Does Government Intervention Affect Banking Globalization?
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Transcript of Does Government Intervention Affect Banking Globalization?
Does Government Intervention Affect Banking Globalization?
Anya Kleymenova,1 Andrew K. Rose2 and Tomasz Wieladek3
1 Chicago-Booth2 Berkeley-Haas, ABFER, CEPR and NBER
3 Barclays Capital, ex Bank of England
Disclaimer: The research presented here solely reflects the views of the authors and not those of the Bank of England.
Motivation (I)
• Global financial crisis of 2007-2009 led to a decrease in global bank lending but not in portfolio and bond flows – Potential explanations include:
1. Rise in financial regulation2. Weakness in loan demand3. Political interference
2
Motivation (II)
• Cross-border bank lending fell by an unprecedented amount
Stock of Foreign Assets by Type
Sources: BIS and IFS3
Motivation (III)
• Simultaneously: large public sector financial interventions in system around the world
Public Capital Injections as a Fraction of 2008 GDP
Source: IMF
0
1
2
3
4
5
6
7
4
Motivation (IV)
• Rose and Wieladek (2014) show that one possible explanation is “financial protectionism” – Increase in home bias following government
intervention• Objective here: provide more evidence of
financial protectionism
5
Financial Protectionism
• Public financial intervention nationalistic change in banks’ behaviour
Discrimination between domestic and foreign borrowers and depositors (greater home bias)
Convergence of bank preferences for lending abroad
6
Anecdotal Evidence
• Germany– Commerzbank Nov 2008 public capital injection was conditional
on lending to Mittelstand (German SMEs)
• UK– Project Merlin encouraged more domestic lending (in particular
to SMEs)
• US– TARP banks were supposed to raise capital ratios and maintain or
increase domestic lending– The only way to meet these inconsistent goals was to cut back
foreign lending (unintended consequence)
7
Three Research Questions1. Do banks’ preferences for domestic vs. foreign lending/ deposits
change when they experience a large public intervention? (Analogue to existing asset work, but liabilities.)– Test using UK data (depth)
2. Does this lead to a similar cross-country portfolio allocation by nationalized banks from the same country?– Test using UK data (breadth)
3. Does this change in geographic asset allocation persist after the intervention ends?– Test using US TARP entry and exits (persistence)
8
Question 1Do banks’ preferences for domestic vs. foreign liabilities change with nationalization? Is there a liability effect similar to (already observed) asset effect?•Compare before/after nationalizations•Panel Approach with many private banks, fixed bank and time effects
– Hence difference in difference methodology
9
Empirical approach: DepthFori,t/(Domi,t+Fori,t) = αi + βt + γFORNatFOR,i,t + γUKNatUK,i,t + θFORLLFOR,i,t + θUKLLUK,i,t
+ζFORCapFOR,i,t + ζUKCapUK,i,t + εi,t,
Fori,t – lending to (borrowing from) foreign residents by bank i at time t;
Domi,t – lending to (borrowing from) domestic (British) residents by bank i at time t;
αi – bank-specific fixed effects;
βt – time fixed effects;
NatFOR,i,t = 1 if a foreign bank is nationalized at or before time t, 0 otherwise;
NatUK,i,t = 1 when a British bank i is nationalized at or before time t, and 0 otherwise;
LLi,t , Capi,t – analogues for banks that receive unusual access to liquidity or loan guarantees (LL), or are the recipients of public capital injections (Cap); andεi,t – well-behaved disturbance term.
