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on Banking |
| By: | Rafael Repullo (CEMFI, Centro de Estudios Monetarios y Financieros); Javier Suarez (CEMFI, Centro de Estudios Monetarios y Financieros) |
| Abstract: | We develop and calibrate a dynamic equilibrium model of relationship lending in which banks are unable to access the equity markets every period and the business cycle is a Markov process that determines loans’ probabilities of default. Banks anticipate that shocks to their earnings and the possible variation of capital requirements over the cycle can impair their future lending capacity and, as a precaution, hold capital buffers. We compare the relative performance of several capital regulation regimes, including one that maximizes a measure of social welfare. We show that Basel II is significantly more procyclical than Basel I, but makes banks safer. For this reason, it dominates Basel I in terms of welfare except for small social costs of bank failure. We also show that for high values of this cost, Basel III points in the right direction, with higher but less cyclically-varying capital requirements. |
| Keywords: | Banking regulation, Basel capital requirements, Capital market frictions, Credit rationing, Loan defaults, Relationship banking, Social cost of bank failure. |
| JEL: | G21 G28 E44 |
| Date: | 2012–02 |
| URL: | http://d.repec.org/n?u=RePEc:cmf:wpaper:wp2012_1202&r=ban |
| By: | Gabriel Jiménez; Steven Ongena; José-Luis Peydró; Jesús Saurina |
| Abstract: | We analyze the impact of the countercyclical capital buffers held by banks on the supply of credit to firms and their subsequent performance. Countercyclical "dynamic" provisioning that is unrelated to specific loan losses was introduced in Spain in 2000, and modified in 2005 and 2008. These policy experiments which entailed bank-specific shocks to capital buffers, combined with the financial crisis that shocked banks according to their available pre-crisis buffers, underpin our identification strategy. Our estimates from comprehensive bank-, firm-, loan-, and loan application-level data suggest that countercyclical capital buffers help smooth credit supply cycles and in bad times have positive effects on firm credit availability, assets, employment and survival. Our findings therefore hold important implications for theory and macroprudential policy. |
| Keywords: | bank capital, dynamic provisioning, credit availability, financial crisis. |
| JEL: | E51 E58 E60 G21 G28 |
| Date: | 2012–05 |
| URL: | http://d.repec.org/n?u=RePEc:upf:upfgen:1315&r=ban |
| By: | Mircea Epure; Esteban Lafuente |
| Abstract: | This paper devises management and accounting tools for monitoring bank performance. We first propose a multidimensional efficiency measure that integrates credit risk and is adapted to the real banking technology. Second, traditional accounting ratios complement the analysis. Third, the impact of different risk measures over efficiency and accounting ratios is shown. Fourth, we examine the effect of CEO turnover on future performance. An empirical application considers a unique dataset of Costa Rican banks during 1998-2007. Results reveal that performance improvements follow regulatory changes and that risk explains differences in performance. Non-performing loans negatively affect efficiency and return on assets, whereas the capital adequacy ratio positively affects the net interest margin. This supports that incurring monitoring costs and having higher levels of capitalisation may enhance performance. Finally, results confirm that appointing CEOs from outside the bank significantly improves performance, thus suggesting the potential benefits of new organisational practices. |
| Keywords: | efficiency; accounting; performance; risk; CEO turnover. |
| JEL: | G21 G28 G3 M1 M2 |
| Date: | 2012–03 |
| URL: | http://d.repec.org/n?u=RePEc:upf:upfgen:1310&r=ban |
| By: | Rafael Repullo (CEMFI, Centro de Estudios Monetarios y Financieros) |
| Abstract: | We present a simple model of an economy with heterogeneous banks that may be funded with uninsured deposits and equity capital. Capital serves to ameliorate a moral hazard problem in the choice of risk. There is a fixed aggregate supply of bank capital, so the cost of capital is endogenous. A regulator sets risk-sensitive capital requirements in order to maximize a social welfare function that incorporates a social cost of bank failure. We consider the effect of a negative shock to the supply of bank capital and show that optimal capital requirements should be lowered. Failure to do so would keep banks safer but produce a large reduction in aggregate investment. The result provides a rationale for the cyclical adjustment of risk-sensitive capital requirements. |
