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on Banking |
| By: | Labonne, C.; Lamé, G. |
| Abstract: | This paper examines the sensitivity of NFC lending to banks' capital ratios and their supervisory capital requirements. We use a unique database for the French banking sector between 2003 and 2011 combining confidential bank-level Bank Lending Survey answers with the discretionary capital requirements set by the supervisory authority. We find that on average, more capital means more credit. But the elasticity of lending to capital depends on the intensity of the supervisory capital constraint. More supervisory capital constrained banks tend to have a slower credit growth than unconstrained banks. We also find that the ratio of non-performing loans to total loans granted may be considered a transmission channel for supervisory requirements. More supervisory capital constrained banks tend to be more reactive to this ratio than unconstrained banks. The former are more prone to reduce credit allocation after a rise in non-performing loans than the latter. |
| Keywords: | Lending, Bank Regulation, Capital. |
| JEL: | G21 G28 G32 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:bfr:banfra:481&r=ban |
| By: | Colliard, Jean-Edouard |
| Abstract: | The regulatory use of banks' internal models aims at making capital requirements more accurate and reducing regulatory arbitrage, but may also give banks incentives to choose their risk models strategically. Current policy answers to this problem include the use of risk-weight floors and leverage ratios. I show that banks for which those are binding reduce their credit supply, which drives interest rates up, invites other banks to adopt optimistic models and possibly increases aggregate risk in the banking sector. Instead, the strategic use of risk models can be avoided by imposing penalties on banks with low risk-weights when they suffer abnormal losses or bailing out defaulting banks that truthfully reported high risk measures. If such selective bail-outs are not desirable, second-best capital requirements still rely on internal models, but less than in the first-best. JEL Classification: D82, D84, G21, G32, G38 |
| Keywords: | Basel risk-weights, internal risk models, leverage ratio, tail risk |
| Date: | 2014–02 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20141641&r=ban |
| By: | Clerc, L.; Gabrieli, S.; Kern, S.; El Omari, Y. |
| Abstract: | Based on a unique data set referencing exposures on single name credit default swaps (CDS) on European reference entities, we study the structure and the topology of the European CDS market and its evolution from 2008 to 2012, resorting to network analysis. The structural features revealed show bilateral CDS exposures describing growing scale-free networks whose highly interconnected hubs constitute both a strength and weakness for the stability of the system. The potential “super spreaders” of financial contagion, identified as the most interconnected participants, consist mostly of banks. For some of them net notional exposures may be particularly large relative to their total common equity. Our findings also point to the importance of some non-dealer/non-bank participants belonging to the shadow banking system. |
| Keywords: | Credit default swaps; Financial networks; Centrality measures; Contagion; Shadow banking. |
| JEL: | E17 E44 E51 G21 G28 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:bfr:banfra:477&r=ban |
| By: | Herrala, Risto |
| Abstract: | This paper presents evidence that banks react to regulation in a forward-looking manner. A case study documents a reaction to Basel II as early as 2000, in other words about seven years prior to the implementation of the regulation in 2007. Based on the initial information released on Basel II, banks loosened their credit policies towards households. The changes were substantial, improving household credit availability by 20-50%. A new approach to estimate borrowing constraints from loan samples is also presented. JEL Classification: D14, E32, E51, G21 |
| Keywords: | bank regulation, borrowing constraints, credit policy |
| Date: | 2014–03 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20141645&r=ban |
| By: | Tayler, William; Zilberman, Roy |
| Abstract: | This paper examines the macroprudential roles of bank capital regulation and monetary policy in a Dynamic Stochastic General Equilibrium model with endogenous financial frictions and a borrowing cost channel. We identify various transmission channels through which credit risk, commercial bank losses, monetary policy and bank capital requirements affect the real economy. These mechanisms generate significant financial accelerator effects, thus providing a rationale for a macroprudential toolkit. Following credit shocks, countercyclical bank capital regulation is more effective than monetary policy in promoting financial, price and overall macroeconomic stability. For supply shocks, macroprudential regulation combined with a strong response to inflation in the central bank policy rule yield the lowest welfare losses. The findings emphasize the importance of the Basel III regulatory accords and cast doubt on the desirability of conventional Taylor rules during periods of financial distress. |
