This paper adds to the literature on the impact of financial weakness of borrowers and lenders on credit conditions. Its main contribution is that it assesses this impact along several dimensions of the loan contract, including price and non-price terms.
These are valuable insights because they provide further detail on the margins along which lenders adjust their lending conditions and on the relative importance of the financial health of borrowers and lenders.
The paper finds that banks use several financial characteristics to assess borrower risk and adjust loan contract terms accordingly: loan pricing, collateral requirements, amount granted and maturity of the loan. The main results confirm the view that borrower’s credit risk is the main determinant of the conditions in the bank loan contract, at least when the overall banking sector is financially strong (Jim´enez et al.
2017).
This leads us to the other important finding of this paper: that financial weakness of banks matters, especially when a large share of the banking sector is affected, as for example in periphery countries. The negative effects of banks’ financial weakness on loan conditions are significant years after the end of the sovereign debt crisis, suggesting that banking crises may have a long-lasting impact on the real economy.
Overall, our analysis provides new evidence supportive of the bank lending chan-nel in Europe as well as of some stigmas. The effects of the bank lending chanchan-nel may be asymetric across asset classes. The financing of some assets, such as intangibles which cannot be collateralized, could even be more adversely impacted. This is left for further research.
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Annexes
Table A1: Variable definitions
Variable Definition
Firms
Age categorical variable: age<2y, 2y≤age<5y, 5y≤age<10y, 10y≤age<20y, age>20y
Size log (total assets)
Profitability net income/total assets Leverage debt/total assets
Liquidity current assets/current liabilities Weakness Index* (Leverage-Profitability-Liquidity)/3 Satisfaction with
ex-ternal finance
EIBIS question: “Thinking about all of the external finance you ob-tained, how satisfied or dissatisfied are you with it in terms of [dimen-sion]? We defined assatisfiedfirms answering ”Very satisfied“, ”Fairly satisfied“, ”Neither Satisfied or dissatisfied“. Dissatisfied firms are those answering either ”Very dissatisfied or “Fairly dissatisfied”. Di-mensions: amount, cost, collateral requirements, maturity.
Banks
Size log (total assets)
Capital Ratio equity/total assets
Asset Quality non-performing loans/gross loans Profitability net income/total assets
Liquidity Mismatch (total deposits-liquid assets)/total assets
Weakness Index* (AssetQuality+LiquidityMismatch-CapitalRatio-Profitabiltiy)/4
Macro and sectoral factors
Sovereign spread long-term (10y) bond yield (spread against Germany) Sector-level growth
rate
gross value added growth rate (spread against EU economy-wide gross value added growth rate)
Note:* Financial ratios included in the weakness indices are all standardized.
Table A2: Summary statistics of the variables entering the indices
Mean SD Min Max N
Firm-specific variables
Firm Size 15.21 2.03 10.16 20.64 3184
Firm Profitability 0.04 0.09 -0.37 0.45 3011
Firm Leverage 0.64 0.26 0.05 1.92 3167
Firm Liquidity 1.68 1.59 0.15 14.65 3177
Bank-specific variables
Bank Size 23.22 2.01 18.89 27.92 537
Bank Capital Ratio 0.09 0.05 0.02 0.35 537
Bank NPL/Gross Loans 0.12 0.11 0.00 0.54 416 Bank Profitability 0.00 0.01 -0.07 0.03 522 Bank Liquidity Mismatch 0.55 0.24 -0.37 0.87 537
Note: Sample of 3184 firm-year observations (2885 unique firms) and 537 bank-year observations (367 unique banks) from 28 European countries for the years 2015 and 2016. Variables are defined in Table A1.
Source:EIBIS-Orbis, Orbis Bank Focus, Eurostat, IHS Markit.
Table A3: Dissatisfaction with external finance by country group (%) Cohesion Core Periphery
Note:Each line reports the share of dissatisfied firms, in per-centage, to each of the four dimensions of the loan contract considered in the EIBIS question.
Source:EIBIS for the years 2016 and 2017.
Table A4: Correlation coefficients across satisfaction dimensions
Amount Cost Maturity Collateral
Amount 1
Cost 0.357 1
Maturity 0.272 0.271 1
Collateral 0.288 0.314 0.271 1
Note:Pearson correlation coefficients for the four dimensions of the loan contract considered in the EIBIS question.
Source:EIBIS for the years 2016 and 2017.
