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DETERMINANTS OF EURO-AREA BANK LENDING MARGINS:

 FINANCIAL FRAGMENTATION AND ECB POLICIES

 

Helen Louri

Athens University of Economics and Business and

London School of Economics (EI/HO)

 

Petros M. Migiakis

Bank of Greece

Abstract

In the present paper we study the determinants of the margins paid by euro-area non-financial corporations (NFCs) for their bank loans on top of the rates they earn for their deposits (bank lending margins). We use panel VAR techniques, in order to test for causality relationships and produce impulse response functions for eleven euro-area countries from 2003:1 to 2014:12. The countries are separated to two groups (distressed and non-distressed), in order to examine for heterogeneities in the relationships between lending margins, the period is also separated with reference to the peak of the global financial crisis (before and after the collapse of Lehman in September 2008). We find that significant heterogeneities existed even before the global financial crisis and remained in its aftermath, although the magnitude and the direction of the effects exercised by the explanatory variables have changed. Furthermore, apart from finding that market concentration and the prudence of banks’ management increase the lending margins NFCs pay for their loans, there is evidence of substitution effects between financing obtained from banks and corporate bond markets. The provision of ample liquidity from the ECB, in the aftermath of the global financial crisis was found to be effective only for the core countries, suggesting that further policy actions are needed in order to reduce the fragmentation of bank lending and promote financial integration to the benefit of the euro-area real economy.

Keywords: bank lending margins; euro area; financial fragmentation; global financial crisis; European Central Bank

JEL classification: E44; E51; E58; F36; F42

Acknowledgements: The authors would like to thank Mike Tsionas and Heather Gibson, for many useful comments and suggestions on earlier drafts of the present paper, as well as discussants and participants of the 5th Financial Engineering and Banking Society Conference in Nantes, France, and the 9th Infiniti Conference in Ljubljana, Slovenia. The views expressed in this paper are those of the authors and do not necessarily reflect those of the Bank of Greece.

Correspondence:

Petros M. Migiakis

Economic Analysis and Research Department

Bank of Greece

21, El. Venizelos Av.

10250 Athens, Greece

Email: pmigiakis@bankofgrece.gr  

Tel: +30 2103203587


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