Bank lending margins in the euro area: Funding conditions, fragmentation and ECB's policies

• Author: Helen Louri,Petros M. Migiakis
• Date: 01 October 2019
• DOI: http://doi.org/10.1002/rfe.1057
• Published date: 01 October 2019

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wileyonlinelibrary.com/journal/rfe Rev Financ Econ. 2019;37:482–505.

© 2019 University of New Orleans

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INTRODUCTION

Bank lending margins, i.e. the difference between interest rates charged by banks on loans and those paid by banks on deposits,

constitute one of the main sources of the effects exercised by finance on economic activity as they impact upon the cost of in-

vestment. The topic is covered in the finance- growth nexus literature (Claessens, Kose, & Terrones, 2012; Borio, 2012), while

it is also related to the effective transmission of monetary policy (Amidu & Wolfe, 2013; Aristei & Gallo, 2014; Bernhofer

& van Treeck, 2013; Hristov, Hülsewig, & Wollmershäuser, 2014). The global financial crisis caused many changes in the

functioning of the European banking system due to the needs for deleveraging and prudence as well as structural changes and

reforms in financial regulation.1 Bank lending margins were consequently affected showing a clear tendency to increase (see

Table 1).

With respect to structural changes it should be noted that the total number of banks in the euro area decreased to 4,385 at

the end of 2016 from 6,062 in 2008, a reduction of 28% (ECB, 2017). The reduction was not equally spread among member

countries. For instance, in Spain the respective reduction was 55% and in Greece 50%, while in Germany it was only 15%. Such

an increase in banking concentration may be good for the consumers of banking services if it leads to an increase in efficiency

and technological innovation and a reduction in bank risk. On the other hand, it may be detrimental if it leads to higher prices

and reduced services due to the exploitation of increased market power. Lending rates have often been found to increase with

concentration which keeps deposit interest rates rigid, thereby leading to higher lending margins.

Financing of economic activity is distinguished according to its source as either “bank- based” or “market- based” and its

composition has been found to play an important role (Cambacorta, Yang, & Tsatsaronis, 2014). In the euro- area member

states financing comes mainly in the form of bank lending. So, the decline of bank credit and the increase in its cost in the

aftermath of the global financial crisis has had serious repercussions on economic activity.2 To counteract blockages in the

Received: 16 December 2017

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Revised: 13 December 2018

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Accepted: 14 December 2018

DOI: 10.1002/rfe.1057

ORIGINAL ARTICLE

Bank lending margins in the euro area: Funding conditions,

fragmentation and ECB's policies

HelenLouri1

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Petros M.Migiakis2

1Athens University of Economics and

Business & London School of Economics

(EI/HO), Athens, Greece

2Bank of Greece,Economic Analysis and

Research Department, Athens, Greece

Correspondence

Petros M. Migiakis, Bank of Greece,

Economic Analysis and Research

Department, Athens, Greece.

Email: pmigiakis@bankofgreece.gr

Abstract

In this paper we study the determinants of lending margins paid by euro- area corpo-

rates for their bank loans. Across two separate groups of countries (distressed and

non- distressed) we examine whether lending margins have been affected by struc-

tural changes in the banking sector, the credit and liquidity position of banks and the

costs of funding in the corporate and sovereign bond markets. The role of ECB poli-

cies with respect to narrowing down the fragmentation in the bank lending channel is

also investigated through a structural panel VAR model for the period 2003:1 to

2014:12.

