Skip to main content
SpringerLink
Log in

Alternative Specifications of Bank Lending in France and Germany: Theory, Evidence, and Policy Implications

  • Conference paper
  • First Online:
Book cover The Financial Crisis

  • 771 Accesses

Abstract

In this chapter, I compare a capital budgeting model of bank lending based on stock valuations to a supply/demand model based on an interest rate channel for France and Germany using non-nested hypothesis tests and omitted variables tests. For France, the results of these two statistical tests indicate a strong rejection of the supply/demand model with an interest rate channel and non-rejection of the capital budgeting model. The results for Germany are mixed. For Monetary Financial Institutions, the non-nested hypothesis test and omitted variables test rejected both models. For the banking sector of Monetary Financial Institutions, both tests rejected the supply/demand model but did not reject the capital budgeting model. Do these results have any implications for policy? If volatility in share prices leads to volatility in bank lending which in turn leads to volatility in real economic activity, then governments may want to begin thinking of ways to dampen the volatility in the stock market.

This is a preview of subscription content, log in via an institution to check access.

Access this chapter

Log in via an institution
Chapter
USD 29.95
Price excludes VAT (USA)
  • Available as PDF
  • Read on any device
  • Instant download
  • Own it forever
eBook
USD 129.00
Price excludes VAT (USA)
  • Available as EPUB and PDF
  • Read on any device
  • Instant download
  • Own it forever
Softcover Book
USD 169.99
Price excludes VAT (USA)
  • Compact, lightweight edition
  • Dispatched in 3 to 5 business days
  • Free shipping worldwide - see info
Hardcover Book
USD 169.99
Price excludes VAT (USA)
  • Durable hardcover edition
  • Dispatched in 3 to 5 business days
  • Free shipping worldwide - see info

Tax calculation will be finalised at checkout

Purchases are for personal use only

Institutional subscriptions

Notes

  1. 1.

    There is a minority view that the direction of causation is from economic development to financial development. For this view, see Robinson (1952) and Manning (2003). Moreover, Acemoglu et al. (2001), Rioja and Valev (2004), and Rousseau and Wachtel (2006) argue that the finance/growth link is becoming weaker over time for developed countries like the US.

  2. 2.

    A small sample of this research would include Berger and Humphrey (1998), Berger and Udell (1994, 1995), Nakamura (1993), and Peterson and Rajan (1994).

  3. 3.

    For a description of the data see the Appendix on Data Sources.

  4. 4.

    In other words, we assume that the managers of the firm cannot instantaneously change R(d,ER) by instantly changing its investments for “time to plan” and “time to build” reasons. Consequently, market values of debt (and as we will see later, equity) securities can be temporarily different than book values.

  5. 5.

    As the firm/economy moves closer to z′ by downsizing, the difference between market and book values for both debt and equity securities becomes smaller. When the firm/economy reaches z′ market values will equal book values and that will be the signal for managers to stop the downsizing. When at point z′ the firm/economy is in a recession equilibrium according to this model.

  6. 6.

    The financial leverage of nonfinancial enterprises that is predicted by this theory to be countercyclical is long-term financial leverage. What about short-term debt like bank loans that is predicted in this chapter to be procyclical? Are these two predictions contradictory? Bank loans are risky assets on the balance sheets of banks. As such the model predicts they will be procyclical. Bank loans are also liabilities on the balance sheets of bank loan customers such as nonfinancial enterprises and households. In the case of nonfinancial enterprises short-term bank debt in our model is more like equity than long-term debt. This is because short-term lenders like banks have the option of getting in or out of a loan to a borrowing company at book value at higher frequencies than long-term bondholders where the option is to get in or out at continually changing current market prices before the redemption date. When a short-term bank loan matures the decision by the bank to renew or not depends on the borrower (particularly small and medium size companies) presenting an acceptable business plan; that is, an operating plan and a financing plan. By continually requiring the borrowing firm to produce an updated business plan bank control of the business plan of the borrowing firm rivals that of equity holders and far exceeds that of long-term bondholders. Control rights are another way to distinguish among financial claims on firms. Equity claims contain the most control rights and long-term funded debt the least. Short-term bank loans are somewhere in-between but closer to equity. For that reason we include bank loans along with equity to be in the denominator of the leverage ratio of firms. Research by Dichev and Skinner (2002) indicates that banks exercise this control by setting covenants in loan agreements tightly so that they are frequently breached, roughly 30 % in their sample. Typically, the bank waives the resulting noncompliance but instead uses it as an opportunity to discuss the borrowing firm’s business plan further. In this way, banks, like the board of directors representing stockholders, frequently monitor the ongoing business strategy of borrowing firms.

