On the Cyclical Nature of Finance: The role and impact of financial institutions

Rotterdam School of Management, Erasmus University ERIM Electronic Series Portal: repub.eur.nl/

RSM PhD Series in Research in Management, # 1 ISBN 978-90-5892-557-2

© 2019, Patty Duijm

Design: Kris Kras, www.kriskras.nl

This publication (cover and interior) is printed by Tuijtel on recycled paper, BalanceSilk® The ink used is produced from renewable resources and alcohol free fountain solution.

Certifications for the paper and the printing production process: Recycle, EU Ecolabel, FSC®, ISO14001. More info: www.tuijtel.com

All rights reserved. No part of this publication may be reproduced or transmitted in any form or by any means electronic

or mechanical, including photocopying, recording, or by any information storage and retrieval system, without permission

lit σ(li) lit σ(li) lit≥ θσ(li) θ1 lit σ(li) lit≥ θσ(li) θ2

l_it

σ(l_i) l_it ≤ −θσ(l_i) θ

lit

FFC_i,tDirect) FFC_i,tIndirect 𝑆_𝐹𝐹𝐶_𝑖,𝑡 = 𝐹𝐹𝐶𝑖,𝑡 𝐷𝑖𝑟𝑒𝑐𝑡_{+ 𝐹𝐹𝐶} 𝑖,𝑡𝐼𝑛𝑑𝑖𝑟𝑒𝑐𝑡 𝐷𝐶_𝑖,𝑡 + 𝐹𝐹𝐶_𝑖,𝑡𝐷𝑖𝑟𝑒𝑐𝑡 (1)

whereas DC_i,t represents the domestic credit (excluding credit to governments), taken from the BIS credit statistics.

ℙ[γi,t= 1] = δt+ μi+ β1∆S_FFCi,t+ ∑ βj J j=3 Xi,t+ εi,t (2) δi,t ℙ[δi,t= 1] ∆S_FFCi,t

Xi,t

δt μi ∆ ∆ ∆ ∆

∆𝑆_𝐹𝐹𝐶𝑖,𝑡

∆𝑆_𝐹𝐹𝐶𝑖,𝑡

∆𝑆_𝐹𝐹𝐶𝑖,𝑡

ℙ[𝛿𝑖,𝑡= 1]

ℙ [𝛿𝑖, 𝑡− 1 ;𝑡 − 𝑐 = 1 ] ∆ 𝑆 _𝐹𝐹𝐶 𝑖, 𝑡 ∆ 𝑆 _𝐹𝐹𝐶 𝑖, 𝑡 ∆ 𝑆 _𝐹𝐹𝐶 𝑖, 𝑡 ∆ 𝑆 _𝐹𝐹𝐶 𝑖, 𝑡 ∆ 𝑆 _𝐹𝐹𝐶 𝑖, 𝑡

θ θ θ

θ θ θ

θ θ θ

∆ 𝑆 _𝐹𝐹𝐶 𝑖, 𝑡 ∆

∆𝑆_𝐹𝐹𝐶𝑖,𝑡

∆𝑆_𝐹𝐹𝐶𝑖,𝑡

∆𝑆_𝐹𝐹𝐶𝑖,𝑡

∆𝑆_𝐹𝐹𝐶𝑖,𝑡

5% 6% 5% 6% 18% 8% 9% 10% 7% 8% 12% 21% 9%

𝐿𝑛 (𝐿𝑜𝑎𝑛𝑠𝑏,𝑖,𝑗,𝑡 𝐴𝑠𝑠𝑒𝑡𝑠𝑏,𝑡 ) = 𝛼𝑏+ 𝛾𝑡+ 𝛿𝑗+ ∑ 𝛽𝑘 𝐾 𝑘=2 𝑋𝑖,𝑗,𝑡+ ∑ 𝛽𝑙 𝐿 𝑙=𝐾+1 𝑌𝑖,𝑗 + 𝛽𝑚𝐺𝑜𝑣𝑗,𝑡+ 𝛽𝑛𝐺𝐼𝐼𝑃𝑆𝐶𝑗+ + 𝜀𝑏,𝑖,𝑗,𝑡 (1) 𝐿𝑜𝑎𝑛𝑠𝑏,𝑖,𝑗,𝑡 𝐴𝑠𝑠𝑒𝑡𝑠𝑏,𝑡 𝛼𝑏 𝛾𝑡 𝛿𝑗 𝜀𝑏,𝑖,𝑗,𝑡 𝑋𝑖,𝑗,𝑡 𝐺𝐷𝑃𝑐𝑎𝑝𝑖𝑡𝑎| 𝑖−𝑗|,𝑡) 𝑢𝑛𝑒𝑚𝑝𝑙𝑜𝑦𝑚𝑒𝑛𝑡| 𝑖−𝑗|,𝑡) 𝐺𝐷𝑃𝑔𝑟𝑜𝑤𝑡ℎ_{| 𝑖−𝑗|,𝑡} ) 𝑙𝑛 𝑡𝑟𝑎𝑑𝑒𝑖,𝑗,𝑡

