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on Banking |
| By: | María Rodríguez-Moreno (European Central Bank); Sergio Mayordomo (School of Economics and Business Administration, University of Navarra); Juan Ignacio Peña (Department of Business Administration, Universidad Carlos III de Madrid) |
| Abstract: | This paper studies the impact of the banks’ portfolio holdings of financial derivatives on the banks’ individual contribution to systemic risk over and above the effect of variables related to size, interconnectedness, substitutability, and other balance sheet information. Using a sample of 91 U.S. bank holding companies from 2002 to 2011, we compare five measures of the banks’ contribution to systemic risk and find that the new measure proposed in this study, Net Shapley Value, outperforms the others. Using this measure we find that the banks’ holdings of foreign exchange and credit derivatives increase the banks contributions to systemic risk whereas holdings of interest rate derivatives decrease it. Nevertheless, the proportion of non-performing loans over total loans and the leverage ratio have much stronger impact on systemic risk than derivatives holdings. We find that before the subprime crisis credit derivatives decreased systemic risk whereas during the crisis increased it. So, credit derivatives seemed to change their role from shock absorbers to shock issuers. This effect is not observed in the other types of derivatives. |
| Keywords: | Systemic risk, derivatives, Shapley value |
| JEL: | C32 G01 G21 |
| Date: | 2012–12–21 |
| URL: | http://d.repec.org/n?u=RePEc:una:unccee:wp2112&r=ban |
| By: | Yuliya Demyanyk; Elena Loutskina |
| Abstract: | Mortgage companies (MCs) originated about 60% of all mortgages before the 2007 crisis and continue to hold a 30% market share postcrisis. While financial regulations are strictly enforced for depository institutions (banks), they are weakly enforced for MCs even if they are subsidiaries of a bank holding company (BHC). This study documents that the resulting regulatory arbitrage creates incentives for BHCs to engage in risk shifting through their MC affiliates. We show that MCs are established to circumvent the capital requirements and to shield the parent BHCs from loan-related losses. BHCs run the risky mortgage business through their MC affiliates. As compared to bank affiliates of BHCs, the MC affiliates lent more to individuals with lower credit scores, lower incomes, and higher loan-to-income ratios. MC borrowers experienced higher rates of foreclosure and delinquency during the crisis. Our results imply that the regulation in place had the capacity to prevent the deterioration of lending standards widely blamed for the crisis. The inconsistent enforcement of regulation, though, eroded its effectiveness. Higher involvement of mortgage companies in subprime lending and securitization activity do not explain our results. |
| Keywords: | Banks and banking ; Mortgages ; Foreclosure ; Regulation ; Regulation |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedcwp:1220&r=ban |
| By: | Laurent Maurin (European Central Bank); Mervi Toivanen (Bank of Finland) |
| Abstract: | We develop a partial adjustment model in order to estimate the factors contributing to banks’ internal target capital ratio, lending policy and holding of securities. The model is estimated on a panel of listed euro area banks and country specific macrovariables. Firstly, banks’ internal target capital ratios are estimated by using information on banks’ riskiness and earnings capacity. Secondly, the impact of banks’ capital gap on the credit supply and the security portfolio is estimated while controlling for the macroeconomic environment. An increase in bank’ balance sheet risk is shown to increase the target capital ratios. The adjustment towards higher equilibrium capital ratios has a significant impact on banks’ assets. The impact is found to be more sizeable on security holdings than on loans, thereby suggesting a pecking order. JEL Classification: G21 |
| Keywords: | Banks, euro area, capital ratios, credit supply, partial adjustment model |
| Date: | 2012–11 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20121499&r=ban |
| By: | Trapp, Monika; Wewel, Claudio |
| Abstract: | In this paper we study systemic risk for North America and Europe. We show that banks' exposures to common risk factors are crucial for systemic risk. We come to this conclusion by first showing that relations between North American and European banks are smaller than within each region. We then show that European banks react more strongly to the onset of the financial crisis than North American ones. Regarding the consequences of systemic risk, we show that dependence between the banking sector and a wide range of real sectors is limited. Our results imply that regulators and supervisors should address international bank dependencies arising from common risk factors, while recessions in real sectors due to bank defaults should be a secondary concern. -- |
| Keywords: | systemic risk,banking sector,real sectors,international,copula |
| JEL: | G01 G15 G18 G21 G28 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:cfrwps:1210&r=ban |
| By: | Steven Ongena (Tilburg University; CEPR - Centre for Economic Policy Research); Alexander Popov (European Central Bank); Gregory F. Udell (Indiana University Bloomington) |
| Abstract: | This paper provides the first empirical evidence that bank regulation is associated with cross-border spillover effects through the lending activities of large multinational banks. We analyze business lending by 155 banks to 9613 firms in 1976 different localities across 16 countries. We find that lower barriers to entry, tighter restrictions on bank activities, and higher minimum capital requirements in domestic markets are associated with lower bank lending standards abroad. The effects are stronger when banks are less efficiently supervised at home, and are observed to exist independently from the impact of host-country regulation. JEL Classification: G21, G28, G32 |
| Keywords: | Bank regulation, cross-border financial institutions, lending standards, financial risk |
| Date: | 2012–11 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20121488&r=ban |
| By: | Arvid Raknerud (Statistics Norway); Bjørn Helge Vatne (Norges Bank (Central Bank of Norway)) |
| Abstract: | We use a dynamic factor model and a detailed panel data set for six Norwegian bank groups to analyze i) how funding costs affect retail loan rates and ii) how retail rate differences between banks affect market shares. The data set consist of quarterly data for 2002Q1-2011Q3 and include information on loan volumes and retail (interest) rates for loans to firms and households. The cost of market funding is represented in our analysis by the three-month money market rate and a proxy for market risk { the credit spread on unsecured senior bonds issued by Norwegian banks. Our estimates clearly suggest incomplete pass-through: a 10 basis points increase in the market rate leads to an approximately 8 basis points increase in retail loan rates. We also find that credit demand from households is more elastic with regard to the loan rate than demand from businesses. |
| Keywords: | Monopolistic competition, credit spread, pass-through, funding costs, bank micro data, dynamic factor model |
| JEL: | C33 E27 E43 |
| Date: | 2012–12–20 |
| URL: | http://d.repec.org/n?u=RePEc:bno:worpap:2012_17&r=ban |
| By: | Martin M. Andreasen (Aarhus University); Marcelo Ferman (LSE - London School of Economics and Political Science); Pawel Zabczyk (Bank of England) |
| Abstract: | This paper develops a DSGE model where banks use short-term deposits to provide firms with long-term credit. The demand for long-term credit arises because firms borrow in order to finance their capital stock which they only adjust at infrequent intervals. Within an RBC framework, we show that maturity transformation in the banking sector dampens the consumption and investment response to a technology shock. Our model also implies that the average deposit rate is less persistent than the average long-term loan rate, which we show is in line with corporate interest rate data in the US. JEL Classification: E32, E44, E22, G21 |
| Keywords: | Banks, DSGE model, Financial frictions, Long-term credit, Maturity transformation |
| Date: | 2012–11 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20121489&r=ban |
| By: | Stefan Arping (University of Amsterdam) |
| Abstract: | In imperfectly competitive credit markets, banks can face a tradeoff between exploiting their market power and enforcing hard budget constraints. As market power rises, banks eventually find it too costly to discipline underperforming borrowers by stopping their projects. Lending relationships become "too cozy", interest rates rise, and loan performance deteriorates. |
| Keywords: | Banking Competition; Soft Budget Constraint Problem; Moral Hazard |
| JEL: | G2 G3 |
