Trümmerfilm: Die Mörder sind unter uns

Table of contents

0 Introduction

1 Definitions & Theory
1.1 Financial Institutions
1.1.1 Commercial banks
1.1.2 Savings banks
1.2 Definition of Parameters and its Ratios
1.2.1 Risk-weighted assets
1.2.2 Tier 1 - Capital and its ratio
1.2.3 Tier 2 capital
1.2.4 Total capital and its ratio

2 Literature review

3 Data and descriptive statistics
3.1 Data
3.2 Descriptive statistics on commercial banks
3.2.1 General
3.2.2 Large commercial banks
3.2.3 Small commercial banks
3.3 Descriptive statistics on savings banks
3.3.1 General
3.3.2 Large savings banks
3.3.3 Small savings banks

4 Analysis
4.1 Commercial Banks
4.2 Savings banks

5 Conclusion

6 Bibliography

List of tables

Table 1: General results for commercial banks

Table 2: Results for large commercial banks

Table 3: Results for small commercial banks

Table 4: General results for savings banks

Table 5: Results for large savings banks

Table 6: Results for small savings banks

List of figures

Figure 1: Average Total Assets and Net Loans (2008 - 2017)

Figure 2: General average Total Capital- and Equity to Asset-Ratio (2008 - 2017) and the corresponding loan growth (2009 - 2017)

Figure 3: Average Total Assets and Net Loans of large commercial banks (2008 - 2017)

Figure 4: Average Total capital- and Equity to Asset-Ratio of large commercial banks (2008 - 2017) and the corresponding loan growth (2009 - 2017)

Figure 5: Average Total Assets and Net Loans of small commercial banks (2008 - 2017)

Figure 6: Average Total Capital- and Equity to Asset-ratio of small commercial banks (2008 - 2017) and the corresponding loan growth (2009 - 2017)

Figure 7: General average Total Assets & Net loans of savings banks (2008 -2017) 19 Figure 8: General average Total Capital- & Equity to Asset-ratio of savings banks (2008 - 2017) and the corresponding loan growth (2009 - 2017)

Figure 9: Average Total Assets & Net loans of large savings banks (2008 -2017).

Figure 10: Average Total Capital- & Equity to Asset-ratio of large savings banks (2008 - 2017) and the corresponding loan growth (2009 - 2017)

Figure 11: Average Total Assets & Net loans of small savings banks (2008 -2017)

Figure 12: Average Total Capital- & Equity to Asset-ratio of small savings banks (2008 - 2017) and the corresponding loan growth (2009 - 2017)

0 Introduction

This bachelor's thesis is dealing with the relationship between Capital Ratios and lending behaviour of banks with the focus on the German banks. After the financial crisis in 2008/9, the assets of banks took severe losses and threatened the banks on the brink of bankruptcy. Afterwards the regulation of banks and its capital ratios became stricter. This regulation and requirement have an impact on the lending behaviour of banks and forced them to rethink the construction of their assets due to the maintaining of a regulated capital ratio. There are two different ways on approaching it. The first is by either adjusting their risk-weighted assets or the second is by increasing their levels of regulatory capital. This approaches led to different lending behaviours of the banks because loans are a main component of risk-weighted assets and assets in general. Nowadays there is a debate whether the new regulation is the reason why banks are lending less money than in the past and three scientific papers, which will be reviewed, have different arguments and different perspectives. The goal of this thesis is to take a look on assets, loans and capital ratios of German banks, compare and analyse them throughout the years in order to give an answer on the question whether capital ratios and the requirements have an impact on the lending of these banks. The first step is to give some insights about the definitions of the reviewed bank types in Germany and their business models, different ratios and their structure and how they are connected to the regulatory standard Basel III. Secondly, I will give a literature review and then the thesis will give an examination of a given data set about German banks. I lay my focus on the commercial banks and the so called “Sparkassen” (savings banks in Germany). By working with them, I want to find out a correlation between capital ratios and loan growths and provide a descriptive statistic about my calculations. I will also distinguish between small and large banks and analyse them separately in order to see if their behaviours differ from each other and if we are able to conclude that the size of their assets matters. In the end, the thesis will provide an analysis, which also involves the findings of the papers, of the results I found out and I will see if my analysis and thesis are agreeing with the statements of the papers.

