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on Banking |
| By: | Giorgia Barboni; Tania Treibich |
| Abstract: | The widespread evidence of multiple bank lending relationships in credit markets suggests that firms are interested in setting up a diversity of banking links. However, it is hard to know from the empirical data whether a firm's observed number of lenders is symptomatic of financial constraints or rather a well-designed strategy. We design an experimental credit market to analyze the determinants of multiple bank lending relationships, both from the demand and the supply side. Our results show that borrowers prefer multiple lending when they are credit rationed and unable to stabilize their lending source, whatever their risk level. Moreover, rationed borrowers are less likely to repay and display a higher tendency to switch between lenders. At the same time, we observe that the determinants of lending change according to the type of information available on the loan applicants. Overall, our findings support the view that the number of banking relationships is mainly determined by the supply side. |
| Keywords: | Repeated games, experiment, information asymmetries, multiple lending, relationship lending |
| JEL: | C72 C73 C92 G21 |
| Date: | 2013–09 |
| URL: | http://d.repec.org/n?u=RePEc:gre:wpaper:2013-28&r=ban |
| By: | Viral V. Acharya; Gara Afonso; Anna Kovner |
| Abstract: | In August of 2007, banks faced a freeze in funding liquidity from the asset-backed commercial paper (ABCP) market. We investigate how banks scrambled for liquidity in response to this freeze and its implications for corporate borrowing. Commercial banks in the United States raised deposits and took advances from Federal Home Loan Banks (FHLBs). In contrast, foreign banks – with limited access to the deposit market and FHLB advances – lent less in the overnight interbank market and borrowed more from the Federal Reserve’s Term Auction Facility (TAF) auctions. Relative to before the ABCP freeze and relative to their non-U.S. dollar lending, foreign banks with ABCP exposure charged higher interest rates to corporations for syndicated loan packages denominated in dollars. The results point to a funding risk in global banking, manifesting as currency shortages for banks engaged in maturity transformation in foreign countries. |
| Keywords: | Commercial paper ; Bank liquidity ; Loans, Foreign ; Interbank market ; International liquidity |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:623&r=ban |
| By: | Philipp König; Kartik Anand; Frank Heinemann |
| Abstract: | Bank liability guarantee schemes have traditionally been viewed as costless measures to shore up investor confidence and prevent bank runs. However, as the experiences of some European countries, most notably Ireland, have demonstrated, the credibility and effectiveness of these guarantees are crucially intertwined with the sovereign’s funding risks. Employing methods from the literature on global games, we develop a simple model to explore the systemic linkage between the rollover risks of a bank and a government, which are connected through the government’s guarantee of bank liabilities. We show the existence and uniqueness of the joint equilibrium and derive its comparative static properties. In solving for the optimal guarantee numerically, we show how its credibility can be improved through policies that promote balance-sheet transparency. We explain the asymmetry in risk transfer between the sovereign and the banking sector, following the introduction of a guarantee as being attributed to the resolution of strategic uncertainties held by bank depositors and the opacity of the banks’ balance sheets. |
| Keywords: | Financial stability; Financial system regulation and policies |
| JEL: | G01 G28 D89 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:13-31&r=ban |
| By: | Jose M. Berrospide; Lamont K. Black; William R. Keeton |
| Abstract: | This paper investigates the mortgage lending of banks operating in multiple U.S. metropolitan areas during the housing market collapse of 2007-2009. Some metro areas in the U.S. suffered much greater mortgage defaults than others. We use this regional variation to identify whether high mortgage delinquencies in some markets affected multi-market banks' mortgage lending in other markets. Our results show that multi-market banks reduced local mortgage lending in response to delinquencies in other markets, consistent with the view that local economic shocks can be transmitted to other regions through banks' internal capital markets. This spillover effect was greatest in peripheral markets where multi-market banks do a small share of their lending. We find that securitized lending may have mitigated the decline in portfolio lending, but the effect on total lending is economically significant. The mechanism of the transmission appears to be through changes in bank capital and new information about the mortgage market. |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2013-52&r=ban |
| By: | Adams-Kane, Jonathon; Caballero, Julian A.; Lim, Jamus Jerome |
| Abstract: | One of the persistent policy problems faced by governments contemplating financial liberalizations is the question of whether to allow foreign banks entry into the domestic economy. This question has become ever more urgent in recent times, due to rapid financial globalization, coupled with the credit contractions experienced as a result of the 2007/08 financial crisis. This paper examines the question of whether opening the financial sector to foreign participation is a good idea for developing countries, using a unique bank-level database of foreign ownership. In particular, the authors examine whether the credit supply of majority foreign-owned financial institutions differ systematically conditional on a crisis event in their home economies. They show that foreign banks that were exposed to crises in their home countries exhibit changes in lending patterns that are lower by between 13 and 42 percent than their non-crisis counterparts. |
| Keywords: | Banks&Banking Reform,Debt Markets,Access to Finance,Financial Crisis Management&Restructuring,Bankruptcy and Resolution of Financial Distress |
| Date: | 2013–09–01 |
| URL: | http://d.repec.org/n?u=RePEc:wbk:wbrwps:6590&r=ban |
