|
on Banking |
| By: | Peter Christoffersen (University of Toronto and CREATES); Kris Jacobs (University of Houston); Xisong Jin (University of Luxembourg); Hugues Langlois (McGill University) |
| Abstract: | We characterize diversification in corporate credit using a new class of dynamic copula models which can capture dynamic dependence and asymmetry in large samples of firms. We also document important differences between credit spread and equity return dependence dynamics. Modeling a decade of weekly CDS spreads for 215 firms, we find that copula correlations are highly time-varying and persistent, and that they increase significantly in the financial crisis and have remained high since. Perhaps most importantly, tail dependence of CDS spreads increase even more than copula correlations during the crisis and remain high as well. The most important shocks to credit dependence occur in August of 2007 and in August of 2011, but interestingly these dates are not associated with significant changes to median credit spreads. |
| Keywords: | Credit risk, default risk, CDS, dynamic dependence, copula |
| JEL: | G12 |
| Date: | 2013–11–22 |
| URL: | http://d.repec.org/n?u=RePEc:aah:create:2013-46&r=ban |
| By: | Dong Hwan Oh; Andrew J. Patton |
| Abstract: | This paper proposes a new class of copula-based dynamic models for high dimension conditional distributions, facilitating the estimation of a wide variety of measures of systemic risk. Our proposed models draw on successful ideas from the literature on modeling high dimension covariance matrices and on recent work on models for general time-varying distributions. Our use of copula-based models enable the estimation of the joint model in stages, greatly reducing the computational burden. We use the proposed new models to study a collection of daily credit default swap (CDS) spreads on 100 U.S. firms over the period 2006 to 2012. We find that while the probability of distress for individual firms has greatly reduced since the financial crisis of 2008-09, the joint probability of distress (a measure of systemic risk) is substantially higher now than in the pre-crisis period. |
| Keywords: | correlation, tail risk, financial crises, DCC |
| JEL: | C32 C58 G01 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:duk:dukeec:13-30&r=ban |
| By: | Céline Meslier-Crouzille (LAPE - Laboratoire d'Analyse et de Prospective Economique - Université de Limoges : EA1088 - Institut Sciences de l'Homme et de la Société); Ruth Tacneng (LAPE - Laboratoire d'Analyse et de Prospective Economique - Université de Limoges : EA1088 - Institut Sciences de l'Homme et de la Société); Amine Tarazi (LAPE - Laboratoire d'Analyse et de Prospective Economique - Université de Limoges : EA1088 - Institut Sciences de l'Homme et de la Société) |
| Abstract: | This paper examines the impact of bank revenue diversification on the performance of banks in an emerging economy. Using a unique dataset with detailed information on non- interest income, our findings show that, conversely to studies on Western economies, a shift towards non-interest activities increases bank profits and risk-adjusted profits particularly when they are more involved in trading in government securities. Our results also indicate that foreign banks benefit more from such a shift than their domestic counterparts. Moreover, we account for the institutional and regulatory environment advocating loans to SMEs and find that higher involvement in non-interest activities is only beneficial for banks with low exposures to SMEs. Our findings have important policy implications in terms of achieving optimal diversification and lower risk exposure, which might conflict with policies aiming to promote SME lending. |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:hal-00918574&r=ban |
| By: | Dirk Schoenmaker; Toon Peek |
| Abstract: | This paper reviews the state of the banking sector in Europe. At the aggregate level, the empirical data suggest that the Baltics, Cyprus, Greece and Ireland, in particular, are hit by a strong decline in lending in the wake of the financial crisis. This deleveraging is mainly caused by a reduction in cross-border supply of credit. We also examine the capital position of the European banking system, using November 2013 stock market data. In the basic scenario to restore capital to a market based leverage ratio of 3%, EUR 84 billion of extra capital would be needed for the largest 60 banks. At the bank level, the top tertile of well-capitalised banks (with a market based leverage ratio well above 4%) continues lending. By contrast, the 2nd tertile of medium-capitalised banks (between 3 and 4%) and the 3rd tertile of weakly capitalised banks (well below 3%) show a strong decline in lending. Moreover, the market-to-book ratio is below one for these banks. The market