| Date: | 2012–12–20 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:uvatin:20120146&r=ban |
| By: | Clemens Bonner |
| Abstract: | This paper analyzes the impact of a liquidity requirement similar to the Basel 3 Liquidity Coverage Ratio (LCR) on banks’ funding costs and corporate lending rates. Using a dataset of 26 Dutch banks from January 2008 to December 2011, I find that banks which are just above/below their quantitative liquidity requirement do not charge higher interest rates for corporate lending. This effect is caused by banks being not able to pass on their increased funding costs in the interbank market to private sector clients, implying that banks do not have pricing power. The results are robust to including demand effects, solvency and loan characteristics. The analysis in this paper suggests that the current design of the LCR is unlikely to have a major impact on corporate lending rates. |
| Keywords: | Monetary transmission mechanism; Liquidity; Basel 3; Lending; Interest Rate |
| JEL: | G21 E42 E43 |
| Date: | 2012–12 |
| URL: | http://d.repec.org/n?u=RePEc:dnb:dnbwpp:361&r=ban |
| By: | Todd Keister (Federal Reserve Bank of New York); Huberto Ennis (Richmond Fed) |
| Abstract: | We study a finite-depositor version of the Diamond-Dybvig model of financial intermediation in which the bank and all depositors observe withdrawals as they occur. We derive the (constrained) efficient allocation of resources in closed-form and show that this allocation provides liquidity insurance to depositors. The contractual arrangement that decentralizes this allocation has debt-like features and resembles the type of demand deposits commonly offered by banking institutions. We provide examples where this arrangement admits another equilibrium in which some depositors run on the bank, withdrawing funds regardless of their liquidity needs. A bank run in our setting is always partial, with only those depositors who can withdraw sufficiently early participating. Depositors who are late to withdraw during a run suffer significant discounts from the face value of their deposits. The run, while partial, may involve a large number of depositors and result in significant inefficiencies. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed012:179&r=ban |
| By: | Steven Ongena (Tilburg University); Kasper Roszbach (Sveriges Riksbank and University of Groningen); Geraldo Cerqueiro (Universidade Católica Portuguesa) |
| Abstract: | We study a change in the Swedish law that exogenously reduced the value of all outstanding company mortgages, i.e., a type of collateral that is comparable to the floating lien. We explore this natural experiment to identify how collateral determines borrower quality, loan terms, access to credit and bank monitoring of business term loans. Using a differences-in-differences approach, we find that following the change in the law and the loss in collateral value borrowers pay a higher interest rate on their loans, receive a worse quality assessment by their bank, and experience a substantial reduction in the supply of credit by their bank. The reduction in collateral value also precedes a decrease in bank monitoring intensity and frequency of both the collateral and the borrower, consistent with models in which the pledging of risky assets incentivizes banks to monitor. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed012:235&r=ban |
| By: | Gourieroux, C.; Heam, J.C.; Monfort, A. |
| Abstract: | By introducing a structure of the balance sheets of the banks, which takes into account their bilateral exposures in terms of stocks or lendings, we get a structural model for default analysis. This model allows distinguishing the exogenous and endogenous default dependence. We prove the existence and uniqueness of the liquidation equilibrium, we study the consequences of exogenous shocks on the banking system and we measure contagion phenomena. This approach is illustrated by an application to the French banking system. |
| Keywords: | Contagion, Systemic Risk, Solvency, Clearing, Liquidation Equilibrium, Impulse Response, Value-of-the Firm Model. |
| JEL: | G21 G28 G18 G33 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:bfr:banfra:414&r=ban |
| By: | Q. Farook Akram (Norges Bank (Central Bank of Norway)) |
| Abstract: | I investigate macro effects of higher bank capital requirements on the Norwegian economy and their use as a macroprudential policy instrument under Basel III. To this end, I develop a macroeconometric model where the capital adequacy ratio, lending rates, asset prices and credit interact with each other and with the real economy. The empirical results suggest that changes in capital requirements are primarily transmitted via lending rates to the other variables in the model. The proposed increases in capital requirements under Basel III are found to have significant effects especially on house prices and credit. I also derive optimal paths for the countercyclical capital buffer in response to various shocks. The buffer is found to equal its imposed ceiling of 2.5% in response to most of the shocks considered while its duration varies in the range of 1-12 quarters depending on the shock and its persistence. |
| Keywords: | Basel III, Capital requirements, Macroprudential policy |
| JEL: | C52 C53 E52 G38 |
| Date: | 2012–12–20 |
| URL: | http://d.repec.org/n?u=RePEc:bno:worpap:2012_21&r=ban |
| By: | Asaf Manela (Washington University in St. Louis); Zhiguo He (University of Chicago) |
| Abstract: | We study the endogenous information acquisition and withdrawal-redeposit decisions of individual agents when a liquidity event triggers a spreading rumor and therefore exposes a bank to a run. Uncertainty about the bank's liquidity and potential failure motivates agents who hear the rumor to acquire additional information, and in equilibrium depositors with unfavorable information run on the bank gradually. Although the bank run equilibrium is unique given the additional signal's quality, multiple equilibria emerge with endogenous information acquisition. A bank run equilibrium exists when agents aggressively acquire information. We study the threshold parameters that eliminate bank runs. Public provision of solvency information (e.g. stress tests) can eliminate bank runs by indirectly crowding-out individual depositors' effort to acquire liquidity information. However, providing too much information that slightly differentiates competing solvent-but-illiquid banks can result in inefficient runs. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed012:170&r=ban |
| By: | William Goulding; Daniel E. Nolle |
| Abstract: | This paper describes the foreign banking landscape in the United States. It begins by establishing a vocabulary for discussion of the subject, and then identifies a number of important data-related issues. With that information in hand, the remainder of the paper focuses on identifying the most important underlying trends on both sides of the balance sheets of foreign-owned banks' U.S. operations. At each step, the investigation considers how foreign-owned banks compare to U.S.-owned domestic banks, and how two types of foreign banks operations in the U.S. -- branches and agencies of foreign banks (FBAs), and foreign-owned subsidiary banks (FSUBs) -- compare to each other. The banking sector in the U.S. experienced substantial swings in performance and stability over the decade surrounding the 2008-2009 financial crisis and changes in every major dimension of foreign-owned banks' assets and liabilities were even larger than for domestic banks. Changes were especially large at FBAs. For example, cash balances came to dominate the assets side of FBAs’ aggregate balance sheet, with the absolute level of cash balances larger than those of domestic U.S. banks beginning in 2011, despite the fact that total assets of domestic U.S. banks are five times the assets of FBAs. Further, the recent unprecedented build-up of cash balances by FBAs was almost entirely composed of excess reserves. Changes in FBAs' liabilities-side activities have also been large, with much funding coming from large wholesale deposits and net borrowing from their foreign parents and related offices abroad. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgif:1064&r=ban |
| By: | Artashes Karapetyan (Norges Bank (Central Bank of Norway)); Bogdan Stacescu (BI Norwegian Business School,) |
| Abstract: | Information sharing and collateral reduce adverse selection costs, but are costly for lenders. When a bank learns more about the types of its rival's borrowers through information sharing (e.g., credit bureaus), it might seem that this information should substitute the role of collateral in screening their types. We instead show that information sharing may increase, rather than decrease, the role of collateral, which can be required in loans to high-risk borrowers in cases when it is not in the absence of information sharing. We extend to show that ex ante screening can substitute both collateral and information sharing. |
