Essays in banking and finance
Δοκίμια στην τραπεζική και χρηματοοικονομική
Παπαφίλης, Μιχαήλ - Παναγιώτης
Papafilis, Michail - Panayiotis
KeywordsSovereign credit risk ; Bank credit risk ; Contagion effects ; Bank lending channel ; Balance sheet channel ; Financial crisis
The global financial crisis that began in the US as a subprime mortgage crisis in 2007 and quickly spread to the other side of the Atlantic, triggered a sovereign and banking crisis in core and peripheral Eurozone countries. Government authorities and monetary policymakers had a key role during this turbulent period in both sides of the Atlantic, in stabilizing economic activity, strengthening the financial system through credit policy measures, enhancing investment and improving financial conditions. Further research is needed for this controversial period. In this direction, this dissertation consists of three essays. The first essay focuses on the implications of the recent crisis on the dynamic causal interlinkanges between sovereign and bank credit risk in the Eurozone. The second essay provides an alternative definition of the cost of internal finance, calculates the cost differential between external and internal finance and derives a measure of the equilibrium real interest rate in terms of the cost of internal finance. Finally, the third essay examines the potency of the bank lending and the balance sheet channels in the U.S. during the last two decades. More specifically, the first essay examines the nexus between sovereigns and banks during the recent crisis period, with a focus on the effects of the Private Sector Involvement (PSI) program, the voluntary exchange program of Greek sovereign bonds with private sector involvement. We investigate the effectiveness of the program through its impact on credit default swaps of eight Eurozone countries and twenty-one banking institutions, using daily data over the period January 2009 to May 2014. Using linear and nonlinear causality analyses, we find that the link between sovereign and bank credit risk weakened after the PSI, while the persistence and magnitude of lead-lag interactions also declined in the same period. A difference-in-difference model confirms this result. Our findings are also robust to second moment filtering, with GARCH-BEKK residuals indicating the presence of significant albeit declining nonlinear causal effects. We conclude that sovereign debt restructuring initiatives, such as the PSI, could be an effective policy measure to ease off pressure on the nexus between banks and their sovereigns, whereby unstable bank balance sheets degrade the solvency of their sovereigns, and vice versa. In the second essay, we draw a conceptual distinction between the cost of internal finance and the opportunity cost of internal finance, the latter being a fundamental part of the definition of the external finance premium employed extensively in the literature. We come up with an alternative definition of the cost of internal finance and calculate its differential with the cost of external finance. We further investigate the concept of the equilibrium real interest rate and measure it in terms of the cost of internal finance, as the rate that would prevail in the long run after temporary shocks in the economy have died out. In the third essay, we quantify the amplifying effects of a monetary policy change on real economic activity, due to the operation of the credit channel. These effects are stronger in relation to the case where only the conventional interest rate channel operates. We develop a theoretical framework, based on the Bernanke and Blinder (1988) model, extended to incorporate imperfect substitution between internal and external finance of firms. Our aim is to study the operation of the bank lending and the balance sheet channels in the U.S. over the period January 1994 to June 2017, by using aggregate data. By employing multivariate cointegration techniques and testing appropriate restrictions on estimated equilibrium relationships, we provide evidence that only the balance sheet channel is operational for the periods before and after the global financial crisis.