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on Banking |
| By: | Yener Altunbas (Bangor Business School); Leonardo Gambacorta (Bank for International Settlements); David Marques-Ibanez (European Central Bank) |
| Abstract: | We investigate the effect of relatively loose monetary policy on bank risk through a large panel including quarterly information from listed banks operating in the European Union and the United States. We find evidence that relatively low levels of interest rates over an extended period of time contributed to an increase in bank risk. This result holds for a wide range of measures of risk, as well as macroeconomic and institutional controls including the intensity of supervision, securitization activity and bank competition. The results also hold when changes in realized bank risk due to the crisis are accounted for. The results suggest that monetary policy is not neutral from a financial stability perspective. |
| Keywords: | bank risk, monetary policy, credit crisis. |
| JEL: | E44 E52 G21 |
| Date: | 2012–01 |
| URL: | http://d.repec.org/n?u=RePEc:bng:wpaper:12002&r=ban |
| By: | Itai Agur (IMF (Singapore Regional Training Institute), 10 Shenton Way, MAS Building #14-03, Singapore 079117); Maria Demertzis (De Nederlandsche Bank, PO Box 98, 1000 AB Amsterdam, The Netherlands) |
| Abstract: | Why should monetary policy "lean against the wind"? Can’t bank regulation perform its task alone? We model banks that choose both asset volatility and leverage, and identify how monetary policy transmits to bank risk. Subsequently, we introduce a regulator whose tool is a risk-based capital requirement. We derive from welfare that the regulator trades off bank risk and credit supply, and show that monetary policy affects both sides of this trade-off. Hence, regulation cannot neutralize the policy rate’s impact, and monetary policy matters for financial stability. An extension shows how the commonality of bank exposures affects monetary transmission. JEL Classification: E43, E52, E61, G01, G21, G28 |
| Keywords: | Macroprudential, leverage, supervision, monetary transmission |
| Date: | 2012–08 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20121457&r=ban |
| By: | Basab Dasgupta; Christian Zimmermann |
| Abstract: | We study the impact of loan regulation in rural India on child labor with an overlapping-generations model of formal and informal lending, human capital accumulation, adverse selection, and differentiated risk types. Specifically, we build a model economy that replicates the current outcome with a loan rate cap and no lender discrimination by risk using a survey of rural lenders. Households borrow primarily from informal moneylenders and use child labor. Removing the rate cap and allowing lender discrimination markedly increases capital use, eliminates child labor, and improves welfare of all household types. |
| Keywords: | Loans ; Child labor ; India |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2012-027&r=ban |
| By: | P-R. Agénor; G.J. Bratsiotis; D. Pfajfar |
| Abstract: | This paper examines the behaviour of the finance premium following technology and monetary shocks in a Dynamic Stochastic General Equilibrium (DSGE) model where borrowers use a fraction of their production (output) as collateral. We show that this simple framework is capable of producing a countercyclical finance premium, while matching the macro dynamics of well-documented stylized facts. A key feature is the endogenous derivation of the default probability from break even conditions, that results in the loan rate being set as a countercyclical finance premium over the cost of borrowing from the central bank. The latter is shown to provide an accelerator effect through which shocks can amplify the loan spread and the dynamic response of macro variables. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:man:cgbcrp:172&r=ban |
| By: | Hui Chen; Yu Xu; Jun Yang |
| Abstract: | We build a dynamic capital structure model to study the link between firms' systematic risk exposures and their time-varying debt maturity choices, as well as its implications for the term structure of credit spreads. Compared to short-term debt, long-term debt helps reduce rollover risks, but its illiquidity raises the costs of financing. With both default risk and liquidity costs changing over the business cycle, our calibrated model implies that debt maturity is pro-cyclical, firms with high systematic risk favor longer debt maturity, and that these firms will have more stable maturity structures over the cycle. Moreover, pro-cyclical maturity variation can significantly amplify the impact of aggregate shocks on the term structure of credit spreads, especially for firms with high beta, high leverage, or a lumpy maturity structure. We provide empirical evidence for the model predictions on both debt maturity and credit spreads. |
