The Impact of COVID-19 on the European Commercial Banking Sector: A Cross-country Empirical Analysis
Abstract: This paper investigates the impact of COVID-19 on the European commercial banking sector. Using panel data, we study the effect of the severity of the pandemic on bank lending, customer depositing behavior, and the provisioning for credit losses. First, our findings indicate a significant decrease in lending activity with higher exposure to COVID-19, which leads us to call the role of banks as lenders of first resort during times of crisis into question. Second, we find weak empirical evidence for the safe haven theory, a behavioral observation with depositors, that more funds from customer deposits become available during times of economic uncertainty. In theory, this increased deposit inflow from delayed consumption decisions should finance the origination of new loans. In opposition to prior literature, we do not find statistical evidence for this natural hedge in a European setting. Third, we observe a significantly positive relationship between pandemic impact and loan loss provisions indicating that banks on average perceived an increase in their credit risk during 2020.
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