  7. 7.

    Why this particular assignment of decisions to claimants? In our model it is the case (as reflected in Fig. 1) that entrepreneur investors have a better understanding of the technology underlying the assets of the all equity firm they created than subsequent debt investors. In addition the variable residual nature of equity claims on the firm allows subsequent less risk averse investors to benefit from their (or their agent’s) understanding of the technology. More risk averse debt investors can protect themselves with a financial contract that allows them to determine the financial strategy of the firm. For a numerical example on how the financial contract might work see Krainer (2014).

  8. 8.

    Before the Great Crisis empirical work on demand models of bank lending included Calza et al. (2003), Eickmeier et al. (2006), and Frommel and Schmidt (2006) among others. After the Crisis work on these models include Sorensen et al. (2009), Kooths and Rieger (2009), Carpenter and Demiralp (2010), Campello et al. (2012), Kahle and Stulz (2011), among many others.

  9. 9.

    Two hypothesized specifications H1 and H2 for an economic variable is said to be non-nested if it is not possible to derive either one from the other by means of a set of parametric restrictions.

  10. 10.

    Since the equity leverage variable \( \Delta {\left(\frac{\mathrm{Tier}1}{A}\right)}_t \) was not significantly different from zero in the OLS test of H1 and H2, we dropped it from the non-nested hypothesis test in the bottom half of Table 3.

  11. 11.

    It should also be noted that the standalone specification for H1 in the top half of Table 5 for commercial banks was not as supportive of the capital budgeting model of bank lending as the standalone specification for MFI lending in Table 4 in that the positive estimated coefficient on (SP,CDAX) was not statistically significant at the 5 % significance level.

  12. 12.

    For a detailed description of this episode see Goodhart and Dai (2003).

References

  • Acemoglu, D., Johnson, S., & Robinson, J. (2001). The colonial origins of economic development: An empirical investigation. American Economic Review, 91, 1369–1401.

    Article  Google Scholar 

  • Admati, A., DeMarzo, P., Hellwig, M., & Pfleider, P. (2011). Fallacies, irrelevant facts, and myths in the discussion of capital regulation: Why bank equity is not expensive. Stanford GSB Research Paper No. 2065.

    Google Scholar 

  • Baker, M., & Wurgler, J. (2013). Do strict capital requirements raise the cost of capital? Banking regulation and the low risk anomaly. NBER Working Paper No. 19018.

    Google Scholar 

  • Bean, C. (1981). An econometric model of manufacturing investment in the U.K. Economic Journal, 91, 106–121.

    Article  Google Scholar 

  • Berger, A., & Humphrey, D. (1998). Efficiency of financial institutions: International survey and directions for future research. In P. Harker & S. Zenios (Eds.), Performance of financial institutions. Cambridge: Cambridge University Press.

    Google Scholar 

  • Berger, A., & Udell, G. (1994). Did risk-based capital allocate bank credit and cause a “credit crunch” in the United States? Journal of Money, Credit, and Banking, 26, 585–628.

    Article  Google Scholar 

  • Berger, A., & Udell, G. (1995). Relationship and lines of credit in small firm finance. Journal of Business, 68, 351–382.

    Article  Google Scholar 

  • Bernanke, B., Bohn, H., & Reiss, P. (1988). Alternative nonnested specification tests of time series models. Journal of Econometrics, 37, 293–326.

    Article  Google Scholar 

  • Bernanke, B., & Gertler, M. (1995). Inside the black box: The credit channel of monetary policy transmission. Journal of Economic Perspectives, 9, 27–48.

    Article  Google Scholar 

  • Brounen, D., & Derwall, J. (2010). The impact of terrorist attacks on international stock markets. European Financial Management, 16, 585–598.

    Article  Google Scholar 

  • Brun, M., Fraisse, H., & Thesmar, D. (2013). The real effects of bank capital requirements. HEC Paris Research Paper No. FIN-2013-988.