| JEL: | E32 G32 G33 |
| Date: | 2012–09 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:18367&r=ban |
| By: | Luca Guerrieri; Michelle Welch |
| Abstract: | When stress tests for the banking sector use a macroeconomic scenario, an unstated premise is that macro variables should be useful factors in forecasting the performance of banks. We assess whether variables such as the ones included in stress tests for U.S. bank holding companies help improve out of sample forecasts of chargeoffs on loans, revenues, and capital measures, relative to forecasting models that exclude a role for macro factors. Using only public data on bank performance, we find the macro variables helpful, but not for all measures. Moreover, even our best-performing models imply bands of uncertainty around the forecasts so large as to make it challenging to distinguish the implications of alternative macro scenarios. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2012-49&r=ban |
| By: | Allen N. Berger (University of South Carolina); Thomas Kick (Deutsche Bundesbank); Klaus Schaeck (Bangor Business School) |
| Abstract: | Little is known about how socioeconomic characteristics of executive teams affect corporate governance in banking. Exploiting a unique dataset, we show how age, gender, and education composition of executive teams affect risk taking of financial institutions. First, we establish that age, gender, and education jointly affect the variability of bank performance. Second, we use difference-in-difference estimations that focus exclusively on mandatory executive retirements and find that younger executive teams increase risk taking, as do board changes that result in a higher proportion of female executives. In contrast, if board changes increase the representation of executives holding Ph.D. degrees, risk taking declines. |
| Keywords: | Banks, executives, risk taking, age, gender, education |
| JEL: | G21 G34 I21 J16 |
| Date: | 2012–02 |
| URL: | http://d.repec.org/n?u=RePEc:bng:wpaper:12004&r=ban |
| By: | Yener Altunbas (Bangor Business School); Simone Manganelli (European Central Bank); David Marques-Ibanez (European Central Bank) |
| Abstract: | We exploit the 2007-2009 financial crisis to analyze how risk relates to bank business models. Institutions with higher risk exposure had less capital, larger size, greater reliance on short-term market funding, and aggressive credit growth. Business models related to significantly reduced bank risk were characterized by a strong deposit base and greater income diversification. The effect of business models is non-linear: it has a different impact on riskier banks. Finally, it is difficult to establish in real time whether greater stock market capitalization involves real value creation or the accumulation of latent risk. |
| Keywords: | bank risk, business models, bank regulation, financial crisis, Basle III |
| JEL: | G21 G15 E58 G32 |
| Date: | 2012–02 |
| URL: | http://d.repec.org/n?u=RePEc:bng:wpaper:12003&r=ban |
| By: | Sören Radde |
| Abstract: | This paper argues that counter-cyclical liquidity hoarding by financial intermediaries may strongly amplify business cycles. It develops a dynamic stochastic general equilibrium model in which banks operate subject to financial frictions and idiosyncratic funding liquidity risk in their intermediation activity. Importantly, the amount of liquidity reserves held in the financial sector is determined endogenously: Balance sheet constraints force banks to trade off insurance against funding outflows with loan scale. The model shows that an aggregate shock to the collateral value of bank assets triggers a flight to liquidity, which amplifies the initial shock and induces credit crunch dynamics sharing key features with the Great Recession. The paper thus develops a new balance sheet channel of shock transmission that works through the composition of banks' asset portfolios rather than fluctuations in borrower net worth as in the financial accelerator literature. |
| Keywords: | real business cycles, financial frictions, liquidity hoarding, bank capital channel, credit crunch |
| JEL: | E22 E32 E44 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:diw:diwwpp:dp1242&r=ban |
| By: | Jongha Lim; Bernadette A. Minton; Michael Weisbach |