10
Depth and Breadth: Data• Confidential Bank of England dataset
– Comprehensive balance sheet information for all banks operating in the UK (1999Q1 – 2011Q4)
– Used for regulatory purposes and national account statistics– Covers 334 banks, 53 are UK-owned– A large number of banks do both domestic and cross-border
lending– Total number of observations is 11,544
• Hand-collected public interventions– Includes access to liquidity insurance facilities, public capital
injections and nationalizations11
Results (Depth)• Foreign bank nationalization
raises the mix of foreign to total assets by around 15%
• Foreign bank nationalization increases the fraction of foreign liabilities by 14%
• Consistent with financial protectionism
• Results are robust to:– Treatment of outliers– Bank size– Inclusion of bank controls– Inclusion of random effects
Assets Liabilities NetForeignNationalization
.15*(.06)
.14*(.06)
.02(.08)
Foreign CapitalInjection
.00(.02)
.10**(.03)
-.09*(.04)
Foreign Accessto Lending
.00(.04)
.07(.08)
-.01(.09)
BritishNationalization
-.03(.02)
.03(.09)
-.07(.09)
British CapitalInjection
-.05*(.02)
.02(.06)
-.07(.06)
British Accessto Lending
.00(.02)
-.01(.03)
.01(.03)
12
Sensitivity AnalysisRegressand: External/Total Assets External/Total Liabilities Foreign
Nationalization
British Nationalizatio
n
Foreign Nationalizatio
n
British Nationalizatio
nDefault .15*
(.06)-.03(.02)
.14*(.06)
.03(.09)
Ignore >1 .14*(.06)
-.03(.02)
.13*(.06)
.03(.09)
Only in (1,99) .19**(.03)
-.04(.03)
.14*(.06)
.03(.09)
Drop 2.5σ outliers
.14*(.06)
-.04(.02)
.15**(.06)
-.01(.05)
Drop early obs .14*(.06)
-.03(.02)
.15**(.05)
.04(.08)
13
More Sensitivity AnalysisRegressand: External/Total Assets External/Total Liabilities Foreign
NationalizationBritish
NationalizationForeign
NationalizationBritish
NationalizationDrop small banks .14*
(.06)-.04(.02)
.14*(.06)
.03(.09)
Add controls .12*(.06)
-.04(.03)
.14*(.06)
.04(.09)
Weight by size .09(.06)
.00(.04)
.17*(.08)
-.04**(.01)
Random bank effects
.15*(.06)
-.04(.02)
.14*(.06)
.03(.09)
No time effects .20**(.06)
-.03(.02)
.15**(.06)
.04(.08)
Tobit(random effects)
.22**(.02)
-.04(.03)
.14**(.02)
.03(.02)
14
Summary: Big Depth Effect
• Bank nationalization of non-British banks tilts composition of bank balance sheets away from British to foreign activity, for both assets and liabilities– Prima Facie evidence of Financial Protectionism
• Strong statistically and economically, insensitive, similar asset and liability magnitudes
15
Empirical approach: Breadth
16
• Do government interventions also affect cross-country breadth of banking globalization?– Do officials who take charge of any given
nationalized bank divest in a similar fashion?– Do portfolios of nationalized banks grow alike? – Does a given bank’s cross-country portfolio mix
converge (to resemble the portfolio of other nationalized banks) or diverge in the wake of nationalization?
Question 2Do banks’ cross-country asset portfolios change systematically with nationalization? Compare pair of banks before/after nationalizations.
– One bank nationalized– Two banks nationalized from different countries– Two banks nationalized from same country
•Panel Approach with many bank-pairs, fixed dyad and time effects
– Again, difference in difference methodology
17
Simple Example
18
• HSBC: British bank with substantial Asian operations
• Yorkshire Bank: subsidiary of National Australia Bank, specializes in UK mortgages, little overseas– Similarity of overseas portfolios of HSBC and YB
likely to be limited• Q: if both HSBC and YB were nationalized,
would their foreign portfolios converge?
Measurement of Similarity
19
• Cosine Similarity• COSAi,I,t ≡
[Σk Assets(k)i,t∙Assets(k)j,t]
{[Σk(Assets(k)i,t)2].5} ● {[Σk(Assets(k)j,t)2].5}
• Varies between 0 and 1• Assets(k)i,t denotes Assets bank i holds in country k at time t, taken
from the CC1 form of the Bank of England–Typical resident UK bank lends to average of 53 countries–We require i and j share at least 30 countries
Histogram of Cosine Similarity
0.5
11.
5D
ensi
ty
0 .2 .4 .6 .8 1Cosine Similarity of Bank Assets Across Countries
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Estimation Equation: BreadthCOSAi,j,t = αi,j + βt + γOneNati,j,t + ψBothNati,j,t + φSCBothNati,j,t + vi,j,t
COSAi,j,t – cosine similarity of foreign assets (across countries) for a pair of banks i and j at time t;αi,j – comprehensive set of dyadic bank pair-specific fixed effects;
βt – time fixed effects;
OneNati,j,t = 1 if either bank i or bank j (but not both) is nationalized at or before time t;
BothNati,j,t = 1 if both bank i and bank j are nationalized at or before time t;
SCBothNati,j,t =1 if both bank i and bank j are nationalized at or before time t and both banks are from the same country; andvi,j,t – omitted factors determining the similarity of the cross-country portfolio mix for a pair of banks.