𝑌 𝑖,𝑗 𝑙𝑛 𝑑𝑖𝑠𝑡𝑎𝑛𝑐𝑒𝑖,𝑗), 𝑐𝑜𝑚𝑚𝑜𝑛 𝑏𝑜𝑟𝑑𝑒𝑟𝑖,𝑗) 𝑐𝑜𝑚𝑚𝑜𝑛 𝑐𝑢𝑟𝑟𝑒𝑛𝑐𝑦𝑖,𝑗) 𝑙𝑒𝑔𝑎𝑙 𝑜𝑟𝑖𝑔𝑖𝑛 𝑖,𝑗)

𝐺𝑜𝑣j,t

𝑥𝑏,𝑗,𝑡)

𝐻𝐻𝐼𝑏,𝑡

𝐻𝐻𝐼 ̅̅̅̅̅̅_𝑏,𝑡𝑤𝑖𝑡ℎ𝑖𝑛

(𝐻𝐻𝐼𝑏,𝑡𝑏𝑒𝑡𝑤𝑒𝑒𝑛 𝐻𝐻𝐼𝑏,𝑡𝑏𝑒𝑡𝑤𝑒𝑒𝑛

𝑋_𝑏,𝑡𝑑𝑖𝑠𝑠𝑖𝑚 𝑋_𝑏,𝑡𝑠𝑖𝑚 𝐻𝐻𝐼 ̅̅̅̅̅̅_𝑏,𝑡𝑤𝑖𝑡ℎ𝑖𝑛 𝐻𝐻𝐼̅̅̅̅̅̅_𝑏,𝑡𝑤𝑖𝑡ℎ𝑖𝑛= 1 𝐻𝐻𝐼_𝑏,𝑡𝑏𝑒𝑡𝑤𝑒𝑒𝑛 ∗ [∑ (𝑥𝑏,𝑚,𝑡 𝑑𝑖𝑠𝑠𝑖𝑚₎2 𝑀 𝑚=1 ∑𝑁𝑛=1(𝑥𝑏,𝑛,𝑡𝑠𝑖𝑚)2 𝑋𝑏,𝑡𝑑𝑖𝑠𝑠𝑖𝑚 𝑋𝑏,𝑡𝑠𝑖𝑚 𝑥𝑏,𝑚,𝑡𝑑𝑖𝑠𝑠𝑖𝑚 𝑥𝑏,𝑛,𝑡𝑠𝑖𝑚 𝑋_𝑏,𝑡𝑑𝑖𝑠𝑠𝑖𝑚= ∑𝑀𝑚=1(𝑥_{𝑏,𝑚,𝑡}𝑑𝑖𝑠𝑠𝑖𝑚) 𝑋𝑏,𝑡𝑠𝑖𝑚 = ∑𝑁𝑛=1(𝑥𝑏,𝑛,𝑡𝑠𝑖𝑚). 𝐻𝐻𝐼𝑏,𝑡 = 𝐻𝐻𝐼𝑏,𝑡𝑏𝑒𝑡𝑤𝑒𝑒𝑛∗ 𝐻𝐻𝐼̅̅̅̅̅̅𝑏,𝑡𝑤𝑖𝑡ℎ𝑖𝑛 (5) 𝐺𝐷𝑃𝑐𝑎𝑝𝑖𝑡𝑎| 𝑖−𝑗|,𝑡) 𝑢𝑛𝑒𝑚𝑝𝑙𝑜𝑦𝑚𝑒𝑛𝑡| 𝑖−𝑗|,𝑡) 𝐺𝐷𝑃𝑔𝑟𝑜𝑤𝑡ℎ| 𝑖−𝑗|

