State Supported Banks
Timely paper from the BIS: External support and bank behaviour in the international syndicated loan market by Blaise Gadanecz, Kostas Tsatsaronis and Yener Altunbaş
Extract:
Where supported banks seem to differ substantially from their peers is the attitude towards risk. Supported banks hold portfolios of loans that are on average lower priced than a market benchmark (although some of these lower spreads may be recouped in the form of higher fees, meaning that they may be substituting revenue for risk compensation). Moreover, as senior arrangers they tend to be involved in initiating loans that carry thinner spreads that the average loan with similar characteristics. Finally, they also seem to be less responsive to indicators of balance sheet risk in deciding whether to invest on a particular loan as compared to other banks.
This relatively relaxed attitude towards risk is more problematic from a policy perspective. It is an indication that support distorts the incentives of these banks and encourages risk taking that is not remunerated by market expected returns. Combined with a non-innovative attitude towards investment also suggests that these banks are likely to be using the funding benefits of their status to engage in price competition in the international loan market. This behaviour is not compatible with the typical motivation for support, and is akin to an abuse of their privileged status.
These results shed a sceptical light on the beneficial impact of state support. Clearly, the data used in this paper cannot examine the overall behaviour of the banks, but only a small component in their activities in the international arena. More research is needed to generate a more complete picture of the impact of support on the banks. Nevertheless, the results suggest that there are externalities from state support that go beyond the national markets. Hence, they warrant a more careful consideration of the conditions at which support is made available and the governance structures in these institutions.