| Keywords: | Bank competition, Information sharing, Collateral |
| JEL: | G21 L13 |
| Date: | 2012–12–18 |
| URL: | http://d.repec.org/n?u=RePEc:bno:worpap:2012_19&r=ban |
| By: | Ansgar Rannenberg (Macroeconomic Policy Institute) |
| Abstract: | I add a moral hazard problem between banks and depositors as in Gertler and Karadi (2009) to a DSGE model with a costly state verification problem between entrepreneurs and banks as in Bernanke et al. (1999) (BGG). This modification amplifies the response of the external finance premium and the overall economy to monetary policy and productivity shocks. It allows my model to match the volatility and correlation with output of the external finance premium, bank leverage, entrepreneurial leverage and other variables in US data better than a BGG-type model. A reasonably calibrated combination of balance sheet shocks produces a downturn of a magnitude similar to the "Great Recession". JEL Classification: E44, E43, E32 |
| Keywords: | Leverage cycle, bank capital, financial accelerator, output effects of financial shock |
| Date: | 2012–10 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20121487&r=ban |
| By: | Javier Bianchi (NYU and Wisconsin) |
| Abstract: | This paper develops a non-linear DSGE model to assess the interaction between ex-post interventions in credit markets and the build-up of risk ex ante. During a systemic crisis, bailouts to the financial sector relax balance sheet constraints and accelerate the economic recovery. Ex ante, the anticipation of such bailouts leads to an increase in risk-taking, making the economy more vulnerable to a financial crisis. We find that the optimal intervention in the economy requires a bailout of around two percentage points of GDP during a credit crunch. We also show how bailouts may increase financial fragility in the absence of prudential policy. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed012:162&r=ban |
| By: | Ross Levine; Alexey Levkov; Yona Rubinstein |
| Abstract: | We use the cross-state, cross-time variation in bank deregulation across the U.S. states to assess how improvements in banking systems affected the labor market opportunities of black workers. Bank deregulation from the 1970s through the 1990s improved bank efficiency, lowered entry barriers facing nonfinancial firms, and intensified competition for labor throughout the economy. Consistent with Becker’s (1957) seminal theory of racial discrimination, we find that deregulation-induced improvements in the banking system boosted blacks’relative wages by facilitating the entry of new firms and reducing the manifestation of racial prejudices in labor markets. |
| Keywords: | Banks and banking ; Labor market ; Wages ; Bank competition |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedbqu:rpa12-5&r=ban |
| By: | Eichengreen, Barry; Gupta, Poonam |
| Abstract: | The Indian banking system was initially thought to be insulated from the global financial crisis owing to heavy public ownership and cautious management. It was thus a surprise when some banks experienced a deposit flight, as depositors shifted their money toward government-owned banks and specifically toward the State Bank of India, the largest public bank. While there was some tendency for depositors to favour healthier banks and the banks with more stable funding, the reallocation of deposits toward the State Bank of India in particular cannot be explained by these factors alone. Nor can it be explained by the impact of explicit capital injections by the government into some public-sector banks. Rather it appears that the implicit guarantee of the liabilities of the country’s largest public bank dominated other considerations. |
| Keywords: | State-owned banks; banking and financial crises |
| JEL: | G28 G20 G01 G21 |
| Date: | 2012–12 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:43365&r=ban |
| By: | Nijskens, R.G.M. (Tilburg University) |
| Abstract: | The theoretical analysis in the second part investigates the effect of liquidity assistance and bailouts on bank risk taking and liquidity choice. Furthermore, it explores the possibilities for central banks to create ambiguity about liquidity assistance, thereby influencing bank choices. The results in this thesis have implications for the reform of financial regulation and the safety net. Banks have become more systemically relevant; new regulation has to take this into account. Moreover, a new financial safety net should involve suitable bailout penalties and central banks that can resort to constructive ambiguity to give banks proper incentives. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:ner:tilbur:urn:nbn:nl:ui:12-5661648&r=ban |
| By: | Josef Schroth |
| Abstract: | This paper studies a dynamic version of the Holmstrom-Tirole model of intermediated finance. I show that competitive equilibria are not constrained efficient when the economy experiences a financial crisis. A pecuniary externality entails that banks’ desire to accumulate capital over time aggravates the scarcity of informed capital during the financial crisis. I show that a constrained social planner finds it beneficial to introduce a permanent wedge between the deposit rate and the economy’s marginal rate of transformation. The wedge improves borrowers’ access to finance during a financial crisis by strengthening banks’ incentives to provide intermediation services. I propose a simple implementation of the constrained-efficient allocation that limits bank size. |
| Keywords: | Financial markets; Financial system regulation and policies |
| JEL: | G01 G10 D53 G18 E60 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:12-42&r=ban |
| By: | Roman Horváth (Charles University; IOS - Institute for East and Southeast European Studies); Jakub Seidler (Czech National Bank; Charles University); Laurent Weill (EM Strasbourg Business School) |
| Abstract: | We examine the relation between capital and liquidity creation. This issue is interesting because of the potential impact on liquidity creation from tighter capital requirements such as those in Basel III. We perform Granger-causality tests in a dynamic GMM panel estimator framework on an exhaustive data set of Czech banks, which mainly includes small banks from 2000 to 2010. We observe a strong expansion in liquidity creation until the financial crisis that was mainly driven by large banks. We show that capital negatively Granger-causes liquidity creation in this industry, where majority of banks are small. But we also observe that liquidity creation Granger-causes a reduction in capital. These findings support the view that Basel III can reduce liquidity creation, but also that greater liquidity creation can reduce banks’ solvency. Thus, we show that this reverse causality generates a trade-off between the benefits of financial stability induced by stronger capital requirements and the benefits of increased liquidity creation. JEL Classification: G21, G28 |
| Keywords: | Bank capital, Liquidity creation, Basel III |
| Date: | 2012–11 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20121497&r=ban |
| By: | Hasumi, Ryo; Hirata, Hideaki; Ono, Arito |
| Abstract: | This paper examines the ex-post performance of small and medium enterprises (SMEs) that obtained small business credit scoring (SBCS) loans by using a unique Japanese firm-bank matched dataset. The ex-post probability of default after the SBCS loan was provided significantly increased for SMEs that obtained an SBCS loan from a transactional lender. Also, the lending attitude of relationship lenders during the recent global financial crisis was more severe if a transactional lender had extended an SBCS loan to a firm. These findings suggest that SBCS loans by a transactional lender are detrimental to a relationship lender’s incentive to monitor SMEs and maintain relationships. |
| Keywords: | small business credit scoring, lending technology, relationship lending |
| JEL: | G21 G32 |
| Date: | 2012–12 |
| URL: | http://d.repec.org/n?u=RePEc:hit:cinwps:23&r=ban |
| By: | Artashes Karapetyan (Norges Bank (Central Bank of Norway)); Bogdan Stacescu (BI Norwegian Business School,) |
| Abstract: | Lending is often associated with significant asymmetric information issues between suppliers of funds and their potential borrowers. Banks can screen their borrowers, or can require them to post collateral in order to select creditworthy projects. We find that the potential for longer-term relationships increases banks' preference for screening. This is because posting collateral only provides the information that the current project of a given borrower is of good quality, whereas screening provides information that can be used in evaluating future projects as well as the current ones. |
| Keywords: | Collateral, Screening, Bank relationships |
| JEL: | G21 L13 |
| Date: | 2012–12–18 |
| URL: | http://d.repec.org/n?u=RePEc:bno:worpap:2012_18&r=ban |
| By: | David Murphy |