| Abstract: | The past decade has seen significant changes in the structure of the corporate lending market, with non-bank institutional investors playing larger roles than they historically have played. These non-bank institutional lenders typically have higher required rates of return than banks, but invest in the same loan facilities. We hypothesize that non-bank institutional lenders invest in loan facilities that would not otherwise be filled by banks, so that the arranger has to offer a higher spread to attract the non-bank institution. In a sample of 20,031 leveraged loan facilities originated between 1997 and 2007, we find that, loan facilities including a non-bank institution in their syndicates have higher spreads than otherwise identical bank-only facilities. Contrary to risk-based explanations of this finding, non-bank facilities are priced with premiums relative to bank-only facilities of the same loan package. These premiums for non-bank facilities are substantially larger when a hedge or private equity fund is one of the syndicate members. Consistent with the notion that firms are willing to pay spread premiums when loan facilities are particularly important to the firm, we find that firms spend the capital raised by loan facilities priced at a premium faster than other loan facilities, especially when the premium is associated with a non-bank institutional investor. |
| JEL: | G21 G23 G32 |
| Date: | 2012–09 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:18356&r=ban |
| By: | Enrico Onali (Bangor Business School) |
| Abstract: | The relation between dividends and bank soundness has recently drawn much attention from both academics and policy makers. However, the existing literature lacks an investigation of the relation between dividends and bank risk taking. I find a positive relation between default risk and payout ratios, although this relation is insignificant for very high levels of default risk. Capital requirements and the desire to preserve the charter can offset the positive relation between default risk and payout ratios. Dividends can increase despite very high default risk, and during the recent financial crisis many banks paid out dividends after recording a loss. |
| Keywords: | dividend, bank risk, moral hazard |
| JEL: | G21 G35 |
| Date: | 2012–01 |
| URL: | http://d.repec.org/n?u=RePEc:bng:wpaper:12001&r=ban |
| By: | Paolo Guarda (Banque centrale du Luxembourg, 2, boulevard Royal, 2983 Luxembourg, Luxembourg); Abdelaziz Rouabah (Banque centrale du Luxembourg, 2, boulevard Royal, 2983 Luxembourg, Luxembourg); John Theal (Banque centrale du Luxembourg, 2, boulevard Royal, 2983 Luxembourg, Luxembourg) |
| Abstract: | Severe financial turbulences are driven by high impact and low probability events that are the characteristic hallmarks of systemic financial stress. These unlikely adverse events arise from the extreme tail of a probability distribution and are therefore very poorly captured by traditional econometric models that rely on the assumption of normality. In order to address the problem of extreme tail events, we adopt a mixture vector autoregressive (MVAR) model framework that allows for a multi-modal distribution of the residuals. A comparison between the respective results of a VAR and MVAR approach suggests that the mixture of distributions allows for a better assessment of the effect that adverse shocks have on counterparty credit risk, the real economy and banks’ capital requirements. Consequently, we argue that the MVAR provides a more accurate assessment of risk since it captures the fat tail events often observed in time series of default probabilities. JEL Classification: C15, E44, G01, G21 |
| Keywords: | stress testing, MVAR, tier 1 capital ratio, counterparty risk, Luxembourg banking sector |
| Date: | 2012–08 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20121464&r=ban |
| By: | Sosa-Padilla, Cesar |
| Abstract: | Episodes of sovereign default feature three key empirical regularities in connection with the banking systems of the countries where they occur: (i) sovereign defaults and banking crises tend to happen together, (ii) commercial banks have substantial holdings of government debt, and (iii) sovereign defaults result in major contractions in bank credit and production. This paper provides a rationale for these phenomena by extending the traditional sovereign default framework to incorporate bankers that lend to both the government and the corporate sector. When these bankers are highly exposed to government debt a default triggers a banking crisis which leads to a corporate credit collapse and subsequently to an output decline. When calibrated to Argentina's 2001 default episode the model produces default on equilibrium with a frequency in line with actual default frequencies, and when it happens credit experiences a sharp contraction which generates an output drop similar in magnitude to the one observed in the data. Moreover, the model also matches several moments of the cyclical dynamics of macroeconomic aggregates. |