TableA5:LinearProbabilityModel(LPM):baselineandvariants BaselineVariant:FEforcountry,sector,yearVariant:withoutbankindex AmountCostMat.Col.AmountCostMat.Col.AmountCostMat.Col. VARIABLES FirmWeakness-2.04***-3.70***-0.73*-2.30***-2.01***-3.45***-0.78*-2.52***-2.08***-3.87***-0.78**-2.40*** (0.45)(0.63)(0.38)(0.66)(0.48)(0.65)(0.4)(0.68)(0.45)(0.64)(0.39)(0.66) BankWeakness-0.53-2.47***-0.76**-1.54**-0.72-2.17***-0.45-2.56*** (0.4)(0.59)(0.38)(0.73)(0.5)(0.7)(0.42)(0.84) Sov.spread-0.12-1.54***-0.61*-0.84-0.29-2.30***-0.85***-1.32*** (0.32)(0.5)(0.33)(0.53)(0.31)(0.49)(0.33)(0.49) VAgrowthdiff0.040.020.11*0.090.050.040.11*0.10 (0.09)(0.12)(0.06)(0.13)(0.09)(0.12)(0.06)(0.13) BankSize0.270.20.021.17***0.390.40.20.030.250.07-0.011.10*** (0.22)(0.32)(0.2)(0.33)(0.32)(0.44)(0.30)(0.47)(0.22)(0.32)(0.2)(0.33) FirmSize0.66***1.63***0.211.26***0.57**1.61***0.20.96***0.65***1.60***0.21.25*** (0.21)(0.29)(0.18)(0.31)(0.22)(0.32)(0.2)(0.34)(0.21)(0.29)(0.19)(0.31) Observations3,1673,1513,1683,0863,1673,1513,1683,0863,1673,1513,1683,086 AdjustedR2 (%)1.43.90.51.81.85.50.63.21.33.40.51.6 Note:FE,Mat.andCol.respectivelystandforfixedeffect,maturityandcollateral.Bondspreadisthe10-yeargovernmentbondspreadwithrespecttoGermany. EachcolumnreportstheestimationfortheshareofdissatisfiedfirmsineachofthefourdimensionsoftheloancontractconsideredintheEIBISquestion.Indices standardised.Robuststandarderrorsinparentheses.Rejectionprobabilitiesindicatedwithasterisks:***,**,and*denotesignificanceatrespectively1,5and 10%.
Table A6: Variant: logistic regression
Amount Cost Maturity Collateral VARIABLES Satisfied Satisfied Satisfied Satisfied Firm Weakness -1.84*** -3.51*** -0.76* -2.21***
(0.42) (0.64) (0.41) (0.66)
Bank Weakness -0.61 -2.56*** -0.74* -1.54**
(0.40) (0.65) (0.42) (0.72)
Sov. spread -0.10 -1.00*** -0.35 -0.72
(0.28) (0.38) (0.22) (0.45)
VA growth diff 0.06 0.03 0.10 0.09
(0.09) (0.11) (0.07) (0.13)
Bank Size 0.27 0.27 0.08 1.20***
(0.22) (0.32) (0.20) (0.33)
Firm Size 0.58*** 1.58*** 0.20 1.26***
(0.22) (0.31) (0.19) (0.33)
Observations 3,167 3,151 3,168 3,086
PseudoR2 (%) 3.9 5.7 2.0 2.5
AIC 1268 2101 1161 2518
Note:Bond spread is the 10-year government bond spread with respect to Germany. Indices standardised. Firm age dummies in all the regressions.
Robust standard errors in parentheses. Rejection probabilities indicated with asterisks: ***, **, and * denote significance at respectively 1, 5 and 10 %.
Table A7: Impact of weakness indices on firms’ satisfaction: interaction effects
(1) (2) (3) (4)
Amount Cost Maturity Collateral
Firm Weakness -2.88*** -4.36*** -0.95 -2.91***
(0.86) (1.09) (0.62) (1.05)
COH×Firm Weakness 2.13** 2.37* 1.59* 2.24
(1.05) (1.38) (0.83) (1.48)
PER×Firm Weakness -0.66 -1.54 -2.18** -2.74
(1.34) (2.00) (1.10) (1.69)
Bank Weakness 2.08** 1.56 0.61 -1.16
(0.99) (1.50) (0.97) (1.74) COH×Bank Weakness -2.46** -3.46** -0.83 -0.13
(1.12) (1.71) (1.09) (2.07) PER×Bank Weakness -3.76*** -5.45*** -2.25* -2.88
(1.31) (1.89) (1.26) (2.14)
Sov. spread 0.34 -0.93 -0.17 -0.41
(0.42) (0.62) (0.40) (0.62)
VA growth diff 0.02 -0.04 0.07 0.08
(0.09) (0.12) (0.07) (0.14)
Observations 3167 3151 3168 3086
AdjustedR2 (%) 1.7 4.3 1.1 2.1
Note: Base caterory is core countries. Bond spread is the 10-year government bond spread with respect to Germany. Indices standardised. Firm age as well as firm size and bank size dummies in all the regressions. Robust standard errors in parentheses. Rejection probabilities indicated with asterisks: ***, **, and * denote significance at respectively 1, 5 and 10 %.
