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on Banking |
| By: | Bucher, Monika; Dietrich, Diemo; Hauck, Achim |
| Abstract: | Business cycles imply liquidity risks for banks. This paper explores how these risks influence bank lending over the cycle. With forward-looking banks, lending cycles, credit booms and busts, or suppressed and highly fragile bank systems can emerge, depending on the magnitude of liquidity risks. In this context, regulatory stability-enhancing measures have some unpleasant effects on bank lending. Imposing countercyclical capital adequacy ratio may amplify procyclicality or result in disintermediation, when liquidity risks are only moderate and financial stability is barely a threat. Adopting a regulatory margin call eliminates failures but stops lending for larger liquidity risks whereas a liquidity ratio might be a way to reduce risk-taking without fully hampering credit intermediation. -- |
| JEL: | G28 G21 E32 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc13:79792&r=ban |
| By: | Pausch, Thilo |
| Abstract: | The industrial organization approach to banking is extended to analyze the effects of interbank market activity and regulatory liquidity requirements on bank behavior. A multi-stage decision situation allows for considering the interaction between credit risk and liquidity risk of banks. This interaction is found to make a risk neutral bank behave as if it were risk averse in an environment where there is no interbank market and liquidity regulation. Introducing a buoyant interbank money market destroys endogenous risk aversion and allows banks to manage credit risk and liquidity risk independently. The paper shows that a liquidity regulation just like the one proposed in BCBS (2010) is not generally able to offset the separating effect of interbank money markets and recreate endogenous risk aversion of banks. -- |
| JEL: | G21 G28 G32 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc13:79702&r=ban |
| By: | Uhde, Andre; Farruggio, Christian; Michalak, Tobias C. |
| Abstract: | This paper empirically investigates the impact of the first announcement of TARP, the announcement of revised TARP, respective capital infusions under TARP-CPP and capital repayments on changes in shareholder value and the risk exposure of supported U.S. banks. Our analysis reveals a light and a dark side of TARP. While announcements as well as capital repayments may provoke positive wealth effects and a decrease in bank risk, equity capital injections to banks are observed to be a severe impediment to restore market confidence and financial stability. Furthermore, while TARP announcements and capital injections may increase systemic risk, no significant effect on systemic risk is found for capital repayments. -- |
| JEL: | G14 G21 G28 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc13:80004&r=ban |
| By: | Diego Avanzini; Alejandro Jara |
| Abstract: | This paper studies three related aspects of the Chilean banking’s systemic risk: (i) to what extent the degree of common risk exposure in the Chilean banking system has changed over the past decades, (ii) during which periods this exposure increased the most, and (iii) when this degree of commonality became a systemic concern. Additionally, it identifies systemically important financial institutions in Chile based on their contribution to the degree of common risk exposure. It finds that prior to the 2008-09 global financial crisis the degree of common risk exposure in Chile increased significantly, and that the banks that contributed the most were not necessarily the biggest ones in size, as measured by their assets share. |
| Date: | 2013–12 |
| URL: | http://d.repec.org/n?u=RePEc:chb:bcchwp:707&r=ban |
| By: | Korte, Josef |
| Abstract: | In general, banks play a growth-enhancing role for the real economy. However, distorted incentives of banks, depositors, and regulators around bank insolvency may corrupt banks' credit allocation and monitoring decisions, leading to suboptimal real economic outcomes. A rules-based prompt resolution regime for insolvent banks may reestablish the incentive system and provide for economically superior credit allocation and monitoring. We test this hypothesis of a 'catharsis effect' of regulatory insolvency using a large firm-level dataset and proposing a new indicator to measure the catharsis effect. Employing an instrumental variable setup and an interaction approach, we try to overcome potential endogeneity and causality concerns usually inhering research on real economic implications of bank regulation. We find a comparably stronger implementation of a hypothetical positive capital closure rule to have a positive and statistically as well as economically significant effect on individual firm growth - particularly for firms that are structurally more dependent on bank financing. Our findings are robust to various specifications. Investigating the transmission channels of the catharsis effect, we find that it essentially works through benefiting better quality firms and reallocating credit towards firms that need it most. Additional analyses suggest that the catharsis effect works best in open banking systems that provide high access to international finance and hence mitigate potentially negative credit supply effects of insolvent bank liquidation. Taken together, our findings advocate for stronger attention to incentive-compatible bank resolution regimes. -- |
| JEL: | G28 G21 K23 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc13:79938&r=ban |
| By: | Maier, Ulf; Haufler, Andreas |
