IDEAS home Printed from https://ideas.repec.org/a/iez/survey/ces-v26_1-2024_ercegovac-klinac-pecaric.html
   My bibliography  Save this article

The Non-Sensitivity of Public Development Banks to Key Stability Performance of the Banking Sector: The Lessons for Policymakers

Author

Listed:
  • Roberto Ercegovac

    (University of Split, Faculty of Economics, Business and Tourism, Croatia)

  • Ivica Klinac

    (University of Rijeka, Faculty of Economics and Business, Croatia)

  • Mario Pecaric

    (University of Split, Faculty of Economics, Business and Tourism; University of Rijeka, Faculty of Economics and Business, Croatia)

Abstract

Public development banks are mission-oriented financial institutions whose purpose is to finance investments on behalf of the policymakers. After the last global financial crisis and the changes in the regulatory framework, the lending activities of commercial banks have declined, and their business models have shown a strong pro-cyclical character. On the other hand, public development banks are gaining considerable importance in maintaining the supply of credit in the event of disruptions in the financial system. Because the activity of public development banks is policy-driven, their credit supply is not affected by the GDP rate movement. The paper not only links the credit activity of public development banks with the indicator of financial stability of commercial banking before and after the establishment of the new banking regulatory framework but also examines the quality of the loan portfolio of public development banks and the movement of the ratio of non-performing loans of the commercial banking sector. The empirical analysis was conducted on a panel sample of EU27 countries using the publicly available database of the World Bank and the Bloomberg database for the 10 largest public development banks in the European Union in the period from 2005 to 2021. A research model with dynamic panels and a systematic one-step GMM estimator was employed. The results of the research confirmed and supported the basic research hypothesis that lending by public development banks is negatively related to the stability of the banking system, which indicates the contribution of public development banks in providing access to finance during the banking system crisis. Furthermore, research results showed that public lending by development banks is not related to GDP growth. The results of the research also confirmed an additional research hypothesis that the quality of lending by public development banks is significantly inversely proportional to the share of non-performing loans in the banking system as a whole. Accordingly, it is associated with a stable business model during economic cycles, solid credit standards, disclosure obligations, and public interest monitoring to avoid adverse shocks. Finally, the research result has confirmed the positive role of European public development banks in case of an increase in the probability of banking system distress due to efficient risk management and credit standards. Its conclusion is that the policymakers need to continue to promote the importance of public development banks in contributing to policy objectives and extending financial inclusion, both during the periods of financial stability and in the periods of indications of financial uncertainties and crises.

Suggested Citation

  • Roberto Ercegovac & Ivica Klinac & Mario Pecaric, 2024. "The Non-Sensitivity of Public Development Banks to Key Stability Performance of the Banking Sector: The Lessons for Policymakers," Croatian Economic Survey, The Institute of Economics, Zagreb, vol. 26(1), pages 37-58, June.
  • Handle: RePEc:iez:survey:ces-v26_1-2024_ercegovac-klinac-pecaric
    as

