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on Banking |
| By: | Mary Amiti; David E. Weinstein |
| Abstract: | We show that supply-side financial shocks have a large impact on firms’ investment. We do this by developing a new methodology to separate firm credit shocks from loan supply shocks using a vast sample of matched bank-firm lending data. We decompose loan movements in Japan for the period 1990 to 2010 into bank, firm, industry, and common shocks. The high degree of financial institution concentration means that individual banks are large relative to the size of the economy, which creates a role for granular shocks as in Gabaix (2011). As a result, idiosyncratic bank shocks—i.e., movements in bank loan supply net of borrower characteristics and general credit conditions—can have large impacts on aggregate loan supply and investment. We show that these idiosyncratic bank shocks explain 40 percent of aggregate loan and investment fluctuations. |
| JEL: | E44 G21 G31 |
| Date: | 2013–03 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:18890&r=ban |
| By: | Marco Cipriani; Antoine Martin; Bruno M. Parigi |
| Abstract: | In recent years, U.S. banks have increasingly relied on deposits from financial intermediaries, especially money market funds (MMFs), which collect funds from large institutional investors and lend them to banks. In this paper, we show that intermediation through MMFs allows investors to limit their exposure to a given bank (i.e., reap gains from diversification). However, since MMFs are themselves subject to runs from their own investors, a banking system intermediated through MMFs is more unstable than one in which investors interact directly with banks. A mechanism through which instability can arise in an MMF-intermediated financial system is the release of private information on bank assets, which is aggregated by MMFs and could lead them to withdraw en masse from a bank. In addition, we show that MMF intermediation can also be a channel of contagion among banking institutions. |
| Keywords: | Intermediation (Finance) ; Money market funds ; Bank investments ; Financial crises |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:599&r=ban |
| By: | Stefano Borgioli (European Central Bank); Ana Cláudia Gouveia; Claudio Labanca |
| Abstract: | This occasional paper explores the Consolidated Banking Data (CBD), a key component of the ECB statistical toolbox for financial stability analysis. We show that non-consolidated, host-country Monetary Financial Institutions (MFI) balance sheet data, which constitutes a key source of input into monetary analysis, are a rather weak proxy for consolidated, home-country data and therefore cannot easily substitute CBD for the purposes of macro-prudential assessment. In addition, it is argued that, notwithstanding the relevance of large banks, medium-sized and small banks must also be taken into account in financial stability analysis, given their relevance in several EU countries and their different business models. A discussion follows on how aggregate data, broken down by bank size, can be used to complement micro data, in particular by signalling where and what to look for, again highlighting the differences between large banks on the one hand and small and mediumsized banks on the other. JEL Classification: C82, G21 |
| Keywords: | Macro-prudential analysis, Consolidated Banking Data, banking indicators |
| Date: | 2013–01 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbops:20130140&r=ban |
| By: | Han, Rui; Melecky, Martin |
| Abstract: | In crisis times, depositors get anxious, can run on banks, and withdraw their deposits. Correlated deposit withdrawals of bank deposits could be mitigated if bank deposits are more diversified, i.e. held by more individuals. This paper examines the link between a broader access to bank deposits prior to the 2008 crisis and the dynamics of bank deposit growth in the crisis, while controlling for relevant covariates. Employing the proxies of Honohan (2008) for access to deposits and of Demirguc-Kunt and Klapper (2012) for the use of bank deposits, the authors find that greater access to bank deposits can make the deposit funding base of banks more resilient in times of financial stress. Policy efforts to enhance financial stability should thus focus not only on macroprudential regulation, but also recognize the positive effect of broader access to bank deposits on financial stability. |
| Keywords: | Financial Inclusion, Access to Deposits, Deposit Withdrawals, Financial Stability, 2008 Global Financial Crisis. |
| JEL: | G01 G21 G28 |
| Date: | 2013–03 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:45157&r=ban |
| By: | Adrian Van Rixtel; Gabriele Gasperini |
| Abstract: | This paper provides an overview of bank funding trends in the euro area following the 2007-09 global financial crisis and the euro area crisis. It shows that funding has become segmented along national borders and that secured instruments are much more prevalent than previously. Rising debt retention by euro area banks has accompanied greater dependence on liquidity provided by the ECB. |
| Keywords: | euro area, financial crisis, bank funding, renationalisation, secured issuance, debt retention |
| Date: | 2013–03 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:406&r=ban |
| By: | Tobias Adrian; Daniel Covitz; Nellie J. Liang |
