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on Banking |
| By: | Carlos Garriga (Federal Reserve Bank of St. Louis); Finn E. Kydland (University of California-Santa Barbara (UCSB)); Roman Šustek (Queen Mary, School of Economics and Finance) |
| Abstract: | Mortgage loans are a striking example of a persistent nominal rigidity. As a result, under incomplete markets, monetary policy affects decisions through the cost of new mortgage borrowing and the value of payments on outstanding debt. Observed debt levels and payment to income ratios suggest the role of such loans in monetary transmission may be important. A general equilibrium model is developed to address this question. The transmission is found to be stronger under adjustable- than fixed-rate contracts. The source of impulse also matters: persistent inflation shocks have larger effects than cyclical fluctuations in inflation and nominal interest rates. |
| Keywords: | Mortgages, debt servicing costs, monetary policy, transmission mechanism, housing investment |
| JEL: | E32 E52 G21 R21 |
| Date: | 2013–12 |
| URL: | http://d.repec.org/n?u=RePEc:cfm:wpaper:1306&r=ban |
| By: | Mark Gertler; Peter Karadi |
| Abstract: | We provide evidence on the nature of the monetary transmission mechanism. To identify policy shocks in a setting with both economic and financial variables, we combine traditional monetary vector autoregression (VAR) analysis with high frequency identification (HFI) of monetary policy shocks. We first show that the shocks identified using HFI surprises as external instruments produce responses in output and inflation consistent with both textbook theory and conventional monetary VAR analysis. We also find, however, that monetary policy surprises typically produce "modest movements" in short rates that lead to "large" movements in credit costs and economic activity. The large movements in credit costs are mainly due to the reaction of both term premia and credit spreads that are typically absent from the standard model of monetary policy transmission. Finally, we show that forward guidance is important to the overall strength of the transmission mechanism. |
| JEL: | E3 E4 E5 |
| Date: | 2014–06 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:20224&r=ban |
| By: | Jin Cheng (BETA - Bureau d'économie théorique et appliquée - CNRS : UMR7522 - Université Louis Pasteur - Strasbourg I); Meixing Dai (BETA - Bureau d'économie théorique et appliquée - CNRS : UMR7522 - Université Louis Pasteur - Strasbourg I); Frédéric Dufourt (AMSE - Aix-Marseille School of Economics - Centre national de la recherche scientifique (CNRS) - École des Hautes Études en Sciences Sociales (EHESS) - Ecole Centrale Marseille (ECM), IUF - Institut Universitaire de France - Ministère de l'Enseignement Supérieur et de la Recherche Scientifique) |
| Abstract: | We analyze the conditions of emergence of a twin banking and sovereign debt crisis within a monetary union in which: (i) the central bank is not allowed to provide direct financial support to stressed member states or to play the role of lender of last resort in sovereign bond markets, and (ii) the responsibility of fighting against large scale bank runs, ascribed to domestic governments, is ensured through the implementation of a financial safety net (banking regulation and government deposit guarantee). We show that this broad institutional architecture, typical of the Eurozone at the onset of the financial crisis, is not always able to prevent the occurrence of a twin banking and sovereign debt crisis triggered by pessimistic investors' expectations. Without significant backstop by the central bank, the financial safety net may actually aggravate, instead of improve, the financial situation of banks and of the government. |
| Keywords: | banking crisis; sovereign debt crisis; bank runs; financial safety net; liquidity regulation; government deposit guarantee; self-fulfilling propheties |
| Date: | 2014–06 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:halshs-01009684&r=ban |
| By: | Oliver Hart; Luigi Zingales |
| Abstract: | What is so special about banks that their demise often triggers government intervention? In this paper we develop a simple model where, even ignoring interconnectedness issues, the failure of a bank causes a larger welfare loss than the failure of other institutions. The reason is that agents in need of liquidity tend to concentrate their holdings in banks. Thus, a shock to banks disproportionately affects the agents who need liquidity the most, reducing aggregate demand and the level of economic activity. In the context of our model, the optimal fiscal response to such a shock is to help people, not banks, and the size of this response should be larger if a bank, rather than a similarly-sized nonfinancial firm, fails. |
| JEL: | E41 E51 G21 |
| Date: | 2014–06 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:20207&r=ban |
| By: | Hanson, Samuel (Harvard University); Shleifer, Andrei (Harvard University); Stein, Jeremy C. (Board of Governors of the Federal Reserve System (U.S.)); Vishny, Robert W. (University of Chicago) |