| Abstract: | This paper proposes the solvency/liquidity spiral as an failure mode affecting large financial institutions in the recent crisis. The essential features of this mode are that a combination of funding liquidity risk and investor doubts over the solvency of an institution can lead to its failure. We analyse the failures of Lehman Brothers and RBS in detail, and find considerable support for the spiral model of distress. Our model suggests that a key determinant of the financial stability of many large banks is the confidence of the funding markets. This has consequences for the design of financial regulation, suggesting that capital requirements, liquidity rules, and disclosure should be explicitly constructed so as not just to mitigate solvency risk and liquidity risk, but also to be seen to do so even in stressed conditions. |
| Date: | 2012–12 |
| URL: | http://d.repec.org/n?u=RePEc:fmg:fmgsps:sp216&r=ban |
| By: | S. Arping (University of Amsterdam) |
| Abstract: | We examine the impact CDS protection on lending relationships and efficiency. CDS insulate lenders against losses from forcing borrowers into default and liquidation. This improves the credibility of foreclosure threats, which can have positive implications for borrower incentives and credit availability ex ante. However, lenders may also abuse their enhanced bargaining power vis-a-vis borrowers and extract additional surplus in debt renegotiations. If this hold up threat becomes severe, borrowers will be reluctant to agree to debt maturity designs or control right transfers that would have been optimal in the absence of CDS protection. The introduction of CDS markets may then ultimately tighten credit constraints and be detrimental to welfare. |
| Keywords: | Corporate Lending; Financial Innovation; Credit Default Swaps; Credit Derivatives; Credit Risk Transfer; Empty Creditor Problem |
| JEL: | G2 G3 |
| Date: | 2012–12–12 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:uvatin:20120142&r=ban |
| By: | Vítor Castro (Universidade de Coimbra - NIPE) |
| Abstract: | In this paper, we analyse the link between the macroeconomic developments and the banking credit risk in a particular group of countries – Greece, Ireland, Portugal, Spain and Italy (GIPSI) – recently affected by unfavourable economic and financial conditions and to which, on this matter, the literature has not given a particular attention yet. Employing dynamic panel data approaches to these five countries over the period 1997q1-2011q3, we conclude that the banking credit risk is significantly affected by the macroeconomic environment: the credit risk increases when GDP growth and the share price indices decrease and rises when the unemployment rate, interest rate, and credit growth increase; it is also positively affected by an appreciation of the real exchange rate; moreover, we observe a substantial increase in the credit risk during the recent financial crisis period. Several robustness tests with different estimators have also confirmed these results. |
| Keywords: | Credit risk; Macroeconomic factors; Banking system; GIPSI; Panel data |
| JEL: | C23 G21 F41 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:nip:nipewp:11/2012&r=ban |
| By: | Collard, F.; Dellas, H.; Diba, B.; Loisel, O. |
| Abstract: | The recent financial crisis has highlighted the interconnectedness between macroeconomic and financial stability and has raised the question of whether and how to combine the corresponding main policy instruments (interest rate and bank-capital requirements). This paper offers a characterization of the jointly optimal setting of monetary and prudential policies and discusses its implications for the business cycle. The source of financial fragility is the socially excessive risk-taking by banks due to limited liability and deposit insurance. We characterize the conditions under which locally optimal (Ramsey) policy dedicates the prudential instrument to preventing inefficient risk-taking by banks; and the monetary instrument to dealing with the business cycle, with the two instruments co-varying negatively. Our analysis thus identifies circumstances that can validate the prevailing view among central bankers that standard interest-rate policy cannot serve as the first line of defense against financial instability. In addition, we also provide conditions under which the two instruments might optimally co-move positively and countercyclically. |
| Keywords: | Prudential policy – Capital requirements – Monetary policy – Ramsey-optimal policies. |
| JEL: | E32 E44 E52 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:bfr:banfra:413&r=ban |
| By: | Telyukova, Irina A. |
| Abstract: | In the 2001 U.S. Survey of Consumer Finances (SCF), 27% of households report simultaneously revolving significant credit card debt and holding sizeable amounts of low-return liquid assets; this is known as the \credit card debt puzzle". In this paper, I quantitatively evaluate the role of liquidity demand in accounting for this puzzle: households that accumulate credit card debt may not pay it off using their money in the bank, because they anticipate needing that money in situations where credit cards cannot be used. I characterize the puzzle in survey data, and calibrate a dynamic stochastic heterogeneous-agent model of household portfolio choice, where consumer credit and liquidity coexist as means of consumption and saving, where households consume a cash good and a credit good, and where cash consumption is subject to uncertainty. The model accounts for between 44% and 56% of the households in the data who hold consumer debt and liquidity simultaneously, and for 100% of the liquidity held by a median such household. Under reasonable calibration alternatives, the model can capture the entire puzzle group size as well. One-half of money demand in the model is precautionary. |
| Keywords: | Economics, General, credit card debt, liquidity demand, stochastic heterogeneous-agent |
| Date: | 2012–10–09 |
| URL: | http://d.repec.org/n?u=RePEc:cdl:ucsdec:qt0ww2c04z&r=ban |
| By: | Susan Herbst-Murphy |
| Abstract: | America’s small businesses have adopted credit cards as both a payment method and a borrowing vehicle. The segment also uses other payment card products, including debit, charge, and prepaid cards. The dollar volume of spending with cards designed for small businesses increased by 230 percent over the five-year period from 2003-2008. But the recession of 2007-2009 and contemporaneous changes in the regulatory environment had effects on both the supply to and demand of small businesses with respect to credit cards. To obtain an update on these issues, the Payment Cards Center hosted a workshop facilitated by Frank Martien, a partner with First Annapolis Consulting. During the workshop, Martien presented evidence of improved supply and demand conditions for small business credit cards. In addition to these positive post-recession observations, Martien described how the symmetry between a small firm’s accounts receivable cycle and the billing cycle for a credit card may help explain why credit card use is so attractive to this segment. This summary also discusses recent developments in the small business debit card market. |
| Keywords: | Small business ; Credit cards ; Cash flow ; Credit |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedpdp:12-05&r=ban |
| By: | Cândida Ferreira |
| Abstract: | Well-functioning financial markets and banking institutions are usually considered to be a condition favourable to economic growth. The importance of bank efficiency and bank market concentration has also been the object of discussion, with the general belief that while they are of particular relevance in the context of the European Union, there is no consensus on their specific roles. This paper aims to study the effects on economic growth of the efficiency of the banking institutions, measured through Data Envelopment Analysis (DEA), and also of the concentration of the bank markets, measured by the percentage share of the total assets held by the three largest banking institutions (C3) and the Herfindahl-Hirschman Index (HHI). Considering a panel of all 27 EU countries for the time period between 1996 and 2008, the study analyses the influence of these bank and market conditions not only on the Gross Domestic Product (GDP) but also on its components: the final consumption expenditure, the gross fixed capital formation, the export of goods and services and the import of goods and services. The main findings point to the generally positive influence of bank cost efficiency on economic growth. More precisely, this influence is statistically significant for GDP and particularly with respect to the gross fixed capital formation. With regard to the bank market concentration, a generally negative influence is revealed, not only on GDP, but also on its components and is statistically more significant for the gross fixed capital formation, as well as for the export and import of goods and services. JEL Classification: G21; F43; D4; L11 |