| Abstract: | While the Dodd-Frank Act (DFA) broadens the regulatory reach to reduce systemic risks to the U.S. financial system, it does not address some important risks that could migrate to or emanate from entities outside the federal safety net. At the same time, it limits the types of interventions by financial authorities to address systemic events when they occur. As a result, a broad and forward-looking monitoring program, which seeks to identify financial vulnerabilities and guide the development of preemptive policies to help mitigate them, is essential. Systemic vulnerabilities arise from market failures that can lead to excessive leverage, maturity transformation, interconnectedness, and complexity. These vulnerabilities, when hit by adverse shocks, can lead to fire-sale dynamics, negative feedback loops, and inefficient contractions in the supply of credit. We present a framework that centers on the vulnerabilities that propagate adverse shocks, rather than shocks themselves, which are difficult to predict. Vulnerabilities can emerge in four areas: 1) systemically important financial institutions (SIFIs), 2) shadow banking, 3) asset markets, and 4) the nonfinancial sector. This framework also highlights how policies that reduce the likelihood of systemic crises may do so only by raising the cost of financial intermediation in noncrisis periods. |
| Keywords: | Financial stability ; Systemic risk ; Financial risk management ; Financial Institutions Monitoring System |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:601&r=ban |
| By: | Gunther Capelle-Blancard; Olena Havrylchyk |
| Abstract: | In the context of the financial crisis, many projects of bank levies have emerged. Yet, there is very little evidence on the incidence of bank taxes and, hence, it is not clear who will bear the burden of the new taxes. In this paper, we investigate the ability of banks to shift corporate income taxes to their clients and we consider whether tax incidence is influenced by market competition and banks’ market power. Our sample consists of 1,411 European commercial banks over the period 1992-2008. To measure competition we rely on a large number of indicators, such as banks’ market share, the Herfindhal index, the Lerner index and the Panzar and Rosse h-statistic. We find that even in uncompetitive markets banks are not able to shift corporate income taxes to their customers. Our results contradict earlier papers that find a significant pass-through, and we argue that previous studies suffer either from endogeneity problems or from the wrong specification of the tax burden. |
| Keywords: | Bank taxation;Bank levy;Net interest margin;European banks;Banking;market structure;Corporate tax incidence |
| JEL: | G21 H25 |
| Date: | 2013–02 |
| URL: | http://d.repec.org/n?u=RePEc:cii:cepidt:2013-09&r=ban |
| By: | Zhang, Lei (University of Warwick); Zhang, Lin (Southwestern University of Finance and Economics); Zheng, Yong (Southwestern University of Finance and Economics) |
| Abstract: | We use the global games approach to study key factors a?ecting the credit risk associated with roll-over of bank debt. When creditors are heterogenous, these include the extent of short-term borrowing and capital market liquidity for repo ?nancing. Speci?cally, in a model with a large institutional creditor and a continuum of small creditors independently making their roll-over decisions based on private information, we ?nd that increasing the proportion of short-term debt and/or decreasing market liquidity reduces the willingness of creditors to roll over. This raises credit risk in equilibrium. The presence of a large creditor does not always reduce credit risk, however, unless it is better informed. |
| Keywords: | Credit Risk; Coordination; Debt Crisis; Private information; Global games |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:cge:warwcg:123&r=ban |
| By: | Dennis Kuo; David Skeie; James Vickery; Thomas Youle |
| Abstract: | Interbank markets for term maturities experienced great stress during the 2007-09 financial crisis, as illustrated by the behavior of one- and three-month Libor. Despite widespread interest in these markets, little data are available on dollar interbank lending for maturities beyond overnight. We develop a methodology to infer individual term dollar interbank loans (for maturities between two days and one year) by applying a set of filters to payments settled on the Fedwire Funds Service, the large-value bank payment system operated by the Federal Reserve Banks. Our approach introduces several innovations and refinements relative to previous research by Furfine (1999) and others that measures overnight interbank lending. Diagnostic tests to date suggest our approach provides a novel and useful source of information about the term interbank market, allowing for a number of research applications. Limitations of the algorithm and caveats on its use are discussed in detail. We also present stylized facts based on the algorithm's results, focusing on the 2007-09 period. At the crisis peak following the failure of Lehman Brothers in September 2008, we observe a sharp increase in the dispersion of inferred term interbank interest rates, a shortening of loan maturities, and a decline in term lending volume. |
| Keywords: | Interbank market ; Fedwire ; Financial crises |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:603&r=ban |
| By: | Kris James Mitchener; Gary Richardson |
