Do Exposures to Sagging Real Estate, Subprime or Conduits Abroad Lead to Contraction and Flight to Quality in Bank Lending at Home?

Transcription

1 Do Exposures to Sagging Real Estate, Subprime or Conduits Abroad Lead to Contraction and Flight to Quality in Bank Lending at Home? Steven Ongena University of Zurich, Swiss Finance Institute and CEPR Günseli Tümer-Alkan VU University Amsterdam Natalja v. Westernhagen Deutsche Bundesbank October 22-23, 2015, Bank of Finland Housing Market, Monetary Policy and Macroprudential Policy Conference The views expressed in this paper represent the authors personal opinions and do not necessarily reflect the views of the Deutsche Bundesbank.

2 started in the U.S. 2

3 Ingredients Initial measures using monetary policy tools proved to be ineffective due to excessive household debt with decreasing house prices. The crisis might not have been as severe if those underlying problems were addressed as the first step (Mian and Sufi (2014)) pointing to house prices again 3

4 led to a global financial crisis 4

5 Contraction in lending not so obvious before

6 Structured Finance & German banks Asset-Backed Commercial Paper (ABCP) conduits performed maturity transformation by purchasing long-term assets and issuing ST- ABCP. 100% committed liquidity support from a third party Different from SIVs Played a central role in the financial crisis with the deteriorating quality of US subprime mortgages. The total value of ABCP outstanding decreased from $1.18 trillion to $745 billion. German banks were exposed by setting up ABCP conduits and providing liquidity. 6

7 What we do We investigate how exposures in the US real estate sector influenced domestic lending in Germany when home prices started to decline in the US, whether there is a flight to quality in lending for those banks that were more exposed to the U.S. real estate sector. We define the three different bank exposures in the US: direct exposures to the US real estate industry and to the subprime lenders in the US, and indirect exposure as liquidity provided to ABCP conduits. 7

8 What we find Banks with higher exposure to US real estate contract their lending to German firms more following a decrease in US home prices than banks did not have such exposure. In terms of credit composition we find clear evidence for a flight to quality. Banks with higher exposures to conduits prefer lending to regions/industries with lower insolvency ratios. Banks with higher exposure to US real estate & conduits contract their lending in Germany to firms in riskier industry region combinations following a decrease in US home prices. 8

9 Related Literature International transmission of shocks through the banking sector. Peek and Rosengren (1997, 2000) During the recent crisis Cetorelli and Goldberg (2011); Allen, Hryckiewicz, Kowalewski and Tümer-Alkan (2012); Cetorelli and Goldberg (2012); Albertazzi and Bottero (2013); Claessens and van Horen (2013); Cull and Martinez Peria (2013); Ongena, Peydró and van Horen (2013); Bertay (2014); and de Haas and van Lelyveld (2014) De Haas and Van Horen (2013) and Popov and Van Horen (2013). Credit supply of German savings banks during the crisis Puri, Rocholl and Steffen (2011) 9

10 Related Literature Flight to quality following a negative shock Lang and Nakamura (1995); Bernanke, Gertler and Gilchrist (1996)) Bank risk-taking following expansionary monetary shocks Ioannidou, Ongena and Peydró (2013); Jiménez, Ongena, Peydró and Saurina (2014). Altunbas, Gambacorta and Marquez-Ibañez (2010); Delis, Hasan and Mylonidis (2011); Paligorova and Santos (2012); Dell Ariccia, Laeven and Suarez (2013); Buch, Eickmeier and Prieto (2014b); Buch, Eickmeier and Prieto (2014a) Gaggl and Valderrama (2010), López, Tenjo and Zárate (2010), López, Tenjo and Zárate (2010), Geršl, Jakubík, Kowalczyk, Ongena and Peydró (2012), Bonfim and Soares (2013), and Apel and Claussen (2012) 10

11 Contribution We cover the entire banking sector through the entire crisis period Have access to the time-varying effects of various types of German bank exposures in the US real estate market, combined with US home price shocks Identify potential (but not yet publicly observable) bank losses. not just the presumed impact through indirect linkages within parts of the system - ex post publicly reported distress at three Landesbanks Puri, Rocholl and Steffen (2011) Finally, we examine not only the resultant volume but also the composition of bank lending in Germany across corporations and regions to investigate whether there is a flight to quality in lending in Germany for those banks that were more exposed to the U.S. real estate sector. 11

12 Data Time period 2005Q1-2009Q4 Combination of several databases: the credit register (MiMik) Destatis Insolvency Data & Turnover Tax Statistics Moody s ABCP Query Bank balance sheet data (Bista, BAKIS) S&P/Case-Shiller Home Price Indices Information on individual lending behavior of German banks to domestic firms and industry-level number of firm defaults within particular German Federal States exposure of German banks to real estate in the US, to the subprime lenders in the US, and to their conduits in the US. 12

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14 Empirical Approach log Domestic Lending ijt = β 1 log Exposure it-1 + β 2 US Houseprices t + β 3 Insolvency jt-1 + β 4 log Exposure it-1 * US Houseprices t + β 5 log Exposure it-1 * Insolvency jt-1 + β 6 US Houseprices t *Insolvency jt-1 + β 7 log Exposure it-1 * US Houseprices t *Insolvency jt-1 N + β 8n Bank Controls it 1n + α i + α j + ε ijt n=1 Only non-zero exposures to predominately focus on continuing changes in domestic lending which we call internal margin. Our identification strategy relies on bank and bank-time level variation in exposures in the US, coupled with firm fixed effects that account for firm-level demand in Germany. 14

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16 Exposures by German Banks in the US in 2007Q2 16

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18 1 billion Euro US exposure and by 5 index points in US Home Price Index ==> contract domestic lending by 1.1 pp contract lending to firms in Germany in riskier industry region combinations (1 pp higher insolvency rate) by an additional 3.3 pp 18

19 Exposure to Subprime Lenders and Conduits 19

20 To sum up 20

21 Robustness Controlling for Demand Effects Our identification strategy relies on bank and bank-time level variation in exposures in the US, firm fixed effects : firm-level demand in Germany. Lack of multiplicity in relationships=> firm-quarter fixed effects removes all the variation. To account for time varying firm-level demand, we generate firm-size times year fixed effects. We proxy firm size with total bank borrowing at firm level, and use the distribution of this variable to generate dummies. 21

22 Implications for Real Activity log Sales jt = γ 0 + γ 1 log Domestic Lending ijt 1 + µ t + ε ijt 22

23 Conclusions We investigate how exposures in the US real estate sector influenced domestic lending in Germany. We find that banks with higher exposure to US real estate & conduits contract their lending in Germany to firms in riskier industry region combinations following a decrease in US home prices. To sum up: potential losses abroad shift bank lending at home Moreover, flight to quality spurs growth in the lowinsolvency part of the economy. 23