    Google Scholar 

  • Calza, A., Gartner, C., & Sousa, J. (2003). Modelling the demand for loans to the private sector in the Euro area. Applied Economics, 35, 107–117.

    Article  Google Scholar 

  • Campello, M., Giambona, E., Graham, J., & Harvey, C. (2012). Access to liquidity and corporate investment in Europe. Review of Finance, 16, 323–346.

    Article  Google Scholar 

  • Carpenter, S., & Demiralp, S. (2010). Money, reserves, and the transmission of monetary policy: Does the money multiplier exist? Finance and Economics Discussion Series. Division of Research & Statistics and Monetary Affairs, Federal Reserve Board, Washington, DC.

    Google Scholar 

  • Carpenter, S., Demiralp, S., & Eisenschmidt, J. (2013). The effectiveness of the non-standard policy measures during the financial crisis: The experience of the Federal Reserve and the European Central Bank. Finance and Economics Discussion Series. Division of Research & Statistics and Monetary Affairs, Federal Reserve Board, Washington, DC.

    Google Scholar 

  • Davidson, R., & MacKinnon, J. (1981). Several tests for model specification in the presence of alternative hypotheses. Econometrica, 49, 781–793.

    Article  Google Scholar 

  • Davidson, R., & MacKinnon, J. (1993). Estimation and inference in econometrics. Oxford: Oxford University Press.

    Google Scholar 

  • Dichev, I., & Skinner, D. (2002). Large sample evidence on the debt covenant hypothesis. Journal of Accounting Research, 40, 1091–1193.

    Article  Google Scholar 

  • Eickmeier, S., Hofmann, B., & Worms, A. (2006). Macroeconomic Fluctuations and bank lending: Evidence for Germany and the Euro area. Deutsche Bundesbank Discussion Paper, Series 1: Economic Studies, No. 34/2006.

    Google Scholar 

  • Fischer, S., & Merton, R. (1984). Macroeconomics and finance. Carnegie-Rochester Conference Series on Public Policy, 21, 57–108.

    Article  Google Scholar 

  • Friedman, B., & Kuttner, K. (1993). Economic activity and the short-term credit markets: An analysis of prices and quantities. Brookings Papers on Economic Activity, 2, 193–283.

    Article  Google Scholar 

  • Frommel, M., & Schmidt, T. (2006). Bank lending and asset prices in the Euro area. Unpublished paper available on the SSRN.

    Google Scholar 

  • Goodhart, C., & Dai, L. (2003). Intervention to save Hong Kong: The authorities counter-speculation in financial markets. Oxford: Oxford University Press.

    Google Scholar 

  • Gurley, J. (1961). Review of M. Friedman’s A program for monetary stability. Review of Economics and Statistics, 43, 307–308.

    Article  Google Scholar 

  • Johannes, J., & Nasseh, A. (1985). Income or wealth in money demand: An application of non-nested hypothesis tests. Southern Economic Journal, 51, 1099–1106.

    Article  Google Scholar 

  • Kahle, K., & Stulz, R. (2011). Financial Policies, investment, and the financial crisis: Impaired credit channel or diminished demand for capital. Dice Center Working Paper 2011-3.

    Google Scholar 

  • Kashyap, A., Stein, J., & Hanson, S. (2010). An Analysis of the impact of substantially heightened capital requirements on large financial institutions. Harvard University Working Paper.

    Google Scholar 

  • King, R., & Levine, R. (1993). Finance and growth: Schumpeter might be right. Quarterly Journal of Economics, 108, 717–737.

    Article  Google Scholar 

  • Kooths, S., & Rieger, M. (2009). Caught in the U.S. subprime meltdown 2007/2008: Germany loses its wallet but escapes major harm. Unpublished manuscript available at http://ssrn.com/abstract=1425530

  • Krainer, R. (1985). The financial system and the coordination of economic activity. New York: Praeger.

    Google Scholar 

  • Krainer, R. (1992). Finance in a theory of the business cycle. Oxford: Blackwell.

    Google Scholar 

  • Krainer, R. (2002). Banking in a theory of the business cycle: A model and critique of the basle accord on risk-based capital requirements for banks. International Review of Law and Economics, 21, 413–433.