| Abstract: | This essay examines how the Banking Acts of the 1933 and 1935 and related New Deal legislation influenced risk taking in the financial sector of the U.S. economy. The analysis focuses on contingent liability of bank owners for losses incurred by their firms and how the elimination of this liability influenced leverage and lending by commercial banks. Using a new panel data set, we find contingent liability reduced risk taking. In states with contingent liability, banks used less leverage and converted each dollar of capital into fewer loans, and thus could survive larger loan losses (as a fraction of their portfolio) than banks in limited liability states. In states with limited liability, banks took on more leverage and risk, particularly in states that required banks with limited liability to join the Federal Deposit Insurance Corporation. In the long run, the New Deal replaced a regime of contingent liability with deposit insurance, stricter balance sheet regulation, and increased capital requirements, shifting the onus of risk management from bankers to state and federal regulators. |
| JEL: | E44 G28 G33 N22 |
| Date: | 2013–03 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:18895&r=ban |
| By: | Tasca, Paolo; Battiston, Stefano |
| Abstract: | We model the systemic risk associated with the so-called balance-sheet amplification mechanism in a system of banks with interlocked balance sheets and with positions in real-economy-related assets. Our modeling framework integrates a stochastic price dynamics with an active balance-sheet management aimed to maintain the Value-at-Risk at a target level. We find that a strong compliance with capital requirements, usually alleged to be procyclical, does not increase systemic risk unless the asset market is illiquid. Conversely, when the asset market is illiquid, even a weak compliance with capital requirements increases significantly systemic risk. Our findings have implications in terms of possible macro-prudential policies to mitigate systemic risk. |
| Keywords: | Systemic risk, Procyclicality, Leverage, Market liquidity, Network models |
| JEL: | G20 G28 |
| Date: | 2013–03 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:45156&r=ban |
| By: | Rodney Ramcharan; Skander Van den Heuvel; Stephane Verani |
| Abstract: | This paper studies how the collapse of the asset backed securities (ABS) market during the financial crisis of 2007-2009 affected the supply of credit to the broader economy using a new dataset that describes unique interbank relationships within the credit union industry. This industry is important for consumer finance, and we find that ABS related losses at correspondent credit unions are associated with a large contraction in the supply of consumer credit and a hoarding of cash among downstream credit unions. We also find that this contraction in credit supply was concentrated among downstream credit unions that began the crisis with lower capital asset ratios, and that it may have amplified the initial decline in house prices. These results suggest that capital regulation might shape the ability of financial institutions to transmit securities price volatility onto the real economy. |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2013-10&r=ban |
| By: | Irfan Akbar Kazi; Suzanne Salloy |
| Abstract: | This article investigates the dynamics of conditional correlation among the G14 banks’ dealer for the credit default swap market from January 2004 until May 2009. By using the asymmetric dynamic conditional correlation model developed by Cappiello, Engle and Sheppard (2006), we examine if there is contagion during the global financial crisis, following Lehman Brothers’ bankruptcy of September 15th, 2008. The main contribution of this article is to analyze if the interdependence structure between the G14 banks changed significantly during the crisis period. We try to identify the banks which were the most or the least affected by losses induced by the crisis and we draw some conclusions in terms of their vulnerability to financial shocks. We find that all banks became highly interdependent during Lehman Brothers’ bankruptcy (short term impact), but only some banks faced high contagion during the global financial crisis (long term impact). Regulators who try to reinforce banks’ stability with the Basel 3 reforms proposals should be interested by these results. |
| Keywords: | Financial Crisis, Contagion, Credit Default Swap, Lehman Brothers, Asymmetric Dynamic Conditional Correlation |
| JEL: | G01 G15 G21 G33 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:drm:wpaper:2013-6&r=ban |
| By: | Gogas, Periklis (Democritus University of Thrace, Department of International Economic Relations and Development); Papadimitriou, Theophilos (Democritus University of Thrace, Department of International Economic Relations and Development); Plakandaras, Vasilios (Democritus University of Thrace, Department of International Economic Relations and Development) |
| Abstract: | We propose a Support Vector Machine (SVM) based structural model in order to forecast the collapse of banking institutions in the U.S. using publicly disclosed information from their financial statements on a four-year rolling window. In our approach, the optimum input variable set is defined from a large dataset using an iterative relevance-based selection procedure. We train an SVM model to classify banks as solvent and insolvent. The resulting model exhibits significant ability in bank default forecasting. |
| Keywords: | Bank insolvency; SVM; local learning; feature selection; |
| JEL: | G21 |
| Date: | 2013–03–19 |
| URL: | http://d.repec.org/n?u=RePEc:ris:duthrp:2013_002&r=ban |
| By: | Marius Jurgilas (Norges Bank (Central Bank of Norway)); Filip Zikes (Bank of England) |
