The determinants of long-term debt issuance by European banks: evidence of two crises

Adrian Rixtel (), Luna Azahara Romo Gonzalez () and Jing Yang

No 513, BIS Working Papers from Bank for International Settlements

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, allowing us to differentiate between different types of long-term debt securities. By investigating at the individual bank level, we are able to test explicitly a broad set of hypotheses from both the corporate finance and banking literature on the drivers of bond issuance. We use both country and bank-specific financial characteristics as explanatory variables. With respect to the country determinants, 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. Our results yield strongly significant coefficients for the bank-specific variables, with signs as expected. We find evidence of "leverage targeting" by issuing 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 since the crisis years. We also find that higher rated banks were more likely to issue bonds, also during the crisis period. Stronger banks issued especially unsecured debt, 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. Our results pass several robustness tests. We present an additional aggregated country analysis in a separate appendix.

Keywords: bank funding; bond issuance; banking crisis; Europe (search for similar items in EconPapers)
Pages: 63 pages
Date: 2015-10
New Economics Papers: this item is included in nep-ban and nep-eec
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (15)

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Related works:
Working Paper: The determinants of long-term debt issuance by European banks: evidence of two crises (2016)
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