| Abstract: | This paper studies regulatory competition in the banking sector in a model where banks are heterogeneous and taxpayers come up for the losses of failing banks. Capital requirements force the weakest banks to exit the market. This gives rise to a signalling effect of capital standards, as borrowing firms anticipate the higher average quality of banks in a more strictly regulated country. In this model, regulatory competition in capital standards may lead to a `race to the top' for two different reasons. First, if the signalling effect is sufficiently strong, the overall demand for loans from the high-quality banks of the regulating country rises, even though the number of active banks in this country is reduced. Second, if governments are heavily concerned about the tax revenue losses arising from bank failures, strict capital requirements are imposed to improve the pool quality of the domestic banking sector and reduce the risk to taxpayers. -- |
| JEL: | G21 G18 H73 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc13:79769&r=ban |
| By: | Jokivuolle, Esa (Bank of Finland Research and Aalto University); Keppo, Jussi (NUS Business School and Risk Management Institute, National University of Singapore) |
| Abstract: | The global financial crisis of 2007–2008 has given rise to new regulatory initiatives to put restrictions on the size and the term of bankers' pay. We revisit both theoretically and empirically the question of whether these regulations are justified. We model bonuses as a series of sequential call options on profits and show that they provide higher risk-taking incentives the shorter the time is between payments. However, using data on CEO bonuses at the end of 2006 and our model, we find no robust relationship between risk-taking incentives and US banks' stock returns during the global financial crisis. The crisis returns are related negatively to leverage and positively to the market-to-book equity ratio. Our findings suggest that regulating leverage would be more effective than regulating bankers' compensation. |
| Keywords: | banking; bonuses; regulation; compensation |
| JEL: | G01 G21 G28 J33 M52 |
| Date: | 2014–01–15 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:bofrdp:2014_002&r=ban |
| By: | Karmann, Alexander; Bühn, Andreas; Pedrotti, Marco |
| Abstract: | This paper analyzes the determinants of the interest margin of German banks over the period 1995-2007, explicitly addressing differences among different bank groups. We use three empirical models to focus on the following aspects: the time evolution of the interest margin, the average differences across groups, and the presence of autoregressive effects. For each model our results show that the interest margin can be mainly explained by market power and inefficiency, the influence of which is particularly high for cooperative banks. The Winner s Curse phenomenon and the cross-subsidization strategy negatively influence the margin of private banks. -- |
| JEL: | G21 G21 G21 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc13:80029&r=ban |
| By: | Stowasser, Till; Englmaier, Florian |
| Abstract: | We provide causal evidence that German savings banks where local politicians are by law involved in their management systematically adjust lending policies in response to local electoral cycles. The different timing of county elections across states and the existence of a control group of cooperative banks that are very similar to savings banks but lack their political connectedness allow for clean identification of causal effects of county elections on savings banks lending. These effects are economically meaningful and robust to various specifications. Moreover, politically induced lending increases in incumbent party entrenchment and in the contestedness of upcoming elections. -- |
| JEL: | D72 D73 G21 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc13:79897&r=ban |
| By: | Fungácová , Zuzana (BOFIT); Kochanova, Anna (BOFIT); Weill, Laurent (BOFIT) |
| Abstract: | This study examines how bribery influences bank debt ratios for a large sample of firms from 14 transition countries. We combine information on bribery practices from the BEEPS survey with firm-level accounting data from the Amadeus database. Bribery is measured by the frequency of extra unofficial payments to officials to “get things done”. We find that bribery is positively related to firms’ bank debt ratios, which provides evidence that bribing bank officials facilitates firms’ access to bank loans. This impact differs with the maturity of bank debt, as bribery contributes to higher short-term bank debt ratios but lower long-term bank debt ratios. Finally, we find that the institutional characteristics of the banking industry influence the relation between bribery and firms’ bank debt ratios. Higher levels of financial development constrain the positive effects of bribery whereas larger market shares of state-owned banks have the opposite effect. Foreign bank presence also affects the impact of bribery, albeit this effect depends on the maturity of firms’ bank-debt. |
| Keywords: | bank lending; bribery; corruption; Eastern Europe |
| JEL: | G32 K42 P29 |
| Date: | 2014–01–21 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:bofitp:2014_004&r=ban |
| By: | Frey, Rainer; Düwel, Cornelia |
| Abstract: | We investigate how the lending activities of a multinational bank s affiliates located abroad are affected by funding difficulties in view of the financial crisis. For this, we consider transaction-induced changes in long-term lending to the private sector of 40 countries by the affiliates of the 68 largest German banks. We find that affiliates local deposits and profitability have been stabilizing loan supply. By contrast, relying on short-term wholesale funding has increasingly proven to be a disadvantage in the crisis, as inter-bank and capital markets froze. Besides, the more an affiliate abroad takes recourse to intra-bank funding in the crisis, the more it becomes dependent on a stable deposit and long-term wholesale funding position of its parent bank. We furthermore detect competition for intra-bank funding across the affiliates abroad as well as an increasing focus on the parent bank s home market activities. -- |