| Keywords: | Banking regulation, Basel II, capital requirements, procyclicality. |
| JEL: | G21 G28 E44 |
| Date: | 2012–05 |
| URL: | http://d.repec.org/n?u=RePEc:cmf:wpaper:wp2012_1205&r=ban |
| By: | Tatiana Damjanovic; Vladislav Damjanovic; Charles Nolan |
| Abstract: | A stylized macroeconomic model is developed with an indebted, heterogeneous Investment Banking Sector funded by borrowing from a retail banking sector. The government guarantees retail deposits. Investment banks choose how risky their activities should be. We compared the benefits of separated vs. universal banking modelled as a vertical integration of the retail and investment banks. The incidence of banking default is considered under different constellations of shocks and degrees of competitiveness. The benefits of universal banking rise in the volatility of idiosyncratic shocks to trading strategies and are positive even for very bad common shocks, even though government bailouts, which are costly, are larger compared to the case of separated banking entities. The welfare assessment of the structure of banks may depend crucially on the kinds of shock hitting the economy as well as on the efficiency of government intervention. |
| Keywords: | Risk in DSGE models, investment banking, financial intermediation, separating commercial and investment banking, competition and risk, moral hazard in banking, prudential regulation, systematic vs. idiosyncratic risks. |
| JEL: | E13 E44 G11 G24 G28 |
| Date: | 2012–01–17 |
| URL: | http://d.repec.org/n?u=RePEc:san:cdmawp:1205&r=ban |
| By: | Benos, Evangelos (Bank of England); Garratt, Rodney (University of California at Santa Barbara); zimmerman, Peter (Bank of England) |
| Abstract: | We use payments data for the period 2006-09 to study the impact of the global financial crisis on payment patterns in CHAPS, the United Kingdom’s large-value wholesale payments system. CHAPS functioned smoothly throughout the crisis and all CHAPS settlement banks continued to meet their payment obligations. However, the data show that in the two months following the Lehman Brothers failure, banks did, on average, make payments at a slower pace than before the failure. Our analysis suggests this was partly explained by concerns about counterparty default risk as well as system-wide risk. The ratio of payments made to liquidity used was 30% lower in the period from 15 September 2008 to 30 September 2009 than in the period preceding the default of Lehman Brothers. This was due initially to payment delay, but later was due to banks making more payments with their own liquidity, probably because quantitative easing increased the amount of reserves in the system. To assess the economic significance of the observed delays in the value of payments settled, we develop risk indicators, based on Markov models, to quantify the theoretical liquidity impact of delays during an operational outage. We find that payment delays in the months following the failure of Lehman Brothers led to a statistically significant but economically modest increase in these risk measures. |
| Keywords: | Payments; Intraday liquidity; Credit default swap; Operational outage; Insurance |
| JEL: | E42 |
| Date: | 2012–06–21 |
| URL: | http://d.repec.org/n?u=RePEc:boe:boeewp:0451&r=ban |
| By: | Carmassi, Jacopo; Micossi, Stefano |
| Abstract: | Excessive leverage and risk-taking by large international banks were the main causes of the 2008-09 financial crisis and the ensuing sharp drop in economic activity and employment. World leaders and central bankers promised that it would not happen again and, to this end, undertook to overhaul banking regulation, first and foremost by rectifying Basel prudential rules. This study argues that the new Basel III Accord and the ensuing EU Capital Requirements Directive IV fail to correct the two main shortcomings of international prudential rules: 1) reliance on banks’ risk management models for the calculation of capital requirements and 2) the lack of accountability by supervisors. Accordingly, the authors propose the calculation of capital requirements without risk adjustment and creation of a system of mandated action by supervisors modelled on the US framework of Prompt Corrective Action (PCA). They also recommend that banks should be required to issue large amounts of debentures that are convertible into equity in order to strengthen market discipline on management and shareholders. |
| Date: | 2012–03 |
| URL: | http://d.repec.org/n?u=RePEc:eps:cepswp:6734&r=ban |
| By: | Alessandri, Piergiorgio (Bank of England); Nelson, Benjamin (Bank of England) |