𝑟𝑏,𝑡 = 𝛼𝑏+ 𝛾𝑡+ 𝛽1∗ (1 − 𝐻𝐻𝐼𝑏,𝑡 ) + ∑ 𝛽𝑘 𝐾 𝑘=5 𝑋𝑏,𝑡−1 + 𝜀𝑏,𝑡 (6) r𝑏,t 𝑧 − 𝑠𝑐𝑜𝑟𝑒𝑏,𝑡= 𝐿𝑒𝑣𝑒𝑟𝑎𝑔𝑒 𝑟𝑎𝑡𝑖𝑜𝑏,𝑡+ 𝑅𝑂𝐴𝑏,𝑡 𝜎(𝑅𝑂𝐴𝑏,𝑡) (7)

𝐿𝑒𝑣𝑒𝑟𝑎𝑔𝑒 𝑟𝑎𝑡𝑖𝑜𝑏,𝑡) 𝑅𝑂𝐴𝑏,𝑡 𝜎(𝑅𝑂𝐴𝑏,𝑡) α𝑏 γt εb,t 𝐻𝐻𝐼𝑏,𝑡 𝑋𝑏,𝑡−1 𝑙𝑛 𝑇𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡𝑠𝑏,𝑡−1) 𝑐𝑜𝑠𝑡 − 𝑡𝑜 − 𝑖𝑛𝑐𝑜𝑚𝑒𝑏,𝑡−1)

( 𝑇𝑖𝑒𝑟 1 𝑙𝑒𝑣𝑒𝑟𝑎𝑔𝑒𝑏,𝑡−1) 𝑙𝑛 𝑃𝑟𝑜𝑏𝑙𝑒𝑚𝑟𝑎𝑡𝑖𝑜𝑏,𝑡−1). 𝑆ℎ𝑎𝑟𝑒 𝑛𝑜𝑛 − 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑖𝑛𝑐𝑜𝑚𝑒 (%)) 𝑅𝑂𝐴𝑏,𝑡−1 𝑟𝑏,𝑡 = 𝛼𝑏+ 𝛾𝑡+ 𝛽1∗ (1 − 𝐻𝐻𝐼𝑏,𝑡𝑏𝑒𝑡𝑤𝑒𝑒𝑛) + 𝛽2∗ (1 − 𝐻𝐻𝐼̅̅̅̅̅̅𝑏,𝑡𝑤𝑖𝑡ℎ𝑖𝑛) + ∑ 𝛽𝑙 𝐿 𝑙=5 𝑋𝑏,𝑡−1 + 𝜀𝑏,𝑡 (8)

𝐻𝐻𝐼𝑏,𝑡 𝐻𝐻𝐼̅̅̅̅̅̅_𝑏,𝑡𝑤𝑖𝑡ℎ𝑖𝑛 𝐻𝐻𝐼_𝑏,𝑡𝑏𝑒𝑡𝑤𝑒𝑒𝑛 𝐻𝐻𝐼𝑏,𝑡 𝐻𝐻𝐼𝑏,𝑡𝑏𝑒𝑡𝑤𝑒𝑒𝑛 𝐻𝐻𝐼̅̅̅̅̅̅𝑏,𝑡𝑤𝑖𝑡ℎ𝑖𝑛 𝐻𝐻𝐼𝑏,𝑡 𝐻𝐻𝐼𝑏,𝑡 𝐻𝐻𝐼_𝑏,𝑡𝑏𝑒𝑡𝑤𝑒𝑒𝑛 𝐻𝐻𝐼̅̅̅̅̅̅_𝑏,𝑡𝑤𝑖𝑡ℎ𝑖𝑛

𝐻𝐻𝐼𝑏,𝑡

𝐻𝐻𝐼̅̅̅̅̅̅_𝑏,𝑡𝑤𝑖𝑡ℎ𝑖𝑛 𝐻𝐻𝐼̅̅̅̅̅̅_𝑏,𝑡𝑤𝑖𝑡ℎ𝑖𝑛

σ

𝐿𝐶𝑅 = 𝐻𝑖𝑔ℎ 𝑄𝑢𝑎𝑙𝑖𝑡𝑦 𝐿𝑖𝑞𝑢𝑖𝑑 𝐴𝑠𝑠𝑒𝑡𝑠

𝐶𝑎𝑠ℎ 𝑜𝑢𝑡𝑓𝑙𝑜𝑤𝑠 − 𝐶𝑎𝑠ℎ 𝑖𝑛𝑓𝑙𝑜𝑤𝑠 (1)