| Abstract: | We examine the business model of traditional commercial banks in the context of their co-existence with shadow banks. While both types of intermediaries create safe "money-like" claims, they go about this in very different ways. Traditional banks create safe claims with a combination of costly equity capital and fixed income assets that allows their depositors to remain "sleepy": they do not have to pay attention to transient fluctuations in the mark-to-market value of bank assets. In contrast, shadow banks create safe claims by giving their investors an early exit option that allows them to seize collateral and liquidate it at the first sign of trouble. Thus traditional banks have a stable source of cheap funding, while shadow banks are subject to runs and fire-sale losses. These different funding models in turn influence the kinds of assets that traditional banks and shadow banks hold in equilibrium: traditional banks have a comparative advantage at holding fixed-income assets that have only modest fundamental risk, but are relatively illiquid and have substantial transitory price volatility. |
| Keywords: | Banks; shadow banks; money creation |
| Date: | 2014–02–10 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2014-15&r=ban |
| By: | O'Brien, Martin (Central Bank of Ireland); Whelan, Karl (University College Dublin) |
| Abstract: | This paper examines how banks respond to shocks to their equity. If banks react to equity shocks by more than proportionately adjusting liabilities, then this will tend to generate a positive correlation between asset growth and leverage growth. However, we show that in the presence of changes in liabilities that are uncorrelated with shocks to equity, a positive correlation of this sort can occur without banks adjusting to equity shocks by more than proportionately adjusting liabilities. The paper uses data from US bank holding companies to estimate an empirical model of bank balance sheet adjustment. We identify shocks to equity as well as orthogonal shocks to bank liabilities and show that both equity and liabilities tend to adjust to move leverage towards target ratios. We also show that banks allow leverage ratios to fall in response to positive equity shocks, though this pattern is weaker for large banks, which are more active in adjusting liabilities after these shocks. We show how this explains why large banks have lower correlations between asset growth and leverage growth. |
| Keywords: | Bank Leveraging, Bank Holding Companies, Equity Shocks. |
| JEL: | E32 E44 E51 G21 |
| Date: | 2014–02 |
| URL: | http://d.repec.org/n?u=RePEc:cbi:wpaper:01/rt/14&r=ban |
| By: | Danielsson, Jon (London School of Economics); James, Kevin (London School of Economics); Valenzuela, Marcela (University of Chile); Zer, Ilknur (Board of Governors of the Federal Reserve System (U.S.)) |
| Abstract: | This paper evaluates the model risk of models used for forecasting systemic and market risk. Model risk, which is the potential for different models to provide inconsistent outcomes, is shown to be increasing with and caused by market uncertainty. During calm periods, the underlying risk forecast models produce similar risk readings, hence, model risk is typically negligible. However, the disagreement between the various candidate models increases significantly during market distress, with a no obvious way to identify which method is the best. Finally, we discuss the main problems in risk forecasting for macro prudential purposes and propose an evaluation criteria for such models. |
| Keywords: | Value-at-Risk; expected shortfall; systemic risk; financial stability; Basel III; CoVaR; MES |
| Date: | 2014–04–16 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2014-34&r=ban |
| By: | Jerome Creel (OFCE - Sciences Po, and ESCP Europe); Paul Hubert (OFCE - Sciences Po); Mathilde Viennot (ENS Cachan) |
| 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: | 2013–12–01 |
| URL: | http://d.repec.org/n?u=RePEc:fes:wpaper:wpaper34&r=ban |
| By: | Hryckiewicz, Aneta |
| Abstract: | The most recent crisis prompted regulatory authorities to implement directives prescribing actions to resolve systemic banking crises. Recent findings show that government intervention results in only a small proportion of bank recoveries. This study examines the reasons for this failure and evaluates the effectiveness of regulatory instruments, demonstrating that weaker banks are more likely to receive government support, that the support extended addresses banks’ specific issues, and that supported banks are more likely to face bankruptcy than non-supported banks. Therefore, government interventions must be sufficiently large, and an optimal banking recovery program must include a deep restructuring process. |
| Keywords: | Bank risk, business models, bank regulation, financial crisis, banking stability |
| JEL: | E58 G15 G21 G32 |
| Date: | 2014–06–18 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:56730&r=ban |
| By: | Buch, Claudia M. (Federal Reserve Bank of New York); Goldberg, Linda S. (Federal Reserve Bank of New York) |
