Browsing by Author "Bonfim, Diana"
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- Deposit insurance and cross-border banksPublication . Azevedo, João Valle e; Bonfim, Diana
- Fiscal policy and credit supply in a crisisPublication . Bonfim, Diana; Ferreira, Miguel A.; Queiró, Francisco; Zhao, Sujiao (Emma)We measure how cuts to public procurement propagate through the banking system in a financial crisis. During the European sovereign debt crisis, the Portuguese government cut procurement spending by 4.3 percent of GDP. We find that this cut saddled banks with nonperforming loans from government contractors, which led to a persistent reduction in credit supply to other firms. We estimate a bank-level elasticity of credit supply with respect to procurement demand of 2.5. In a general equilibrium model, our findings point to large effects of fiscal policy on credit supply and output in a crisis.
- Liquidity risk and collective moral hazardPublication . Bonfim, Diana; Kim, MosheBanks individually optimize their liquidity risk manage-ment, often neglecting the externalities generated by their choices on the overall risk of the financial system. However, banks may have incentives to optimize their choices not strictly at the individual level, but engaging instead in collective risk-taking strategies. In this paper we look for evidence of such behaviors in the run-up to the global financial crisis. We find strong and robust evidence of peer effects in banks’ liquidity risk management. This suggests that incentives for collective risk-taking play a role in banks’ choices, thus calling for a macroprudential approach to liquidity regulation.
- On-site inspecting zombie lendingPublication . Bonfim, Diana; Cerqueiro, Geraldo; Degryse, Hans; Ongena, Steven R. G.In spite of growing regulatory pressure in most developed economies, “zombie lending” remains a widespread practice by banks. In this paper we exploit a series of large-scale on-site inspections made on the credit portfolios of several Portuguese banks to investigate how these inspections affect banks’ future lending decisions. We find that an inspected bank becomes 20% less likely to refinance zombie firms, immediately spurring their default. Overall, banks seemingly reduce zombie lending because the incentives to hold these loans disappear once they are forced to recognize losses.
- On-site inspecting zombie lendingPublication . Bonfim, Diana; Cerqueiro, Geraldo; Degryse, Hans; Ongena, Steven“Zombie lending” remains a widespread practice by banks around the world. In this paper, we exploit a series of large-scale on-site inspections made on the credit portfolios of several Portuguese banks to investigate how these inspections affect banks’ future lending decisions. We find that an inspected bank becomes 20% less likely to refinance zombie firms, immediately spurring their default. Overall, banks seemingly reduce zombie lending because the incentives to hold these loans disappear once they are forced to recognize losses.
- "Sorry, we're closed" bank branch closures, loan pricing, and information asymmetriesPublication . Bonfim, Diana; Nogueira, Gil; Ongena, StevenWe study local loan conditions when banks close branches. In places where branch closures do not take place, firms that purposely switch banks receive a sixty-three basis points (bps) discount. However, after the closure of nearby branches of their credit-granting banks, firms that locally and hurriedly transfer to other banks receive no such discount. Yet, the loan default rate for the latter (more expensive) transfer loans is on average a full percentage point lower than that for the former (cheaper) switching loans. This suggests that transfer firms are of "better"quality than switching firms. In sum, even if local markets remain competitive, when banks close branches, firms lose.
- Supporting small firms through recessions and recoveriesPublication . Bonfim, Diana; Custódio, Cláudia; Raposo, ClaraWe use variation in the access to a government credit certification program to estimate the financial and real effects of supporting small firms. This program was first implemented during the global financial crisis, but has remained active ever since, allowing us to analyze its effects both during recessions and recoveries. Eligible firms have access to government loan guarantees and a credit quality certification. We estimate real effects using a multidimensional regression discontinuity design. We find that eligible firms borrow more and at lower rates than non-eligible firms, allowing them to increase investment and employment during crises. Industry-level analysis shows reduced productivity heterogeneity in more exposed industries, which is consistent with improved credit allocation. However, when the economy is recovering the effects of the program are less pronounced and centered on the certification component. The cost-per-job in the recovery period is half of the one estimated for the crisis period (5784€ and 11,788€, respectively).
- The importance of deposit insurance credibilityPublication . Bonfim, Diana; Santos, João A.C.Sovereigns usually back up their deposit insurance arrangements to lend them credibility. When the sovereign is in distress, the credibility of deposit insurance might be threatened, with detrimental effects to financial stability. We investigate the behavior of depositors during the euro area sovereign debt crisis to understand the importance of deposit insurance credibility. We find that depositors responded to foreign banks’ decision to convert their subsidiaries into branches. By relocating their deposits into these newly formed branches during a period of sovereign distress, depositors became insured by a deposit insurance scheme with a stronger fiscal backstop. These results document a novel channel through which sovereign-bank links can be reinforced during a crisis: the credibility of deposit insurance.