New Economics Papers
on Banking
Issue of 2014‒02‒08
ten papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Identifying channels of credit substitution when bank capital requirements are varied By Aiyar, Shekhar; Calomiris , Charles; Wieladek, Tomasz
  2. The impact of capital requirements on bank lending By Bridges, Jonathan; Gregory, David; Nielsen, Mette; Pezzini, Silvia; Radia, Amar; Spaltro, Marco
  3. Volatility Connectedness of Bank Stocks Across the Atlantic By Kamil Yilmaz
  5. The Role of Foreign Banks in Monetary Policy Transmission: Evidence from Asia during the Crisis of 2008-9 By Bang Nam Jeon; Ji Wu
  6. What drives loan losses in Europe? By Jokivuolle, Esa; Pesola, Jarmo; Viren, Matti
  7. Does Greater Inequality Lead to More Household Borrowing? New Evidence from Household Data By Coibion, Olivier; Gorodnichenko, Yuriy; Kudlyak, Marianna; Mondragon, John
  8. Small banks and local economic development By Hakenes , Hendrik; Hasan, Iftekhar; Molyneux, Phil; Xie , Ru
  9. Performance of credit risk prediction models via proper loss functions By Silvia Figini; Mario Maggi
  10. Vertical Linkage between Formal and Informal Credit Markets, Corruption and Credit Subsidy policy: A Note By Chaudhuri, Sarbajit; Ghosh Dastidar, Krishnendu

  1. By: Aiyar, Shekhar (International Monetary Fund); Calomiris , Charles (Columbia Business School, International Monetary Fund and NBER); Wieladek, Tomasz (Bank of England)
    Abstract: What kinds of credit substitution, if any, occur when changes to banks’ minimum capital requirements induce banks to change their supply of credit? The question is central to the new ‘macroprudential’ policy regimes that have been constructed in the wake of the global financial crisis, under which minimum capital ratio requirements for banks will be employed to control the supply of bank credit. Regulatory efforts to influence the aggregate supply of credit may be thwarted to some degree by ‘leakages’, as other credit suppliers substitute for the variation induced in the supply of credit by regulated banks. Credit substitution could occur through foreign banks operating domestic branches that are not subject to capital regulation by the domestic supervisor, or through bond and stock markets. The UK experience for the period 1998-2007 is ideally suited to address these questions, given its unique regulatory history (UK bank regulators imposed bank-specific and time-varying capital requirements on regulated banks), the substantial presence of both domestically regulated and foreign regulated banks, and the United Kingdom’s deep capital markets. We show that leakage by foreign branches can occur either as a result of competition between branches and regulated banks that are parts of separate banking groups, or because a foreign banking group shifts loans from its UK-regulated subsidiary to its affiliated branch. The responsiveness of affiliated branches is nearly twice as strong. We do not find any evidence for leakages through capital markets. These findings reinforce the need for the type of international co-ordination, specifically reciprocity in capital requirement regulation, which is embedded in Basel III and the European CRD IV directive, which will be gradually phased in starting January 2014.
    Keywords: Macroprudential regulation; credit substitution; leakages
    JEL: G21 G28
    Date: 2014–01–31
  2. By: Bridges, Jonathan (Bank of England); Gregory, David (Bank of England); Nielsen, Mette (Bank of England); Pezzini, Silvia (Bank of England); Radia, Amar (Bank of England); Spaltro, Marco (Morgan Stanley)
    Abstract: We estimate the effect of changes in microprudential regulatory capital requirements on bank capital ratios and bank lending. We do so by running panel regressions using a rich new data set, exploiting variation in individual bank capital requirements in the United Kingdom from 1990-2011. There are two key results. First, regulatory capital requirements affect the capital ratios held by banks – following an increase in capital requirements, banks gradually rebuild the buffers that they initially held over the regulatory minimum. Second, capital requirements affect lending with heterogeneous responses in different sectors of the economy – in the year following an increase in capital requirements, banks, on average, cut (in descending order based on point estimates) loan growth for commercial real estate, other corporates and household secured lending. The response of unsecured household lending is smaller and insignificant over the first year as a whole. Loan growth mostly recovers within three years. While estimated over a different policy regime and at the individual bank level, these results may contain some insights into how changing capital requirements might affect lending in a macroprudential regime. However, during the transition to higher global regulatory standards, the effects of changes in capital requirements may be different. For example, increasing capital requirements might augment rather than reduce lending for initially undercapitalised banks.
