Work detail

The Modern Money Creation Process: The Case of Collateral Crunch

Author: Mgr. Šárka Kroulíková
Year: 2014 - summer
Leaders: prof. PhDr. Petr Teplý Ph.D.
Work type: Finance, Financial Markets and Banking
Language: English
Pages: 104
Awards and prizes: M.A. with distinction from the Dean of the Faculty of Social Sciences for an excellent state-final examination performance.
Abstract: The aim of this thesis is to investigate the role of the wholesale funding in the
modern credit intermediation process and to estimate the possible impact of pro-
posed regulation of the wholesale funding on lending activity of a bank or its risk
profile. Throughout the analysis we used data set of 132-1167 banks from the
European Union (number of banks depends on the hypotheses tested) during the
period 2006-2012. We found that the banks that are more exposed to the whole-
sale funding are able to increase their lending relatively more in comparison to
the less exposed banks; this advantage is wiped out during the times of liquidity
or collateral crunch. Results of defined simultaneous equation model suggest that
stricter eligibility criteria, higher margins and introduction of 100% threshold for
the Net Stable Funding Ratio will signi cantly decrease the wholesale funding ra-
tio and thus limit the supply of loans. We consider those results alarming since the
majority of European enterprises is financed by the financial intermediaries, not
on the capital market and therefore additional limitation of the wholesale funding
activities could negatively in uence the overall economic activity within the Euro-
pean Union. We discovered that the commercial banks tent to transfer the costs of
the wholesale funding which are usually higher than the costs of deposits to their
customers through the loan rate; the opposite is true for the cooperative banks.
Additionally, we showed that higher share of the wholesale funding increases the
default risk of a bank measured by adjusted z-score. This positive correlation sup-
ports the regulatory efforts to decrease/limit the wholesale activities in order to
reduce the systemic risk inherent within the financial system.


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