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Essays on Credit Contagion and Shocks in Banking

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Essays on Credit Contagion and Shocks in Banking MERVI TOIVANEN Essays on Credit Contagion and Shocks in Banking ACTA WASAENSIA 332 ECONOMICS 9 Reviewers Professor Koen Schoors Ghent University Reep 1 BE-9000 Gent Belgium Professor Ari Hyytinen University of Jyväskylä, School of Business and Economics PL 35 FI-40014 Jyväskylän yliopisto III Julkaisija Julkaisupäivämäärä Vaasan yliopisto Elokuu 2015 Tekijä(t) Julkaisun tyyppi Mervi Toivanen Artikkeliväitöskirja Julkaisusarjan nimi, osan numero Acta Wasaensia, 332 Yhteystiedot ISBN Vaasan yliopisto 978-952-476-630-2 (painettu) PL 700 978-952-476-631-9 (verkkojulkaisu) 65101 VAASA ISSN 0355-2667 (Acta Wasaensia 332, painettu) 2323-9123 (Acta Wasaensia 332, verkkojulkaisu) 1235-788X (Acta Wasaensia. Kansantaloustiede 9, pai- nettu) 2342-2238 (Acta Wasaensia. Kansantaloustiede 9, verkkojulkaisu) Sivumäärä Kieli 168 Englanti Julkaisun nimike Essays on Credit Contagion and Shocks in Banking Tiivistelmä Tässä väitöskirjassa käsitellään sokkien vaikutusta pankkeihin finanssikriisien aikana. Tarkemmin ottaen tarkastelun kohteena ovat tartuntariskit pankkien välisillä rahamarkki- noilla Suomessa ja Euroopassa. Lisäksi tarkastellaan pankkien pääomaan ja likviditeettiin kohdistuvien paineiden vaikutusta euroalueen pankkien lainanantoon ja makrotalouteen. Ensimmäisessä esseessä tutkitaan kotimaisten ja ulkomaisten tartuntariskien välittymistä Suomen rahamarkkinoilla. Tulokset osoittavat, että kotimaisen tartuntariskin takia kes- kimäärin noin puolet Suomen pankkisektorista joutuu vaikeuksiin 1990-luvulla ja 66 % vuosina 2005–2011. 2000-luvulla ulkomaisen pankin kaatuminen vaikuttaa 77 prosenttiin suomalaisista pankeista. Toisessa esseessä tarkastellaan pankkien välisiä tartuntariskejä Euroopassa. Ne vaikuttavat keskimäärin 70 prosenttiin pankeista vuonna 2007 ja 40 pro- senttiin vuonna 2010. Ranskalaiset, englantilaiset, saksalaiset ja espanjalaiset pankit ovat merkittävimpiä tartuntariskien lähteitä. Tutkimus myös osoittaa, että tartuntariskiä lisää- vät pankin keskeinen asema rahamarkkinoilla, lainapositioiltaan suurten pankkien ryh- mät, useat linkit ja pankin suuri koko. Kolmannessa esseessä analysoidaan euroalueen pankkien sisäisiä vakavaraisuustavoittei- ta ja sitä, vaikuttaako tavoitteisiin pyrkiminen pankkien taseisiin. Tulokset osoittavat, että euroalueen pankit olivat alipääomitettuja vuonna 2008. Täyttäessään pääomavajeitaan pankit supistavat lainanantoa vähemmän kuin arvopaperiomistuksia. Neljännessä essees- sä tarkastellaan riski-, rahoitus- ja velkakriisisokkien vaikutusta euroalueella, Saksassa, Ranskassa, Italiassa ja Espanjassa. Vuonna 2009 sokit selittävät noin 60 % euroalueen yrityslainanannon vähenemisestä ja noin kolmasosan vuosittaisen bruttokansantuotteen supistumisesta. Sokkien vaikutus on merkittävä Saksassa ja Ranskassa vuosina 2009– 2011, mutta italialaisille ja espanjalaisille pankeille sokit ovat merkittäviä vasta simuloin- tiperiodin loppupuolella. Asiasanat pankit, finanssikriisit, tartuntariski, interbanksaamiset, euroalue, Suomi, luotontarjonta V Publisher Date of publication University of Vaasa August 2015 Author(s) Type of publication Mervi Toivanen Selection of Articles Name and number of series Acta Wasaensia, 332 Contact information ISBN University of Vaasa 978-952-476-630-2 (print) P.O. BOX 700 978-952-476-631-9 (online) FI-65101 Vaasa ISSN Finland 0355-2667 (Acta Wasaensia 332, print) 2323-9123 (Acta Wasaensia 332, online) 1235-788X (Acta Wasaensia. Economics 9, print) 2342-2238 (Acta Wasaensia. Economics 9, online) Number of pages Language 168 English Title of publication Essays on Credit Contagion and Shocks in Banking Abstract This dissertation examines the impact of shocks on banks in the context of financial crises. Specifically, it studies credit contagion in Finnish and European interbank mar- kets as well as the effects of capital and liquidity pressures on euro area banks’ lending and the macro economy. The first essay studies the domestic and foreign credit contagion via Finnish banks’ interbank exposures. The results show that domestic contagion affects, on average, al- most half of the Finnish banking sector in the 1990s and 66% in 2005–2011. In the 2000s, the failure of a foreign bank impacts 77% of the total assets of Finnish banks. The second essay examines credit contagion at the European level. The average conta- gion affects 70% and 40% of European banks’ total assets in 2007 and in 2010, respec- tively. Contagion is most prevalent among the French, British, German and Spanish banks. The most prominent factors for determining the magnitude of contagion are the bank’s central position in the network, bank clusters with large interbank loans, number of links and bank size. The third essay analyses euro area