| Keywords: | Bank Capital Regulation; Macroprudential Policy; Basel III; Monetary Policy; Borrowing Cost Channel |
| JEL: | E32 E44 E52 E58 G28 |
| Date: | 2014–04 |
| URL: | http://d.repec.org/n?u=RePEc:cpm:dynare:037&r=ban |
| By: | Hałaj, Grzegorz; Kok, Christoffer |
| Abstract: | Interbank contagion has become a buzzword in the aftermath of the financial crisis that led to a series of shocks to the interbank market and to periods of pronounced market disruptions. However, little is known about how interbank networks are formed and about their sensitivity to changes in key bank parameters (for example, induced by common exogenous shocks or by regulatory initiatives). This paper aims to shed light on these issues by modelling endogenously the formation of interbank networks, which in turn allows for checking the sensitivity of interbank network structures and hence their underlying contagion risk to changes in market-driven parameters as well as to changes in regulatory measures such as large exposures limits. The sequential network formation mechanism presented in the paper is based on a portfolio optimisation model whereby banks allocate their interbank exposures while balancing the return and risk of counterparty default risk and the placements are accepted taking into account funding diversification benefits. The model offers some interesting insights into how key parameters may affect interbank network structures and can be a valuable tool for analysing the impact of various regulatory policy measures relating to banks' incentives to operate in the interbank market. JEL Classification: G21, C63, C78 |
| Keywords: | counterparty risk, interbank network, nancial contagion, nancial regulation |
| Date: | 2014–03 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20141646&r=ban |
| By: | Canals-Cerda, Jose J. (Federal Reserve Bank of Philadelphia); Kerr, Sougata (Federal Reserve Bank of Philadelphia) |
| Abstract: | Credit card portfolios represent a significant component of the balance sheets of the largest US banks. The charge‐off rate in this asset class increased drastically during the Great Recession. The recent economic downturn offers a unique opportunity to analyze the performance of credit risk models applied to credit card portfolios under conditions of economic stress. Specifically, we evaluate three potential sources of model risk: model specification, sample selection, and stress scenario selection. Our analysis indicates that model specifications that incorporate interactions between policy variables and core account characteristics generate the most accurate loss projections across risk segments. Models estimated over a time frame that includes a significant economic downturn are able to project levels of credit loss consistent with those experienced during the Great Recession. Models estimated over a time frame that does not include a significant economic downturn can severely under-predict credit loss in some cases, and the level of forecast error can be significantly impacted by model specification assumptions. Higher credit-score segments of the portfolio are proportionally more severely impacted by downturn economic conditions and model specification assumptions. The selection of the stress scenario can have a dramatic impact on projected loss. |
| Keywords: | Credit cards; Credit risk; Stress test; Regulatory capital |
| JEL: | G20 G32 G33 |
| Date: | 2014–03–31 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedpwp:14-10&r=ban |
| By: | Beaubrun-Diant, Kevin; Tripier, Fabien |
| Abstract: | The present paper contributes to the body of knowledge on search frictions in credit markets by demonstrating their ability to explain why the net interest margins of banks behave countercyclically. During periods of expansion, a fall in the net interest margin proceeds from two mechanisms: (i) lenders accept that they must finance entrepreneurs that have lower productivity and (ii) the liquidity of the credit market rises, which simplifies access to loans for entrepreneurs and thereby reinforces their threat point when bargaining the interest rate of the loan. |
| Keywords: | Search Friction; Matching Model; Nash Bargaining; Bank Interest Margin; |
| JEL: | C78 E32 E44 G21 |
| Date: | 2013–12 |
| URL: | http://d.repec.org/n?u=RePEc:dau:papers:123456789/13009&r=ban |