| Abstract: | How does bank profitability vary with interest rates? We present a model of a monopolistically competitive bank subject to repricing frictions, and test the model’s predictions using a unique panel data set on UK banks. We find evidence that large banks retain a residual exposure to interest rates, even after accounting for hedging activity operating through the trading book. In the long run, both level and slope of the yield curve contribute positively to profitability. In the short run, however, increases in market rates compress interest margins, consistent with the presence of non negligible loan pricing frictions. |
| JEL: | E40 G21 |
| Date: | 2012–06–21 |
| URL: | http://d.repec.org/n?u=RePEc:boe:boeewp:0452&r=ban |
| By: | Mimir, Yasin; Sunel, Enes; Taskin, Temel |
| Abstract: | This paper conducts a quantitative investigation of the role of reserve requirements as a macroprudential policy tool. We build a monetary DSGE model with a banking sector in which (i) an agency problem between households and banks leads to endogenous capital constraints for banks in obtaining funds from households, (ii) banks are subject to time-varying reserve requirements that countercyclically respond to expected credit growth, (iii) households face cash-in-advance constraints, requiring them to hold real balances, and (iv) standard productivity and money growth shocks are two sources of aggregate uncertainty. We calibrate the model to the Turkish economy which is representative of using reserve requirements as a macroprudential policy tool recently. We also consider the impact of financial shocks that affect the net worth of financial intermediaries. We find that (i) the time-varying required reserve ratio rule countervails the negative effects of the financial accelerator mechanism triggered by adverse macroeconomic and financial shocks, (ii) in response to TFP and money growth shocks, countercyclical reserves policy reduces the volatilities of key real macroeconomic and financial variables compared to fixed reserves policy over the business cycle, and (iii) a time-varying reserve requirement policy is welfare superior to a fixed reserve requirement policy. The credit policy is most effective when the economy is hit by a financial shock. Time-varying required reserves policy reduces the intertemporal distortions created by the credit spreads at expense of generating higher inflation volatility, indicating an interesting trade-off between price stability and financial stability. |
| Keywords: | Banking sector; time-varying reserve requirements; macroeconomic and financial shocks |
| JEL: | E51 E44 G28 G21 |
| Date: | 2012–06–22 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:39613&r=ban |
| By: | FOUNANOU, Mathurin/M; RATSIMALAHELO, Zaka/Z |
| Abstract: | We study the optimal regulation of a cooperative credit society which has private information on the intrinsic quality of its loan portfolio (adverse selection) and where the cooperative’s choice of effort to improve this quality cannot be observed by the regulator (moral hazard). We characterize the optimal contracts offered by the regulator to the credit cooperatives. We have been able to show that the optimal contracts depend on 3 main factors namely: on the accuracy of the supervisor’s signal, the likelihood of facing a high quality credit cooperative, and the cost of supervision. |
| Keywords: | Microfinance; Informational asymmetry; optimal incentive contract; regulation; supervision |
| JEL: | G28 G10 G21 |
| Date: | 2012–03 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:39581&r=ban |
| By: | Detzer, Daniel |
| Abstract: | This paper analyzes two instruments - asset-based reserve requirements put forward by Thomas Palley and asset-based capital requirements proposed by Charles Goodhart and Avinash Persaud - regarding their merits in reducing excessive asset price inflation. A theoretical framework of asset pricing based on the ideas of Keynes and Minsky is developed, within which the working of the instruments is demonstrated and analyzed. It is shown that in theory both instruments are able to reduce excessive asset price inflation by reducing the amount of credit money and investment flowing from financial institutions into a booming sector. It is found that asset-based reserve requirements will only work through a predictable price effect, while the effect of asset-based capital requirements is hard to predict and may even become a quantitative supply constraint. Hence, it is concluded that due to the higher predictability of asset-based reserve requirements those are more suitable for the task of tackling asset price bubbles. -- |
| Keywords: | Monetary Policy,Banking Regulation,Asset Prices,Bubbles,Minsky,Financial Instability Hypothesis,Asset Based Reserve Requirements,Capital Requirements,Macroprudential Regulation |