| Keywords: | Bank efficiency, market concentration, economic growth, European Union. |
| Date: | 2012–10 |
| URL: | http://d.repec.org/n?u=RePEc:ise:isegwp:wp382012&r=ban |
| By: | UEMURA Shuichi |
| Abstract: | In the aftermath of the global financial crisis, the Group of 20 (G20) countries and international institutions such as the International Monetary Fund (IMF) and the Bank for International Settlements (BIS) have frequently discussed macroprudential policies and their relationship to systemic risk. One such macroprudential instrument discussed is the imposition of a ceiling on credit or credit growth to tame real estate booms and the related problems.<br />In Japan, a credit ceiling for real estate lending was introduced in 1990 and phased out at the end of the following year. This regulation is now notorious as many people believe that it caused the bursting of the real estate bubble and led to Japan's lost decade.<br />However, if it had been adopted earlier as a macroprudential policy to control the real estate boom, the outcome might have been different for the Japanese economy and for the reputation of the regulation itself.<br />Since the Japanese financial crisis in the 1990s, the financial system has been reformed. However, it is still necessary to consider Japan's macroprudential policy framework and its coordination with monetary policy.<br />At the minimum, it is imperative to improve the current situation in which there is difficulty for us to see a common understanding on systemic risks among the related organizations such as the Financial Supervisory Agency and the Bank of Japan including whether or not they exist. |
| Date: | 2012–11 |
| URL: | http://d.repec.org/n?u=RePEc:eti:rpdpjp:12019&r=ban |
| By: | Renaud Beaupain (IÉSEG School of Management; Lille Economie & Management - LEM-CNRS (U.M.R. 8179)); Alain Durré (European Central Bank; IÉSEG School of Management; Lille Economie & Management - LEM-CNRS (U.M.R. 8179)) |
| Abstract: | The market-oriented approach promoted by the European Central Bank in the design of its refinancing operations creates incentives to credit insitutions to use actively the interbank market to manage their liquidity needs. In this context, we examine the ability of the overnight segment to guarantee the timely provision of unsecured funds to banks to smoothly absorb their liquidity shocks. This paper specifically focuses on the speed of reversion of transaction costs and available depth to their equilibrium levels in this market for overnight unsecured funds from 4 September 2000 to 31 December 2007. The reported evidence points to time-varying liquidity adjustments and identifies liquidity, market activity and the institutional setting of the ECB’s refinancing operations as significant determinants of the observed resiliency regimes. Our analysis also shows how the speed of mean reversion of market liquidity, by affecting the level and the volatility of the overnight market rate, also affects the anchoring of the yield curve in the euro area. JEL Classification: C22, C25, G01, G10, G21, E52 |
| Keywords: | Overnight money market, market microstructure, transaction costs, price impact, mean reversion, financial turmoil |
| Date: | 2012–12 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20121500&r=ban |
| By: | Hazama, Makoto; Uesugi, Iichiro |
| Abstract: | Using a unique and massive data set that contains information on interfirm transaction relationships, we examine default propagation along the trade credit channel and for the first time provide direct and systematic evidence of its existence and relevance. Not only do we implement simulations in order to detect prospective defaulters, we also estimate the probabilities of actual firm bankruptcies and compare the predicted defaults and actual defaults. We find, first, that an economically sizable number of firms are predicted to fail when their customers default on their trade debt. Second, these prospective defaulters are indeed more likely to go bankrupt than other firms. Third, a certain type of firm-bank relationships, in which a bank extends loans to many of the firms in the same supply chain, significantly reduces firms' bankruptcy probability, providing evidence for the existence and relevance of ”deep pockets” as documented in Kiyotaki and Moore (1997). |
| Keywords: | interfirm networks, trade credit, default propagation |
| JEL: | E32 G21 G32 G33 |
| Date: | 2012–12 |
| URL: | http://d.repec.org/n?u=RePEc:hit:cinwps:20&r=ban |
| By: | Tobias Adrian |
| Abstract: | A 2012 paper by Goodhart, Kashyap, Tsomocos, and Vardoulakis (GKTV) proposes a dynamic general equilibrium framework that provides a conceptual—and to some extent quantitative—framework for the analysis of macroprudential policies. The distinguishing feature of GKTV’s paper relative to any other on macroprudential policy is its study of a setting with multiple financial frictions that permits the analysis of multiple macroprudential policy tools at the same time. The modeling approach includes various market failures such as incomplete markets with heterogeneous agents, fire-sale externalities, and margin spirals, all of which provide rationales for policies designed to improve welfare. In GKTV’s model, liquidity ratios are found to be more efficient preemptive tools than capital ratios or loan-to-value ratios. However, these liquidity ratios need to be relaxed in times of crises in order to reduce adverse effects from fire-sale externalities. It remains to be seen how robust these findings are in alternative, fully dynamic settings. Furthermore, GKTV’s approach does not address the tension between micro- and macroprudential objectives, and the timing of the buildup and release of policies is not specified precisely. |
| Keywords: | Financial institutions - Law and legislation ; Systemic risk ; Equilibrium (Economics) - Mathematical models ; Econometric models ; Liquidity (Economics) ; Financial institutions |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:583&r=ban |
| By: | Domenico Giannone (ECARES – European Center for Advanced Research in Economics and Statistics; CEPR - Centre for Economic Policy Research); Michele Lenza (European Central Bank); Huw Pill (Goldman Sachs); Lucrezia Reichlin (London Business School; CEPR - Centre for Economic Policy Research) |
| Abstract: | We analyse the impact on the euro area economy of the ECB’s non-standard monetary policy measures by studying the effect of the expansion of intermediation of interbank transactions across the central bank balance sheet. We exploit data drawn from the aggregated Monetary and Financial Institutions (MFI) balance sheet, which allows us to construct a measure of the ‘policy shock’ represented by the ECB’s increasing role as a financial intermediary. We find small but significant effects both on loans and real economic activity. JEL Classification: E5, E58 |
| Keywords: | Non-standard monetary policy measures, interbank market |
| Date: | 2012–11 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20121496&r=ban |
| By: | Gelain, Paolo; Lansing, Kevin J.; Mendicino, Caterina |
| Abstract: | Progress on the question of whether policymakers should respond directly to financial variables requires a realistic economic model that captures the links between asset prices, credit expansion, and real economic activity. Standard DSGE models with fully-rational expectations have difficulty producing large swings in house prices and household debt that resemble the patterns observed in many developed countries over the past decade. We introduce excess volatility into an otherwise standard DSGE model by allowing a fraction of households to depart from fully-rational expectations. Specifically, we show that the introduction of simple moving-average forecast rules for a subset of households can significantly magnify the volatility and persistence of house prices and household debt relative to otherwise similar model with fully-rational expectations. We evaluate various policy actions that might be used to dampen the resulting excess volatility, including a direct response to house price growth or credit growth in the central bank’s interest rate rule, the imposition of more restrictive loan-to-value ratios, and the use of a modified collateral constraint that takes into account the borrower’s loan-to-income ratio. Of these, we find that a loan-to-income constraint is the most effective tool for dampening overall excess volatility in the model economy. We find that while an interest-rate response to house price growth or credit growth can stabilize some economic variables, it can significantly magnify the volatility of others, particularly inflation. |
| Keywords: | asset pricing; excess volatility; credit cycles; housing bubbles; monetary policy; macroprudential policy |
| JEL: | E32 E44 G12 O40 |
| Date: | 2012–12 |
| URL: | http://d.repec.org/n?u=RePEc:cpm:dynare:021&r=ban |