21
Effect of Nationalization of OneBank on Cosine Similarity
• Cosine similarity of foreign assets (CSFA) of pair of banks:– Not expected to change if causes of bank
nationalization independent of cross-country exposures mix
• But suppose sub-prime losses in US caused GFC?• CSFA would change similarly for all banks
– So include comprehensive time effects
22
What if Both Banks Nationalized?
• If governments have different preferences for cross-country assets:– Country x divests from a,b,c, invests in d,e,f– Country y has opposite preferences
• CSFA falls if banks from different countries (xy)• CSFA rises if banks from same country (xx/yy)
– 55 observations
• 354 observations where both banks nationalized
23
ResultsOne(γ)
Both(ψ)
Both, Same
Nation (φ)
Both + Both Same
Nation (ψ+φ) = 0 (p-value)
-.01(.02)
-.22**(.02)
.31**(.04)
.00
• Single bank nationalization has little detectable effect (γ)
• When both banks are nationalized, the similarity of banks’ cross-country portfolio mixes falls significantly (ψ)
• Opposite effect if nationalized banks from same country (φ)
24
Insensitive ResultsNationalization:
One(γ)
Both(ψ)
Both, SameNation (φ)
(ψ+φ) = 0 (p-value)
Default -.01(.02)
-.22**(.02)
.31**(.04)
.00
≥28 obs -.02(.01)
-.18**(.06)
.28**(.07)
.00
≥32 obs -.01(.02)
-.21**(.02)
.31**(.03)
.00
Liabilities -.03*(.01)
-.10(.08)
.10(.10)
.90
Weight by observations
-.01(.02)
-.22**(.02)
.31**(.03)
.00
Tobit -.01*(.01)
-.22**(.04)
.31**(.08)
.00
25
More Sensitivity AnalysisNationalization One
(γ)Both(ψ)
Both, SameNation (φ)
(ψ+φ) = 0 (p-value)
Random Effects -.01(.02)
-.22**(.02)
.31**(.04)
.00
Drop early obs -.03*(.02)
-.19**(.02)
.21**(.05)
.57
Drop small banks
-.01(.02)
-.22**(.02)
.32**(.04)
.00
Drop 2.5σ outliers
-.01(.02)
-.21**(.02)
.30**(.04)
.00
Add controls -.01(.02)
-.22**(.02)
.31**(.04)
.00
Add more controls
-.03(.02)
-.14**(.02)
.10*(.05)
.46
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Summary: Big Breadth Effect
• When pair of banks from same country nationalized, cross-country asset portfolios converge; financial globalization shrinks– Nationalized banks in different countries: opposite– Prima Facie evidence of financial protectionism– Strong statistically and economically, insensitive
27
Question 3Does banks’ preferences for domestic vs. foreign assets persist after intervention ended?•Compare before/after TARP and reversal•Panel Approach with many banks, fixed bank and time effects
– Still again, difference in difference methodology
28
Empirical Approach: PersistenceYi,t = αi + βt + γTARPEntryi,t + θTARPExiti,t + εi,t
Yi,t – growth rate of domestic household, commercial and industrial/foreign lending;
αi – comprehensive set of bank-specific fixed effects;
βt – set of time fixed effects;
TARPEntryi,t = 1 when bank i receives TARP funds at or before time t and 0 otherwise;
TARPExiti,t = 1 when bank i repays TARP funds at or before time t and 0 otherwise; and
εi,t – well behaved disturbance term.