| Keywords: | Sovereign Default; Banking Crisis; Credit Crunch; Optimal Fiscal Policy; Markov Perfect Equilibrium; Endogenous Cost of Default; Domestic Debt |
| JEL: | E62 F34 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:41074&r=ban |
| By: | Robert M. Adams |
| Abstract: | This study investigates trends in consolidation and merger activity in the United States banking industry from 2000 through 2010. Over this period, the U.S. banking industry has consistently experienced over 150 mergers annually, with the largest banking organizations holding an increasing share of banking assets. While the industry has undergone considerable consolidation at the national level, local banking markets have not experienced significant increases in concentration. The dynamics of consolidation raise concerns about competition, output, efficiency, and financial stability. This study uses a comprehensive proprietary data set to examine mergers and acquisitions involving banks and thrifts. The methodology in this paper expands the definition of mergers to include more types of transactions than previous studies on bank mergers. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2012-51&r=ban |
| By: | Andreas Jobst |
| Abstract: | Little progress has been made so far in addressing—in a comprehensive way—the externalities caused by impact of the interconnectedness within institutions and markets on funding and market liquidity risk within financial systems. The Systemic Risk-adjusted Liquidity (SRL) model combines option pricing with market information and balance sheet data to generate a probabilistic measure of the frequency and severity of multiple entities experiencing a joint liquidity event. It links a firm’s maturity mismatch between assets and liabilities impacting the stability of its funding with those characteristics of other firms, subject to individual changes in risk profiles and common changes in market conditions. This approach can then be used (i) to quantify an individual institution’s time-varying contribution to system-wide liquidity shortfalls and (ii) to price liquidity risk within a macroprudential framework that, if used to motivate a capital charge or insurance premia, provides incentives for liquidity managers to internalize the systemic risk of their decisions. The model can also accommodate a stress testing approach for institution-specific and/or general funding shocks that generate estimates of systemic liquidity risk (and associated charges) under adverse scenarios. |
| Keywords: | Banking sector , Economic models , Liquidity , Risk management , United States , |
| Date: | 2012–08–24 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:12/209&r=ban |
| By: | Kim Abildgren (Danmarks Nationalbank, Havnegade 5, DK-1093 Copenhagen K, Denmark) |
| Abstract: | We examine the real effects of credit-supply shocks using a series of structural vector autoregressive models estimated on the basis on a new quarterly data set for Denmark spanning the past 90 years or so. We find no effects on the unemployment level from supplyshocks to credit from commercial/savings banks in the periods 1922-1949 and 1981-2011 even though these periods contained several cases of severe banking and financial crises. Furthermore, credit-supply shocks do not seem to explain any significant share of the volatility in the unemployment rate during these periods. We attribute these findings to the large market for mortgage-credit loans in Denmark raised through bond-financed mortgage banks combined with comprehensive government interventions to safeguard financial stability during times of crises. There might, however, be indications of real effects from credit-supply shocks in the period 1950-1980 where credit rationing and exchange controls served as important economic-policy instruments. Overall these results indicate that both the financialsystem structure as well as the extent of government intervention during banking crises play a key role to the significance of real effects of credit-supply shocks. These findings must be kept in mind when modelling the role of financial intermediaries in macroeconomic models. JEL Classification: |
| Keywords: | Credit-supply shocks, banking and financial crises, vector autoregressions, Danish economic history |
| Date: | 2012–08 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20121460&r=ban |