| JEL: | G21 F23 F34 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc13:80013&r=ban |
| By: | Hakenes, Hendrik; Schnabel, Isabel |
| Abstract: | One explanation for the poor performance of regulation in the recent financial crisis is that regulators had been captured by the financial sector. We present a micro-founded model with rational agents in which banks may capture regulators due to their high degree of sophistication. Banks can search for arguments of differing complexity against regulation. Finding such arguments is more difficult for a bad bank, which the regulator wants to regulate more strictly. However, the more sophisticated a bank is, the more easily it can produce an argument that a regulator may not understand. Career concerns prevent the regulator from admitting this, hence he rubber-stamps even bad banks, which leads to inefficiently low levels of regulation. Bank sophistication leads to capture, and thus to worse regulatory decisions. -- |
| JEL: | G21 G28 L51 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc13:79991&r=ban |
| By: | Kellermann, Kersten; Schlag, Carsten |
| Abstract: | In September 2009, G20 representatives called for introducing a minimum leverage ratio as an instrument of financial regulation. It is supposed to assure a certain degree of core capital for banks, independent of the controversial procedures used to assess risk. This paper discusses the interaction and tensions between the leverage ratio and risk-based capital requirements, using financial data of the Swiss systemically important bank UBS. It can be shown that the leverage ratio potentially undermines risk weighting such that banks feel encouraged to take greater risks. The paper proposes an alternative instrument that is conceived as a base risk weight and functions as a backstop. It ensures a minimum core capital ratio, based on unweighted total exposure by ensuring a minimum ratio of risk-weighted to total assets for all banks. The proposed measure is easy to compute like the leverage ratio, and also like the latter, it is independent of risk weighting. Yet, its primary advantage is that it does not supersede risk-based capital adequacy targets, but rather supplements them. -- |
| JEL: | G28 G21 G01 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc13:79901&r=ban |
| By: | Schlegel, Friederike; Hakenes, Hendrik |
| Abstract: | In the recent financial crisis, risk management tools have been proven inadequate. Model risk, a key component of bank risk, has shown its negative impact. It seems that risk models did not cover the included risks comprehensively and were not kept up-to-date by banks, and also rating agencies. Consequently, in the aftermath of the crisis banks must adjust their models to reduce model risk. We discuss if banks undertake enough effort to improve their risk models. Furthermore, the paper deals with the optimal organizational structure of this improvement process. We take a close look at risk models of banks and discuss if banks generally invest enough effort to improve their risk models. The question of risk model innovation is analyzed from a managerial as well as from a welfare perspective in the context of a principal agent model - where the bank has to incentivize an agent to perform innovative improvement in the risk model technology. -- |
| JEL: | G01 G21 L22 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc13:79954&r=ban |
| By: | Hasan, Iftekhar (Fordham University and Bank of Finland); Hoi, Chun-Keung (Stan) (E. Philip Saunders College of Business, Rochester Institute of Technology); Wu, Qiang (Lally School of Management, Rensselaer Polytechnic Institute); Zhang, Hao (E. Philip Saunders College of Business, Rochester Institute of Technology) |
| Abstract: | We find that firms with greater tax avoidance incur higher spreads when obtaining bank loans. This finding is robust in a battery of sensitivity analyses and in two quasi-experimental settings including the implementation of Financial Accounting Standards Board Interpretation No. 48 and the revelation of past tax sheltering activity. Firms with greater tax avoidance also incur more stringent non-price loan terms, incur higher at-issue bond spreads, and prefer bank loans over public bonds when obtaining debt financing. Overall, these findings indicate that banks perceive tax avoidance as engendering significant risks. |
| Keywords: | tax avoidance; cost of bank loans; information risk; agency risk; audit risk; FIN 48 |
| JEL: | G21 H26 |
| Date: | 2014–01–15 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:bofrdp:2014_003&r=ban |
| By: | Hott, Christian |
| Abstract: | This paper examines the impact of implicit guarantees and capital regulations on the behavior of a bank and on the expected losses for its depositors. I show that implicit guarantees increase the incentives of the bank to enhance leverage and/or risk taking and that this leads to higher expected losses for its depositors. To reduce the adverse effects of moral hazard, policy measures have to be taken. However, a simple leverage ratio is likely to increase expected losses further and risk adjusted capital requirements do not necessarily affect highly leveraged banks with very low risk assets. A combination of both requirements can be successful. Positive long-term effects can be achieved by a reduction of moral hazard and informational imperfections. However, it is difficult to achieve these reductions and potentially severe short-term effects have to be taken into account. -- |
| JEL: | G18 G21 G32 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc13:79960&r=ban |
| By: | Ruprecht, Benedikt; Entrop, Oliver; Kick, Thomas; Wilkens, Marco |
