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on Banking |
| By: | Gary Gorton (Department of Economics, Yale University); Guillermo Ordonez (Department of Economics, University of Pennsylvania) |
| Abstract: | Credit booms usually precede financial crises. However, some credit booms end in a crisis (bad booms) and other booms do not (good booms). We document that, while all booms start with an increase in the growth of Total Factor Productivity (TFP), such growth falls much faster subsequently for bad booms. We then develop a simple framework to explain this. Firms finance investment opportunities with short-term collateralized debt. If agents do not produce information about the collateral quality, a credit boom develops, accommodating firms with lower quality projects and increasing the incentives of lenders to acquire information about the collateral, eventually triggering a crisis. When the quality of investment opportunities also grow, the credit boom may not end in a crisis because there is a gradual adoption of low quality projects, but those projects are also of better quality, not inducing information about collateral. |
| Keywords: | Financial Crises, Credit booms, Productivity |
| JEL: | E3 E5 |
| Date: | 2014–02–01 |
| URL: | http://d.repec.org/n?u=RePEc:pen:papers:14-008&r=ban |
| By: | Christian Calmès (Chaire d'information financière et organisationnelle ESG-UQAM, Laboratory for Research in Statistics and Probability, Université du Québec (Outaouais)); Raymond Théoret (Chaire d'information financière et organisationnelle ESG-UQAM, Université du Québec (Montréal), Université du Québec (Outaouais)); François-Éric Racicot (Chaire d'information financière et organisationnelle ESG-UQAM, Telfer School of Management, University of Ottawa) |
| Abstract: | Since the subprime crisis, securitization by financial institutions has been threatened, both in the U.S. and in Canada. In the U.S., private financial institutions have almost completely stopped their securitization activities. In Canada, the asset-backet commercial paper market is moribund and the new accounting rules (IFRS) hamper the future of residential mortgage securitization. Nevertheless, in spite of obvious weaknesses, securitization contributes to decrease the procyclicality of credit. Public measures must thus be taken to revive these markets. |
| Keywords: | Securitization; Asset-backed commercial paper; Banks; Disintermediation; Procyclicality; IFRS. |
| JEL: | G20 G21 |
| Date: | 2014–04–02 |
| URL: | http://d.repec.org/n?u=RePEc:pqs:wpaper:032014&r=ban |
| By: | Laetitia Lepetit (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); Nadia Zedek (LAPE - Laboratoire d'Analyse et de Prospective Economique - Université de Limoges : EA1088 - Institut Sciences de l'Homme et de la Société) |
| Abstract: | We investigate whether excess control rights of ultimate owners in pyramids affect banks' adjustment to their target capital ratio. When ultimate control rights and cash-flow rights are identical, banks increase their capital ratio by issuing equity and by reshuffling their assets without slowing their lending. However, when control rights exceed cash-flow rights, banks are reluctant to issue equity to increase their capital ratio and, instead, shrink their assets by mainly cutting their lending. A deeper investigation shows that this behavior is only apparent in family-controlled banks and in countries with relatively weak shareholder protection rights. Our findings provide new insights in the capital structure adjustment process and have critical policy implications for the implementation of Basel III. |
| Keywords: | Dynamic capital structure; bank lending; pyramids; excess control rights; European banking |
| Date: | 2013–12–14 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:hal-00967892&r=ban |
| By: | Bonin, John (BOFIT); Hasan, Iftekhar (BOFIT); Wachtel , Paul (BOFIT) |
| Abstract: | Modern banking institutions were virtually non-existent in the planned economies of central Europe and the former Soviet Union. In the early transition period, banking sectors began to develop during several years of macroeconomic decline and turbulence accompanied by repeated bank crises. However, governments in many transition countries learned from these tumultuous experiences and eventually dealt successfully with the accumulated bad loans and lack of strong bank regulation. In addition, rapid progress in bank privatization and consolidation took place in the late 1990s and early 2000s, usually with the participation of foreign banks. By the mid 2000s the banking sectors in many transition countries were dominated by foreign owners and were able to provide a wide range of services. Credit growth resumed, sometimes too rapidly, particularly in the form of lending to households. The global financial crisis put transition banking to test. Countries that had expanded credit rapidly were vulnerable to the macroeconomic shock and there was considerable concern that foreign owners would reduce their funding to transition country subsidiaries. However, the banking sectors turned out to be resilient, a strong indication of the rapid progress in institutional development and regulatory capabilities in the transition countries. |