thus gives a lower value to these banks. Our findings provide prima facie evidence of a credit crunch in Europe. Another fallout of the financial crisis is an increase, though very modest, of concentration in banking in the distressed countries (Greece, Ireland, Portugal, Spain and Italy). The enhancement of financial stability through (forced) M&As seems to come at the expense of reduced competition. L'état du secteur bancaire en Europe Ce document examine l'état du secteur bancaire en Europe. Au niveau agrégé, les données empiriques suggèrent que les pays baltes, Chypre, la Grèce et l'Irlande, en particulier, sont touchés par une forte diminution du crédit à la suite de la crise financière. Ce désendettement est principalement dû à une réduction de l'offre transfrontalière de crédit. Nous examinons également la capitalisation du système bancaire européen, en utilisant les données boursières de novembre 2013. Dans le scénario de base qui consiste à restaurer à 3 % le ratio de levier fondé sur la capitalisation boursière, 84 milliards d’euros de capitaux supplémentaires seraient nécessaires pour les 60 plus grandes banques. Au niveau des banques, le tiers supérieur des banques les mieux capitalisées (avec un ratio de levier fondé sur la capitalisation boursière bien au-dessus de 4 %) continue de prêter. En revanche, le deuxième tiers de banques de capitalisation intermédiaire (entre 3 et 4 %) et le troisième tiers des banques faiblement capitalisées (bien en-dessous de 3 %) montrent une forte diminution des prêts. En outre, le ratio entre valeur de marché et valeur comptable est inférieur à un pour ces banques. Le marché donne ainsi à ces banques une valeur inférieure. Nos résultats fournissent la preuve prima facie d'une chute du crédit en Europe. Une autre retombée de la crise financière est une augmentation, bien que très modeste, de la concentration du secteur bancaire dans les pays en difficulté (Espagne, Grèce, Irlande, Italie et Portugal). Le renforcement de la stabilité financière à travers des fusions et acquisitions (forcées) semble se faire au détriment de la concurrence. |
| Keywords: | capital, credit supply, banks, geographical segmentation, deleveraging, cross-border banking, activité bancaire transfrontalière, segmentation géographique, banques, capital, offre de crédit, désendettement |
| JEL: | D40 F36 G21 G28 |
| Date: | 2013–12–13 |
| URL: | http://d.repec.org/n?u=RePEc:oec:ecoaaa:1102-en&r=ban |
| By: | Pau Rabanal (IMF); Dominic Quint (Free University Berlin) |
| Abstract: | In this paper, we study the optimal mix of monetary and macroprudential policies in an estimated two-country model of the euro area. The model includes real, nominal and financial frictions, and hence both monetary and macroprudential policies can play a role. We find that the introduction of a macroprudential rule would help in reducing macroeconomic volatility, improve welfare, and partially substitute for the lack of national monetary policies. Macroprudential policies always increase the welfare of savers, but their effects on borrowers depend on the shock that hits the economy. In particular, macroprudential policies may entail welfare costs for borrowers under technology shocks, by increasing the countercyclical behavior of lending spreads. |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed013:604&r=ban |
| By: | Schaeck, K.; Silva Buston, C.F.; Wagner, W.B. (Tilburg University, Center for Economic Research) |
| Abstract: | Abstract: We decompose the correlation of bank stock returns into a systemic risk component and a component arising from diversi cation activities. Estimation for U.S. Bank Holding Companies (BHCs) shows the diversification component to be large and positively related to BHC performance during the crisis of 2007-2009. This suggests that it is important to distinguish between the two sources of interbank correlations when quantifying systemic risk at banks. Our decomposition also permits us to estimate the marginal gains from diversfication, which turn out to be rapidly declining with bank size. Since large banks are additionally found to display high levels of the systemic risk component, they are hence predominantly exposed to the undesirable source of interbank correlation. |
| Keywords: | systemic risk;interbank correlation;diversification |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:kubcen:2013077&r=ban |
| By: | Sylwester Kozak (Department of Financial System, Narodowy Bank Polski; Economic Faculty of SGGW) |