TableA8:Variant:LPMestimatedforeachregionseparately CoreCohesionPeriphery AmountCostMat.Col.AmountCostMat.Col.AmountCostMat.Col. VARIABLES FirmWeakness-2.76***-4.26***-0.96-2.65**-0.80-2.12**0.66-0.98-3.63***-5.93***-3.21***-6.16*** (0.85)(1.08)(0.62)(1.04)(0.61)(0.85)(0.57)(1.04)(1.04)(1.71)(0.93)(1.35) BankWeakness1.75*1.110.67-0.76-0.24-1.53*-0.11-1.17-2.03**-4.26***-2.07**-5.05*** (1.04)(1.56)(1.02)(1.80)(0.55)(0.80)(0.52)(1.13)(0.96)(1.24)(0.84)(1.28) Sov.spread4.317.25*-0.21-0.130.07-1.48*-0.53-1.86*0.42-0.760.05-0.34 (2.94)(3.88)(2.54)(3.96)(0.66)(0.89)(0.53)(1.05)(0.61)(0.94)(0.60)(0.85) VAgrowthdiff-0.17-0.56**-0.050.44*0.130.210.140.34-0.17-0.130.02-0.46* (0.18)(0.25)(0.14)(0.25)(0.13)(0.17)(0.10)(0.22)(0.16)(0.26)(0.13)(0.24) BankSize-0.08-0.100.361.19**0.962.62**0.541.590.630.21-0.12-0.50 (0.42)(0.58)(0.37)(0.60)(0.73)(1.04)(0.52)(1.11)(0.49)(0.66)(0.53)(0.62) FirmSize0.81**0.97*0.111.11**1.25***1.74***0.73**0.74-0.122.49***-0.061.19** (0.34)(0.51)(0.25)(0.49)(0.40)(0.52)(0.36)(0.60)(0.36)(0.56)(0.35)(0.57) Observations1,0059981,0069921,1961,1891,1961,178966964966916 R2 (%)4.13.80.84.01.93.81.31.73.07.42.25.9 Note:Mat.andCol.repsectivelystandformaturityandcollateral.Bondspreadisthe10-yeargovernmentbondspreadwithrespecttoGermany.Indices standardised.Firmagedummiesinalltheregressions.Robuststandarderrorsinparentheses.Rejectionprobabilitiesindicatedwithasterisks:***,**,and *denotesignificanceatrespectively1,5and10%.
TableA9:Variant:LPMwitheachcomponentoffinancialsseparatelyandfixedeffects Onlyfirms’characteristicsBothbanksandfirms’characteristics AmountCostMaturityCollateralAmountCostMaturityCollateral VARIABLES FirmProfitability15.34**24.62***4.0513.83*14.98**16.57*0.7316.78* (6.11)(8.26)(4.68)(8.26)(7.36)(10.00)(5.51)(9.80) FirmLiquidity-0.20.34-0.39-0.55-0.280.08-0.04-0.73 (0.3)(0.37)(0.29)(0.52)(0.39)(0.44)(0.27)(0.64) FirmLeverage-4.56**-6.16*-4.96***-11.09***-4.18-5.06-2.02-11.23*** (2.25)(3.17)(1.83)(3.52)(2.79)(3.79)(2.11)(4.27) FirmSize0.50**1.59***0.120.88**0.73***1.80***0.280.86** (0.24)(0.34)(0.22)(0.36)(0.27)(0.39)(0.26)(0.42) BankCapitalRatio4.72-13.32-8.02-24.04 (18.14)(27.22)(16.26)(31.20) BankProfitability-14.0230.19.96128.83 (62.55)(97.34)(64.44)(113.65) BankNPL/GrossLoans-6.67-27.86**-11.75-27.63* (8.55)(13.68)(8.34)(15.13) BankLiquidityMismatch-0.56-10.21**0.77-5.02 (3.16)(4.39)(2.81)(5.57) BankSize0.82*-0.20.380.35 (0.48)(0.61)(0.43)(0.70) Observations2,9722,9552,9722,8952,1752,1562,1732,109 AdjustedR2 (%)1.44.70.73.21.650.24.03.6 Note:Indicesstandardised.Firmageaswellascountry,sector,yeardummiesinalltheregressions.Robuststandarderrorsinparentheses. Rejectionprobabilitiesindicatedwithasterisks:***,**,and*denotesignificanceatrespectively1,5and10%.