1 Definitions & Theory

1.1 Financial Institutions

There are different financial institutions with different business and the most common types are depository institutions which contain commercial banks, savings institutions and credit unions. They are allowed to accept deposits and fund themselves with it. Deposits are a significant component of their assets and they offer loans as their main source of investments. However the German banking system does not contain that many private banks than public credit institutions. This system has a “three-pillar-system”, which distinguished between, private commercial banks, public banks (containing savings banks) and cooperative banking. This section focuses on the business models of the banks, which are given in the data set and are relevant for the analysis.

1.1.1 Commercial banks

Commercial banks are the largest group of depository institutions when it comes to the size of their assets. They typically accept deposits and giving out loans in order to invest the borrowed money. However they also finance themselves with liabilities which also include several types of non-deposit sources and they give out a wider range of loans like consumer, commercial and real estate loans. Typical examples in the given data set include Deutsche Bank and Commerzbank.

1.1.2 Savings banks

Savings banks in Germany are mainly called “Sparkasses” and serve a different purpose than typical commercial banks. They are primarily responsible for the saving of the money of their population in the region and serve as a safe financial investment. These deposits are insured and protected by regional support funds (in German “regionale Stützungsfonds), which involves 12 regional savings banks. Also the regional authorities are responsible for the existence of those banks. The supply of credits are mainly for regional customers of the Sparkassen and they do not act out of gaining profit but mainly out service of for the community. The regulations and laws for them also differ from federal state to federal state.

1.2 Definition of Parameters and its Ratios

1.2.1 Risk-weighted assets

Risk-weighted assets are bank's assets weighted by their risk. Different asset types can have different types of risk and the regulator uses different tools in order to sort the asset types into their proper risk categories. For example loans to consumer on the one hand are exposed to default risk if the borrower cannot meet its obligations and causes loses to banks. Thus it has a high risk-weight. On the other hand the German Bundesanleihe is a bond issued by the German government and can be backed up by generating taxes so that Germany can meet its obligations and thus it has a very low risk-weight. The reason for implementing this measurement is that financial institutions knows how much capital for each unit of risky assets they have to put aside in order to avoid bankruptcy. That's why it is most of the time the denominator for different ratios.

1.2.2 Tier 1 - Capital and its ratio

Tier 1 capital is referring to the core capital of a bank which includes common stocks and disclosed reserves or also known as retained earnings (Common equity Tier 1 Capital) and noncumulative perpetual preferred stocks and related surplus (Additional Tier 1 Capital). The money from this capital has to be stored so the banks can still functioning through all its risky transactions. Thus making it the purest form of a bank's capital and it serves as an implication for the bank's capital adequacy. Basel III says that the minimum Common equity Tier 1 ratio has to be 4.5% and the minimum Tier 1 capital ratio is set to 6%. The Tier 1 capital ratio is comparing the bank's core capital with its risk-weighted assets and hence the formula is the following:

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1.2.3 Tier 2 capital

Tier 2 - capital usually consists of subordinated debt, preferred stocks, unaudited reserves and retained earnings, loan loss reserves and various hybrid instruments. It has a lower loss-absorbing quality than the Tier 1 capital and serves as a cushion if the bank is liquidating. Its amount is restricted accordingly for the capital adequacy calculation.

1.2.4 Total capital and its ratio

Total capital is the sum of Tier 1 and Tier 2 capital and its ratio is also known as Capital Adequacy Ratio because the regulator has an overview of the bank's capital adequacy and which stress test they can execute. Total capital ratio is important because it serves as an indicator on how much loss the bank can absorb in case of insolvency. Especially the money of depositors has to be protected. By implementing this ratio the insolvency risk of a bank will be reduced and ensures the financial stability and efficiency of a nation's financial system. Thus a higher ratio implies a safe bank which can meet its financial obligations and it compares the Tier 1 and Tier 2 capital to its risk- weighted assets. The minimum total capital ratio has to be 8%. Basel III also effected the minimal total equity requirement (total equity/risk-weighted assets) by setting a 7% minimum