| Abstract: | Consolidation of the Polish banking sector was greatly associated with development and expansion of the banking sectors of EU countries and followed some consolidation patterns used by US banks. Deregulation of 1989 contributed to creation of a large group of small private banks and paved the way to privatization of the state-owned banks comprising majority of the market. In the 1990s consolidation resulted mostly from takeovers of insolvent newly created banks and had a limited impact on the banking sector. At the turn of the 1990s and the 2000s, after completion of privatization, large banks controlled by the same foreign investors merged within their capital groups and harmonized operations in one entity, frequently after changing names for parent bank names. This process impacted market concentration the most. Poland`s entrance to EU resulted in cross-border consolidation relied on taking over subsidiaries by branches of their parent banks in Poland. Developments of the EU banking sector significantly contributed to mergers and acquisitions of Polish banks. Takeovers of parent banks resulted in immediate mergers of their subsidiaries, and the post-crisis recovery process resulted in a forced sale-out their subsidiaries, creating opportunities for consolidation and market expansion of some Polish medium-sized banks. |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:nbp:nbpmis:166&r=ban |
| By: | Dwight Jaffee (UC Berkeley); Alexei Tchistyi (Haas School of Business, UC Berkeley); Boris Albul (UC Berkeley) |
| Abstract: | This paper provides a formal model of contingent convertible bonds (CCBs), a new instrument offering potential value as a component of corporate capital structures for all types of firms, as well as being considered for the reform of prudential bank regulation following the recent financial crisis. CCBs are debt instruments that automatically convert to equity if and when the issuing firm or bank reaches a specified level of financial distress. CCBs have the potential to avoid bank bailouts of the type that occurred during the subprime mortgage crisis when banks could not raise sufficient new capital and bank regulators feared the consequences if systemically important banks failed. While qualitative discussions of CCBs are available in the literature, this is the first paper to develop a formal model of their properties. The paper provides analytic propositions concerning CCB attributes and develops implications for structuring CCBs to maximize their general benefits for corporations and their specific benefits for prudential bank regulation. |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed013:682&r=ban |
| By: | Morten L. Bech; Todd Keister |
| Abstract: | In addition to revamping existing rules for bank capital, Basel III introduces a new global framework for liquidity regulation. One part of this framework is the liquidity coverage ratio (LCR), which requires banks to hold sufficient high-quality liquid assets to survive a 30-day period of market stress. As monetary policy typically involves targeting the interest rate on loans of one of these assets — central bank reserves — it is important to understand how this regulation may impact the efficacy of central banks’ current operational frameworks. We introduce term funding and an LCR requirement into an otherwise standard model of monetary policy implementation. Our model shows that if banks face the possibility of an LCR shortfall, then the usual link between open market operations and the overnight interest rate changes and the short end of the yield curve becomes steeper. Our results suggest that central banks may want to adjust their operational frameworks as the new regulation is implemented. |
| Keywords: | Basel III, Liquidity regulation, LCR, Reserves, Corridor system, Monetary policy |
| Date: | 2013–10 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:432&r=ban |
| By: | Gong, D.; Ligthart, J.E. (Tilburg University, Center for Economic Research) |
| Abstract: | Abstract: Corporate income taxation, by affecting the after-tax cost of funding, has implications for a bank's incentive to securitize. Using a sample of OECD banks over the period 1999-2006, we fi nd that corporate income taxation led to more securitization at banks that are constrained in funding markets, while it did not affect securitization at unconstrained banks. This is consistent with prior theory suggesting that the tax effects of securitization depend on the extent to which banks face funding constraints. Our results suggest that a country's tax system has distorting effects on banks' securitization decisions and therefore proposals of new taxes on bank profi ts are inappropriate. |
| Keywords: | Securitization;Banking;Corporate Income Tax |
| JEL: | G21 H25 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:kubcen:2013067&r=ban |
| By: | Duprey , T. |