| Keywords: | transition banking; bank privatization; foreign banks; bank regulation; credit growth |
| JEL: | G21 O57 P27 |
| Date: | 2014–03–18 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:bofitp:2014_008&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,Cost Channel |
| JEL: | E32 E44 E52 E58 G28 |
| Date: | 2014–03–31 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:esprep:95230&r=ban |
| By: | Bluhm, Marcel; Faia, Ester; Krahnen, Jan Pieter |
| Abstract: | This paper makes a conceptual contribution to the e ffect of monetary policy on financial stability. We develop a microfounded network model with endogenous network formation to analyze the impact of central banks' monetary policy interventions on systemic risk. Banks choose their portfolio, including their borrowing and lending decisions on the interbank market, to maximize profit subject to regulatory constraints in an asset-liability framework. Systemic risk arises in the form of multiple bank defaults driven by common shock exposure on asset markets, direct contagion via the interbank market, and firesale spirals. The central bank injects or withdraws liquidity on the interbank markets to achieve its desired interest rate target. A tension arises between the bene ficial effects of stabilized interest rates and increased loan volume and the detrimental effects of higher risk taking incentives.We fi nd that central bank supply of liquidity quite generally increases systemic risk. -- |
| Keywords: | network formation,contagion,central banks' interventions |
| JEL: | C63 D85 G01 G28 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:safewp:46&r=ban |
| By: | Federico GIRI (Universit… Politecnica delle Marche, Dipartimento di Scienze Economiche e Sociali) |
| Abstract: | The aim of this paper is to assess the impact of the interbank market on the business cycle fluctuations. We build a DSGE model with heterogeneous households and banks. Two kind of banks are in the model: Deficit banks which are net borrowers on the interbank market and they provide credit to the real economy. The surplus bank are net lender and they could choose to provide interbank lending or purchase government bonds.;The portfolio choice of the surplus bank is affected by an exogenous shock that modifies the riskiness of the interbank lending thus allowing us to capture the collapse of the interbank market and the fl y to quality mechanism underlying the 2007 financial crisis.;The main result is that an interbank riskiness shock seems to explain part of the 2007 downturn and the rise of the interest rate on the credit market just after the financial turmoil. |
| Keywords: | Bayesan estimation, DSGE model, financial frictions, interbank market |
| JEL: | E30 E44 E51 |
| Date: | 2014–03 |
| URL: | http://d.repec.org/n?u=RePEc:anc:wpaper:398&r=ban |
| By: | Leandro D’Aurizio; Tommaso Oliviero (CSEF, University of Naples Federico II.; CSEF, University of Naples); Livio Romano (Confindustria) |
| Abstract: | This paper studies how access to bank lending differed between family and non-family firms in the 2007-2009 financial crisis. The theoretical prediction is that family block-holders’ incentive structure results in lower agency conflict in the borrower-lender relationship. Using highly detailed data on bank-firm relations, we exploit the reduction in bank lending in Italy following the crisis in October 2008. We find statistically and economically significant evidence that the contraction in credit for family firms was smaller than that for non-family firms. Results are robust to ex-ante observable differences between the two types of firms and to time-varying bank fixed effects. We further show that the difference in the amount of credit granted to family and non-family firms is related to an increased role for soft information in Italian banks’ operations, following the Lehman Brothers’ failure. Finally, by identifying a match between those banks and family firms, we can control for time-varying unobserved heterogeneity among the firms and validate the hypothesis that our results are supply driven. |
| Keywords: | Family firms, Financial crisis, Soft information, Bank lending |
| JEL: | C81 D22 E44 G21 G32 L26 |
| Date: | 2014–03–29 |
| URL: | http://d.repec.org/n?u=RePEc:sef:csefwp:357&r=ban |
| By: | Ho, Chun-Yu (BOFIT) |
