The Determinants of Long-Term Debt Issuance by European Banks: Evidence of Two Crises

58 Pages Posted: 12 Oct 2016

See all articles by Adrian Van Rixtel

Adrian Van Rixtel

Banco de España - Department of International Economics & International Relations

Luna Azahara Romo González

Banco de España

Jing Yang

Government of Canada - Bank of Canada

Multiple version iconThere are 2 versions of this paper

Date Written: October 6, 2016

Abstract

This paper is one of the first to investigate the determinants of bond issuance by European banks. We use a unique database of around 50,000 bonds issued by 63 banks from 14 European countries to test explicitly a broad set of hypotheses on the drivers of bond issuance. The sample covers the two major financial crises that caused severe dislocations in bank funding structures, i.e. the global financial crisis of 2008-2009 and the euro area financial crisis of 2010-2012. Our findings suggest that “market timing” (low interest rates) drove issuance before but not during the crisis, when access to funding became more important than its cost. Moreover, during the crisis years, country-risk characteristics became drivers of bond issuance, while for banks from the euro area periphery central bank liquidity substituted for unsecured long-term debt. We also show that heightened financial market tensions were detrimental to bond issuance, and more strongly so during crisis episodes. We find evidence of “leverage targeting” by means of the issuance of long-term debt during the crisis years. The positive and significant coefficient for the capital ratio supports the “risk absorption” hypothesis, suggesting that larger capital buffers enhanced the risk-bearing capacity of banks and allowed them to issue more debt. Moreover, banks with deposit supply constraints and relatively large loan portfolios issued more bonds, both before and after the crisis years. We find, too, that higher rated banks were more likely to issue bonds, also during the crisis period. Stronger banks issued unsecured debt in particular, while weaker banks resorted more to issuance of covered bonds. Overall, our results suggest that stronger banks – including those from peripheral countries – maintained better access to longer-term funding markets, even during crisis periods.

Keywords: bank funding, bond issuance, banking crisis, Europe

JEL Classification: G21, G32, E44, E58, F3

Suggested Citation

Rixtel, Adrian Van and Romo González, Luna Azahara and Jing, Yang, The Determinants of Long-Term Debt Issuance by European Banks: Evidence of Two Crises (October 6, 2016). Banco de Espana Working Paper No. 1621, Available at SSRN: https://ssrn.com/abstract=2848841 or http://dx.doi.org/10.2139/ssrn.2848841

Adrian Van Rixtel (Contact Author)

Banco de España - Department of International Economics & International Relations ( email )

Alcala 50
Madrid, 28014
Spain

Luna Azahara Romo González

Banco de España ( email )

Alcala 50
Madrid 28014
Spain

Yang Jing

Government of Canada - Bank of Canada ( email )

234 Wellington Street
Ontario, Ottawa K1A 0G9
Canada

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