•We estimate our default model for banks with assets in the top 5% of the asset distribution•We use growth rates rather than levels as growth rates are almost normally distributed (and many American banks have no foreign activity)
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Persistence: Data• FR Y-9C and US Treasury
– US Bank Holding Companies (BHCs) participating in TARP (1991Q1-2012Q4)
– Main analysis uses large banks (5% of assets distribution, 75 banks on average)
– 2,981 observations are large banks with foreign lending (35 banks on average)
– Robustness tests show results for the full sample of banks
30
Persistence: Results
• Negative and significant effect on foreign loan growth rate upon banks’ entry into TARP
• The effect appears to reverse upon banks’ exit from TARP, but poor precision• Results are robust to various specifications• In large: results reasonably weak; poor precision for almost all coefficients, small
economic sizes
Domestic Loan Growth Foreign Loan Growth Coefficient Sums
TARPEntry
TARPExit
TARPEntry
TARPExit
Domestic Entry+Exit
Foreign Entry+Exit
Domestic-Foreign
EntryDefault -.01
(.02)-.03(.02)
-.04*(.02)
.02(.04)
-.04(.03)
-.02(.05)
.04(.02)
Bigger (1%) Banks
-.00(.06)
-.13*(.07)
-.07*(.03)
.01(.05)
-.13(.11)
-.06(.06)
.07*(.03)
AllBanks
.04**(.02)
-.04*(.01)
-.05(.04)
.03(.03)
.00(.01)
-.01(.02)
.09*(.04)
31
Sensitivity Analysis Domestic Loan Growth Foreign Loan Growth Coefficient Sums
TARPEntry
TARPExit
TARPEntry
TARPExit
Domestic Entry+Exit
Foreign Entry+Exit Domestic-Foreign Entry
Default -.01(.02)
-.03(.02)
-.04*(.02)
.02(.04)
-.04(.03)
-.02(.05)
.04(.02)
Bigger (1%) Banks -.00(.06)
-.13*(.07)
-.07*(.03)
.01(.05)
-.13(.11)
-.06(.06)
.07*(.03)
AllBanks
.04**(.02)
-.04*(.01)
-.05(.04)
.03(.03)
.00(.01)
-.01(.02)
.09*(.04)
No Big-6 Banks -.01(.02)
-.02(.02)
-.04(.02)
.02(.04)
-.02(.03)
-.02(.06)
.04(.03)
After2000
-.01(.02)
-.04(.02)
-.04*(.02)
.02(.04)
-.05(.04)
-.02(.05)
.03(.02)
HCI + Mortgage Loans
-.04(.02)
-.04*(.02)
-.04*(.02)
.02(.04)
-.08*(.04)
-.02(.05)
.01(.02)
Drop Time Effects -.01(.01)
-.02(.01)
-.05*(.02)
.03(.02)
-.03**(.01)
-.02(.01)
.03(.02)
Drop Bank Effects -.01(.02)
-.00(.02)
-.00(.02)
.04(.03)
-.00(.03)
-.03(.04)
-.00(.02)
Drop 2σ outliers .00(.01)
.00(.01)
-.00(.02)
.03(.03)
.01(.02)
.03(.04)
.01(.02)
CDS Spread .05*(.01)
-.04(.03)
-.02(.02)
.03(.04)
.01(.04)
.02(.05)
.07**(.02)
Weighted Sample (Top 5% Banks)
.01(.01)
-.02(.01)
-.04(.02)
.01(.04)
-.01(.02)
-.02(.05)
.04(.02)
Weighted Sample (All Banks)
.01*(.00)
.01**(.00)
-.02(.02)
-.00(.03)
.02**(.01)
-.02(.04)
.03(.02)
32
Results: Persistence• Using our results we construct
a counterfactual of aggregate foreign lending without TARP
• Following entry into TARP aggregate foreign lending decreased by 16.8%.
• This decrease would have been 3.3% lower in the absence of TARP.
• Without TARP, the rebound in foreign lending would have been faster
300
400
500
600
700
USD
billio
n
2004 2006 2008 2010 2012
Aggregate foreign lendingCounterfactual foreign lending
TARP and Aggregate Foreign Lending
33
Summary: Weak Persistence Effect
• Effect of TARP on domestic vs. foreign lending growth simply too weak to have much confidence– Small effects both economically and statistically
34
Conclusions1. Government interventions influence both sides of banks’ balance sheets
– We find evidence consistent with effects on the depth of the asset and funding side: foreign nationalized banks in the UK discriminate against UK borrowers and UK lenders.
2. Banks’ cross-country asset allocations converge following nationalization, likely reflecting government preferences– We find evidence of similarities in portfolio allocations of nationalized
banks from same country, opposite from different countries (breadth is affected).
– 1 and 2 supportive of financial protectionism3. This effect might wear off once government support is withdrawn
– We find evidence effects erode following banks’ exit from TARP, but statistical results are weak.
– So financial protectionism effects might not be persistent.
35