Viewing 19 posts categorized under Bank Credit

Exports response to changes in credit conditions

January 26, 2024

Exports represent one fourth of Portuguese GDP and are largely responsible for the economic recovery following the sovereign debt crisis. However, exports and exporters are also fragile as they display a strong dependence on bank credit. This paper studies the impact of an increase in the cost of credit for exporters. This increase is driven by a change in banking regulation (Basel III) which makes giving credit to exporters who sell in high-risk destinations more expensive for banks.

Loss given default in residential mortgage loans in Portugal

December 13, 2023

Expected costs of mortgage default depend on the borrower’s probability of default (PD) and the loss in the event of default (LGD). This paper studies the factors that characterize LGD using comprehensive loan-level data obtained from the Portuguese Central Credit Register. The paper finds that the initial loan-to-value (LTV) ratio is the most important determinant of the LGD of mortgage loans, although the relation between these two variables is not linear.

The rise of the walking dead: zombie firms around the world

November 10, 2023

The macroeconomic implications of unproductive and unviable zombie firms have returned to the forefront of the public debate during the Covid-19 pandemic, as the unprecedented public support to firms may have helped these zombie firms stay afloat. The presence of zombie firms creates important negative spillover effects to healthy firms operating in the same industry: zombie firms distort the competition in the markets in which they operate, ultimately depressing market prices and raising market wages, which crowd out the profits of healthy firms.

Supporting small firms through recessions and recoveries

March 30, 2023

Small firms often struggle in getting access to credit. This is especially true during recessions, when banks tighten credit supply. To overcome this, governments around the world have implemented different programs to help small firms. Despite the widespread implementation of these programs, evidence on their effectiveness is mixed and often challenged by difficulties in pinpointing the causal effects of the programs. For example, these programs are usually available to all small firms, who decide whether or not to enter the program.

Government support measures in Portugal during the COVID-19 pandemic

October 11, 2022

During the COVID-19 pandemic, the Portuguese government provided a plethora of different support measures for firms. These included state-guarantees for new loans and a public moratorium for existing ones. These measures have been essential to support firms in the most acute phase of the crisis by providing liquidity at reduced costs in a context of an abrupt increase in the level of risk. However, there are still open questions regarding the medium- to long-term impact of these measures.

Bank credit allocation and productivity: stylized facts for Portugal

January 6, 2022

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.

Bank pricing of corporate loans, short versus long maturities

June 25, 2021

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.

Indebtedness in export-led SMEs

May 17, 2021

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.

Portuguese firms’ financial vulnerability and excess debt in the context of the COVID-19 shock

March 8, 2021

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 from 1961 to 2011

January 22, 2021

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.

Product market decisions and product quality in the wine industry when financial constraints hit

November 4, 2020

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.

On-site inspecting zombie lending

July 6, 2020

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.

Non-performing loans and bank lending: evidence for Portugal

February 21, 2020

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.

Finance and labor rigidity in Portugal

January 7, 2020

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.

Sovereign exposures in the Portuguese banking system

November 27, 2019

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.

Debt financing and internationalization of Portuguese SMEs

June 4, 2018

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.

Entry and exit in the 2008–2013 Portuguese economic crisis

November 6, 2017

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.

The Portuguese interbank money market during the subprime crisis and sovereign debt crisis

July 14, 2016

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.

Sorry, we’re closed: loan conditions when bank branches close and firms transfer to another bank

April 23, 2016

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.