| By: | Siem Jan Koopman (VU University Amsterdam, Department of Econometrics, De Boelelaan 1105, 1081 HV Amsterdam, The Netherlands and Tinbergen Institute); André Lucas (VU University Amsterdam, Department of Finance, De Boelelaan 1105, 1081 HV Amsterdam, The Netherlands, Tinbergen Institute and Duisenberg school of finance); Bernd Schwaab (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt, Germany) |
| Abstract: | We develop a high-dimensional and partly nonlinear non-Gaussian dynamic factor model for the decomposition of systematic default risk conditions into a set of latent components that correspond with macroeconomic/financial, default-specific (frailty), and industry-specific effects. Discrete default counts together with macroeconomic and financial variables are modeled simultaneously in this framework. In our empirical study based on defaults of U.S. firms, we find that approximately 35 percent of default rate variation is due to systematic and industry factors. Approximately one third of systematic variation is captured by macroeconomic/financial factors. The remainder is captured by frailty (about 40 percent) and industry (about 25 percent) effects. The default-specific effects are particularly relevant before and during times of financial turbulence. For example, we detect a build-up of systematic risk over the period preceding the 2008 credit crisis. JEL Classification: C33, G21 |
| Keywords: | Financial crisis, default risk, credit portfolio models, frailty-correlated defaults, state space methods |
| Date: | 2012–08 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20121459&r=ban |
| By: | John Ashton (Bangor Business School); Andros Gregoriou (Hull University) |
| Abstract: | This study examines whether regionally and nationally branching banks set deposits interest rates differently. This assessment of the UK retail deposit market between 1992 and 2008 indicates regional banks set deposit interest rates in a manner distinct to nationally branching banks. This deviation between changes in the market interest to retail interest rates is characterised by a non-linear mean reverting process. Deposit interest rates offered by regional banks also display lower levels, a slower response to wholesale interest rate increases and a swifter response to wholesale interest rate falls, relative to national banks. It is concluded this evidence is consistent with distinct monetary conditions existing in the UK regions. |
| Keywords: | Interest rate transmission, Market definition, Bank Branching. |
| JEL: | G21 |
| Date: | 2012–02 |
| URL: | http://d.repec.org/n?u=RePEc:bng:wpaper:12005&r=ban |
| By: | Murizah Osman Salleh (Bank Negara Malaysia and Bangor University); Aziz Jaafar (Bangor Business School); M. Shahid Ebrahim (Bangor Business School) |
| Abstract: | Permanent disequilibrium in mainstream credit markets have pushed the unbanked and underbanked households to frequent high cost payday loans for their liquidity needs. Associated with the latter are welfare-reducing issues of predation and debt-entrapment. In response to this market failure, we expound a simple model that integrates inexpensive interest-free liquidity facility within an endogenous leverage circuit. This builds on the technology of ROSCA/ ASCRA/ mutual/ financial cooperative and cultural beliefs indoctrinated in Islam. Results indicate that such a circuit moderates adverse selection and moral hazard issues more efficiently than payday loan and mainstream financier. Additionally, it does not suffer the drawbacks of welfare-reducing payday loans and also addresses financial exclusion in mainstream credit markets. |
| Keywords: | interest-free loan, payday loan, financial exclusion, liquidity facility, cooperatives |
| JEL: | D14 G29 G32 Z12 |
| Date: | 2012–07 |
| URL: | http://d.repec.org/n?u=RePEc:bng:wpaper:12008&r=ban |
| By: | Masahiro Kawai (Asian Development Bank Institute (ADBI)); Peter J. Morgan |
| Abstract: | A key lesson of the 2007–2009 global financial crisis (GFC) was the importance of containing systemic financial risk and the need for a “macroprudential†approach to surveillance and regulation that can identify system-wide risks and take appropriate actions to maintain financial stability. By virtue of their overview of the economy and the financial system and their responsibility for payments and settlement systems, there is a broad consensus that central banks should play a key role in monitoring and regulating financial stability. Emerging economies face additional challenges because of their underdeveloped financial systems and vulnerability to volatile international capital flows, especially “sudden stops†or reversals of capital inflows. This paper reviews the recent literature on this topic and identifies relevant lessons for central banks, especially