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Is small beautiful? The resilience of small banks during the European debt crisis

Liu, C. and Varotto, S. ORCID: https://orcid.org/0000-0001-5328-5327 (2021) Is small beautiful? The resilience of small banks during the European debt crisis. International Review of Financial Analysis. 101793. ISSN 1057-5219

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To link to this item DOI: 10.1016/j.irfa.2021.101793

Abstract/Summary

We examine the lending behaviour of small and large banks in the Eurozone during the sovereign debt crisis. Relative to large banks, small banks are less pro-cyclical in that they exhibit more stable lending growth across credit expansion and contraction periods. In peripheral countries, the portfolio rebalancing of small banks towards higher public debt (substitution effect) does not appear to cause a reduction of their lending to the private sector. Instead, the level of public debt seems to provide a liquidity buffer that influences bank-specific loan growth positively (complementarity effect), particularly during market-wide lending contractions. Our findings show that for small peripheral banks the substitution effect found in the literature can coexist with a complementarity effect when public debt grows faster than private loans. Our analysis contributes to the ongoing debate on the regulatory treatment of public debt in banks and supports incentives embedded in new banking regulation that penalise bank size.

Item Type:Article
Refereed:Yes
Divisions:Henley Business School > ICMA Centre
ID Code:97852
Publisher:Elsevier

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