The impact of the designation “global systemically important bank” on corporate lending
The risk of national and global contagion during the global crisis forced governments to bail out financial institutions and this had the potential to seriously disrupt the global financial system. As far as such interventions are to be expected, they can trigger moral hazard. Indeed, implicit guarantees of government support have shown that they increase risk-taking, undermine market discipline, distort competition and, in general, increase the likelihood of future emergencies (Dam and Koetter 2012).
Against this background, the Financial Stability Board (FSB) explicitly identified 29 financial institutions as “global systemically important banks” (or GSIBs) in November 2011 as part of a changed supervisory framework for institutions that are classified as “too big to fail”. In order to reduce moral hazard and promote a stronger financial market infrastructure, these institutions have been subjected to higher capital requirements, tighter supervision and more effective resolution mechanisms. However, a bank name that is systematically important around the world also certifies that banks are too big to fail (which can lead to more moral hazard). Such a designation also increases the regulatory costs, which banks may try to compensate by assuming additional risk. The ultimate effect of a globally systemically relevant bank name is therefore an open empirical question.
This is particularly true against the background that the known effects of higher capital requirements – even with large banks – cannot necessarily be transferred to institutions that have been identified as globally systemically important banks. Firstly, this is because these institutions tend to have more market power, political influence and more opportunities for cross-jurisdiction arbitrage. And secondly, this is because the GSIB designation means a competitive disadvantage compared to similar, unnamed competitors (who are not subject to the additional requirements). In the specific case of the FSB framework, the capital requirements are supplemented by additional regulatory reviews. This may or may not be effective to incentivize risk taking.
A particularly important dimension along which the designated banks can react is lending to companies. In this context, the main question that arises is whether (and how) banks adjust their credit supply and whether these adjustments have consequences for the real economy.
The FSB recently described its own lessons from the evaluation of the too-big-to-fail reform (Book 2020) and – as in existing research – usually finds small economic effects. Corporate borrowers from the USA, for example, are experiencing a reduced supply of credit from designated institutions, but seem to offset the effect with financing from less affected banks (Favara et al. 2020). Other existing studies have examined the longer-term effects of the global systemically relevant reporting of banks (Behn and Schramm 2020) as well as the isolated effect of capital add-ons (Favara et al. 2020) or based on data at the bank level (Violon et al. 2017, Behn et al. 2019, Goel including 2019).
In our most recent work (Degryse et al. 2020) we instead analyzed the short-term effects of the first designation announcement on the credit supply of the global syndicated loan market. The original list of global systemically important banks on which we relied did not provide detailed information on the actual capital add-ons, which improves the comparability of the impact across all affected banks. The focus on the first announcement – and thus on an earlier point in time than existing work – enables us to capture anticipatory effects.
Our analysis uses a difference-in-differences approach with a one-year window around the first designation on November 4, 2011 (see Figure 1) to examine three research questions: How do designated banks adapt their credit terms to their designation? Are the designated banks changing the composition of their corporate loans? And do the adjustments in the lending behavior of the designated banks affect the company’s results?
illustration 1 The first GSIB designation, relevant events and the sampling period
note: The figure shows the chronological sequence of the first GSIB designation and relevant events. It also illustrates the pre and post treatment periods used in our analysis.
To answer these questions, we use syndicated loan data for 81 international bank holding companies, all of which have been considered (at some point) by the Bank for International Settlements as a global systemic bank name. As shown in Figure 2, we examine bank lending at the bank level (Figure a), at the bank-country-branch level (Figure b) and at the bank-company level (Figure c). For identification purposes, we not only rely on the deliberate reluctance of the FSB to publish an official designation list, but also exploit the leaks in the Financial Times’ only partially correct global systemically important bank lists.
Figure 2 Bank loans in the syndicated loan market over time
Remarks: The figure shows the development of the mean value of the logarithm of outstanding loans, calculated at the bank level (panel A), bank-country-branch (panel B) and bank-company level (panel C). We also differentiate between old GSIBs (solid blue line), new GSIBs (solid red line), FT-non-GSIBs (solid green line) and pure non-GSIBs (solid gray line). Two dashed vertical lines mark the year immediately before (November 2010 – November 2011) and after (November 2011 – November 2012) the first GSIB award of the FSB.
