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What ‘special purposes’ explain cross-border debt funding by banks? Evidence from Ireland

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Abstract

We examine the factors determining cross-border debt issuance by banks using a unique dataset on international banks issuing debt through special purpose entities (SPEs). Our results indicate that such debt issuance is consistently explained by bank size and leverage. We also find that cross-border SPE debt issuance is associated with more stringent capital flow policies and macro-prudential regulation in the bank’s home country, and incentivised by higher domestic corporate taxation and herding behaviour. These findings suggest potential implications for financial stability in that cross-border debt funding through SPEs may involve a relatively opaque build-up of leverage beyond the banking perimeter.

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Notes

  1. Lane (2014) calls out that datasets lack the detailed information to provide a sufficient basis for risk surveillance and monitoring.

  2. Capital flow management policies refer to controls (restrictions) on capital movements across borders.

  3. Sponsor refers to the entity on whose behalf the SPE was established. For example, if a bank sets up an SPE to securitise loans originated in its balance sheet or elsewhere, the bank is the sponsor. This does not refer to a charitable trust that owns shares of the SPE in an orphan vehicle structure.

  4. Other papers in the area refer to the term ‘originator’, which is the entity originating the securitised assets. The concept of sponsor is in our view more appealing in that it refers to the entity ultimately responsible for setting up the vehicle.

  5. The sample includes the following list of identified SPE sponsor banks’ countries: Austria, Belgium, Canada, China, France, Germany, Greece, Italy, Japan, Netherlands, Poland, Portugal, Russia, Spain, Switzerland, Turkey, United Arab Emirates, United Kingdom and United States.

  6. Most of our data points are in the post-crisis period. This allowed us to at least confirm that our results hold in the post-crisis period.

  7. 7823 debt securities were issued via securitisation SPEs and 365 via other SPEs during the sample period, rendering a total of 8188 debt issues. 5220 securities have available issuance dates (all with available issuance volume as well), of which 2525 are linked to 243 bank-sponsored Irish vehicles.

  8. We account for duplicates representing issuance in tranches. Separately, observations for which pricing and issuance volumes are not available are removed from the dataset.

  9. Variable DFR (Irish SPE) is left-censored at 0.

  10. Debt issuance volumes are divided by sponsor bank total assets in our regression analysis, in order to have comparable units across sponsor banks.

  11. Sponsor bank-level balance sheet indicators are interpolated by combining quarterly, semi-annual and yearly bank reports.

  12. See Fernandez et al. (2015).

  13. See Cerrutti et al. (2015).

  14. Country or country-time fixed effects generate model convergence issues. To overcome these, we include the GDP growth and Credit growth indicators as country-level controls. We also carry out a number of robustness checks that broadly support our empirical findings (see Sect. 5).

  15. All country-level regressors enter our regressions lagged by one quarter.

  16. The sub-sample, which accounts for 85 per cent of the total sample in terms of instances of debt issuance, excludes the following EME countries: Poland, Russia, Saudi Arabia, South Africa, Turkey and United Arab Emirates.

  17. The analysis cannot not be separately undertaken on EME sponsor banks only as the regression analysis becomes unidentifiable.

  18. Wald tests for the baseline specification in fact reject the null hypothesis that the error terms of both DFB (Irish SPE) and DFB (Other) equations are uncorrelated. This provides further support for the simultaneous estimation of both equations in order to account for the correlation of the respective error terms.

  19. Robustness checks by means of the estimation of quarterly frequency linear prediction models for the binary dependent variable DFB (Irish SPE) accommodating both country and time fixed-effects broadly support our empirical findings. Moreover, the estimation of the bivariate probit simultaneous regression model at yearly frequency suggests that our results are not sensitive to the large number of zero observations in our quarterly frequency dataset.

  20. We present the ROA regressor as banks with higher returns, and hence potentially more profitable investment and balance sheet expansion opportunities, are more likely to issue offshore debt through SPEs. However, we find it more intuitively appealing that those banks under balance sheet pressure regarding profitability are more likely to employ SPEs.

  21. Differences across specifications are driven by specification, rather than sampling differences.

  22. Our findings are robust to the estimation of quarterly frequency linear prediction models for our censored dependent variable, accommodating both country and time fixed-effects. Empirical results do not appear to be sensitive to the large number of zero observations in our quarterly frequency dataset, as indicated by robust results from yearly frequency Tobit model regressions. Additionally, a quarterly frequency two-step Heckman regression model provides further robustness to our findings.

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  1. Central Bank of Ireland, New Wapping Street, North Wall Quay, Dublin 1, Ireland

    Brian Golden & Eduardo Maqui

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  1. Brian Golden
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Correspondence to Brian Golden.

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The views presented in this paper are those of the authors alone, and do not represent the views of the Central Bank of Ireland or the Eurosystem. Any remaining errors are our own. We are thankful to Peter Dunne, Gabriel Fagan, Philip Lane, Reamonn Lydon, Fergal McCann, Joe McNeill, Gerard O’Reilly and Maria Woods for their helpful comments in the preparation of this article.

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Golden, B., Maqui, E. What ‘special purposes’ explain cross-border debt funding by banks? Evidence from Ireland. Rev World Econ (2023). https://doi.org/10.1007/s10290-023-00513-5

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