Download Bank Lending During the Financial Crisis of 2008

Bank Lending During the
Financial Crisis of 2008
Victoria Ivashina
David Scharfstein
Harvard Business School
Goal
To understand the spill over of the crisis from financial
sector to real sector through the lending channel
– Did bank lending fall?
– If so, was it a contraction in demand or supply?
• How did different types of banks respond to the crisis?
Prior:
C&I Loans by Domestically Chartered Commercial Banks
Source: Federal Reserve Board, Assets and Liabilities of Commercial Banks in the United States,
(http://www.federalreserve.gov/releases/h8). Not seasonally adjusted, adjusted for mergers.
Data
• Reuters DealScan: Origination of large loans (primarily
syndicated loans)
Self reported data:
-advertise
-reflect market conditions
-most importantly, receive league tables credit (published quarterly)
• Data through December 31, 2008
• US companies
• Primarily US banks but also includes domestic affiliates of
foreign banks
• From Aug ’08 to Oct ’08, top three US banks Citi, JPM, BAC originated 62%
of the loans to the US companies, followed by Morgan Stanley with 4% of
the loan origination
Basic Facts: Bank Lending Falls
Total Loan Issuance, US Corporate Loans (Amount and Number of Loans)
•
•
New lending in 2008 was significantly below new lending in 2007, even before the peak period of
the financial crisis
The decline in new loans accelerated during the financial crisis, falling by 47% in dollar volume and
33% in number of issues in 4th quarter of 2008 relative to the previous quarter (79% and 61%
with respect to the peak)
QI '00
QII '00
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Basic Facts: Bank Lending Falls
Total Loan Issuance, US Corporate Loans (Billion USD)
800
700
600
500
400
300
200
100
0
Æ Look at the loan issuance across three categories:
• Restructuring loans (M&A, LBOs, and stock repurchases) vs.
Real investment loans (working capital or general corporate
purposes)
• Non-investment grade vs. investment grade loans
• Term loans vs. revolving lines
Restructuring loans vs. Real investment loans:
Exit financing Proj. finance
2%
1%
CP backup
2%
Real estate
3%
Debtor-in-poss.
0%
Other
0%
Corp. purposes
24%
Work. Capital
7%
Recap.
5%
LBO/M&A
56%
*Based on 2007 numbers
Restructuring loans
Real investment loans
Restructuring loans vs. Real investment loans:
450
400
350
300
250
200
150
100
50
0
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Restructuring Loans
•
QI '08
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QIV '08
Real Investment Loans
There is a drop in both real investment loans (working capital or general corporate
purposes) and restructuring loans (those for M&A, LBOs, and stock repurchases)
Non-investment grade vs. investment grade loans:
400
350
300
250
200
150
100
50
0
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Non-Investment Grade
•
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Investment Grade
In the last quarter of 2008, non-investment grade loans fell by 82% relative to the
prior quarter, while investment grade loans fell by 77%
Term loans vs. revolving lines:
400
350
300
250
200
150
100
50
0
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Term Loans
•
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Revolving Lines
Sep–Nov 2008, revolving credit facilities and term loans both declined, but the
decline in term loans (67%) was larger than the decline in revolving facilities (27%)
Is drop in lending a supply shock or demand
shock?
Supply effect if bank characteristics affect lending
• Effect of deposit base on lending
–
–
Banks that are more reliant on short-term debt have
difficulty rolling over debt and will have to cut lending more
Thus, banks with strong deposit base will cut lending less
Caveat: insured deposits
C&I Loans by Domestically Chartered Commercial Banks
Source: Federal Reserve Board, Assets and Liabilities of Commercial Banks in the United States,
(http://www.federalreserve.gov/releases/h8). Not seasonally adjusted, adjusted for mergers.
Reconciling the facts:
• Borrowers draw down their credit facilities:
OutstandingLoanst
=
OutstandingLoanst-1 + NewLoanst +
Drawdownst –
LoanRetirementst
Borrowers draw down their credit facilities
34 firms,
nearly $27
billion just in
this sample
(i.e., 26% of
the jump)
Borrowers draw down their credit facilities for
precautionary reasons
“
Drawing down these funds is a prudent liquidity measure. Ensuring access to our
liquidity to the fullest extent possible at a time of ambiguity in the capital markets is
in the best interest of our customers, suppliers, shareholders, and employees.”
Dana Corp. explaining $200 mm drawdown.
“
In light of the uncertain market environment, we have made this proactive financial
decision to increase our liquidity and cash position and to bridge our access to the
debt capital markets.”
Duke Energy explaining $1 bn drawdown.
“ The Company believes that these actions were necessary to preserve its availability
to capital due to Lehman Brothers’ level of participation in the Company’s debt
facilities and the uncertainty surrounding both that firm and the financial markets in
general.”
FairPoint Communications explaining $200 mm drawdown.
Source: SEC filings
Is drop in lending a supply shock or demand
shock?
Supply effect if bank characteristics affect lending
• Effect of deposit base on lending
–
–
Banks that are more reliant on short-term debt have
difficulty rolling over debt and will have to cut lending more
Thus, banks with strong deposit base will cut lending less
Caveat: insured deposits
• Effect of revolving line exposure on lending
–
Banks with large exposure to revolving lines will cut new
lending more
But, note that banks with large exposure to revolving lines also
tend to have a strong deposit base (Kashyap, Rajan, and Stein,
2002)
Revolvers and Deposits
1
Revolvers/Total Loans
0.8
0.6
y = 0.34+ 0.45x
R² = 0.47
0.4
0.2
0
0
0.1
0.2
0.3
0.4
0.5
0.6
Deposits/Assets
0.7
0.8
0.9
1
Lehman exposure
Example: Tribune Co. 750 $MM revolving line
Tribune needs/draws 300 $MM
JPM
150 $MM
Lehman
150 $MM
(375 $MM)
(375 $MM)
With Lehman out of the picture:
JPM
(375 $MM)
Tribune needs/draws 300 $MM
Lehman
300 $MM
Empirical Approach
Define three windows:
Pre-Crisis: August 2006 – July 2007
Crisis I: August 2007 – July 2008
Crisis II: August 2008 –December 2008
Dependent variable:
%Δ Total number of loans =
[Mean(#loans per month)Crisis II / Mean(#loans per month)Base – 1]
where base = Pre-Crisis or Crisis I
(Median is -55% relative to Pre-crisis, and -39% relative to Crisis I)
%Δ Total volume of loans per month (defined analogously)
Regression:
%Δ Total number of loans on lagged Deposits/Assets
Results
Results
Economic magnitude: banks with revolving line exposure to Lehman one standard
deviation above the mean (12%) cut lending by 44%, while banks with Lehman exposure
one standard deviation below the mean (0%) cut lending by only 25%
Robustness: Revolving lines vs. term loans
Results
Robustness: CDS
Implications
• Measurement issues
• Financial crisis had an adverse effect on supply of credit at
the bank level
• However, it is possible that there was a drop in loan
demand, which was satisfied by the banking sector as a
whole though a shift in supply from low deposit banks to
high deposit banks
–
Raises an important question: Can firms easily switch from one bank to another? If not, there
will be real effects of the financial crisis even if there has been a drop in demand