those in Asia’s emerging economies. Major topics discussed include the debate about the definition of financial stability, the consistency of a financial stability objective with the more traditional and well-established central bank objective of price stability, the appropriate governance structure for coordination of macroprudential policy with other financial supervisors and entities, and the appropriate policy instruments to achieve macroprudential policy objectives, including conventional, unconventional, and macroprudential tools. Finally, the paper considers issues involved with regional financial regulatory cooperation. Overall, the report concludes that the “lean versus clean†debate has been resolved largely in favor of the former, and that central banks should have a financial stability mandate and the policy tools to successfully pursue that mandate. |
| Keywords: | Asia, Central Banking, Financial Stability, GFC lessons, systemic financial risk, emerging economies, macroprudential, financial system, financial regulatory cooperation, central banks |
| JEL: | E52 F31 G28 |
| Date: | 2012–08 |
| URL: | http://d.repec.org/n?u=RePEc:eab:develo:23328&r=ban |
| By: | Francisco Javier Sáez-Fernández (Universidad de Granada); Andrés J. Picazo-Tadeo (Universidad de Valencia) |
| Abstract: | This paper assesses efficiency in Latin-American and Caribbean banking, distinguishing between domestic and foreign banks. Scores of both proportional and input-specific technical efficiency are computed using Data Envelopment Analysis (DEA) techniques. Furthermore, the so-called program approach is employed to assess differences in the technology used by domestic and foreign banks. Foreign banks are found to manage all production factors more efficiently; furthermore, this greater efficiency is partly due to the superior technology they use. |
| Date: | 2012–09 |
| URL: | http://d.repec.org/n?u=RePEc:eec:wpaper:1213&r=ban |
| By: | Seung Jung Lee; Viktors Stebunovs |
| Abstract: | We exploit variation in commercial bank capital ratios across states to identify the impact of commercial bank balance sheet pressures manifested through changes in capital ratios on employment in the manufacturing sector. For industries dependent on external finance, we find that an increase in the capital ratio has no statistically significant effect on net firm creation, but has an economically significant impact on average firm size, as measured in the number of employees. Our findings indicate a lack of substitutes for bank funding both in the short and long run. This lack of substitutes implies a notable adverse impact of balance sheet pressures on employment in industries dependent on external sources of funding. Our results highlight the potential effects that bank balance sheet pressures, for example, from tightening capital adequacy standards, such as Basel III, may have on nonfinancial firm dynamics. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2012-53&r=ban |
| By: | Kozo Harimaya (Faculty of Business Administration, Ritsumeikan University); Takao Ohkawa (Faculty of Economics, Ritsumeikan University); Makoto Okamura (Faculty of Economics, Ritsumeikan University); Tetsuya Shinkai (School of Economics, Kwansei Gakuin University) |
| Abstract: | In this paper, we analyze the managerial behavior of firms by estimating a nested objective function consistent with the framework of Fershtman and Judd (1987). Using data for Japanese regional banks for FY 1980-FY 2009, we focus on oligopolistic behavior in the domestic loan market and examine the intensity with which managers attempt to maximize sales and profits. We find that sales-maximization explains the behavior of Japanese regional banks more adequately and appropriately than profit-maximization. In particular, yearly fluctuations of the degree of managerial objectives suggest that the effort to maximize sales has intensified after full-scale liberalization of interest rates. |
| Keywords: | firm objective, strategic delegation, managerial incentives, financial liberalization and banking |
| JEL: | L13 L21 G21 |
| Date: | 2012–09 |
| URL: | http://d.repec.org/n?u=RePEc:kgu:wpaper:94&r=ban |
| By: | William F. Bassett; Seung Jung Lee; Thomas W. Spiller |