| Abstract: | We investigate financial intermediaries interest rate risk management as the simultaneous decision of on-balance-sheet exposure and interest rate swap use. Our findings show that both decisions are substitute risk management strategies. Hausman exogeneity tests indicate that both decisions are only endogenous to one another for banks that start using swaps for the first time. For other banks, the maturity gap is exogenous to the decision to use swaps, but the reverse relationship is endogenous. For banks with trading activity, both decisions are exogenous to one another. We interpret these findings as the maturity gap being largely determined by customer liquidity needs, whereas the decision to use swaps relies on compliance with the interest rate risk regulation. Although hedging motives dominate, we find selective hedging behavior in swap use driven by the slope of the yield curve as well as by funding uncertainty. -- |
| JEL: | G21 G32 G33 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc13:79733&r=ban |
| By: | König, Philipp; Anand, Kartik; Heinemann, Frank |
| Abstract: | Bank liability guarantee schemes have traditionally been viewed as costless measures to shore up investor confidence and stave off bank runs. However, as the experience of some European countries, most notably Ireland, has demonstrated, the credibility and effectiveness of these guarantees is crucially intertwined with the sovereign's funding risks. Employing methods from the literature on global games, we develop a simple model to explore the functional co-dependence 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, we further show that its credibility may be improved through policies that promote balance sheet transparency. -- |
| JEL: | G01 D89 G28 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc13:79747&r=ban |
| By: | Kislat, Carmen; Menkhoff, Lukas; Neuberger, Doris |
| Abstract: | The ex ante theory of collateral states that better informed lenders, such as informal lenders, rely less on collateral. We test this by contrasting the use of collateral between formal and informal lenders in the same market. Indeed, formal lenders rely more often on collateral, controlling for conventional determinants of collateral. Moreover, better information about borrowers has implications within lender groups: first, relationship lending reduces asymmetric information, but only for formal lenders who use collateral less with longer relationship; second, short distance between lender and borrower reduces asymmetric information, mainly for informal lenders who use collateral less at shorter distances. -- |
| JEL: | O16 O17 G21 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc13:79765&r=ban |
| By: | Atif Mian |
| Abstract: | How should monetary policy and macro-prudential regulation respond to the dangers of financial bubbles? I argue that bubbles - and their collapse - become a serious problem when there is inadequate risk-sharing. Neither monetary policy nor traditional macro-prudential regulation is designed to deal with this risk-sharing problem. Monetary policy has little hope of either accurately anticipating bubbles or dealing effectively with their consequences. Traditional approaches to macroprudential regulation are unlikely to succeed as they are based on the false premise that risk can always be quantified up front. I propose considering "ex-ante flexible contracting" as a longer-term response to the financial stability question. |
| Date: | 2013–12 |
| URL: | http://d.repec.org/n?u=RePEc:chb:bcchwp:713&r=ban |
| By: | Winkler, Adalbert; Wagner, Charlotte |
| Abstract: | We provide evidence on the growth patterns of microfinance clients. Our analysis is motivated by the debate on the impact of microfinance on client income and growth. Based on loan-level data from close to 40,000 clients in Sub-Saharan Africa we make use of an econometric approach widely employed in the firm growth literature. Results show that on average clients exhibit substantial growth between two consecutive loans. Moreover, there is a non-linear relationship between initial client size and growth: smaller businesses show higher growth rates which is marginally counteracted by positive growth of the very large clients. Results also indicate that growth rates decline in the course of the lending relationship. Overall our results provide econometric support for the largely anecdotal evidence presented by microfinance practitioners that their clients grow. At the same time they suggest that the equilibrium size of most clients remains small. -- |
| JEL: | D22 G21 L25 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc13:79945&r=ban |
| By: | Denis Beau; Christophe Cahn; Laurent Clerc; Benoît Mojon |
| Abstract: | In this paper, we analyse the interactions between monetary and macro-prudential policies and the circumstances under which such interactions call for their coordinated implementation. We start with a review of the interdependencies between monetary and macro-prudential policies. Then, we use a DSGE model incorporating financial frictions, heterogeneous agents and housing, which is estimated for the euro area over the period 1985 -2010, to identify the circumstances under which monetary and macro-prudential policies may have compounding, neutral or conflicting impacts on price stability. We compare inflation dynamics across four “policy regimes” depending on: (a) the monetary policy objectives – that is, whether the policy instrument, the short-term interest rate factors in financial stability considerations by leaning against credit growth; and (b) the existence, or not, of an authority in charge of a financial stability objective through the implementation of macroprudential policies that can “lean against credit” without affecting the short-term interest rate. Our main result is that under most circumstances, macro-prudential policies have either a limited or a stabilizing effect on inflation. |
| Date: | 2013–12 |
| URL: | http://d.repec.org/n?u=RePEc:chb:bcchwp:715&r=ban |