| Abstract: | This paper develops and estimates a dynamic model of consumer demand for deposits in which banks provide differentiated products and product characteristics that evolve over time. Existing consumers are forward-looking and incur a fixed cost for switching banks, whereas incoming consumers are forward-looking but do not incur any cost for joining a bank. The main finding is that consumers prefer banks with more employees and branches. The switching cost is approximately 0.8% of the deposit’s value, which leads the static model to bias the demand estimates. The dynamic model shows that the price elasticity over a long time horizon is substantially larger than the same elasticity over a short time horizon. Counterfactual experiments with a dynamic monopoly show that reducing the switching cost has a comparable competitive effect on bank pricing as a result of reducing the dominant position of the monopoly. |
| Keywords: | banks in China; demand estimation; switching cost |
| JEL: | G21 L10 |
| Date: | 2014–03–25 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:bofitp:2014_009&r=ban |
| By: | Matousek, Roman (Sussex University, UK); Nguyen, Thao Ngoc (Nottingham Trent University, UK); Stewart, Chris (Kingston University London) |
| Abstract: | This paper examines the market structure of Vietnam’s banking system from 1999 to 2009 using the non-structural (Panzar-Rosse) model. We consider a more comprehensive range of specifications, in terms of a greater number of environmental covariates and different dependent variables, than in previous applications of this model. Further, this is the first study that uses lagged input prices (to avoid endogeneity) and excludes assets (to avoid specification bias) in such a study of the Vietnamese banking system. We find that the Vietnamese banking system operates in monopolistic competition with non-state owned commercial banks behaving more competitively than state owned commercial banks. |
| Keywords: | Banking; performance; Non-structural model; Vietnam |
| JEL: | G21 |
| Date: | 2013–05–31 |
| URL: | http://d.repec.org/n?u=RePEc:ris:kngedp:2013_001&r=ban |
| By: | Henri Sterdyniak (OFCE); Maylis Avaro |
| Abstract: | The banking union emerged from the June 2012 European Council as a new project expected to help and solve the euro area crisis. Is banking union a necessary supplement to monetary union or a new rush forward? The banking union would break the link between the sovereign debt crisis and the banking crisis, by asking the ECB to supervise banks, establishing common mechanisms to solve banking crises, and encouraging banks to diversify their activities. The banking union project is based on three pillars: a Single Supervisory Mechanism (SSM), a Single Resolution Mechanism (SRM), a European Deposit Guarantee Scheme. Each of these pillars raises specific problems. Some are related to the current crisis (can deposits in euro area countries facing difficulties be guaranteed?); some other are related to the EU complexity (should the banking union include all EU member states? Who will decide on banking regulations?), some other are related to the EU specificity (is the banking union a step towards more federalism?), the more stringent are related to structural choices regarding the European banking system. The banks' solvency and their ability to lend would primarily depend on their capital ratios, and thus on financial markets' sentiment. The links between the government, firms, households and domestic banks would be cut, which is questionnable. Will governments be able tomorrow to intervene to influence bank lending policies, or to settle specific public banks? An opposite strategy could be promoted: restructuring the banking sector, and isolating retail banking activity from risky activities. Retail banks would focus on lending to domestic agents, and their solvency would be guaranteed because they would not be allowed to run risky activity. Can European peoples leave such strategic choices in the hands of the ECB? |
| Date: | 2013–09 |
| URL: | http://d.repec.org/n?u=RePEc:spo:wpecon:info:hdl:2441/f6h8764enu2lskk9p4srjesb4&r=ban |
| By: | Backman, Mikaela (Jönköping International Business School, & Centre of Excellence for Science and Innovation Studies (CESIS)) |
| Abstract: | It is natural to assume that the characteristics of the bank sector are important factors for new firm formation when external capital is needed for establishing new firms. The local bank sector acts as the main provider of financial funds in Sweden since other sources of external capital are limited. In addition, the banking services needed in the start-up process tend to be sensitive to distance and are mainly supplied locally. Thus, the structure of the local bank sector is an important factor that determines the conditions for start-ups. The finding in this paper supports the hypothesis that new firm formation is positively influenced by (1) the average size of the bank branches, (2) number of independent banks and bank branches per capita, and (3) the intensity of competition level. Access to independent banks and bank branches has a stronger influence on start-ups in more rural locations. |