JEL CLASSIFICATION

E44, E51, E58, F36, F42

KEYWORDS

bank lending margins, ECB's policies, financial fragmentation, funding conditions, structural panel VAR

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LOURI and MIGIaKIS

TABLE 1 Descriptive statistics

Austria Belgium Finland France Germany Greece Ireland Italy Netherlands Portugal Spain

2003:1–2008:8

Bank lending margins 0.967 1.038 1.137 1.074 1.505 1.953 2.254 1.638 1.007 2.614 1.273

0.218 0.085 0.202 0.145 0.160 0.257 0.166 0.244 0.137 0.330 0.145

Herfindahl ratio 5.217 20.188 27.254 6.727 1.816 11.142 6.340 2.628 18.820 11.127 4.789

0.439 1.188 2.259 0.430 0.082 0.337 0.405 0.397 1.474 0.290 0.196

Loans/GDP 1.957 0.692 0.601 0.860 1.025 0.832 1.592 1.108 1.336 0.553 0.619

0.248 0.093 0.079 0.146 0.028 0.252 0.463 0.196 0.117 0.057 0.145

Loans/deposits 1.194 0.841 1.519 1.237 1.367 0.787 1.619 1.488 1.346 1.542 1.690

0.044 0.043 0.096 0.098 0.044 0.021 0.179 0.083 0.037 0.089 0.316

NFC bond spread 0.732 0.732 0.732 0.732 0.732 0.732 0.732 0.732 0.732 0.732 0.732

0.649 0.649 0.649 0.649 0.649 0.649 0.649 0.649 0.649 0.649 0.649

Sovereign spreads 0.043 0.092 0.003 0.045 0.000 0.245 0.000 0.228 0.048 0.132 0.048

0.061 0.093 0.079 0.047 0.000 0.127 0.125 0.103 0.057 0.109 0.074

CISS 0.159 0.159 0.159 0.159 0.159 0.159 0.159 0.159 0.159 0.159 0.159

0.151 0.151 0.151 0.151 0.151 0.151 0.151 0.151 0.151 0.151 0.151

Y- o- Y Δ(Base money) 714.5 714.5 714.5 714.5 714.5 714.5 714.5 714.5 714.5 714.5 714.5

159.1 159.1 159.1 159.1 159.1 159.1 159.1 159.1 159.1 159.1 159.1

2009:1–2014:12

Bank lending margins 0.974 1.427 1.808 1.135 1.772 1.959 2.090 1.369 1.545 3.207 1.326

0.197 0.121 0.189 0.132 0.197 0.741 0.591 0.252 0.344 0.571 0.734

Herfindahl ratio 4.042 11.904 32.770 5.770 2.847 16.280 6.707 3.982 19.692 12.912 6.557

0.088 2.245 2.267 0.254 0.277 4.085 0.241 0.299 2.350 2.490 1.078

Loans/GDP 2.486 0.771 0.953 1.186 1.090 1.305 2.146 1.560 1.623 0.679 0.759

0.037 0.033 0.101 0.081 0.075 0.094 0.328 0.038 0.054 0.063 0.121

Loans/deposits 1.240 0.647 1.541 1.343 1.121 1.040 1.566 1.335 1.239 1.505 1.644

0.017 0.044 0.078 0.117 0.071 0.160 0.209 0.077 0.038 0.151 0.209

NFC bond spread 1.067 1.067 1.067 1.067 1.067 1.067 1.067 1.067 1.067 1.067 1.067

0.605 0.605 0.605 0.605 0.605 0.605 0.605 0.605 0.605 0.605 0.605

Sovereign spreads 0.512 0.926 0.300 0.554 0.000 10.286 3.247 2.186 0.321 4.524 2.287

0.263 0.537 0.137 0.273 0.000 8.741 2.062 1.178 0.133 3.274 1.313

CISS 0.278 0.278 0.278 0.278 0.278 0.278 0.278 0.278 0.278 0.278 0.278

0.195 0.195 0.195 0.195 0.195 0.195 0.195 0.195 0.195 0.195 0.195

Y- o- Y Δ(Base money) 1268.3 1268.3 1268.3 1268.3 1268.3 1268.3 1268.3 1268.3 1268.3 1268.3 1268.3

220.8 220.8 220.8 220.8 220.8 220.8 220.8 220.8 220.8 220.8 220.8

Note. The table reports means and standard deviations (denoted in italics) of the series for the periods 2003:1 to 2008:9 (pre- crisis period) and 2008:10 to 2014:12 (post- crisis period).