| By: | Thomas Conlon; John Cotter |
| Abstract: | To mitigate potential contagion from future banking crises, the European Commission recently proposed a framework which would provide for the $\textit{bail-in}$ of bank creditors in the event of failure. In this study, we examine this framework retrospectively in the context of failed European banks during the global financial crisis. Empirical findings suggest that equity and subordinated bond holders would have been the main losers from the 535 billion euro impairment losses realized by failed European banks. Losses attributed to senior debt holders would, on aggregate, have been proportionally small, while no losses would have been imposed on depositors. Cross-country analysis, incorporating stress-tests, reveals a divergence of outcomes with subordinated debt holders wiped out in a number of countries, while senior debt holders of Greek, Austrian and Irish banks would have required bail-in. |
| Date: | 2014–03 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1403.7628&r=ban |
| By: | Blaise Gadanecz; Aaron Mehrotra; Madhusudan S Mohanty |
| Abstract: | Large-scale forex intervention in emerging market economies (EMEs) aimed at resisting currency appreciation has major implications for the composition of banking system balance sheets. The domestic monetary consequences depend on the nature of central bank liabilities that are the counterpart of forex reserves. Even if the immediate change in bank reserves due to FX intervention is offset by the sale of securities, bank lending may still be stimulated, running counter to the aims of the monetary authority. In this paper, we empirically investigate the impact of banks’ holdings of liquid government securities, generated by such intervention, on bank credit in a panel of EMEs. We find that, for well capitalised banking systems, holdings of government and central bank paper over time lead to an expansion in their credit to the private sector. This result is confirmed at both country and bank level. The balance sheet effects of large-scale FX intervention therefore require close attention. |
| Keywords: | bank lending; sterilised intervention; foreign exchange reserves; central bank securities; emerging market economies |
| Date: | 2014–03 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:445&r=ban |
| By: | Sumit Agarwal; Gene Amromin; Itzhak Ben-David; Souphala Chomsisengphet; Yan Zhang |
| Abstract: | Loss mitigation actions (e.g., liquidation or renegotiation) for delinquent mortgages might be hampered by the conflicting goals of claim holders with different levels of seniority. Although similar agency problems arise in corporate bankruptcies, the mortgage market is unique because in a large share of cases junior claimants, in their role as servicers, exercise operational control over loss mitigation actions on mortgages owned by senior claimants. We show that servicers are less likely to act on the first lien mortgage owned by investors when they themselves own the second lien claim secured by the same property. When they do act, such servicers’ choices are skewed towards actions that maximize the value of their junior claims, favoring modification over liquidation and short sales and deeds-in-lieu over foreclosures. We also show that such servicers find it more difficult to avoid taking actions on second lien loans when first liens are modified and that they do not modify their second lien loans on more concessionary terms. We show that these actions transfer wealth from first to second liens and moderately increase borrower welfare. |
| JEL: | G21 |
| Date: | 2014–03 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:20015&r=ban |
| By: | Feldman, Ron J. (Federal Reserve Bank of Minneapolis); Schreck, Paul (Federal Reserve Bank of Minneapolis) |
| Abstract: | Observers argue that increased regulation and supervision added in response to the financial crisis will speed the decline of community banks. Determining if the rate of community bank consolidation is higher than it would have been absent this additional regulation requires a baseline estimate of community bank consolidation. A baseline estimate is particularly important because the number of community banks in the states of the Ninth Federal Reserve District and the nation as a whole has been in a steady rate of decline for several decades. This paper uses several simple methods to provide baseline estimates of community bank consolidation. We will compare actual consolidation against these baselines, updated quarterly, to help determine if consolidation proceeds at a higher than expected rate. |
| Date: | 2014–02–06 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedmep:14-1&r=ban |
| By: | Darracq Pariès, Matthieu; Maurin, Laurent; Moccero, Diego |