Our key findings can be summarized as follows:
- At the bank level, designated institutions (our treatment group) reduced their lending on the syndicated loan market in the year after their designation by 9.1% compared to non-designated institutions (the control group). However, this result should be treated with caution as we do not control any demand factors that could influence the different reactions of the individual banking groups.
- At the bank-country-branch level and at the bank-company level, we find that designated institutions reduce their loan offer mainly by the intensive margin (e.g. by 6% to the same company compared to non-designated institutions). Importantly, this cut in lending is driven by the additional regulatory scrutiny rather than the expectation of capital add-ons. Designated institutions, which can expect moderate premiums, reduce the lending to a specific company by 6.5% compared to non-designated institutions. We did not find any significant effect for designated institutions that can expect higher premiums.
- Although the FSB list was the first official designation in November 2011, a potential concern could be that the Financial Times an early list leaked in November 2009. We note that designated institutions that not on the leaked list, reduce lending to a particular country industry or company by 10 to 11%, while banks that were correctly predicted reduce lending by around 3 to 5%.
- Designated Institutions reduce their lending to high-risk borrowers, but not to low-risk borrowers. Specifically named institutions that are not involved in the Financial Times list their loan offer at the intensive margin Everyone Borrowers and are more likely to stop (and are less likely to start) lending to high-risk borrowers. In contrast, Designated Institutions, correctly predicted by the Financial Times, are reducing their lending to high-risk borrowers with the intense margin (by 5.7%), but not to less risky companies. At the extreme limit, they don’t seem to adjust their lending.
- In a final step, we link the loan adjustments of the designated institutions with results at company level in order to examine whether the introduction of the new global systemically important banking framework has an impact on the real economy. Using data at company level – and by comparing companies that are dependent on the credit supply of the designated institutions (treatment group)) with companies that are not dependent on the credit supply of the GSIBs (control group), we show that designated institution-dependent risky borrowers Experienced lower asset growth (by 2.2%) and lower investment growth (by 5.4%) compared to similar risky companies that are not dependent on such banks.
We use the first worldwide systemically relevant bank name on November 4, 2011 as well as the publication of a provisional list of names by the Financial Timesto examine how the designated institutions adjust their lending behavior and whether this adjustment has an impact on the real economy. Overall, we note that the designation leads to an economically relevant decline in corporate loans in the syndicated loan market for the intensive margin and causes designated institutions to stop lending to some borrowers for the extensive margin. The lending cut appears to be cross-industry, but it is focused on risky corporate borrowers. This implies a lower risk profile under the FSB framework, which results primarily from stricter supervision. Our results therefore indicate a reduction in the risk appetite of the designated institutions in the market for corporate loans, which corresponds to the intended effects of the policy – namely the reduction of the ex ante moral risk in systemically important banks.
The success of policies in stabilizing the financial system comes at the expense of lower asset growth, investment growth, and revenue growth in riskier companies that experience reduced supply of credit from certain institutions and appear to be unable to borrow from other sources.
Behn, M. and A. Schramm (2020), “The impact of G-SIB Identification on Bank Lending: Evidence from Syndicated Loans”, ECB working paper.
Behn, M., G. Mangiante, L. Parisi and M. Wedow (2019), “Does the G-SIB framework provide incentives for window dressing behavior? Evidence of GSIBs and Reporting Banks ”, European Central Bank, Working Paper.
Book, C (2020), “Evaluation of Too-Big-to-Fail Reforms: Lessons for the COVID-19 Pandemic,” VoxEU.org, September 25.
Dam, L and M Koetter (2012), “Banquet and Moral Hazard: Evidence from Germany”, The review of financial studies 25 (8): 2343-2380.
Degryse, H, M Mariathasan and TH Tang (2020), “GSIB Status and Corporate Loans: An International Analysis,” CEPR Discussion Paper 15564.
Favara, G, I Ivanov and M Rezende (2020), “GSIB Surcharges and Bank Lending: Evidence from US Corporate Loan Data”, Journal of financial economics, forthcoming.
Goel, T, U Lewrick and A Mathur (2019), “Playing it safe: Global systemically important banks after the crisis”, BIS quarterly report.
Violon, A, D Duranty and O Toaderz (2017), “The impact of the identification of GSIBs on their business model”, Banque de France, working paper.