| Keywords: | new firm formation; local bank sector; Sweden |
| JEL: | G21 L26 R11 |
| Date: | 2014–03–31 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:cesisp:0358&r=ban |
| By: | Peter J. Wallison (American Enterprise Institute) |
| Abstract: | In September 2013, the Financial Stability Oversight Council (FSOC) designated Prudential Financial as a systemically important financial institution (SIFI); its rationale was perfunctory and data-free, suggesting that the FSOC sees no need to justify its designation decisions. Congress must step in, and quickly, before this pattern continues. |
| Keywords: | SIFIs,FSOC,Dodd-Frank Act,banking regulation |
| JEL: | A G |
| Date: | 2014–03 |
| URL: | http://d.repec.org/n?u=RePEc:aei:rpaper:40673&r=ban |
| By: | Gabriel Chodorow-Reich |
| Abstract: | Unconventional monetary policy affects financial institutions through their exposure to real project risk, the value of their legacy assets, their temptation to reach for yield, and their choice of leverage. I use high frequency event studies to show the introduction of unconventional policy in the winter of 2008-09 had a strong, beneficial impact on banks and especially on life insurance companies, consistent with the positive effect on legacy asset prices dominating any impulse for additional risk taking. Subsequent policy announcements had minor effects on these institutions. The interaction of low nominal interest rates and administrative costs led money market funds to waive fees, producing a possible incentive to reach for higher returns to reduce waivers. I find some evidence of high cost money market funds reaching for yield in 2009-11, but little thereafter. Private defined benefit pension funds with worse funding status or shorter liability duration also seem to have reached for higher returns beginning in 2009, but again the evidence suggests such behavior dissipated by 2012. Overall, in the present environment there does not seem to be a trade-off between expansionary policy and the health or stability of the financial institutions studied. |
| Date: | 2014–01 |
| URL: | http://d.repec.org/n?u=RePEc:qsh:wpaper:156866&r=ban |
| By: | Jérôme Creel (OFCE); Mathilde Viennot; Paul Hubert |
| Abstract: | This paper assesses the transmission of ECB monetary policies, conventional and unconventional, to both interest rates and lending volumes for the money market, sovereign bonds at 6-month, 5-year and 10-year horizons, loans inferior and superior to 1M€ to non-financial corporations, cash and housing loans to households, and deposits, during the financial crisis and in the four largest economies of the Euro Area. We first identify two series of ECB policy shocks at the euro area aggregated level and then include them in country-specific structural VAR. The main result is that only the pass-through from the ECB rate to interest rates has been really effective, consistently with the existing literature, while the transmission mechanism of the ECB rate to volumes and of quantitative easing (QE) operations to interest rates and volumes has been null or uneven over this sample. One argument to explain the differentiated pass-through of ECB monetary policies is that the successful pass-through from the ECB rate to interest rates, which materialized as a huge decrease in interest rates during the sample period, had a negative effect on the supply side of loans, and offset itself its potential positive effects on lending volumes. |
| Keywords: | transmission channels; unconventional monetary policy; pass-through |
| JEL: | E51 E58 |
| Date: | 2013–12 |
| URL: | http://d.repec.org/n?u=RePEc:spo:wpecon:info:hdl:2441/f6h8764enu2lskk9p4sg18u8h&r=ban |
| By: | Vitor Gonçalves (Phd Student of Finance, FEP.UP); Francisco Vitorino Martins (Professor FEP.UP); Elísio Brandão (Professor of Finance, FEP.UP) |
| Abstract: | In this paper we investigate the behaviour of credit default in start-up companies. Using a logit regression technique on a panel data of 1430 start-ups and considering a tracking period of three years, we tested the impact on the probability of occurrence of the first credit event in financing agreements due to variables grouped into three categories: financial capital, human capital and industry dynamics. We concluded from a financial point of view, that the support provided by partners in the financing of the company’s activity, the intensity of use of assets under management and reduced debt pay-back periods, were decisive in mitigating risk of default. In addition we found that the occurrence of a credit event will only be as limited as higher the quality of human capital held by the promoter of the project in terms of educational background and management experience. |
| Keywords: | Credit Default; Start-Up; Financial Capital; Human Capital; Industry Dynamics |
| JEL: | G33 M13 |
| Date: | 2014–04 |
| URL: | http://d.repec.org/n?u=RePEc:por:fepwps:534&r=ban |