Posts categorized under Bank Credit
Long-term economic growth largely depends on the ability to channel resources to more productive firms, enabling them to invest and expand. Banks play a prominent role in resource allocation, especially in economies, such as the Portuguese one, which are heavily reliant on bank lending. The degree of efficiency in the allocation of bank credit can thus have major consequences for a country’s economic growth. This paper tries to shed light on two related questions.
From the sovereign debt crisis to the end of 2019, bank credit to Portuguese firms fell, spreads on new loans decreased and banks reported an increase in competition. The combination of these dynamics raises concerns that banks were underpricing loans. In a bid to remain competitive, banks may have offered loan spreads below the level needed to compensate banks’ equity holders for bearing risk. This paper studies whether the spreads on new corporate loans are sufficient to cover loans’ expected credit losses, operating costs and capital costs.
This study finds that Portuguese small and medium enterprises (SME) with a higher degree of export intensity rely more on internal funds. This finding arises from examining the determinants of corporate leverage on a sample of 7,676 Portuguese SMEs and by focusing on the impact of export intensity on firms’ capital structure. In addition, the analysis reveals that more profitable SMEs and those with more asset tangibility and business risk have lower debt ratios, but that SMEs with larger growth opportunities (measured either by sales growth or the ratio between CAPEX and total assets) are more levered.
The economic shock prompted by the COVID-19 pandemic strongly restricts Portuguese firms’ ability to generate profits, contributing to an increase in their financial vulnerability and undermining their capacity to meet credit commitments in the short and medium term. This paper assesses the impact of the COVID-19 pandemic on the debt levels of vulnerable firms. Firms are defined as financially vulnerable if their operating profits are less than twice the amount of interest expenses.
Household indebtedness in Portugal has drastically increased in the last 30 years, with households’ indebtedness at around 20 per cent of disposable income in 1990 increasing to 118 per cent of disposable income in 2004. Some of this indebtedness is due an increased demand for housing. For a while rental rates were frozen, disincentivizing the rental market, while successive Portuguese governments helped low-income households into housing through the Crédito Bonificado program.
Barriers in access to finance (i.e., financial constraints) have been shown to affect real decisions of companies such as innovation, investment in fixed capital, and employment. This paper studies whether financial frictions affect one of the most central corporate decisions – which products to produce (i.e., product mix). The hypothesis is that firms adjust their product mix in order to generate cash flows faster. As different products have different production cycles and generate cash-flow at different points in time, companies may adjust their product mix in order to shorten the cash-flow maturity.
Zombie firms have received a lot of attention from academics and policymakers in the aftermath of the last global financial crisis. These are firms that are non-viable, but they remain artificially alive through the rollover of bank loans. This typically happens in low interest rate environments, when banks have fewer incentives to recognize losses in their balance sheet. By lending to these zombie firms, banks are not allocating scarce funding to firms with viable projects, thereby leading to a misallocation of resources in the economy.
In the wake of the international financial crisis and the sovereign debt crises there has been a pronounced and increase of non-performing loans (NPLs) with the potential to impact banks’ supply of credit and ultimately economy-wide growth. This is a relevant topic in many European Countries, including Portugal, where in mid-2016 NPLs accounted at one time for almost 18% of banks’ total loans. The paper analyses the impact of Portuguese banks’ NPLs on their loan supply to non-financial corporations (NFCs) in the 2009-2018 period.
How do credit shocks affect firms’ employment adjustment and exit? How does the propagation of these shocks depend on labor rigidities? Do credit shocks reinforce or hinder productivity-enhancing reallocations in the real economy? According to the classic Schumpeterian view, shocks should bring about creative destruction and a “cleansing eﬀect” on the real economy. However, financial frictions might attenuate or even reverse this, thus leading to “scarring”. The contribution of the paper is to exploit the exogeneity of a credit shock to Portugal to analyze these contrasting issues, and document how the responsiveness of firms to credit shocks depends on labor rigidities.
The euro area sovereign debt crisis exposed the linkages between banks and sovereigns and their adverse implications. In 2010, when sovereign spreads rose in several countries, tensions swiftly transmitted to the banking sector, uncovering the intertwining of banks’ and the respective sovereigns’ creditworthiness. Against a backdrop of already fragile fiscal positions, public finances in some countries were hampered by government support to banking institutions to avoid further systemic stress. These transmission mechanisms were reinforced during the crisis because, as sovereign distress intensified and led to loss of market access in some countries, banks substantially expanded their holdings of domestic sovereign debt.
This paper examines the relationship between the capital structure of Portuguese small and medium enterprises (SMEs) and their export performance. The Portuguese industrial firms are of great importance for the domestic economy and played a significant role in the country’s economic recovery amid the recessionary environment of the last decade. Being smaller and privately owned, and thus with less publicly available information, SMEs tend to face greater agency and asymmetric information problems that impact investment and performance generally, and export performance more specifically.
Recessions are conventionally considered as times in which low-productivity firms are driven out of the market at a relatively accelerated pace and resources freed to more productive uses as a result. But recessions that are closely associated with financial crises can reduce efficiency in resource reallocation through reduced bank lending to profitable projects. Banks may also forbear bad debtors, delaying the process of firm death in an effort to protect their own balance sheets, thereby hindering one of the key mechanisms through which productivity growth does its job.
Money markets were severely impaired by the financial crisis and subsequent sovereign debt crisis. During the summer of 2007, BNP Paribas suspended redemptions for three investment funds due to the uncertainty regarding structured products. This event triggered the first stage of the financial crises in the euro area and linked it to the subprime mortgage crisis in the US. Afterwards, interbank lending was disturbed and the sovereign debt crisis aggravated the problem as country risk became a significant part of bank risk.
Using a dataset with information on new loans granted in Portugal, we find that when firms switch to a new bank they are able to obtain lower interest rates. This result is in line with previous findings in the literature. However, the existing literature fails to explain which of two competing explanations drive these results. On one hand, banks may offer lower rates to compensate firms for the costs they face when switching.
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