𝐷𝐿𝐶𝑅𝑖,𝑡= 𝐴𝐿𝑖,𝑡 𝑅𝐿𝑖,𝑡 = ∑ 𝑎𝑗 𝑗 ∙ 𝐴𝑠𝑠𝑒𝑡𝑖,𝑗,𝑡+ ∑ 𝑏𝑘 𝑘 ∙ 𝐼𝑛𝑓𝑙𝑜𝑤𝑖,𝑘,𝑡 ∑ 𝑐𝑙 _𝑙 ∙ 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑦𝑖,𝑙,𝑡+ ∑ 𝑑𝑚 𝑚 ∙ 𝑂𝑢𝑡𝑓𝑙𝑜𝑤𝑖,𝑚,𝑡 (2) 𝐴𝐿𝑖,𝑡 𝑅𝐿𝑖,𝑡 𝑎𝑗𝑏𝑘 𝑐𝑙, 𝑑𝑚

→ ∑ 𝑏𝑘 𝑘 ∙ 𝐼𝑛𝑓𝑙𝑜𝑤𝑖,𝑘,𝑡 ∑ 𝑎𝑗 𝑗 ∙ 𝐴𝑠𝑠𝑒𝑡𝑖,𝑗,𝑡 ∑ 𝑐𝑙 𝑙 ∙ 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑦𝑖,𝑙,𝑡 → ∑ 𝑑𝑚 𝑚 ∙ 𝑂𝑢𝑡𝑓𝑙𝑜𝑤𝑖,𝑚,𝑡

𝐴𝐿𝑖,𝑡 = 𝛼𝑖𝐴𝐿+ 𝛽̂_{𝑖,𝐹𝑀𝑂𝐿𝑆} 𝐴𝐿 𝑅𝐿𝑖,𝑡+ 𝜀𝑖,𝑡 (3) 𝛼𝑖𝐴𝐿 𝛽̂𝑖,𝐹𝑀𝑂𝐿𝑆 𝐴𝐿 ∆𝐴𝐿𝑖,𝑡 = 𝛼𝑖𝐴𝐿+ 𝜌𝐴𝐿𝐸𝐶𝑇𝑖,𝑡−1𝐴𝐿 + 𝛾𝑖∆𝑅𝐿𝑖,𝑡−1+ 𝑢𝑖,𝑡𝐴𝐿 (4) 𝛼_𝑖𝐴𝐿 ∆𝐴𝐿𝑖,𝑡 𝜌𝐴𝐿 ∆𝑅𝐿𝑖,𝑡−1 𝑢𝑖,𝑡𝐴𝐿 𝑅𝐿𝑖,𝑡 = 𝛼𝑖𝑅𝐿+ 𝛽̂𝑖,𝐹𝑀𝑂𝐿𝑆𝑅𝐿 𝐴𝐿𝑖,𝑡+ 𝜀𝑖,𝑡 (5) ∆𝑅𝐿_𝑖,𝑡 = 𝛼_𝑖𝑅𝐿 + 𝜌𝑅𝐿_𝐸𝐶𝑇 𝑖,𝑡−1𝑅𝐿 + 𝛾𝑖∆𝐴𝐿𝑖,𝑡−1+ 𝑢𝑖,𝑡𝑅𝐿 (6)

Δ 𝝆𝑨𝑳 _{Δ 𝝆}𝑹𝑳 Δ 𝝆𝐛𝐞𝐥𝐨𝐰𝑨𝑳 Δ 𝝆𝐛𝐞𝐥𝐨𝐰𝑹𝑳 Δ 𝝆𝐚𝐛𝐨𝐯𝐞𝑨𝑳 Δ 𝝆𝐚𝐛𝐨𝐯𝐞𝑹𝑳 𝐼 _𝑖,𝑡𝐴𝐿= {1 𝑖𝑓 𝐸𝐶𝑇𝑖,𝑡−1 𝐴𝐿 _{< 0} 0 𝑖𝑓 𝐸𝐶𝑇𝑖,𝑡−1𝐴𝐿 ≥ 0 𝐼 _𝑖,𝑡𝑅𝐿 = {1 𝑖𝑓 𝐸𝐶𝑇𝑖,𝑡−1 𝑅𝐿 _{≥ 0} 0 𝑖𝑓 𝐸𝐶𝑇𝑖,𝑡−1𝑅𝐿 < 0 (6)

