Abstract
This paper explores the lending business and internal capital markets of German banks during periods of liquidity stress and government support. The analysis yields three key findings. First, when liquidity conditions deteriorate, cross-sectional differences in balance sheet characteristics impact the responses while reflecting the respective business models and geographical focus of large as distinct from small banks. Second, large and small banks, on the whole, shift lending away from international markets to the domestic market when drawing on government support during periods of liquidity stress. These findings point to the bank-specific requirements attached to the receipt of government support. Third, government support did not prevent banks focused on the domestic market from transmitting liquidity shocks to their affiliated banks abroad.
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Notes
Research Data and Service Centre of the Deutsche Bundesbank, Monthly balance sheet statistics of banks, 2006:Q1–2012:Q3.
Buch, Koch, and Koetter (2013) draw on a similar sample of banks with foreign affiliates to analyze the impact of bank internationalization on their domestic market power in Germany and bank-level risk.
Large banks are large private banks, Landesbanken and regional institutions of credit cooperatives as defined by the Deutsche Bundesbank. Small banks in our sample are regional banks and other commercial banks, credit cooperatives and savings banks as defined by the Deutsche Bundesbank.
Note that this term is scaled by liabilities instead of assets, as it captures only the funding side of the balance sheet.
Descriptions of the reporting forms for balance sheet statistics can be found under www.bundesbank.de/Redaktion/EN/Downloads/Publications/Statistische_Sonderveroeffentlichungen/Statso_1/statso_1_02_monthly_balance_sheet_statistics.pdf?__blob=publicationFile.
Banks in our subsample of large banks that have received government support are: Bayerische Landesbank, Commerzbank AG, HSH Nordbank AG, Landesbank Baden-Württemberg, Landesbank Sachsen Girozentrale, WestLB AG. Banks in the subsample of small banks that have received government support are: Aareal Bank AG, Düsseldorfer Hypothekenbank AG, IKB Deutsche Industriebank AG.
Deutsche Bundesbank (2015) discusses further the business models of large German banks, which are more oriented toward the capital market than business models of small banks.
In fact, we use the EuroSpread which is the quarterly average of the difference between the London Interbank Offered Rate (LIBOR) for unsecured three-month interbank funding in European euros and the respective overnight index swap rates. For more details and variable specifications in general, see Appendix 1 of our Online Appendix.
As for the liability side, Koch (2014) finds that large German banks significantly reduced their foreign debt in June 2007, while in April 2008 they withdrew from international interbank borrowing.
Results are available in Appendix 3.
References
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Additional information
Supplementary information accompanies this article on the IMF Economic Review website (www.palgrave-journals.com/imfer)
*Cornelia Kerl is an economist in the Monetary Policy and Analysis Division of the Deutsche Bundesbank. Cathérine Koch is an economist in the Monetary and Economic Department of the Bank for International Settlements (BIS). This paper was written while Koch was at the University of Zurich. Any opinions expressed are those of the authors and may not be attributed to the BIS. The views expressed in this paper represent the authors’ personal opinions and do not necessarily reflect the views of the Deutsche Bundesbank or its staff. While working on this paper and previous presentations, the authors have benefited from the ongoing support and discussions with many individuals. They would like to thank Claudia Buch, Linda Goldberg, and the other participants of the IBRN network meetings, in particular Heinz Herrmann and Ben Craig. The hospitality of the Bundesbank and access to its bank-level data sets are gratefully acknowledged.