    Keywords: Bank capital; bank lending; regulatory capital requirements; capital buffer; macroprudential policy
    JEL: G21 G28
    Date: 2014–01–31
  3. By: Kamil Yilmaz (Koc University)
    Abstract: This paper presents an analysis of the dynamic measures of volatility connectedness of major bank stocks in the US and the EU member countries. The results show that in the early stages of the US financial crisis in 2007 and 2008, the direction of the volatility connectedness was from the US banks towards the EU banks. However, once the financial crisis became global in the last quarter of 2008, volatility connectedness became bi-directional. The surge in volatility connectedness from the EU banks to the US banks in June 2011 was unprecedented, reflecting the scale of deterioration in the state of the EU banks. Finally, the within-connectedness of the US banks fluctuated throughout our sample period, while the within-connectedness of the EU banks increased steadily since 2007, a reflection of the fact that the European debt and banking crisis has not ended yet.
    Keywords: Risk measurement, systemic risk, connectedness, systemically important financial institutions, vector autoregression, variance decomposition
    JEL: C3 G2
    Date: 2014–02
  4. By: João Pinto (Faculdade de Economia e Gestão - Universidade Católica Portuguesa, Porto); Manuel Marques (Faculdade de Economia - Universidade do Porto); William Megginson (University of Oklahoma)
    Abstract: Structured finance (SF) – project finance (PF) loans and asset securitization (AS) bonds – and straight debt finance (SDF) – corporate bonds (CB) – transactions are priced in segmented capital markets. Credit spreads are higher for PF loans than they are for AS and CB issues. SF and SDF credit spreads are directly related to default and currency risks, while the slope of the yield curve impacts negatively the credit spreads. The loan to value ratio proves positively related to PF loans and negatively related to AS bonds, while the number of banks has a negative impact on the credit spread for AS and CB issues. PF loan credit spreads and fees are shown to be complements rather than supplements. Borrowers from the U.K. raise funds in PF and CB markets at a higher credit spread and the impact of country risk on the credit spread is positive for PF and CB issues. The 2007/2008 financial crisis have imposed a significant impact on credit spreads. The average credit spread has increased 329.1 bps for PF loans, 206.5 bps for AS bonds, and 220.3 bps for CB issues during the crisis period. Finally, a robust hump-shaped relationship between credit spread and maturity is found for PF loans while a linear positive relationship remains strongly significant for CB.
    Keywords: loan and bond pricing, structured finance, straight debt finance, project finance, asset securitization, corporate bonds, financial crisis, term structure of credit spreads
    JEL: F34 G01 G12 G21 G32
    Date: 2013–12
  5. By: Bang Nam Jeon (Drexel University and Hong Kong Institute for Monetary Research); Ji Wu (Southwestern University of Finance and Economics)
    Abstract: Since the 1997-8 Asian financial crisis, the level of foreign bank penetration has increased steadily in Asian banking markets. This paper examines the impact of foreign banks on the monetary policy transmission mechanism in emerging Asian economies during the period from 2000 to 2009, with a specific focus on the global financial crisis of 2008-9. We present consistent evidence that, on the whole, an increase in foreign bank penetration weakened the effectiveness of the monetary policy transmission mechanism in the host emerging Asian countries during crisis periods. We also investigate various conditions and environments, including the type of monetary policy shocks, the severity of shocks upon parent banks in global crisis, the dependence of parent banks on the wholesale funding market, the country of origin of foreign banks, and entry modes, under which the effectiveness of monetary policy transmission is reduced more severely due to the increasing presence of foreign banks in the emerging Asian banking markets.
    Keywords: Foreign Bank Penetration, Monetary Policy Transmission, Asian Banking
    JEL: E44 F43 G21
    Date: 2014–01
  6. By: Jokivuolle, Esa (Bank of Finland Research); Pesola, Jarmo (Bank of Finland); Viren, Matti (University of Turku and Bank of Finland)
    Abstract: We model banks’ loan losses with a panel of European countries for the period 1982–2012 using three country-specific macro variables: output growth shocks, real interest rates, and a measure of excessive private sector indebtedness. We find that a drop in output has an intensified impact on rising loan losses if the economy is excessively indebted. This may explain differences in loan losses in different recessions across time and across countries. For instance, the dramatic output drop in Finland in 2009 did not cause large loan losses compared with the Finnish crisis of the early 1990s because of the more moderate level of indebtedness. Low interest rates during the recent recession may have been another, perhaps the most important, factor mitigating loan losses.