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2 Literature review

Several literatures have dealt with the topic of the relationship between capital ratios and bank lending. One of these papers was written by Carlson et al. (2013) and used a matched bank approaching by comparing a sample of banks based on geographic area, size and other business characteristics in order to have an effective control for local loan demand and other environmental factors. Their data reaches from 2001 to 2011 and contains income and balance sheets of the sampled banks. The authors were not just separating loan supply and demand and integrating it in a regression model for modelling their approach and showing the relationship between loan growth and capital ratio. They also used MSA fixed effects for having a comparison to their and controlling the local factors. Key findings in that paper were that during the crisis and the aftermath (timeframe of 2008 to 2010) the relationship between capital ratios and bank lending were significant but not at any other given time. Banks with decreased lending tend to have a stronger relation between loan growth and capital ratios than banks with increased lending. They also find out the relationship is nonlinear and assumed that the loan growth is more responsive to capital ratios on banks with lower capital ratios and that certain types of loans also influence the lending of banks. The second paper was written by Gropp et al. (2016) and they research the relationship of bank capital and lending via a quasi-natural experiment, which is an experiment where you cannot randomise your samples in different experimental groups. Like the first paper they also use the balance sheet in order to see the effects of the capital regulation on it and distinguished between the credit supply and demand. They mainly took banks under the supervision of the European Banking Authority or also called EBA-banks and non-EBA-banks into consideration and their timeframe goes from 2006 to 2014 with the main focus on the time during the EBA Capital Exercise. They were dividing the research in different aspects the first being the bank-level, the second being the loan level and the third being the firm level. The matching strategies contain, based on six covariates, the matching of four Non-EBA-banks to each EBA bank. Alternatively they also employed three additional types of matching. In order to robust their results they checked it with a regression analysis and different types of estimators. Their analysis concluded that banks are meeting the capital requirement ratio by rather decreasing their loan supply and thus the overall risk-weighted-assets than increasing its equity, even though EBA-banks increased their Tier 1- capital-ratio. Gambacota and Shin (2016) found out that bank equity plays an important role for unlocking bank lending and the regulatory objective of having a well-capitalised bank. A well-capitalised bank implies a reduction in the cost of funding debt and thus gaining a cost advantage of not just debt but also equity, which translates into a higher loan supply. They also wanted to find out the importance of capital for monetary policy because the goal of this policy is to ease the conditions for a credit. First, they did a country bank­level-study by using a commercial database called “BankScope” and taking banks from advanced economies with a timeframe from 1994 to 2012 into consideration and thus covering different economic cycles and especially the financial crisis. The main focus lies on numbers like the leverage, capital ratios, loan growth and fund costs. Nevertheless they admitted that there are factors like macroeconomic and monetary policy conditions or other specific bank characteristics they cannot control. Then in order to check the robustness of their statements they did an empirical analysis by using different types of regressions. This paper is coherent with the one of Carlson, et al. (2013) because both papers are implying a positive correlation between the regulatory capital ratio and loan growths. The second paper rather suggests that the loan supply is decreased in order to meet these capital requirements, but that EBA-banks, which include German banks, are increasing their Tier 1 - Equity. These papers are researching on the relationship between capital ratio and lending while focusing on different aspects. But the common trait these papers share is that they are using regression analysis in order to verify their thesis.

3 Data and descriptive statistics

3.1 Data

The data was provided by my supervisor and showed different Financial Institutions from different industries. It contains the banks reported total net assets, loans and equity and also the reported Common Equity Tier 1-, Tier 1- and total capital ratio (capital adequacy ratio). However several institutions have to be cut out of the analysis. The first step was to cut out the industries and their contained institutions because they have no relevance for my research. Thus the only industries I take into account are banks or rather commercial banks and savings/thrifts/mutual funds which mainly contain the Sparkassen. Afterwards I have to cut the banks which do not report their total net assets, loans or equity consistently throughout the years. The ratio where the main focus lies is the total capital ratio because the Common Equity-Tier 1 or Tier 1-ratios are not reported consistently, too. Additional ratios such as the loan growth or total equity to asset ratio have to be calculated by myself. The loan growth can be calculated as the natural logarithm of the total net loans of the actual year divided by the total net loans of the last year:

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The equity to asset ratio is nothing more than the total equity divided by the total net assets and tells us how much of the bank is owned by its investors and how strong they are leveraging themselves. Banks tend to have a low equity to asset ratio because they finance themselves with deposits of their customers and thus are very high leveraged. After having the needed parameters, every bank will be put on a list in separate tables with different years spanning from 2008 to 2017. Then every year the average total net assets, total net loans, total capital ratio, loan growth and equity to asset ratio will be calculated. The banks will also be divided into small and large banks by taking the median of the total net assets and any bank which total net assets are smaller than the median will be considered a small bank and larger than the median means large bank. The reason is to analyse the lending behaviour of small and large banks and thus their average numbers will also be taken into account. The average of these parameters will be taken for each year and then a graph with these numbers will be created. Also the correlation between the loan growth and average total capital ratio and the correlation between loan growth and equity to asset ratio will be calculated.

3.2 Descriptive statistics on commercial banks

3.2.1 General

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Table 1: General results for commercial banks

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