banks’ internal target capital ratios and whether banks’ adjustments towards their targets affect their balance sheets. The results indicate that euro area banks were undercapitalised in 2008. While closing the capital gap, banks reduce lending less than security holdings. The fourth essay disentangles the impact of risk, funding and sovereign shocks in the euro area as a whole and in Germany, France, Italy and Spain. In 2009 the shocks account for about 60% of the decrease in corporate lending and around a third of the decline of annual GDP growth in the euro area. While shocks exhibit a notable impact on Germany and France in 2009–2011, they are signifi- cant for Italian and Spanish banks only towards the end of the simulation period. Keywords banks, financial crise s, contagion, interbank exposures, euro area, Finland, credit supply VII ACKNOWLEDGEMENTS The completion of this doctoral dissertation has been a long journey and at times it seemed to be an ever-expanding project with no end in sight. At the wire, it is nevertheless my privilege to thank several persons who have supported me throughout the process. First of all, I would like to thank Professors Hannu Piekkola and Panu Kalmi for discussions and advice. By organizing seminars, courses and study visits they have enhanced the faculty’s research and working atmosphere. I am also very grateful for the opportunity to spend some time as a researcher in the economics department of the University of Vaasa. That period allowed me to fully concen- trate in my thesis and made it possible to finalise one of the articles. I would like to express my sincerest gratitude for the pre-examiners of this disser- tation, Professor Ari Hyytinen from the University of Jyväskylä and Professor Koen Schoors from Ghent University. Their valuable comments, suggestions and insightful views have improved the quality and presentation of this dissertation immensely. A special thank you goes to my co-author, Mr. Laurent Maurin, for the exchange of ideas and brainstorming and for sharing his knowledge of meth- odologies and programming issues. The keen-sighted and explicit advice of Mr. Simone Giansante is also highly appreciated. Special acknowledgement belongs to the OP-Pohjola Research Foundation and Yrjö Jahnsson Foundation for providing financial support for the research. My sincere thanks also go to others who have helped me in various ways. The swift editorial assistance of Ms. Merja Kallio helped me to finalize the disserta- tion. Mr. Glenn Harma has been most kind in helping me enormously with the English language. A word of thanks goes also to Mr. Jouko Vilmunen and Mr. Heikki Koskenkylä for providing me with an opportunity to visit the research department of the Bank of Finland in the early days of the project. I’m deeply indebted to my parents who have patiently supported me in my con- tinuous studies and in my deep love affair with books. I wouldn’t be at this point without them. I’m especially grateful to Dad for taking me to the public library in my youth, and to my granddad for teaching me to read and write as well as for providing the first insights into calculus already before I started preliminary school. I thank my Mom for being there and for providing the best food in the VIII world. I also want to thank my brother who has always managed to find time and solutions to my IT problems. Finally, special thanks go to Risto who has shown incredible patience and support while I made absolutely no sense to a fellow human being in talking about the details and challenges of my research. Yet, he sustained all those rattles valiantly. He also managed to keep my feet on the ground, reminding me of the necessity to finalise the project. Helsinki, July 2015 Mervi Toivanen IX Contents ACKNOWLEDGEMENTS ................................................................................ VII 1 INTRODUCTION ........................................................................................... 1 2 OVERVIEW OF LITERATURE ..................................................................... 2 2.1 Contagion .............................................................................................. 2 2.2 Basics for modelling scale-free networks ............................................. 4 2.3 The relationship between bank capital, lending and the macroeconomy ...................................................................................... 6 2.3.1 Bank capital, liquidity and funding in relation to bank lending .................................................................................. 6 2.3.2 Bank lending and the macro economy ................................. 9 3 FINANCIAL CRISES .................................................................................... 11 3.1 The Finnish banking crisis in the 1990s ............................................
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