    Article  Google Scholar 

  • Krainer, R. (2003). Corporate finance, governance, and business cycles: Theory and international comparisons. Amsterdam: North-Holland.

    Google Scholar 

  • Krainer, R. (2009). Portfolio and financing adjustments for U.S. banks: Some empirical evidence. Journal of Financial Stability, 5, 1–24.

    Article  Google Scholar 

  • Krainer, R. (2013). Towards a program for financial stability. Journal of Economic Behavior and Organization, 85, 207–218.

    Article  Google Scholar 

  • Krainer, R. (2014). Financial aspects of business cycles: An analysis of balance sheet adjustments of U.S. nonfinancial enterprises over the twentieth century. Journal of Money, Credit, and Banking, 46, 371–407.

    Article  Google Scholar 

  • Levine, R. (1998). The legal environment, banks, and long-run economic growth. Journal of Money, Credit, and Banking, 30, 596–613.

    Article  Google Scholar 

  • Manning, M. (2003). Finance causes growth: Can we be so sure? Contributions to Macroeconomics 3, at http://www.bepress.com

  • Mayer, C. (1998). Financial systems and corporate governance: A review of international evidence. Journal of Institutional and Theoretical Economics, 154, 144–165.

    Google Scholar 

  • Nakamura, L. (1993). Recent changes in commercial banking: Information and lending. Financial Markets, Institutions, and Instruments, 2, 73–88.

    Google Scholar 

  • Norden, L., & Weber, M. (2007). Checking account information and credit risk of bank customers. Unpublished manuscript available at SSRN.

    Google Scholar 

  • Pesaran, M., & Deaton, A. (1978). Testing non-nested nonlinear regression models. Econometrica, 46, 677–694.

    Article  Google Scholar 

  • Peterson, M., & Rajan, R. (1994). The benefits of lending relationships: Evidence from small business data. Journal of Finance, 49, 3–37.

    Article  Google Scholar 

  • Rioja, F., & Valev, N. (2004). Does one size fit all? A reexamination of the finance and growth relationship. Journal of Development Economics, 74, 429–447.

    Article  Google Scholar 

  • Robinson, J. (1952). The generalization of the general theory. In The rate of interest and other essays. London: Macmillan.

    Google Scholar 

  • Rousseau, P., & Wachtel, P. (2006). What is happening to the impact of financial deepening on economic growth? Unpublished manuscript available on SSRN.

    Google Scholar 

  • Sorensen, C., Ibanez, D., & Rossi, C. (2009). Modelling loans to non-financial corporations in the Euro area. European Central Bank Working Paper No. 989.

    Google Scholar 

  • Tobin, J., & Brainard, W. (1977). Asset prices and the cost of capital. In B. Balassa & R. Nelson (Eds.), Economic progress, private value, and public policy. New York: North-Holland.

    Google Scholar 

  • Wisley, T., & Johnson, S. (1985). An evaluation of alternative investment hypotheses using nonnested tests. Southern Economic Journal, 52, 422–430.

    Article  Google Scholar 

Download references

Acknowledgments

I would like to thank Colin Mayer, Henri Pages, Natacha Valla, Hubert Kempf, Ted Azarmi, Mathias Moerch, and seminar participants at the 31st SUERF Colloquium & Baffi Finlawmetrics Conference for helpful suggestions and comments on earlier versions of this paper. They are not responsible for any errors that might remain. I am grateful for the financial support provided by the Banque de France and Hochschule Heilbronn. The views expressed in this paper are not necessarily those of the Banque de France.

Author information

Authors and Affiliations

  1. University of Wisconsin-Madison, 3110 Grainger Hall, 975 University Ave., Madison, WI, 53706, USA

    Robert E. Krainer

Authors
  1. Robert E. Krainer
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Robert E. Krainer .

Editor information

Editors and Affiliations

  1. Heilbronn University and the University of Tuebingen, Heilbronn and Tuebingen, Germany

    Ted Azarmi

  2. SBUM/EMBA, HEC Paris School of Management in Qatar, Doha, Qatar

    Wolfgang Amann

Appendix on Data Sources

Appendix on Data Sources

MFI:

Monetary financial institutions excluding the Banque de France and mutual funds. MFIs include resident credit institutions and other resident credit institutions that issue deposits and/or close substitutes, and grant credit and/or make investments in securities.

