Bank Distress Negatively Impacts Corporate Customers
ResearchBank Bailouts
If banks are in distress and therefore depend on rescue measures by bankers’ associations, the customers of these banks may be negatively affected by this. Specifically, there is a growing danger that the corporate customers of the rescued financial institutions will no longer have sufficient trade credits at their disposal and may therefore get into financial difficulties themselves. These are the results of a study conducted jointly by researchers from ZEW Mannheim, the Deutsche Bundesbank and KU Leuven.
The study examines for the period from 2000 to 2011 how the rescue of distressed banks by means of capital injections affects corporate customers of these banks in the real economy. The authors of the study distinguish not only between cyclically normal times and times of crisis, but also between companies whose main banks typically maintain close customer relationships and companies whose principle banks are mainly pure transactions banks. The control group is made up of companies whose principal banks also faced difficulties but were not dependent on capital injections.
The causes of bank distress include problems with the banks’ mortgage portfolio, unexpected defaults by borrowers and structural problems with certain business models. If capital assistance becomes necessary, the respective bankers’ associations usually have far-reaching opportunities to offer support to the bank concerned and initiate restructuring and debt relief measures.
The results of the study show that for the corporate customers of a rescued bank, the default risk increases by around ten per cent. In addition, bank distress also reduces firms’ availability of other external financing options, such as trade credits. The advisory trade credit limit for firms borrowing from bailed out banks drops by eleven per cent. Ultimately, this limited access to financing also has very real effects on the affected firms, with their sales decreasing by a good 8.5 per cent after their bank’s bailout.
Strong customer-bank relationship offers protection
“The default risk of companies whose principal bank depends on an external rescue scheme indeed increases. However, we can also confirm that a strong customer-bank relationship protects companies from possible credit crunches,” says Dr. Johannes Bersch, researcher in the ZEW Department “Economics of Innovation and Industrial Dynamics” and co-author of the study. “The latter, however, also implies that companies that are too risky or weak do not disappear from the market, even in times of crisis – a phenomenon that in the long term can lead to a poorer supply of credit, especially to young and innovative companies,” adds Dr. Georg Licht, head of the ZEW Research Department “Economics of Innovation and Industrial Dynamics”.
The empirical study was based on representative and unique data. For their initial analysis, the researchers used the Mannheim Enterprise Panel (MEP), which contains information on almost all economically active companies in Germany outside the banking sector regarding their individual creditworthiness, the relationship with their principal bank, their turnover and number of employees, as well as a number of industry-specific peculiarities. It is therefore the most extensive firm-level panel dataset for Germany apart from the official business register of the Federal Statistical Office, which is not available for research purposes.
The MEP data were then combined with bank balance sheet and regulatory data from the Deutsche Bundesbank in order to identify distressed credit institutions.