    Keywords: loan losses; banking crises; indebtedness
    JEL: E44 G28
    Date: 2013–12–30
  7. By: Coibion, Olivier (University of Texas at Austin); Gorodnichenko, Yuriy (University of California, Berkeley); Kudlyak, Marianna (Federal Reserve Bank of Richmond); Mondragon, John (University of California, Berkeley)
    Abstract: One suggested hypothesis for the dramatic rise in household borrowing that preceded the financial crisis is that low-income households increased their demand for credit to finance higher consumption expenditures in order to "keep up" with higherincome households. Using household level data on debt accumulation during 2001-2012, we show that low-income households in high-inequality regions accumulated less debt relative to income than their counterparts in lower-inequality regions, which negates the hypothesis. We argue instead that these patterns are consistent with supply-side interpretations of debt accumulation patterns during the 2000s. We present a model in which banks use applicants' incomes, combined with local income inequality, to infer the underlying type of the applicant, so that banks ultimately channel more credit toward lower-income applicants in low-inequality regions than high-inequality regions. We confirm the predictions of the model using data on individual mortgage applications in high- and low-inequality regions over this time period.
    Keywords: inequality, household debt, Great Recession
    JEL: E21 E51 D14 G21
    Date: 2014–01
  8. By: Hakenes , Hendrik (University of Bonn & Max Planck Institute for Research on Collective Goods & Centre for Economic Policy Research /CEPR)); Hasan, Iftekhar (Fordham University and Bank of Finland); Molyneux, Phil (Bangor Business School, Bangor University); Xie , Ru (Bangor Business School, Bangor University)
    Abstract: This paper discusses the effects of small banks on economic growth. We first theoretically show that small banks operating at a regional level can spur local economic growth. As compared with big interregional banks, small regional banks are more effective in promoting local economic growth, especially in regions with lower initial endowments and severe credit rationing. We then test the model predictions using a sample of German banks and corresponding regional statistics. We find that small regional banks are more important funding providers in regions with low access to finance. The empirical results support the theoretical hypotheses.
    Keywords: small banks; regional economic growth
    JEL: G21 O16 R11
    Date: 2014–01–29
  9. By: Silvia Figini (Department of Political and Social Sciences, University of Pavia); Mario Maggi (Department of Economics and Management, University of Pavia)
    Abstract: The performance of predictions models can be assessed using a variety of methods and metrics. Several new measures have recently been proposed that can be seen as refinements of discrimination measures, including variants of the AUC (Area Under the ROC curve), such as the H index. It is widely recognized that AUC suffers from lack of coherency especially when ROC curves cross. On the other hand, the H index requires subjective choices. In our opinion the problem of model comparison should be more adequately handled using a different approach. The main contribution of this paper is to evaluate the performance of prediction models using proper loss function. In order to compare how our approach works with respect to classical measures employed in model comparison, we propose a simulation studies, as well as a real application on credit risk data.
    Keywords: Model Comparison, AUC, H index, Loss Function, Proper Scoring Rules, Credit Risk
    Date: 2014–01
  10. By: Chaudhuri, Sarbajit; Ghosh Dastidar, Krishnendu
    Abstract: We develop a model of vertical linkage between the formal and informal credit markets which highlights the presence of corruption in the distribution of formal credit. The existing moneylender, the bank official and the new moneylenders move sequentially and the existing moneylender acts as a Stackelberg leader and unilaterally decides on the informal interest rate. The analysis distinguishes between two different ways of designing a credit subsidy policy. If a credit subsidy policy is undertaken through an increase in the supply of institutional credit, it is likely to increase the competitiveness in the informal credit market and lower the informal sector interest rate under reasonable parametric restrictions. Any change in the formal sector interest rate has no effect. However, an anticorruption measure (increase in penalty) unambiguously lowers the interest rate in the informal credit market. Finally, we examine the effects of alternative policies on the incomes of different economic agents in our model.
    Keywords: Formal/informal credit markets, informal interest rate; corruption; credit subsidy policy, anticorruption measures
    JEL: O1 O16 O17
    Date: 2014–01–01

This issue is ©2014 by Christian Calmès. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
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