(L,MFI):

The stock of MFI loans outstanding to other Euro area residents. This variable is deflated by the French consumer price index. Source: Banque de France. Pre-1999 data converted into euros at the fixed irrevocable exchange rate between French francs and euros.

(Equity):

The total stock of equity capital and reserves of French MFIs. Source: Banque de France. Pre-1999 data converted at the fixed irrevocable exchange rate between French francs and euros.

A :

The stock of total assets of MFIs in France. Source: Banque de France. Pre-1999 data converted at the fixed irrevocable exchange rate between French francs and euros.

(SP,bk):

Quarterly index of French bank share prices deflated by the consumer price index in France. Source: DataStream, Code: SBFNNKZ.

(SP,250):

Quarterly index of general share prices of 250 stocks traded on the Paris bourse. This stock series was deflated by the consumer price index in France. Source: Datastream, Code: FSBF250.

(GDP):

Real gross domestic product in France. Nominal GDP was deflated by the consumer price index for France. Source: Banque de France.

(R,LT):

Real interest rate on medium to long-term loans to business. The nominal interest rate was deflated by the percentage rate of change in the French consumer price index. Monthly rates were averaged to obtain quarterly rates. Source: Banque de France, Business Conditions Division.

(R,ST):

Real interest rate on overdraft facilities. The nominal rate was deflated by the percentage rate of change in the French consumer price index. Monthly rates were averaged to obtain quarterly rates. Source: Banque de France, Business Conditions Division.

MFI:

Monetary financial institutions excluding the Deutsche Bundesbank and mutual funds. These are financial institutions that issue deposits or close substitutes for deposits, and grant credit and/or make investments in securities.

(L,MFI):

The stock of MFI loans outstanding to non-MFI borrowers. This variable is deflated by the German producer price index (2000 = 100) seasonally adjusted. Source: Deutsche Bundesbank, Time series key OU0083. Pre-1999 data converted at the fixed irrevocable exchange rate between DMs and euros.

(L,Banks):

The stock of commercial bank loans outstanding to non-MFI borrowers. This variable is deflated by the German producer price index seasonally adjusted. Commercial banks comprise the subgroup of big banks, regional banks, other commercial banks, and branches of foreign banks. Source: Deutsche Bundesbank, Time series key OU0783. Pre-1999 data converted at the fixed irrevocable exchange rate between DMs and euros.

(A,MFI):

The stock of total assets of MFIs. Source: Deutsche Bundesbank, Time series key: OU0308. Pre-1999 data converted at the fixed irrevocable exchange rate between DMs and euros.

(A,Banks):

The stock of total assets of commercial banks. Source: Deutsche Bundesbank, Time series key: OU0749. Pre-1999 data converted at the fixed irrevocable exchange rate between DMs and euros.

(Equity):

Total equity capital. For MFIs this variable was obtained from the Deutsche Bundesbank, time series key OU0322. For commercial banks, this variable was obtained from the Deutsche Bundesbank, Time series key OU1543. Pre-1999 data converted at the fixed irrevocable exchange rates between DMs and euros.

(SP,bk):

Quarterly index of large German bank share prices deflated by the German producer price index. Source: Datastream, DS banks, Code BANKSBD (PI).

(SP,CDAX):

The CDAX stock price index of all ordinary and preference shares officially listed on the Frankfurt stock exchange of companies domiciled in Germany. The series is deflated by the German producer price index. Source: Deutsche Bundesbank S 300, Time series key WU 001a.

Δ(GDP):

The change in real GDP in Germany. Source: Deutsche Bundesbank, Time series key jbb000.

(R,Ave):

The average yield on German debt securities of all maturities. Monthly data were averaged to obtain quarterly data. The average yields were deflated by the percentage change in the German producer price index. Source: Deutsche Bundesbank, Time series key WU0017.

Rights and permissions

Reprints and permissions

Copyright information

© 2016 Springer International Publishing Switzerland

About this paper

Cite this paper

Krainer, R.E. (2016). Alternative Specifications of Bank Lending in France and Germany: Theory, Evidence, and Policy Implications. In: Azarmi, T., Amann, W. (eds) The Financial Crisis. Springer, Cham. https://doi.org/10.1007/978-3-319-20588-5_3

Download citation

Publish with us

Policies and ethics

Search

Navigation