| Abstract: | This paper is a first attempt to connect the heterogeneity in bank efficiency with lending fluctuations and allocation efficiency : there is a trade-off between the two in the presence of heterogeneity in bank monitoring efficiency. The mechanism at hand is twofold. (a) First the rent extracted by the most efficient bank distorts incentives of entrepreneurs to undertake efforts. (b) Second banks specialising on contracts that do not include monitoring feature less cyclical fluctuations of aggregate lending. This has clear implications: (i) the presence of banking heterogeneity decreases firms’ average productivity as it increases adverse selection by entrepreneurs as well as favours rent extractions by banks; (ii) an individual bank featuring a lower cyclicality signals a lower efficiency in its monitoring abilities; (iii) a heterogeneous banking system featuring a lower cyclicality of aggregate lending might not be desirable as it may come along with allocative and incentives distortions. |
| Keywords: | firms’ bankruptcy, economic crisis, survival, duration model. |
| JEL: | G21 E30 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:bfr:banfra:464&r=ban |
| By: | Emanuele Brancati (University of Rome Tor Vergata) |
| Abstract: | This paper takes advantage of the Italian experience during the Lehman crisis to test the effects of a banking shock on the real decisions of client firms. Italy is an ideal laboratory because of the structure of its industrial system, mainly composed by small firms, that make large use of (short-term) bank debt and have no access to alternative sources of finance. Moreover, the financial crisis represented an unexpected event that was largely exogenous to the financial position of both Italian banks and firms. This provides a quasi-natural experiment to study the effect of supply shocks on the real economy. The analysis is performed exploiting the information on the lender-borrower relationship from a newly available survey on a representative sample of small and medium enterprises. The magnitude of the shock is modeled with bank pre-crisis exposures to Dollar-denominated assets and liabilities, then interacted with time-varying market measures on the riskiness of the U.S. system (CDS spreads). After controlling for demand conditions I find robust evidence that banks' exposures to Dollar-denominated items affect the investment rate, the amount of borrowing, and the probability of financial constraints of their client firms. The mechanism of transmission is characterized by a flight to quality, with a redistribution of loans away from riskier borrowers. Furthermore, the effects are stronger for firms that borrow from undercapitalized and illiquid banks or financial institutions that depend more upon bank-based sources of finance. |
| Keywords: | Financial crises, banks, lending, investment, flight to quality, financial constraints |
| JEL: | E22 G01 G21 |
| Date: | 2013–12–18 |
| URL: | http://d.repec.org/n?u=RePEc:rtv:ceisrp:302&r=ban |
| By: | Horvath, B.L. (Tilburg University, Center for Economic Research) |
| Abstract: | Abstract: The tax-bene t of interest deductibility encourages debt nancing, but regulatory and market constraints create dependency between bank leverage and risk. Using a large international sample of banks this paper estimates the short and long run effects of corporate income taxes (CIT) on bank capital structure and portfolio risk accounting for their simultaneous determination. A 10 percentage point increase in the statutory CIT rate is associated with an increase of 0.8-1.4 percentage points in bank leverage and a 2-7-percentage point reduction in the average risk-weight of assets. While the estimated overall effect of taxation on bank risk is modest, it induces signi cant portfolio reallocation toward less lending. These results suggest that any elimination of the tax-bias of debt may not bring the expected benefi ts for bank stability. |
| Keywords: | Bank leverage;Bank regulation;Bank risk;Corporate taxation;Debt-bias |
| JEL: | G21 G28 G32 H25 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:kubcen:2013076&r=ban |
| By: | Mehdi Beyhaghi; Chris D'Souza; Gordon S. Roberts |
| Abstract: | We employ a comprehensive data set and a variety of methods to provide evidence on the magnitude of large banks’ funding advantage in Canada, and on the extent to which market discipline exists across different securities issued by the Canadian banks. The banking sector in Canada provides a unique setting in which to examine market discipline along with the prospects of proposed reforms, because Canada has no history of government bailouts. Our results suggest that large banks likely have a funding advantage over small banks after controlling for bank-specific and market risk factors. Working with hand-collected market data on debt issues by large banks, we also find that market discipline exists for subordinated debt and not for senior debt. |
| Keywords: | Financial Institutions; Interest rates |
| JEL: | G01 G21 G28 G32 G33 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:13-50&r=ban |