| By: | Alessio D'Ignazio; Carlo Menon |
| Abstract: | We evaluate the effectiveness of a partial credit guarantee program implemented in a large Italian region using unique microdata from a broad set of firms. Our results show that the policy was effective to the extent that it resulted in an improved financial condition for the beneficiary firms. While the total amount of bank debt was unaffected, firms showed a significant increase in the long-term component. Furthermore, targeted firms benefited from a substantial decrease in interest rates. On the other hand, there is some evidence that the probability of default increases as a consequence of the treatment, although the effect is only marginally significant. There are, instead, no effects on the real outcomes. |
| Keywords: | Financial subsidies, credit constraints, banking |
| JEL: | G2 H2 O16 |
| Date: | 2012–12 |
| URL: | http://d.repec.org/n?u=RePEc:cep:sercdp:0123&r=ban |
| By: | Rubio, Margarita; Carrasco-Gallego, José A. |
| Abstract: | The recent financial crisis has raised the discussion among policy makers and researchers on the need of macroprudential policies to avoid systemic risks in financial markets. However, these new measures need to be combined with the traditional ones, namely monetary policy. The aim of this paper is to study how the interaction of macroprudential and monetary policies a¤ect the economy. We take as a baseline a dynamic stochastic general equilibrium (DSGE) model which features a housing market in order to evaluate the performance of a rule on the loan-to-value ratio (LTV) interacting with the traditional monetary policy conducted by central banks. We find that, introducing the macroprudential rule mitigates the effects of booms on the economy by restricting credit. Furthermore, when both policies are active, interest-rate shocks have weaker effects on the economy. From a normative perspective, results show that the combination of monetary policy and the macroprudential rule is unambiguously welfare enhancing, especially when monetary policy does not respond to output and house prices and only to inflation. |
| Keywords: | macroprudential; monetary policy; collateral constraint; credit |
| JEL: | E32 E44 E58 |
| Date: | 2012–12 |
| URL: | http://d.repec.org/n?u=RePEc:cpm:dynare:023&r=ban |
| By: | Yasushi Hamao; Kenji Kutsuna; Joe Peek |
| Abstract: | This study uses Japanese data to address an important shortcoming of most of the existing literature on credit availability by including a set of unlisted firms (which are the firms most likely to be bank dependent) in the analysis, and by investigating differences between the treatment of listed and unlisted firms by their lenders. While we find evidence consistent with evergreening behavior by banks toward listed firms, whereby banks continue to lend to weak firms so they can continue making interest payments on existing loans and put off bankruptcy, the more striking result is that banks appear to be much less willing to engage in evergreening behavior toward the smaller, unlisted firms. Moreover, among listed firms, for which data on ownership by banks are available, a higher concentration of ownership of the firm by either the main bank or the firm's top three lenders increases the likelihood of the firm obtaining increased loans, suggesting that bank ownership of the firm stimulates evergreening behavior to a greater degree. However, the difference in treatment of unlisted firms relative to listed firms does not appear to be related simply to systematic differences in size between the two groups of firms. Thus, it appears that the distinguishing characteristic that determines whether a bank might evergreen loans to a firm is whether or not the firm is listed. Furthermore, this effect appears to be stronger for those firms listed on the more prestigious Tokyo Stock Exchange than for firms listed on other exchanges: being on the list (being listed) matters, and being on the A-list matters even more, consistent with a Too Connected To Fail phenomenon for nonfinancial firms in Japan. |
| Keywords: | Bank loans - Japan ; Small business - Japan |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedbwp:12-13&r=ban |
| By: | Óscar Arce (Directorate General Economics, Statistics and Research, Bank of Spain); Sergio Mayordomo (School of Economics and Business Administration, University of Navarra) |
| Abstract: | This paper studies the main effects of the short sales ban implemented in August 2011 in the Spanish stock market along two dimensions: financial stability and market performance. Regarding the first, we show that short positions were a significant determinant of the probability of default of medium-sized banks before the ban. We find that, by weakening the contagion effect coming from the sovereign risk, the ban helped stabilise the probability of default of medium-sized banks, an effect which is not significant in the case of the largest banks and non-financials. Nonetheless, the stabilising power of the ban came at the cost of a large decline in the relative liquidity, trading volumes and price information efficiency of medium-sized banks’ stocks. |
| Keywords: | Short-sales constraints, financial stability, financial institutions, credit default swap, contagion |
| JEL: | G01 G12 G14 G18 |
| Date: | 2012–12–21 |
| URL: | http://d.repec.org/n?u=RePEc:una:unccee:wp2512&r=ban |
| By: | Giuseppe Coco (Università degli studi di Firenze); David De Meza (London School of Economics); Giuseppe Pignataro (Università degli studi di Bologna); Francesco Reito (Università degli studi di Catania) |
| Abstract: | Can a bank increase its profi t by subsidizing inactivity? This paper suggests this may occur, due to the presence of hidden information, in a monopolistic credit market. Rather than offering credit in a pooling contract, a monopolist bank can sort borrowers through an appropriate subsidy to inactivity. Under some conditions, sorting may avoid the collapse of the market and increases the welfare of everybody. The bank increases its profi ts, good borrowers bene fit from lower interest rates and bad potential borrowers from the subsidy. The subsidy policy however implies a cross subsidy between contracts and this is possible only under monopoly. |
| Keywords: | Credit market, Screening, Subsidy |
| JEL: | D60 D82 H71 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:frz:wpaper:wp2012_27.rdf&r=ban |
| By: | Andreas Fuster; Paul S. Willen |
| Abstract: | Surprisingly little is known about the importance of mortgage payment size for default, as efforts to measure the treatment effect of rate increases or loan modifications are confounded by borrower selection. We study a sample of hybrid adjustable-rate mortgages that have experienced large rate reductions over the past years and are largely immune to these selection concerns. We show that interest rate changes dramatically affect repayment behavior. Our estimates imply that cutting a borrower’s payment in half reduces his hazard of becoming delinquent by about two-thirds, an effect that is approximately equivalent to lowering the borrower’s combined loan-to-value ratio from 145 to 95 (holding the payment fixed). These findings shed light on the driving forces behind default behavior and have important implications for public policy. |
| Keywords: | Mortgage loans ; Adjustable rate mortgages ; Default (Finance) |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedbpp:12-10&r=ban |
| By: | Honkapohja, Seppo (Bank of Finland) |
| Abstract: | The financial liberalization in the four Nordic countries (Denmark, Finland, Norway, and Sweden) that took place mostly in the 1980s led to a major financial crisis in three of those countries. The crises in Finland, Norway, and Sweden are among the deepest financial crises in advanced market economies since World War II. Denmark experienced some banking problems but managed to avoid a systemic crisis. This paper reviews the process of liberalization and discusses the reasons why Finland, Norway, and Sweden drifted into financial and economic crises. |
| Keywords: | financial repression; credit rationing; capital account controls; financial deregulation |
| JEL: | E42 F36 G28 |
| Date: | 2012–12–14 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:bofrdp:2012_036&r=ban |
| By: | Sergio Mayordomo (School of Economics and Business Administration, University of Navarra); Juan Ignacio Peña (Department of Business Administration, Universidad Carlos III de Madrid); María Rodríguez-Moreno (European Central Bank) |
