Question

We study the credit supply effects of the unexpected freeze of the European interbank market, using exhaustive Portuguese loan-level data. We find that banks that rely more on interbank borrowing before the crisis decrease their credit supply more during the crisis. The credit supply reduction is stronger for firms that are smaller, with weaker banking relationships. Small firms cannot compensate the credit crunch with other sources of debt. Furthermore, the impact of illiquidity on the credit crunch is stronger for less solvent banks. Finally, we find no overall positive effects of central bank liquidity but instead higher hoarding of liquidity.

Table 1 Summary statistics, lyer et al. (2013) SD Mean 3.19 -0.16 0.25 Median No. of banking relationships Change in credit Interbank borrowing Foreign interbank borrowing Domestic interbank borrowing 2.55 1.20 0.31 0.26 0.13 -0.02 0.05 0.27 0.18 0.12 0.006 19.90 0.29 0.005 Bank size 19.54 0.31 0.004 1.95 Bank liquid assets Bank return on assets (ROA) Bank non-performing loans (NPL) Bank capital Firm size Firm emplovees 0.22 0.005 0.009 0.004 0.02 0.11 0.09 0.10 13.11 12.97 1.64 1.20 0.77 1.918 1.791 Firm age 2.470 2.484 Source: lyer et al. (2013)

In Table 1 above,

‘No. of banking relationships’ is the number of different banks that lend to a firm as of 2007:Q2.

‘Change in credit’ is change in the (log) level of all the loans for each firm-bank pair between 2009:Q2 and 2007:Q2, where the initial interbank shock was August 2007.

‘Interbank borrowing’ is the ratio of total interbank borrowing in 2007:Q2 for a bank;

‘Foreign interbank borrowing’ is the part obtained abroad; and

‘Domestic interbank borrowing’ is the part obtained from other banks in Portugal.

‘Bank size’ is the log of total assets of the bank.

‘Bank liquid assets’ is the ratio of cash to total assets of the bank.

‘Bank return on assets’ is the profits of the bank divided by its total assets.

‘Bank non-performing loans (NPL)’ is the fraction of loans that are in default as a fraction of total assets of the bank.

‘Bank capital’ is the total bank capital as a fraction of the bank’s total assets.

‘Firm size’ is the log of total assets of the firm.

‘Firm age’ is the age of the firm measured using the date of the firm’s incorporation (ln(1+age)).

‘Firm employees’ is the log of number of employees of a firm.

Discuss the statistics presented in Table 1. What do the statistics suggest for the purpose of this study?

Do the statistics allow you to identify, as the authors claim, that changes in the interbank borrowing ratio relate to the ability of financial institutions to substitute funds from alternative sources? Explain your answer.

Answer 1

Thr above statistics suggest that domestic interbank borrowing have median very low and mean as average which means smaller banks borrow more than larger banks.

Also foreign interbank borrowing data suggests that more or less bith type of banks i.e. Large and small are dependent on foreign loans.

However above statistics donot specify conckusive evidence that domestic interbank borrowing is replaced by foreign interbank borrowing sijce comparison in each year and individual bank account numbers not shared in detail.

Also Standard deviation being low in both cases which suggests that above tabular data is spread across large datasets.