| By: | Franziska Bremus |
| Abstract: | Patterns in cross-border banking have changed since the global financial crisis. This may affect domestic bank market structures and macroeconomic stability in the longer term. In this study, I theoretically and empirically analyze how different modes of cross-border banking impact bank concentration. I use a two- country general equilibrium model with heterogeneous banks developed by De Blas and Russ (2010) to grasp the effect of cross-border lending and foreign direct investment in the banking sector on bank market structures. The model suggests that both cross-border lending and bank FDI mitigate concentration. Empirical evidence from a linked micro-macro panel dataset of 18 OECD countries supports the theoretical predictions: higher volumes of bank FDI and of cross-border lending coincide with lower Herfindahl-indexes in bank credit markets. |
| Keywords: | Cross-border lending, bank foreign direct investment, bank market concentration, net interest margins |
| JEL: | E44 F41 G21 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:diw:diwwpp:dp1344&r=ban |
| By: | Franziska Bremus; Claudia M. Buch; Katheryn N. Russ; Monika Schnitzer |
| Abstract: | Does the mere presence of big banks affect macroeconomic outcomes? In this paper, we develop a theory of granularity (Gabaix, 2011) for the banking sector, introducing Bertrand competition and heterogeneous banks charging variable markups. Using this framework, we show conditions under which idiosyncratic shocks to bank lending can generate aggregate fluctuations in the credit supply when the banking sector is highly concentrated. We empirically assess the relevance of these granular effects in banking using a linked micro-macro dataset of more than 80 countries for the years 1995-2009. The banking sector for many countries is indeed granular, as the right tail of the bank size distribution follows a power law. We then demonstrate granular effects in the banking sector on macroeconomic outcomes. The presence of big banks measured by high market concentration is associated with a positive and significant relationship between bank-level credit growth and aggregate growth of credit or gross domestic product. |
| Keywords: | Granularity, concentration, bank competition, macroeconomic outcomes, bank markups |
| JEL: | E32 G21 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:diw:diwwpp:dp1348&r=ban |
| By: | Christoffer Kok (European Central Bank); Glenn Schepens (National Bank of Belgium, Research Department; Department of Financial Economics, Ghent University) |
| Abstract: | This paper investigates whether European banks have capital targets and how deviations from the target impact their equity composition and activity mix. Using quarterly data for a sample of large European banks between 2004 and 2011, we show that there are notable asymmetries in banks’ reactions to deviations from optimal capital levels. Banks prefer to reshuffle risk-weighted assets or increase asset holdings when being above their optimal Tier 1 ratio, whereas they rather try to increase equity levels or reshuffle risk-weighted assets without changing asset holdings when being below target. At the same time, focusing instead on a unweighted equity ratio target, we find evidence of deleveraging and lower loan growth for undercapitalized banks during the recent financial crisis, whereas in the pre-crisis periods banks primarily reacted to deviations from their optimal target by adjusting equity levels. |
| Keywords: | Banking, banking capital optimization, financial regulation, deleveraging, capital structure |
| JEL: | D22 E44 G20 G21 G28 |
| Date: | 2013–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbb:reswpp:201312-250&r=ban |
| By: | Federico Cingano (OECD/ELS, Paris, Bank of Italy); Francesco Manaresi (Bank of Italy); Enrico Sette (Bank of Italy) |
| Abstract: | This paper shows evidence on the real effects of the bank lending channel exploiting the dramatic 2007 liquidity drought in interbank markets as a source of variation in banks' credit supply. For a large sample of Italian firms we combine information on firm-bank credit relationships, firms and banks balance sheet data, and estimate both the direct effect of the liquidity drought on the investment rate and the sensitivity to bank credit of investment (as well as of other firms outcomes) in 2007-10. We find that: (i) pre-crisis exposure to the interbank markets does predict banks subsequent credit supply (ii) banks exposure also has a significant direct impact on firms investment rate, accounting for more than 40% of the negative trend in investment observed in the sample; (iii) firms' investments are highly sensitive to bank credit: a 10 percentage point fall in credit growth reduces the investment rate by 8-14 points over four years, depending on the definition of the credit variable; (iv) credit shocks have a significant impact on broader economic activity, lowering firms' value added, employment and intermediate inputs purchases; we also find evidence of its propagation through a contraction in the supply of trade credit by firms. |
