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Impact of Government InterventionOn Banks’ Loan Provision and Quality
Author: Putu Nila Kusuma Devi
Coach: Teng Wang [email protected] Co-reader: Dr. Ben Wempe
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Agenda
• Introduction & Research Questions• Literature Review• Research Methodology• Research Findings• Conclusion • Limitation
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Introduction (1)
•Contagion effect of bank runs
•The rise of the subprime mortgage
•Interest rate rose from 1% - 5.25% during 2003 to 2006
•Failing big investment banks
•Fallen of the U.S. stock market
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Introduction (2)• Government interventions:
– Reduced fed rate 5.25% to 0.25%– October 2008, the government launched
Troubled Assets Relief Program (TARP)Capital Purchase Program (CPP).
• CPP– Purpose: Increase confidence & lending– $205 billion to 709 firms
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Research Questions
• “How does the impact of CPP on banks’ loan provision (loan growth and credit growth)?”
• “How does the impact of CPP on banks’ loan quality (delta non-performing loans ratio and delta loan-loss reserves ratio)?”
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Literature Review (1)
• Bailout– Critics:
• Stiglitz (2010) : banks bailout has almost no multiplier, need of regulation
• Lewis (2010): the incentives on Wall Street are all wrong
– Pro:• Paulson (2010): systemic risk
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Literature Review (2)
• Banks’ Loan Provision– Li (2011) : TARP banks significantly increase
their loan supply by 6.43% of total assets annually.
– Bayazitova & Shivdasani (2010) find that TARP recipient banks increased their outstanding loans by approximately 6.2%
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Literature Review (3)
• Banks’ Loan Provision– Taliaferro (2009) shows limited effect of the
CPP on participants’ lending compared to non-participants.
– Duchin and Sosyura (2010) find no evidence of greater credit origination by TARP participants
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Literature Review (4)
• Banks’ Loan Quality– Li (2011) finds there is no difference in the
loan quality between TARP banks and non-TARP banks.
– Duchin & Sosyura (2010) find CPP recipients give riskier loans and invest in risky securities
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Research Methodology (1)
• Research Subject: – bank holding companies– publicly traded– total consolidated assets of $500 million– CPP and Non-CPP banks
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Research Methodology (2)
• Data Analysis Methods– Independent Samples T-test– Hausman Test of Endogeneity– Ordinary Least Squares (OLS)
Y = β0 + β1XC + β2XE + β3CPP + u
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Findings (1)
– Generally, CPP banks performed worse in the two
and a half years horizon after receiving CPP infusion.– Non-CPP banks have better financial strength
CPP Non-CPP All Sig.(2-tailed)
Total asset 11063098 9022150 10171884 0.666
Loaan growth -0.014 0.012 -0.003 0.37Credit growth -0.021 0.021 -0.003 0.281Non-performing loans ratio
0.027 0.019 0.024 0.027**
Loan-loss reserves ratio 0.011 0.008 0.01 0.056*Tier 1 ratio 10.147 12.105 11.002 0.000***Cash to asset 0.024 0.027 0.025 0.017**Price to book 1.167 1.369 1.255 0.006***Uninsured deposit 0.186 0.161 0.175 0.004***No. of banks 169 131 300
• Independent Sample T-Test
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Findings (2)
• With a negative GDP growth and a high unemployment rate, it is clear that funds are needed to enable the society to boost the economy.
Log population GDP growth Unemployment
Minimum 5.7931 -2.0000 3.2000
Maximum 7.5627 7.3000 8.4000
Mean 6.904780 .681333 5.811667
Std. Deviation .3693710 1.1320143 1.1077851
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Findings (3)
Dependent Variable Probability ValueLoan Growth 0.387Credit Growth 0.2236Non-Performing Loans Ratio 0.158Loan-Loss Reserves Ratio 0.5058
• The Hausman test results show evidence of no endogeneity from CPP to the dependent variable for all models.
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Findings (4) Loan Growth Credit Growth
Independent Variable Coefficient Prob. Coefficient Prob.
Tier 1 ratio0.002 0.531 0.005 0.264
Troubled asset -0.454 0.000*** -0.588 0.000***Age 0.000 0.062* 0.000 0.182ROA-ytd 0.844 0.196 0.909 0.184Cash to asset 0.878 0.104 0.788 0.280Loans to deposit 0.012 0.066* 0.024 0.028**Log asset -0.025 0.165 -0.052 0.083*Delta Tier 1 0.007 0.058* 0.004 0.380Price to book 0.038 0.009*** 0.058 0.012**Uninsured deposit 0.058 0.623 0.005 0.977Log population 0.029 0.192 0.040 0.209GDP growth -0.018 0.079* -0.038 0.058*Unemployment -0.032 0.001*** -0.055 0.003***CPP 0.010 0.595 0.026 0.405C 0.111 0.581 0.300 0.321R2
0.335 0.279
Number of observation 298 299
Jarque-Bera 110510.3 0.000*** 83469.09 0.000***
White Test F Statistic 1.807 0.000*** 1.817 0.000***
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Findings (5)Non-performing Loans Loan-loss Reserves
Independent Variable Coefficient Prob. Coefficient Prob.
Tier 1 ratio-0.001 0.070* 0.000 0.288
Troubled asset -0.018 0.187 0.009 0.045**Age 0.000 0.039** 0.000 0.419ROA-ytd -0.065 0.608 -0.061 0.058*Cash to asset -0.053 0.711 -0.078 0.021**Loans to deposit 0.001 0.841 -0.001 0.082*Log asset -0.001 0.693 0.002 0.031**Delta Tier 1 -0.001 0.296 0.000 0.618Price to book -0.003 0.353 -0.001 0.536Uninsured deposit 0.089 0.000*** 0.027 0.003***Log population -0.003 0.538 0.000 0.936GDP growth -0.004 0.076* -0.002 0.079*Unemployment -0.001 0.729 -0.001 0.244CPP 0.003 0.463 0.000 0.843C 0.069 0.102 0.005 0.746R2 0.122 0.149
Number of observation 300 300
Jarque-Bera 901.071 0.000*** 603.952 0.000***
White Test F Statistic 0.852 0.826 1.248 0.090*
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Conclusion
• The CPP was given to banks with less financial strength compared to non-recipients.
• CPP has no impact on loan provision • CPP has no impact on loan quality
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Limitation
• Absence of sufficient data• Cross-section data, relatively small sample
size.• Short time horizon
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Thank You
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Findings (4)
• OLS on Loan Provision– CPP has no significant influence in both loan
growth and credit growth. – Banks with troubled assets will have
difficulties in increasing loan provision– Banks with less likelihood of financial distress
have better ability to provide loans– GDP growth & unemployment rate influence
loan provision negatively
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Findings (5)
• OLS on Loan Quality– CPP has no significant influence in both non-
performing loans ratio and loan-loss reserves ratio.
– Uninsured deposit decreases loan quality significantly.
– GDP growth positively affects loan quality