| By: | Joshua Gallin |
| Abstract: | I show how to use data from the Flow of Funds Accounts of the United States to estimate how much funding of nonfinancial businesses, households, and governments is provided by the domestic shadow banking system. I define the shadow banking system as the set of entities and activities that provide short-term funding outside of the traditional commercial banking system, but I do not equate all nonbank funding with shadow banking. My results suggest that at the end of 2008, domestic shadow-bank funding of the nonfinancial sector was an important, but fairly modest source of funding relative to that provided by more traditional funding sources such as commercial banks, insurance companies, and pension funds. However,my results suggest that domestic shadow banking played a large role in the increase of nonfinancial-sector debt in the two years before 2008:Q4 and was, at least in an arithmetic sense,the entire reason for the slowdown in nonfinancial-sector debt growth after 2008. Domestic shadow-bank funding of the nonfinancial sector has increased since 2010, but remains well below the level seen right in late 2008. |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2013-50&r=ban |
| By: | Jean Boivin; Marc P. Giannoni; Dalibor Stevanovic |
| Abstract: | We examine the dynamic effects of credit shocks using a large data set of U.S. economic and financial indicators in a structural factor model. The identified credit shocks, interpreted as unexpected deteriorations of credit market conditions, immediately increase credit spreads, decrease rates on Treasury securities, and cause large and persistent downturns in the activity of many economic sectors. Such shocks are found to have important effects on real activity measures, aggregate prices, leading indicators, and credit spreads. Our identification procedure does not require any timing restrictions between the financial and macroeconomic factors, and yields interpretable estimated factors. |
| Keywords: | Credit shock, structural factor analysis |
| JEL: | E32 E44 C32 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:lvl:lacicr:1324&r=ban |
| By: | Luigi Guiso (EIEF and CEPR); Paola Sapienza (Northwestern University, NBER and CEPR); Luigi Zingales (University of Chicago, NBER and CEPR) |
| Abstract: | We use a repeated survey of a large sample of clients of an Italian bank to measure possible changes in investors’ risk aversion following the 2008 financial crisis. We find that both a qualitative and a quantitative measure of risk aversion increase substantially after the crisis. These changes are correlated with changes in portfolio choices, but do not seem to be correlated with “standard” factors that affect risk aversion, such as wealth, consumption habit, and background risk. This opens the possibility that psychological factors might be driving it. To test whether a scary experience (as the financial crisis) can trigger large increases in risk aversion, we conduct a lab experiment. We find that indeed students who watched a scary video have a certainty equivalent that is 27% lower than the ones who did not. Following a sharp drop in stock prices,a fear model predicts that individuals should sell stocks, while the habit model has the opposite implications; people should actively buy stocks to bring the risky assets to the new optimal level. We show that after the drop in stock prices in 2008 individuals rebalanced their portfolio in a way consistent to a fear model. |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:eie:wpaper:1322&r=ban |
| By: | Tobias Adrian; Emanuel Moench; Hyun Song Shin |
| Abstract: | We investigate intermediary asset pricing theories empirically and find strong support for models that have intermediary leverage as the relevant state variable. A parsimonious model that uses detrended dealer leverage as a price-of-risk variable, and innovations to dealer leverage as a pricing factor, is shown to perform well in time series and cross-sectional tests of a wide variety of equity and bond portfolios. The model outperforms alternative specifications of intermediary pricing models that use intermediary net worth as a state variable, and it performs well in comparison to benchmark asset pricing models. We draw implications for macroeconomic modeling. |
| Keywords: | Asset pricing ; Intermediation (Finance) ; Macroeconomics ; Financial leverage |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:625&r=ban |
| By: | Jack R. Rogers (Department of Economics, University of Exeter) |
| Abstract: | This paper investigates the transmission from UK policy and a range of wholesale money market rates to retail mortgage rates using the long-run estimator proposed by Phillips and Loretan (1991), with a single-equation error correction model (SEECM) framework, from 1995 to 2009. I document the economy-wide effect of the financial market turmoil since August 2007, and show how this has altered long- and short-term relationships. In the long-run there is evidence of a contrast between the discounted mortgage rates that banks may use to initially attract customers, and standard variable rates, with pass-through complete for the former but not for the latter. For fixed rate mortgages, pass-through is generally complete. Since the crisis, for eight of the seventeen estimated relationships I find strong evidence in the long-run of both a significant jump in equilibrium spreads, and a fall in pass-through, whilst in the short-run there is a considerable weakening of the process that re-adjusts retail rates back towards their equilibrium with the money market. Although I do not find strong statistical evidence for an asymmetric re-adjustment process before August 2007, retail mortgage rates generally take considerably longer to move back towards their equilibrium with wholesale rates during times when they are relatively expensive. These results add to previous studies by showing that the UK retail banking sector is imperfectly competitive at the aggregate level, and also suggest that discounted rates are used as a highly competitive loss-leader product. |
| Keywords: | Mortgage Rates, Monetary Transmission, Error Correction Model. |
| JEL: | E43 E52 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:exe:wpaper:1307&r=ban |