| Keywords: | Bank Lending Channel, Corporate investments, Corporate liquidit,, Financial crisis |
| JEL: | E22 E44 G01 G21 G32 |
| Date: | 2013–12 |
| URL: | http://d.repec.org/n?u=RePEc:anc:wmofir:91&r=ban |
| By: | Silva Buston, C.F. (Tilburg University, Center for Economic Research) |
| Abstract: | Abstract: This paper analyzes the net impact of two opposing effects of active risk management at banks on their stability: higher risk-taking incentives and better isolation of credit supply from varying economic conditions. We present a model where banks actively manage their portfolio risk by buying and selling credit protection. We show that anticipation of future risk management opportunities allows banks to operate with riskier balance sheets. However, since they are better insulated from shocks than banks without active risk management, they are less prone to insolvency. Empirical evidence from US bank holding companies broadly supports the theoretical predictions. In particular, we fi nd that active risk management banks were less likely to become insolvent during the crisis of 2007-2009, even though their balance sheets displayed higher risktaking. These results provide an important message for bank regulation, which has mainly focused on balance-sheet risks when assessing fi nancial stability. |
| Keywords: | Financial innovation;credit derivatives;financial stability;financial crisis |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:kubcen:2013068&r=ban |
| By: | Roland Meeks; Benjamin Nelson; Piergiorgio Alessandri |
| Abstract: | We develop a macroeconomic model in which commercial banks can offload risky loans to a ‘shadow’ banking sector, and financial intermediaries trade in securitized assets. We analyze the responses of aggregate activity, credit supply and credit spreads to business cycle and financial shocks. We find that: interactions and spillover effects between financial institutions affect credit dynamics; high leverage in the shadow banking system makes the economy excessively vulnerable to aggregate disturbances; and following a financial shock, stabilization policy aimed solely at the securitization markets is relatively ineffective. |
| Date: | 2013–12 |
| URL: | http://d.repec.org/n?u=RePEc:een:camaaa:2013-78&r=ban |
| By: | Lars Norden; Anamaria Stoian |
| Abstract: | We investigate whether banks use of loan loss provisions (LLPs) to manage the level and volatility of their earnings and examine the implications for bank risk. We find that banks use LLPs to manage the level and volatility of earnings downward when they are abnormally high and when expected dividends are lower than current earnings. Moreover, banks adjust LLPs to avoid fluctuations in their risk-weighted assets. Our findings highlight an important tradeoff in the provisioning for expected and unexpected losses that affects bank risk and profitability. |
| Keywords: | Loan loss provisions; Bank risk; Earnings smoothing; Discretion; Payout policy |
| JEL: | G21 G28 G34 M41 |
| Date: | 2013–12 |
| URL: | http://d.repec.org/n?u=RePEc:dnb:dnbwpp:404&r=ban |
| By: | Claudia Lambert; Felix Noth; Ulrich Schüwer |
| Abstract: | This paper tests whether an increase in insured deposits causes banks to become more risky. We use variation introduced by the U.S. Emergency Economic Stabilization Act in October 2008, which increased the deposit insurance coverage from $100,000 to $250,000 per depositor and bank. For some banks, the amount of insured deposits increased significantly; for others, it was a minor change. Our analysis shows that the more affected banks increase their investments in risky commercial real estate loans and become more risky relative to unaffected banks following the change. This effect is most distinct for affected banks that are low capitalized. |
| Keywords: | financial crisis, deposit insurance, bank regulation |
| JEL: | G21 G28 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:diw:diwwpp:dp1347&r=ban |
| By: | Holmberg, Karolina (Monetary Policy Department, Central Bank of Sweden) |
| Abstract: | Using panel data of 68,800 small and large firms, I examine whether firms are subject to shifts in the supply of credit over the business cycle. Shifts in the supply of credit are identified by exploring how firms substitute between commitment credit - lines of credit - and non-commitment credit. I find that firms on average rely more on commitment credits when monetary policy is tight and when the financial health of banks is weaker. The results are consistent with a bank lending channel of monetary policy and with shifts in the supply of credit following deteriorations in banks' balance sheets. |