| Abstract: | The disappointingly slow recovery in the U.S. from the recent recession and financial crisis has once again focused attention on the relationship between financial frictions and economic growth. With bank loans having only recently started growing and still sluggish, some bankers and borrowers have suggested that unnecessarily tight supervisory policies have been a constraint on new lending that is hindering recovery. This paper explores one specific aspect of supervisory policy: whether the standards used to assign commercial bank CAMELS ratings have changed materially over time (1991-2011). We show that models incorporating time-varying parameters or economy-wide variables suggest that standards used in the assignment of CAMELS ratings in recent years generally have been in line with historical experience. Indeed, each of the models used in this analysis suggests that the variation in those standards has been relatively small in absolute terms over most of the sample period. However, we show that when this particular aspect of supervisory stringency becomes elevated, it has a noticeable dampening effect on lending activity in subsequent quarters. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2012-55&r=ban |
| By: | Olszewski, Krzysztof |
| Abstract: | This article reviews the impact of commercial real estate (CRE hereafter) on macro-financial stability and gives some ideas, how central banks could deal with the risk. First, we present the main features of the CRE market, explain its cycle and outline risks related to this market. Its relation to the financial sector is discussed. Further on, basing on the experience of some countries with CRE crises, we critically assess the reactions of their central banks. The characteristics of the CRE market are presented on the case of Poland, because it is a fast growing market. Its analysis should simplify the understanding why the CRE market should be tracked by the central bank. Finally, we present some ideas for the data collection and analysis of the CRE market. Further on, we provide some hints for the macroeconomic and financial stability policy of central banks, which should help to reduce risk and at the same time enhance the growth of the CRE market. |
| Keywords: | Commercial Real Estate; macro-financial stability policy; banking sector; central banks; |
| JEL: | E30 E58 G28 E44 |
| Date: | 2012–09–05 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:41059&r=ban |
| By: | Stefano Corradin (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt, Germany) |
| Abstract: | I propose a life-cycle model where a finitely lived risk averse agent finances her housing investment choosing to provide a down payment. After signing the mortgage contract, the agent may strategically default and move into the rental market. Risk neutral lenders efficiently price mortgages charging a default premium to compensate themselves for expected losses due to default on a mortgage. As a result, mortgage value and amount of leverage are closely linked. An alternative is for the agent to rent the same house, paying a rent fully adjustable to house prices. The rent risk premium is set such that the agent is indifferent ex ante between owning with a mortgage and renting. Three main results arise. First, the optimal down payment and the house price volatility are positively related. The higher the house price volatility, the higher the down payment the agent provides to decrease the volatility of the equity share in the house. Second, in the presence of borrowing constraints, a higher risk of unemployment persistence and/or a substantial drop in labor income decreases the leveraged position the agent takes. Third, ruling out the effect of taking costly leverage on owning a house significantly biases the results in favor of owning over renting. JEL Classification: G21, E21 |
| Keywords: | Default premium, rent risk premium, loan to value ratio, loan to income ratio and negative home equity |
| Date: | 2012–07 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20121452&r=ban |
| By: | Elena Loukoianova; Christian Schmieder; Tidiane Kinda; Nassim N. Taleb; Elie Canetti |
| Abstract: | This paper presents a simple heuristic measure of tail risk, which is applied to individual bank stress tests and to public debt. Stress testing can be seen as a first order test of the level of potential negative outcomes in response to tail shocks. However, the results of stress testing can be misleading in the presence of model error and the uncertainty attending parameters and their estimation. The heuristic can be seen as a second order stress test to detect nonlinearities in the tails that can lead to fragility, i.e., provide additional information on the robustness of stress tests. It also shows how the measure can be used to assess the robustness of public debt forecasts, an important issue in many countries. The heuristic measure outlined here can be used in a variety of situations to ascertain an ordinal ranking of fragility to tail risks. |
| Date: | 2012–08–30 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:12/216&r=ban |