| Abstract: | This paper estimates the intraday value of money implicit in the UK unsecured overnight money market. Using transactions data on overnight loans advanced through the UK large value payments system CHAPS in 2003-2009, we find a positive and economically significant intraday interest rate. While the implicit intraday interest rate is quite small pre-crisis, it increases more than tenfold during the financial crisis of 2007-2009. The key interpretation is that an increase in implicit intraday interest rate reects the increased opportunity cost of pledging collateral intraday and can be used as an indicator to gauge the stress of the payment system. We obtain qualitatively similar estimates of the intraday interest rate by using quoted intraday bid and offer rates and confirm that our results are not driven by the intraday variation in the bid-ask spread. |
| Keywords: | Interbanl money market, Intraday liquidity |
| JEL: | E42 E58 G21 |
| Date: | 2013–03–14 |
| URL: | http://d.repec.org/n?u=RePEc:bno:worpap:2013_09&r=ban |
| By: | Thomas M. Eisenbach |
| Abstract: | Why does the market discipline that banks face seem too weak during good times and too strong during bad times? This paper shows that using rollover risk as a disciplining device is effective only if all banks face purely idiosyncratic risk. However, if banks' assets are correlated, a two-sided inefficiency arises: Good aggregate states have banks taking excessive risks, while bad aggregate states suffer from fire sales. The driving force behind this inefficiency is an amplifying feedback loop between asset liquidation values and market discipline. This feedback loop operates in both good and bad aggregate states, but with opposite effects. |
| Keywords: | Risk management ; Bank investments ; Risk assessment ; Financial markets |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:597&r=ban |
| By: | Ramdane Djoudad; Étienne Bordeleau |
| Abstract: | Default rates are series commonly used in stress testing. In Canada, as in many other countries, there are no historical series available for sectoral default rates on bank loans to firms. Knowledge of such data is required to assess the impact of shocks on the balance sheets of financial institutions and to conduct stress-testing exercises of the banking system. The authors discuss the methodology used to construct historical series of firm default rates for selected sectors of the Canadian economy, as well as the models applied to predict default rates. Their findings confirm the existence of a non-linear relationship between the gross domestic product, the unemployment rate and default rates. |
| Keywords: | Econometric and statistical methods, Financial Institutions, Financial stability |
| JEL: | C13 C18 G21 G33 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocadp:13-2&r=ban |
| By: | Viral V. Acharya; Heitor Almeida; Filippo Ippolito; Ander Perez |
| Abstract: | We propose and test a theory of corporate liquidity management in which credit lines provided by banks to firms are a form of monitored liquidity insurance. Bank monitoring and resulting credit line revocations help control illiquidity-seeking behavior by firms. Firms with high liquidity risk are likely to use cash rather than credit lines for liquidity management because the cost of monitored liquidity insurance increases with liquidity risk. We exploit a quasi-experiment around the downgrade of General Motors (GM) and Ford in 2005 and find that firms that experienced an exogenous increase in liquidity risk (specifically, firms that relied on bonds for financing in the pre-downgrade period) moved out of credit lines and into cash holdings in the aftermath of the downgrade. We observe a similar effect for firms whose ability to raise equity financing is compromised by pricing pressure caused by mutual fund redemptions. Finally, we find support for the model’s other novel empirical implication that firms with low hedging needs (high correlation between cash flows and investment opportunities) are more likely to use credit lines relative to cash, and are also less likely to face covenants and revocations when using credit lines. |
| JEL: | E22 E5 G21 G31 G32 |
| Date: | 2013–03 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:18892&r=ban |
| By: | Rama Cont (LPMA - Laboratoire de Probabilités et Modèles Aléatoires - CNRS : UMR7599 - Université Paris VI - Pierre et Marie Curie - Université Paris VII - Paris Diderot); Andreea Minca (LPMA - Laboratoire de Probabilités et Modèles Aléatoires - CNRS : UMR7599 - Université Paris VI - Pierre et Marie Curie - Université Paris VII - Paris Diderot) |
| Abstract: | We propose a stable non-parametric algorithm for the calibration of pricing models for portfolio credit derivatives: given a set of observations of market spreads for CDO tranches, we construct a risk-neutral default intensity process for the portfolio underlying the CDO which matches these observations, by looking for the risk neutral loss process 'closest' to a prior loss process, verifying the calibration constraints. We formalize the problem in terms of minimization of relative entropy with respect to the prior under calibration constraints and use convex duality methods to solve the problem: the dual problem is shown to be an intensity control problem, characterized in terms of a Hamilton--Jacobi system of differential equations, for which we present an analytical solution. We illustrate our method on ITRAXX index data: our results reveal strong evidence for the dependence of loss transitions rates on the past number of defaults, thus offering quantitative evidence for contagion effects in the risk--neutral loss process. |
| Keywords: | intensity control; stochastic control; point process; inverse problem; nonparametric methods; credit risk; CDO; contagion; |
| Date: | 2013–01–03 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:hal-00413730&r=ban |