Diana Bonfim

The Number of Bank Relationships and Borrowing Costs: The Role of Information Asymmetries

This paper provides new evidence on the effect of bank competition on the cost of lending, in an environment of reduced information asymmetries between firms and banks. We construct a simple model linking the number of bank relationships, the cost of lending and bank competition. Banks are exposed to more competition if the firm has many ongoing bank relationships that improve her threat point when negotiating borrowing costs. Moreover, increased competition in the banking sector might mitigate (substitute) or amplify (complement) this effect. Using a unique data set from Portugal, we find that when a firm borrows from one additional bank, the interest rate on bank loans for this firm becomes 9 to 20 basis points lower on average. In addition, we find that when local bank competition is more intense firms can benefit more from simultaneously engaging in several banking relationships, hence providing evidence of complementarity between competition and the number of bank relationships. However, we do not observe these effects for the smallest and youngest firms.

The Dynamics of Capital Structure Decisions

In this paper we explore the process of convergence to firms’ target leverage ratios. Using a unique dataset of micro, small, medium and large firms, we find that this process is very fast, most notably for smaller firms. We further explore these results by analyzing different convergence trajectories. We find that firms that are currently below their target leverage ratio take more time to reach this target than firms with a symmetrical departure point. Furthermore, smaller firms are able to converge faster to their optimal capital structure, regardless of whether they have to increase or decrease their current leverage ratios. Using a duration analysis framework, we also find that firms that have to increase debt to reach their target leverage ratio take more time to do so if they have more free cash-flow.

Comparing Different Early Warning Systems: Results from a Horse Race Competition Among Members of the Macro-Prudential Research Network

Over the recent decades researchers in academia and central banks have developed early warning systems (EWS) designed to warn policy makers of potential future economic and financial crises. These EWS are based on diverse approaches and empirical models. In this paper we compare the performance of nine distinct models for predicting banking crises resulting from the work of the Macroprudential Research Network (MaRs) initiated by the European System of Central Banks. In order to ensure comparability, all models use the same database of crises created by MaRs and comparable sets of potential early warning indicators. We evaluate the models’ relative usefulness by comparing the ratios of false alarms and missed crises and discuss implications for pratical use and future research. We find that multivariate models, in their many appearances, have great potential added value over simple signalling models. One of the main policy recommendations coming from this exercise is that policy makers can benefit from taking a broad methodological approach when they develop models to set macro-prudential instruments.

The Risk-Taking Channel of Monetary Policy – Exploring All Avenues

It is well established that when monetary policy is accommodative, banks grant more credit. However, only recently has the quality of credit granted been given attention. This literature on the so-called risk-taking channel of monetary policy has been growing quickly, leading to scattered evidence. In this paper we examine through different angles how this channel works. We explore detailed bank and borrower information to look at loan origination and performance over time. We find that ex-ante riskier borrowers have more access to bank funding when interest rates are lower at the extensive margin. Ex-post, overall performance of bank loans is independent of the level of interest rates prevailing when loans were granted. Still, loans granted in periods of low and stable interest rates show higher default rates once interest rates start to increase. Risk-taking behaviors are more prevalent among banks with lower capital ratios, thus suggesting that they may be anchored to managerial incentives for risk-shifting.

Bank Size and Lending Specialization

Using micro-level data on the entire population of business loans of a bank-based economy, we empirically test some of the core predictions of the SME financing literature, examining banks’ lending specializations in firm size and lending technologies. Rejecting the conventional belief that smaller banks focus more on relationship loans than do larger banks, we find that banks of different sizes dedicate similar proportions of loans to relationship lending. However, supporting the SME finance theories on the organizational advantages of small banks, we find that smaller banks provide more access to relationship loans to small firms, though such loans are usually more expensive.

What Happens after Default? Stylized Facts on Access to Credit

In this paper we investigate what happens to firms after they default on their bank loans. We approach this question by establishing a set of stylized facts concerning the evolution of default and its resolution, focusing on access to credit after default. Using a unique dataset from Portugal, we observe that half of the default episodes last 5 quarters or less and that larger firms have shorter default periods. Most firms continue to have access to credit immediately after default, though only a minority has access to new loans. Firms have more difficulties in regaining access to credit if they are small, if their default was long and severe, if they borrow from only one bank or if they default with their main lender. Further, half of the defaulting firms record another default in the future. We observe that firms with repeated defaults are, on average, smaller and have experienced longer and more severe defaults.

Surviving the Perfect Storm: The Role of the Lender of Last Resort

When banks are hit by a severe liquidity shock, central banks have a key role as lenders of last resort. Despite the well-established importance of this mechanism, there is scarce empirical evidence that allows analyzing this key role of central banks. We are able to explore a unique setting in which banks suddenly lose access to market funding due to contagion fears at the onset of the euro area sovereign debt crisis. Using monthly data at the loan, bank, and firm level, we are able to test the role of the central bank in a scenario of imminent collapse. We find that the liquidity obtained from the central bank played a critical role in avoiding the materialization of such a scenario.

Forecasting Banking Crises with Dynamic Panel Probit Models

Banking crises are rare events, however when they occur they often have dramatic consequences. The aim of this paper is to contribute to the toolkit of early warning models available to policy makers by exploring the dynamics and non-linearities embedded in a panel dataset covering several countries over three decades. The in-sample and out-of-sample forecast performance of several dynamic probit models is evaluated, with the objective of developing a common vulnerability indicator with early warning properties. The results obtained evidence that adding dynamic and non-linear components to the models substantially improves the ability to forecast banking crises.

Sorry, We're Closed: Loan Conditions When Bank Branches Close and Firms Transfer to Another Bank

We study loan conditions when bank branches close and firms subsequently transfer to a branch of another bank in the vicinity. Such transfer loans allow us for the first time to observe the conditions granted when banks pool-price new applicants. Consistent with recent theoretical work on hold up in bank-firm relationships we find that transfer loans do not receive the discount in loan rates that prevails when firms otherwise switch banks. We hereby critically augment recent empirical evidence on dynamic cycles in loan rates.

Bank Size and Lending Specialisation: Bank Size and Lending Specialisation

Using micro-level data on the entire population of business loans of a bank-based economy, we empirically test some of the core predictions of the SME financing literature, examining banks’ lending specializations in firm size and lending technologies. Rejecting the conventional belief that smaller banks focus more on relationship loans than do larger banks, we find that banks of different sizes dedicate similar proportions of loans to relationship lending. However, supporting the SME finance theories on the organizational advantages of small banks, we find that smaller banks provide more access to relationship loans to small firms, though such loans are usually more expensive.