| Keywords: | Bank Lending Channel; Bank Capital; Business Fluctuations |
| JEL: | E32 E44 E51 G01 G21 |
| Date: | 2013–11–01 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:rbnkwp:0280&r=ban |
| By: | Chris Stewart (Reserve Bank of Australia); Benn Robertson (Reserve Bank of Australia); Alexandra Heath (Reserve Bank of Australia) |
| Abstract: | This paper describes the Australian banking system, highlighting ways in which it differs from other major banking systems. It draws together themes from previous work conducted at the Reserve Bank of Australia (RBA), and outlines the role the banking system plays in the transmission of monetary policy and the transformation of risk. The paper also discusses some more recent trends, including the increased focus on deposit funding and potential changes in the determination of lending rates due to changes in the pricing of risk. These trends are, in turn, being influenced by changes in the preferences towards, and understanding of, different types of risk by investors, banks' management and regulators. |
| Keywords: | banking; composition of funding; financial crises; interest rates; supply of credit |
| JEL: | G01 G2 E4 E5 |
| Date: | 2013–12 |
| URL: | http://d.repec.org/n?u=RePEc:rba:rbardp:rdp2013-15&r=ban |
| By: | Andrievskaya, Irina (BOFIT); Semenova , Maria (BOFIT) |
| Abstract: | The interbank market plays an important role in the overall function of the financial system. The efficiency of the interbank market, in turn, depends largely on its inherent disciplining mechanisms. This paper investigates the discipline mechanisms of Russia’s interbank market, testing the hypothesis that market discipline in Russia was strong enough to constrain excessive risk-taking by participating banks before, during, and after the 2008–2009 financial crisis. The existence of quantity-based market discipline is investigated using Heckman’s sample selection model and the efficiency of market discipline is studied with a panel data model. Our approach detects market discipline only during the financial crisis, not before or after. Even during the crisis, its efficiency in curbing bank risk-taking was rather low. |
| Keywords: | market discipline; interbank market; risk-taking; banks; Russia |
| JEL: | G01 G21 P20 |
| Date: | 2013–11–29 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:bofitp:2013_029&r=ban |
| By: | Chatterji, S.; Ghosal, S. |
| Abstract: | Bank crises, by interrupting liquidity provision, have been viewed as resulting in welfare losses. In a model of banking with moral hazard, we show that second best bank contracts that improve on autarky ex ante require costly crises to occur with positive probability at the interim stage. When bank payoffs are partially appropriable, either directly via imposition of fines or indirectly by the use of bank equity as a collateral, we argue that an appropriately designed ex-ante regime of policy intervention involving conditional monitoring can prevent bank crises. |
| Keywords: | bank runs, contagion, moral hazard, liquidity, random, contracts, monitoring, |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:edn:sirdps:521&r=ban |
| By: | Barnett, Alina (Bank of England); Thomas, Ryland (Bank of England) |
| Abstract: | This paper investigates the role of credit demand and supply shocks in driving the weakness in UK banks’ lending and economic activity during both the recent financial crisis and the various UK financial crises since 1966. It uses a structural vector autoregression analysis to identify separate credit demand and supply shocks in addition to the standard macroeconomic shocks that are typically analysed in this framework. It finds that credit supply shocks can account for most of the weakness in bank lending since the onset of the crisis and between a third and a half of the fall in GDP relative to its historic trend. It also finds that credit supply shocks appear to behave more like aggregate supply shocks than aggregate demand shocks because they cause output and inflation to move in opposite directions. This may be because credit supply shocks affect potential supply in the economy or because they have a significant exchange rate effect. The results appear robust to different identifying assumptions. The main sensitivity appears to be when spreads are treated as a non-stationary variable and long-run restrictions are placed on the model. |
| Keywords: | Credit supply shocks; Financial and macro linkages; Bayesian SVARs; sign restrictions; long-run restrictions |
| JEL: | C11 C32 E51 E52 |
| Date: | 2013–12–20 |
| URL: | http://d.repec.org/n?u=RePEc:boe:boeewp:0482&r=ban |