Table A10: Baseline model using PCA
Amount Cost Maturity Collateral VARIABLES Satisfied Satisfied Satisfied Satisfied Firm Weakness -1.04*** -1.95*** -0.36 -1.41**
(0.40) (0.54) (0.33) (0.62)
Bank Weakness -0.21 -1.93** -0.78 -0.12
(0.56) (0.84) (0.50) (1.03)
Sov. spread -0.23 -1.37** -0.55 -1.58**
(0.43) (0.66) (0.40) (0.72)
VA growth diff 0.21** 0.28** 0.10 0.15
(0.11) (0.14) (0.08) (0.18)
Bank Size 0.78*** 0.79** 0.22 1.63***
(0.26) (0.35) (0.23) (0.40)
Firm Size 0.82*** 1.72*** 0.32 1.26***
(0.25) (0.33) (0.23) (0.36)
Observations 2,175 2,156 2,173 2,109
AdjustedR2(%) 1.7 4.3 0.8 2.4
Note: Indices standardised. Robust standard errors in parentheses. Re-jection probabilities indicated with asterisks: ***, **, and * denote signifi-cance at respectively 1, 5 and 10 %.
TableA11:LPMontheEIBISfullsample:Firmindexandmacro-financialdevelopments Withmacro-financialvariablesWithcountry,sectorandyearfixedeffects AmountCostMaturityCollateralAmountCostMaturityCollateral VARIABLES FirmWeakness-2.43***-3.75***-1.32***-2.46***-2.42***-3.45***-1.31***-2.61*** (0.35)(0.47)(0.3)(0.49)(0.36)(0.47)(0.31)(0.51) Sov.spread-0.38*-1.81***-1.03***-1.38*** (0.20)(0.30)(0.21)(0.30) VAgrowthdiff0.060.050.060.11 (0.05)(0.07)(0.05)(0.08) FirmSize0.62***1.27***0.31***1.29***0.54***1.17***0.29**1.06*** (0.13)(0.18)(0.12)(0.18)(0.13)(0.19)(0.12)(0.20) Observations7,7447,6907,6277,4147,7447,6907,6277,414 AdjustedR2 (%)1.22.20.81.21.63.91.32.5 Note:Indicesstandardised.Firmageasdummiesinalltheregressions.Inthecaseoffixedeffectsestimation,firmscountry, sectorandyeardummiesareincludedtoaccountformacro-widedevelomments,bothrealandfinancial.Robuststandard errorsinparentheses.Rejectionprobabilitiesindicatedwithasterisks:***,**,and*denotesignificanceatrespectively1,5and 10%.
Table A12: Satisfaction (Probit model with sample selection) Amount Cost Collateral
VARIABLES
Firm Weakness -2.78*** -5.02*** -2.73**
(0.53) (0.74) (1.27) Sov. spread -0.34 -2.05*** -1.96***
(0.25) (0.40) (0.53)
VA growth diff 0.05 0.07 0.06
(0.08) (0.12) (0.12) Firm Size 0.71*** 1.62*** 1.87***
(0.21) (0.31) (0.33) Observations 20,891 20,875 20,810
Note: Indices standardised. Firm age dummies. Robust standard errors in parentheses. Rejection probabilities in-dicated with asterisks: ***, **, and * denote significance at respectively 1, 5 and 10 %.
Figure A1: ROC curve
0.00 0.25 0.50 0.75 1.00
Share of "satisfied with cost" observations correctly predicted
0.00 0.25 0.50 0.75 1.00
Share of "disatisfied with cost" observations incorrectly predicted
Model without bank index Model with bank index
Note: The y-axis represents the share of observations satisfied with the cost of their credit that are correctly predicted by the model and the x-axis represents the share of observations disatisfied with the cost of their credit that are incor-rectly predicted by the model. Each data point gives these two shares for a given cutoff value. A chi-squared test comparing the areas under the ROC curves of the models with and without the bank index shows a difference significant at the 10%
level.
Figure A2: LPM - Split Samples
*** ***
*
***
**
***
***
***
***
***
** *
* **
***
** *** **
**
***
***
−10−505−10−505
Firm Weakness Bank Weakness Firm Weakness Bank Weakness
Amount Cost
Maturity Collateral
EU Core Periphery Cohesion
regression coefficients (x100)
Note: Regression coefficients (x100) of the baseline equation, run separately for the different country groups. Lines indicate the 95% confidence interval. *** p<0.01, ** p<0.05, * p<0.1.
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