∆𝐴𝐿𝑖,𝑡= 𝛼𝑖𝐴𝐿+ 𝐼𝑖,𝑡𝐴𝐿𝜌 𝑏𝑒𝑙𝑜𝑤𝐴𝐿 𝐸𝐶𝑇𝑖,𝑡−1𝐴𝐿 + (1 − 𝐼𝑖,𝑡𝐴𝐿)𝜌 𝑎𝑏𝑜𝑣𝑒𝐴𝐿 𝐸𝐶𝑇𝑖,𝑡−1𝐴𝐿 + ∑ 𝛾𝑖,𝑗∆𝑅𝐿𝑖,𝑡−𝑗 𝐿 𝑗 + 𝑣𝑖,𝑡𝐴𝐿 (7) ∆𝑅𝐿𝑖,𝑡 = 𝛼𝑖𝑅𝐿+ 𝐼𝑖,𝑡𝑅𝐿𝜌 𝑏𝑒𝑙𝑜𝑤𝑅𝐿 𝐸𝐶𝑇𝑖,𝑡−1𝑅𝐿 + (1 − 𝐼𝑖,𝑡𝑅𝐿)𝜌𝑎𝑏𝑜𝑣𝑒𝑅𝐿 𝐸𝐶𝑇𝑖,𝑡−1𝑅𝐿 + ∑ 𝛾𝑖,𝑗∆𝐴𝐿𝑖,𝑡−𝑗+ 𝐿 𝑗 𝑣𝑖,𝑡𝑅𝐿 (8) 𝜌 𝑏𝑒𝑙𝑜𝑤𝐴𝐿 𝜌 𝑎𝑏𝑜𝑣𝑒𝐴𝐿 𝜌 𝑏𝑒𝑙𝑜𝑤 𝑅𝐿 (𝜌𝑎𝑏𝑜𝑣𝑒𝑅𝐿

Δ 𝝆𝑨𝑳 _{Δ 𝝆}𝑹𝑳

Δ 𝝆𝐛𝐞𝐥𝐨𝐰𝑨𝑳 Δ 𝝆𝐛𝐞𝐥𝐨𝐰𝑹𝑳

Δ 𝝆𝐚𝐛𝐨𝐯𝐞𝑨𝑳 Δ 𝝆𝐚𝐛𝐨𝐯𝐞𝑹𝑳

𝑇_𝑖,𝑡𝐸 𝐴_{𝑖,𝑡−1}𝐸 − 𝑇_𝑖,𝑡𝐹𝐼 𝐴_{𝑖,𝑡−1}𝐹𝐼 = 𝛼𝑖+ 𝛽1∗ (𝑟𝑖,𝑡−1 𝐸 _{− 𝑟} 𝑖,𝑡−1𝐹𝐼 ) + 𝛽2∗ ( 𝑇_{𝑖,𝑡−1}𝐸 𝐴_{𝑖,𝑡−2}𝐸 − 𝑇_{𝑖,𝑡−1}𝐹𝐼 𝐴_{𝑖,𝑡−2}𝐹𝐼 ) + ∑𝐾𝑘=3𝛽𝑘𝑋𝑖,𝑡−1+ 𝜀𝑖,𝑡 (1) 𝑇_𝑖,𝑡𝐸 𝐴_{𝑖,𝑡−1}𝐸 − 𝑇_𝑖,𝑡𝐹𝐼 𝐴_{𝑖,𝑡−1}𝐹𝐼 𝑇_{𝑖,𝑡−1}𝐸 𝐴_{𝑖,𝑡−2}𝐸 − 𝑇_{𝑖,𝑡−1}𝐹𝐼 𝐴_{𝑖,𝑡−2}𝐹𝐼

𝛼𝑖

𝑟𝑖,𝑡−1𝐸 − 𝑟𝑖,𝑡−1𝐹𝐼

𝑇_𝑖,𝑡𝐸 𝐴_{𝑖,𝑡−1}𝐸 − 𝑇_𝑖,𝑡𝐹𝐼 𝐴_{𝑖,𝑡−1}𝐹𝐼 = 𝛼𝑖+ 𝛽1∗ (𝑟𝑖,𝑡−1 𝐸 _{− 𝑟} 𝑖,𝑡−1𝐹𝐼 ) ∗ 𝐷𝑡𝐷+ 𝛽2∗ (𝑟𝑖,𝑡−1𝐸 − 𝑟𝑖,𝑡−1𝐹𝐼 ) ∗ 𝐷𝑡𝑈 + 𝛽3∗ ( 𝑇_{𝑖,𝑡−1}𝐸 𝐴_{𝑖,𝑡−2}𝐸 − 𝑇_{𝑖,𝑡−1}𝐹𝐼 𝐴_{𝑖,𝑡−2}𝐹𝐼 ) + ∑ 𝛽𝑘 𝐾 𝑘=4 𝑋𝑖,𝑡−1+ 𝜀𝑖,𝑡 (2)