| Abstract: | We implement a two-step approach to construct a financing conditions index (FCI) for the euro area and its four larger member states (Germany, France, Italy and Spain). The method, which follows Hatzius et al. (2010), is based on factor analysis and enables to summarise information on financing conditions from a large set of financial indicators, controlling for the level of policy interest rates, changes in output and inflation. We find that the FCI tracks successfully both worldwide and euro area specific financial events. Moreover, while the national FCIs are constructed independently, they display a similar pattern across the larger euro area economies over most of the sample period and varied more widely since the start of the sovereign debt crisis in 2010. Focusing on the euro area, we then incorporate the FCI in a VAR model comprising output, inflation, the monetary policy rate, bank loans and bank lending spreads. The credit supply shock extracted with sign restrictions is estimated to have caused around one fifth of the decline in euro area manufacturing production at the trough of the financial crisis and a rise in bank lending spreads of around 30 basis points. We also find that adding the FCI to the VAR enables an earlier detection of credit supply shocks. JEL Classification: E17, E44, E50 |
| Keywords: | credit supply shocks, euro area, factor models, financial conditions index, large dataset, sign restrictions, structural VAR |
| Date: | 2014–03 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20141644&r=ban |
| By: | Williamson, Stephen D. (Washington University in St. Louis); Carapella, Francesca (Board of Governors of the Federal Reserve System) |
| Abstract: | A dynamic model with credit under limited commitment is constructed, in which limited memory can weaken the effects of punishment for default. This creates an endogenous role for government debt in credit markets, and the economy can be non-Ricardian. Default can occur in equilibrium, and government debt essentially plays a role as collateral and thus improves borrowers’ incentives. The provision of government debt acts to discourage default, whether default occurs in equilibrium or not. |
| JEL: | E4 E5 E6 |
| Date: | 2014–02–24 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2014-010&r=ban |
| By: | Lucas, André; Schwaab, Bernd; Zhang, Xin |
| Abstract: | We propose an empirical framework to assess joint and conditional probabilities of credit events from CDS prices observed in the market. Our model is based on a dynamic skewed-t distribution that captures many salient features of CDS data, including skewed and heavy-tailed changes in the price of CDS protection, as well as dynamic volatilities and correlations that ensure that uncertainty and risk dependence can increase in times of stress. We apply the framework to euro area sovereign CDS spreads during the euro area debt crisis. Our results reveal significant time-variation in distress dependence and spill-over effects. We investigate in particular market perceptions of joint and conditional risks around announcements of Eurosystem non-standard monetary policy measures, and document strong reductions in joint risk. JEL Classification: C32, G32 |
| Keywords: | financial stability, higher order moments, sovereign credit risk, time-varying parameters |
| Date: | 2013–12 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20131621&r=ban |
| By: | Creal, Drew; Schwaab, Bernd; Koopman, Siem Jan; Lucas, André |
| Abstract: | We propose a dynamic factor model for mixed-measurement and mixed-frequency panel data. In this framework time series observations may come from a range of families of parametric distributions, may be observed at different time frequencies, may have missing observations, and may exhibit common dynamics and cross-sectional dependence due to shared exposure to dynamic latent factors. The distinguishing feature of our model is that the likelihood function is known in closed form and need not be obtained by means of simulation, thus enabling straightforward parameter estimation by standard maximum likelihood. We use the new mixed-measurement framework for the signal extraction and forecasting of macro, credit, and loss given default risk conditions for U.S. Moody’s-rated firms from January 1982 until March 2010. Our joint modelling framework allows us to construct predictive (conditional) loss densities for portfolios of corporate bonds in the presence of different sources of credit risk such as frailty effects and systematic recovery risk. JEL Classification: C32, G32 |
| Keywords: | default risk, dynamic beta density, dynamic factor model, dynamic ordered probit, loss given default, panel data |
| Date: | 2013–12 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20131626&r=ban |