| Abstract: | This study presents robust empirical evidence suggesting the existence of significant liquidity commonalities in the corporate Credit Default Swap (CDS) market. Using daily data for 438 firms from 25 countries in the period 2005-2012 we find that these commonalities vary over time, being stronger in periods in which the global, counterparty, and funding liquidity risks increase. However, commonalities do not depend on firm’s characteristics. The level of the liquidity commonalities differs across economic areas being on average stronger in the European Monetary Union. The effect of market liquidity is stronger than the effect of industry specific liquidity in most industries excluding the banking sector. We document the existence of asymmetries in commonalities around financial distress episodes such that the effect of market liquidity is stronger when the CDS market price increases. The results are not driven by the CDS data imputation method or by the liquidity of firms with high credit risk and are robust to alternative liquidity measures. |
| Keywords: | Credit Default Swap, Liquidity Commonalities, Global Risk, Funding Liquidity Risk, Counterparty Risk |
| JEL: | G12 G15 |
| Date: | 2012–12–21 |
| URL: | http://d.repec.org/n?u=RePEc:una:unccee:wp2312&r=ban |
| By: | Gregory Connor; Brian O’Kelly |
| Abstract: | The Eurozone needs a bank resolution regime that can work across seventeen independent nations of diverse sizes with varying levels of financial development, limited fiscal coresponsibility, and with systemic instability induced by quick and low-cost deposit transfers across borders. We advocate a Coasean approach to bank resolution policy in the Eurozone, which emphasises clear and consistent contracts and makes explicit the public ownership of the externality costs of bank distress. A variety of resolution mechanisms are compared including bank debt holder bail-in, prompt corrective action, and contingent convertible bonds. We argue that the “dilute-in” of bank debt holders via contingent convertibility provides a clearer and simpler Coasean bargain for the Eurozone than the more conventional alternatives of debt holder bail-in or prompt corrective action. |
| Date: | 2012–12 |
| URL: | http://d.repec.org/n?u=RePEc:fmg:fmgsps:sp214&r=ban |
| By: | Timothée Papin (CEREMADE - CEntre de REcherches en MAthématiques de la DEcision - CNRS : UMR7534 - Université Paris IX - Paris Dauphine); Gabriel Turinici (CEREMADE - CEntre de REcherches en MAthématiques de la DEcision - CNRS : UMR7534 - Université Paris IX - Paris Dauphine) |
| Abstract: | We investigate in this paper a perpetual prepayment option related to a corporate loan. The short interest rate and default intensity of the rm are supposed to follow CIR processes. A liquidity term that represents the funding costs of the bank is introduced and modeled as a continuous time discrete state Markov chain. The prepayment option needs speci c attention as the payo itself is a derivative product and thus an implicit function of the parameters of the problem and of the dynamics. We prove veri cation results that allows to certify the geometry of the exercise region and compute the price of the option. We show moreover that the price is the solution of a constrained minimization problem and propose a numerical algorithm building on this result. The algorithm is implemented in a two-dimensional code and several examples are considered. It is found that the impact of the prepayment option on the loan value is not to be neglected and should be used to assess the risks related to client prepayment. Moreover the Markov chain liquidity model is seen to describe more accurately clients' prepayment behavior than a model with constant liquidity. |
| Keywords: | funding costs, liquidity regime, loan prepayment, mortgage option, American option, perpetual option, option pricing, variational inequality, prepayment option, CIR process, switching regimes, Markov modulated dynamics. |
| Date: | 2012–12–21 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:hal-00768571&r=ban |
| By: | Roger Myerson (University of Chicago) |
| Abstract: | We consider a simple overlapping-generations model with risk-averse financial agents subject to moral hazard. Efficient contracts for such financial intermediaries involve back-loaded late-career rewards. Compared to the analogous model with risk-neutral agents, risk aversion tends to reduce the growth of agents' responsibilities over their careers. This moderation of career growth rates can reduce the amplitude of the widest credit cycles, but it also can cause small deviations from steady state to amplify over time in rational-expectations equilibria. We find equilibria in which fluctuations increase until the economy enters a boom/bust cycle where no financial agents are hired in booms. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed012:182&r=ban |
| By: | Mathias Hoffmann (University of Zurich); Toshihiro Okubo (Keio University) |
| Abstract: | How do financial development and financial integration interact? We focus on Japan's Great Recession after 1990 to study this question. Regional differences in banking integration affected how the recession spread across the country: financing frictions for credit-dependent firms were more severe in less integrated prefectures, which saw larger decreases in lending by nationwide banks and lower GDP growth. We explain these cross-prefectural differences in banking integration by reference to prefectures' different historical pathways to financial development. After Japan's opening to trade in the 19th century, silk reeling emerged as the main export industry. The silk reeling industry depended heavily on credit for working capital but comprised many small firms that could not borrow directly from larger banks. Instead, silk merchants in Yokohama, the main export hub for silk, provided silk reelers with trade loans. Many regional banks in Japan were founded as local clearing houses for such loans, and regional banks continued to account for above-average shares in lending in the formerly silk-exporting prefectures long after the decline of the silk industry. Using the cross-prefectural variation in the number of silk filatures in 1895 as an instrument, we confirm that the post-1990 decline was worse in prefectures where credit constraints were tightened through low levels of banking integration. Our findings suggest that different pathways to financial development can lead to long-term differences in de facto financial integration, even if there are no formal barriers to capital mobility between regions, as is the case in modern Japan. |
| Date: | 2012–12 |
| URL: | http://d.repec.org/n?u=RePEc:kei:dpaper:2012-021&r=ban |
| By: | Kosuke Aoki (University of Tokyo); Kalin Nikolov (European Central Bank) |
| Abstract: | We build a model of rational bubbles in a limited commitment economy and show that the impact of the bubble on the real economy crucially depends on who holds the bubble. When banks are the bubble-holders, this amplifies the output boom while the bubble survives but also deepens the recession when the bubble bursts. In contrast, the real impact of bubbles held by ordinary savers is more muted. |
| Keywords: | Financial stability |
| Date: | 2012–11 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20121495&r=ban |
| By: | Gaetano Antinolfi; Francesca Carapella; Charles Kahn; Antoine Martin; David Mills; Ed Nosal |
| Abstract: | The events from the 2007–09 financial crisis have raised concerns that the failure of large financial institutions can lead to destabilizing fire sales of assets. The risk of fire sales is related to exemptions from bankruptcy's automatic stay provision enjoyed by a number of financial contracts, such as repo. An automatic stay prohibits collection actions by creditors against a bankrupt debtor or his property. It prevents a creditor from liquidating collateral of a defaulting debtor, since collateral is a lien on the debtor's property. In this paper, we construct a model of repo transactions, and consider the effects of changing the bankruptcy rule regarding the automatic stay on the activity in repo and real investment markets. We find that exempting repos from the automatic stay is beneficial for creditors who hold the borrowers' collateral. Although the exemption may increase the size of the repo market by enhancing the liquidity of collateral, it can also lead to subsequent damaging fire sales that are associated with reductions in real investment activity. Hence, policymakers face a trade-off between the benefits of investment activity and the benefits of liquid markets for collateral.. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedhwp:wp-2012-15&r=ban |
| By: | Sergei Koulayev; Marc Rysman; Scott Schuh; Joanna Stavins |
| Abstract: | The way that consumers make payments is changing rapidly and attracts important current policy interest. This paper develops and estimates a structural model of adoption and use of payment instruments by U.S. consumers. We use a cross-section of data from the Survey of Consumer Payment Choice, a new survey of consumer behavior. We evaluate substitution and income effects. Our simulations shed light on the consumer response to the 2011 regulation of interchange fees on debit cards imposed by the Dodd-Frank Act, as well as the proposed settlement between Visa and MasterCard and the Department of Justice that would allow merchants to surcharge the use of payment cards. |