| JEL: | E12 E52 G12 G18 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:ipewps:132012&r=ban |
| By: | Yunus Aksoy (University of London); Henrique S. Basso (University of Warwick) |
| Abstract: | We propose a model that delivers endogenous variations in term spreads driven primarily by banks’ portfolio decision and their appetite to bear the risk of maturity transformation. We first show that fluctuations of the future profitability of banks’ portfolios affect their ability to cover for any liquidity shortage and hence influence the premium they require to carry maturity risk. During a boom, profitability is increasing and thus spreads are low, while during a recession profitability is decreasing and spreads are high, in accordance with the cyclical properties of term spreads in the data. Second, we use the model to look at monetary policy and show that allowing banks to sell long-term assets to the central bank after a liquidity shock leads to a sharp decrease in long-term rates and term spreads. Such interventions have significant impact on long-term investment, decreasing the amplitude of output responses after a liquidity shock. The short-term rate does not need to be decreased as much and inflation turns out to be much higher than if no QE interventions were implemented. Finally, we provide macro and micro-econometric evidence for the U.S. confirming the importance of expected financial business profitability in the determination of term spread fluctuations |
| Keywords: | Yield Curve, Quantitative Easing, Maturity Risk, Bank Portfolio |
| JEL: | E43 E44 E52 G20 |
| Date: | 2012–06 |
| URL: | http://d.repec.org/n?u=RePEc:bde:wpaper:1223&r=ban |
| By: | Michelle Everson |
| Abstract: | The collapse of Lehman Brothers in 2008 ushered in a financial crisis whose ramifications are still being felt. Within the EU, collapse not only led to a change in regulatory rhetoric, emphasising the need to secure the stability of EU money markets, but also to a significant widening and deepening of technocratic supervisory structures for European financial services. This paper accordingly investigates the newly established European System for Financial Supervision and, in particular, semi-autonomous EU agencies for banking, insurance and securities, for its ability to provide robust regulation and supervision within Europe. However, it analyses this increase in technocratic governance at supranational level in light of the worrying question of whether it has undermined capacity for political action within Europe. At a time when readily-apparent failings in established technocratic governance in Europe (monetary union) have led only to more technocratisation (proposed fiscal union), perhaps to the point of systemic collapse, the general European trend to expert-led and evidence-based supervision must be doubted; not simply because it has failed on its own terms, but also because it has established a technology of expertise, or dominant rationality, which further encourages abdication of political responsibility for economic crisis. |
| Date: | 2012–06 |
| URL: | http://d.repec.org/n?u=RePEc:eiq:eileqs:49&r=ban |
| By: | Gros, Daniel; Mayer, Thomas |
| Abstract: | Europe’s policy-makers are engaged in protracted discussion on whether and how to increase the size of the euro rescue funds (the EFSF and the ESM). In this Policy Brief, Daniel Gros and Thomas Mayer argue that this attention on the headline size of the EMS and EFSF is misplaced. They propose that a simpler solution would be to register the ESM as a bank, with access to the ECB under the same conditions as apply to any normal bank. This would provide a liquidity backstop for the EMS which could refinance any secondary market interventions at the ECB. The size of the guarantees given to the ESM would then become secondary. |
| Date: | 2012–03 |
| URL: | http://d.repec.org/n?u=RePEc:eps:cepswp:6787&r=ban |
| By: | Hajime Tomura |
| Abstract: | This paper presents a model of an over-the-counter bond market in which bond dealers and cash investors arrange repurchase agreements (repos) endogenously. If cash investors buy bonds to store their cash, then they suffer an endogenous bond-liquidation cost because they must sell their bonds before the scheduled times of their cash payments. This cost provides incentive for both dealers and cash investors to arrange repos with endogenous margins. As part of multiple equilibria, the bond-liquidation cost also gives rise to another equilibrium in which cash investors stop transacting with dealers all at once. Credit market interventions block this equilibrium. |
| Keywords: | Financial markets; Financial stability; Payment; clearing; and settlement systems |
| JEL: | G24 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:12-17&r=ban |