    Download full text from publisher

    File URL: https://hrcak.srce.hr/318411
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. H. Elif Ture, 2021. "Revisiting the Stabilization Role of Public Banks: Public Debt Matters," IMF Working Papers 2021/007, International Monetary Fund.
    2. repec:oup:ecpoli:v:26:y:2011:i:66:p:135-182 is not listed on IDEAS
    3. Bertay, Ata Can & Demirgüç-Kunt, Asli & Huizinga, Harry, 2015. "Bank ownership and credit over the business cycle: Is lending by state banks less procyclical?," Journal of Banking & Finance, Elsevier, vol. 50(C), pages 326-339.
    4. Ari, Anil & Chen, Sophia & Ratnovski, Lev, 2021. "The dynamics of non-performing loans during banking crises: A new database with post-COVID-19 implications," Journal of Banking & Finance, Elsevier, vol. 133(C).
    5. Leonardo Gambacorta & David Marques-Ibanez, 2011. "The bank lending channel: lessons from the crisis [Financial intermediaries and monetary economics]," Economic Policy, CEPR, CESifo, Sciences Po;CES;MSH, vol. 26(66), pages 135-182.
    6. Ben Naceur, S. & Marton, Katherin & Roulet, Caroline, 2018. "Basel III and bank-lending: Evidence from the United States and Europe," Journal of Financial Stability, Elsevier, vol. 39(C), pages 1-27.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Onder Ozgur & Erdal Tanas Karagol & Fatih Cemil Ozbugday, 2021. "Machine learning approach to drivers of bank lending: evidence from an emerging economy," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 7(1), pages 1-29, December.
    2. Simona Malovaná & Dominika Ehrenbergerová, 2022. "The effect of higher capital requirements on bank lending: the capital surplus matters," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 49(3), pages 793-832, August.
    3. Stewart, Robert & Chowdhury, Murshed & Arjoon, Vaalmikki, 2021. "Interdependencies between regulatory capital, credit extension and economic growth," Journal of Economics and Business, Elsevier, vol. 117(C).
    4. Dang, Van Dan & Dang, Van Cuong, 2021. "Liquidity injection, bank lending, and security holdings: The asymmetric effects in Vietnam," The Journal of Economic Asymmetries, Elsevier, vol. 24(C).
    5. Caterina Di Tommaso, 2022. "Securitization and CDS in U.S. bank lending," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 27(1), pages 1120-1133, January.
    6. Ferri, Giovanni & Kalmi, Panu & Kerola, Eeva, 2014. "Does bank ownership affect lending behavior? Evidence from the Euro area," Journal of Banking & Finance, Elsevier, vol. 48(C), pages 194-209.
    7. Miguel Biron & Felipe Córdova & Antonio Lemus, 2019. "Banks' business model and credit supply in Chile: the role of a state-owned bank," BIS Working Papers 800, Bank for International Settlements.
    8. Brei, Michael & Schclarek, Alfredo, 2013. "Public bank lending in times of crisis," Journal of Financial Stability, Elsevier, vol. 9(4), pages 820-830.
    9. Simona Malovana & Martin Hodula & Josef Bajzik & Zuzana Gric, 2021. "A Tale of Different Capital Ratios: How to Correctly Assess the Impact of Capital Regulation on Lending," Working Papers 2021/8, Czech National Bank.
    10. Demirgüç-Kunt, Asli & Horváth, Bálint L. & Huizinga, Harry, 2020. "Foreign banks and international transmission of monetary policy: Evidence from the syndicated loan market," European Economic Review, Elsevier, vol. 129(C).
    11. Caglayan, Mustafa & Xu, Bing, 2016. "Sentiment volatility and bank lending behavior," International Review of Financial Analysis, Elsevier, vol. 45(C), pages 107-120.
    12. Owen, Ann L. & Temesvary, Judit, 2018. "The performance effects of gender diversity on bank boards," Journal of Banking & Finance, Elsevier, vol. 90(C), pages 50-63.
    13. Jonathon Adams‐Kane & Julián A. Caballero & Jamus Jerome Lim, 2017. "Foreign Bank Behavior during Financial Crises," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 49(2-3), pages 351-392, March.
    14. Senderski, Marcin, 2011. "Justifiable thrift or feverish animal spirits: What stirred the corporate credit crunch in Poland?," MPRA Paper 56613, University Library of Munich, Germany.
    15. D’Orazio, Paola & Valente, Marco, 2019. "The role of finance in environmental innovation diffusion: An evolutionary modeling approach," Journal of Economic Behavior & Organization, Elsevier, vol. 162(C), pages 417-439.
    16. Nobili, Andrea & Zollino, Francesco, 2017. "A structural model for the housing and credit market in Italy," Journal of Housing Economics, Elsevier, vol. 36(C), pages 73-87.
    17. Nina Boyarchenko & Leonardo Elias & Philippe Mueller, 2019. "Corporate Credit Provision," Staff Reports 895, Federal Reserve Bank of New York.
    18. Chen, Minghua & Wu, Ji & Jeon, Bang Nam & Wang, Rui, 2017. "Monetary policy and bank risk-taking: Evidence from emerging economies," Emerging Markets Review, Elsevier, vol. 31(C), pages 116-140.
    19. Brei, Michael & Gambacorta, Leonardo & von Peter, Goetz, 2013. "Rescue packages and bank lending," Journal of Banking & Finance, Elsevier, vol. 37(2), pages 490-505.
    20. Ambrocio, Gene & Hasan, Iftekhar & Jokivuolle, Esa & Ristolainen, Kim, 2020. "Are bank capital requirements optimally set? Evidence from researchers’ views," Journal of Financial Stability, Elsevier, vol. 50(C).

    More about this item

    Keywords

    EU public development banks; stability performance of the banking sector; regulatory framework for commercial banks; dynamic panel models;
    All these keywords.

    JEL classification:

    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
    • F65 - International Economics - - Economic Impacts of Globalization - - - Finance
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:iez:survey:ces-v26_1-2024_ercegovac-klinac-pecaric. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Doris Banicevic (email available below). General contact details of provider: https://edirc.repec.org/data/eizgghr.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.