| Keywords: | Payment systems ; Interchange fees (Banking) |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedbwp:12-14&r=ban |
| By: | Gadea Rivas, Maria Dolores; Pérez-Quirós, Gabriel |
| Abstract: | Much has been written about why economists failed to predict the latest financial and real crisis. Reading the recent literature, it seems that the crisis was so obvious that economists must have been blind when looking at data not to see it coming. In this paper, we illustrate this failure by looking at one of the most cited and relevant variables in this analysis, the now infamous credit to GDP chart. We compare the conclusions reached in the literature after the crisis with the results that could have been drawn from an ex ante analysis. We show that, even though credit affects the business cycle in both the expansion and the recession phases, this effect is almost negligible and impossible to exploit from a policymaker’s point of view. |
| Keywords: | Business Cycles; Credit; Financial Crisis; Forecasting |
| JEL: | C22 E32 |
| Date: | 2012–12 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:9269&r=ban |
| By: | Tamás Briglevics; Oz Shy |
| Abstract: | Recent legislation and court settlements in the United States allow merchants to use price discounts to steer customers to pay with means of payment that are less costly to merchants. This paper suggests one method of calculating merchants’ change in profit associated with giving price discounts to buyers who pay with debit cards and cash. We use data from the pilot of the Boston Fed’s Diary of Consumer Payment Choice to compute rough estimates of the expected net cost reduction by merchant type that may result from debit card and cash price discounts. We find that steering consumers to debit and cash via price discounts reduces some merchants’ card costs. However, this cost reduction may be insufficient to offset the cost increase of administering price menus that vary by payment instrument. In addition, rewards buyers receive on credit card transactions may exceed the price discounts that merchants can provide. These factors may explain why steering via price discounts is not widely observed. |
| Keywords: | Payment systems ; Credit cards ; Debit cards ; Cash transactions |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedbpp:12-9&r=ban |
| By: | Matteo Ciccarelli (European Central Bank); Eva Ortega (Banco de España); Maria Teresa Valderrama (Oesterreichische Nationalbank) |
| Abstract: | We investigate heterogeneity and spillovers in macro-financial linkages across developed economies, with a particular emphasis on the most recent recession. A panel Bayesian VAR model including real and financial variables identifies a statistically significant common component, which proves to be very significant during the most recent recession. Nevertheless, countryspecific factors remain important, which explains the heterogeneous behaviour across countries observed over time. Moreover, spillovers across countries and between real and financial variables are found to matter: a shock to a variable in a given country affects all other countries, and the transmission seems to be faster and deeper between financial variables than between real variables. Finally, shocks spill over in a heterogeneous way across countries |
| Keywords: | financial crisis, macro-financial linkages, panel VAR models |
| JEL: | C11 C33 E32 F44 |
| Date: | 2012–12 |
| URL: | http://d.repec.org/n?u=RePEc:bde:wpaper:1241&r=ban |
| By: | Wilko Bolt |
| Abstract: | Efficient payment services underpin the smooth operation of the economy. Competition and innovation are key drivers for payment market efficiency in both the short and long run. This paper gives an overview and tries to assess the key determinants that affect pricing, competition and the incentives to innovate in the payment market. While the payment landscape is changing rapidly, it is not yet clear what business model will survive. |
| Keywords: | Payments; pricing; competition; innovation |
| JEL: | L11 G21 C21 |
| Date: | 2012–12 |
| URL: | http://d.repec.org/n?u=RePEc:dnb:dnbwpp:362&r=ban |
| By: | Pierre-Olivier Gourinchas; Olivier Jeanne |
| Abstract: | Will the world run out of 'safe assets' and what would be the consequences on global financial stability? We argue that in a world with competing private stores of value, the global economic system tends to favor the riskiest ones. Privately produced stores of value cannot provide sufficient insurance against global shocks. Only public safe assets may, if appropriately supported by monetary policy. We draw some implications for the global financial system. |
| Keywords: | safe assets, dollar, euro, liquidity trap, government debt crisis |
| Date: | 2012–12 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:399&r=ban |
| By: | Robert Engle; Michael Fleming; Eric Ghysels; Giang Nguyen |
| Abstract: | We propose a new class of dynamic order book models that allow us to 1) study episodes of extreme low liquidity and 2) unite liquidity and volatility in one framework through which their joint dynamics can be examined. Liquidity and volatility in the U.S. Treasury securities market are analyzed around the time of economic announcements, throughout the recent financial crisis, and during flight-to-safety episodes. We document that Treasury market depth declines sharply during the crisis, accompanied by increased price volatility, but that trading activity seems unaffected until after the Lehman Brothers bankruptcy. Our models’ key finding is that price volatility and depth at the best bid and ask prices exhibit a negative feedback relationship and that each becomes more persistent during the crisis. Lastly, we characterize the Treasury market during flights to safety as having much lower market depth, along with higher trading volume and greater price uncertainty. |
| Keywords: | Liquidity (Economics) ; Government securities ; Treasury bonds ; Financial crises ; Bonds - Prices |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:590&r=ban |
| By: | Roger E.A. Farmer; Carine Nourry; Alain Venditti |
| Abstract: | Existing literature continues to be unable to offer a convincing explanation for the volatility of the stochastic discount factor in real world data. Our work provides such an explanation. We do not rely on frictions, market incompleteness or transactions costs of any kind. Instead, we modify a simple stochastic representative agent model by allowing for birth and death and by allowing for heterogeneity in agents' discount factors. We show that these two minor and realistic changes to the timeless Arrow-Debreu paradigm are sufficient to invalidate the implication that competitive financial markets efficiently allocate risk. Our work demonstrates that financial markets, by their very nature, cannot be Pareto efficient, except by chance. Although individuals in our model are rational; markets are not. |
| JEL: | E44 G01 G12 G14 |
| Date: | 2012–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:18647&r=ban |
| By: | Stephen Williamson (Washington University in St. Louis); Francesca Carapella (Board of Governors of the Federal Reserv) |
| Abstract: | A model of credit and government debt with limited commitment is constructed, building on a Lagos-Wright construct. In the baseline equilibrium, global punishments support an efficient equilibrium in which government debt is neutral - there is Ricardian equivalence. In a symmetric equilibrium with individual punishments, trade in government debt essentially always serves to increase welfare by altering the incentive to default. In asymmetric equilibria, all borrowers are fundamentally identical, but some default in equilibrium, there is an adverse selection problem in a segment of the credit market, and good borrowers pay a default premium. Government debt, in addition to altering the incentive to default, serves to mitigate the adverse selection problem. Thus, government debt relaxes incentive constraints, working through an endogenous collateral effect. The model highlights the role of government debt in helping to solve the problem of a self-fulfilling breakdown in credit markets. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed012:226&r=ban |
| By: | Alan M. Taylor |
| Abstract: | What can history can tell us about the relationship between the banking system, financial crises, the global economy, and economic performance? Evidence shows that in the advanced economies we live in a world that is more financialized than ever before as measured by importance of credit in the economy. I term this long-run evolution "The Great Leveraging" and present a ten-point examination of its main contours and implications. |
| Keywords: | financial development, credit, booms, crises, recessions, global imbalances, Great Recession, fiscal policy |
| Date: | 2012–12 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:398&r=ban |