced to offer higher yields (compared to the yields offered by government securities with corresponding maturities) to bondholders, with the consequence of an increase in their cost of funding. Finally, we conclude this final Chapter by offering some very recent examples about the application of the BRDD rules in Italy—which have either led to liquidation, resolution, or precautionary recapitalization cases—and the related side effects generated to bank bondholders.

Sovereign and Bank CDS Spreads During the European Debt Crisis: Laying the Foundation for SMEs’ Financial Distress

Using a sample of 14,910 daily credit default swap (CDS) observations related to 24 banks chartered in seven countries in the Euro area, we assess the existence of a causal relation between sovereign and bank credit risk during 2010–2014. Our results show that CDS spreads of the observed banks are highly influenced by the price dynamics of sovereign CDSs.

Legal-Institutional Environment, Social Capital and the Cost of Bank Financing for SMEs: Evidence from the Euro Area

This chapter addresses the question of whether a country’s legal-institutional and social environment affects the cost of bank financing for SMEs. We employ 22,295 firm-level observations drawn from the ECB SAFE from 2009 to 2013 as a sample of eleven euro area countries. After controlling for firm characteristics and macroeconomic features, we find that a less efficient judicial system as well as a higher degree of concentration of the banking industry increases the cost of funding for SMEs; the latter is instead reduced when the market share of cooperative banks and social capital are higher. Overall, we provide evidence that a better institutional and social environment produces positive externalities in the credit market, thereby favouring the cost of bank financing for SMEs.