| Abstract: | Activities of international banks have been at the core of discussions on the causes and effects of the international financial crisis. Yet we know little about the actual magnitudes and mechanisms for transmission of liquidity shocks through international banks, including the reasons for heterogeneity in transmission across banks. The International Banking Research Network, established in 2012, brings together researchers from around the world with access to micro-level data on individual banks to analyze issues pertaining to global banks. This paper summarizes the common methodology and results of empirical studies conducted in eleven countries to explore liquidity risk transmission. Among the main results is, first, that explanatory power of the empirical model is higher for domestic lending than for international lending. Second, how liquidity risk affects bank lending depends on whether the banks are drawing on official-sector liquidity facilities. Third, liquidity management across global banks can be important for liquidity risk transmission into lending. Fourth, there is substantial heterogeneity in the balance sheet characteristics that affect banks’ responses to liquidity risk. Overall, balance sheet characteristics of banks matter for differentiating their lending responses, mainly in the realm of cross-border lending. |
| Keywords: | international banking; liquidity; transmission; central bank liquidity; uncertainty; regulation; crises |
| JEL: | F34 G01 G21 |
| Date: | 2014–05–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:675&r=ban |
| By: | Jaremski, Matthew (Department of Economics, Colgate University) |
| Abstract: | Clearinghouses were private organizations that not only had the power to audit member banks’ balance sheets and levy fines, but also provided emergency liquidity during large-scale financial panics. This paper studies how clearinghouses affected bank composition and solvency during stable periods as well as panics. An annual database of all national bank balance sheets from 1865 to 1914 indicates that national banks grew larger after the creation of a clearinghouse. Relative to the rise in assets, banks reduced their cash reserves and individual deposits and increased their loans, circulation, and interbank deposits. The analysis also shows that while clearinghouse members were less likely to fail during panics, they were more likely to fail in other periods, particularly those in non-financial centers. In this way, clearinghouses seem to have freed up additional resources during stable periods and delayed bank failures until the potential for contagion was removed. |
| Keywords: | Bank Regulation, Financial Panics, Clearinghouses, Bank Failure, National Banking Era |
| JEL: | G21 G32 N21 |
| Date: | 2014–04–01 |
| URL: | http://d.repec.org/n?u=RePEc:cgt:wpaper:2014-06&r=ban |
| By: | Coleman, Nicholas (Board of Governors of the Federal Reserve System (U.S.)); Feler, Leo (Johns Hopkins University SAIS) |
| Abstract: | While the finance literature often equates government banks with political capture and capital misallocation, these banks can help mitigate financial shocks. This paper examines the role of Brazil’s government banks in preventing a recession during the 2008-2010 financial crisis. Government banks in Brazil provided more credit, which offset declines in lending by private banks. Areas in Brazil with a high share of government banks experienced increases in lending, production, and employment during the crisis compared to areas with a low share of these banks. We find no evidence that lending was politically targeted or that it caused productivity to decline in the short-run. |
| Keywords: | Credit; financial crises; state-owned banks; local economic activity |
| Date: | 2014–03–05 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgif:1099&r=ban |
| By: | Correa, Ricardo (Federal Reserve Bank of New York); Goldberg, Linda S. (Federal Reserve Bank of New York); Rice, Tara (Federal Reserve Bank of New York) |
| Abstract: | While the balance sheet structure of U.S. banks influences how they respond to liquidity risks, the mechanisms for the effects on and consequences for lending vary widely across banks. We demonstrate fundamental differences across banks without foreign affiliates versus those with foreign affiliates. Among the nonglobal banks (those without a foreign affiliate), cross-sectional differences in response to liquidity risk depend on the banks’ shares of core deposit funding. By contrast, differences across global banks (those with foreign affiliates) are associated with ex ante liquidity management strategies as reflected in internal borrowing across the global organization. This intra-firm borrowing by banks serves as a shock absorber and affects lending patterns to domestic and foreign customers. The use of official-sector emergency liquidity facilities by global and nonglobal banks in response to market liquidity risks tends to reduce the importance of ex ante differences in balance sheets as drivers of cross-sectional differences in lending. |
| Keywords: | international banking; global banking; liquidity; transmission; internal capital market |
| JEL: | F42 G01 G21 |
| Date: | 2014–06–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:676&r=ban |
| By: | Rezende, Marcelo (Board of Governors of the Federal Reserve System (U.S.)) |
| Abstract: | I study whether commercial banks can improve their supervisory ratings by switching charters. I use the fees charged by chartering authorities to establish a causal effect from switching on ratings. Banks receive more favorable ratings after they change charters, an effect that is large for both national and state charters. In addition, controlling for bank ratings, banks that switch charters fail more often than others. These results suggest that banks can arbitrage ratings by switching charters and are consistent with regulators competing for banks by rating incoming banks better than similar banks that they already supervise. |
| Keywords: | Bank charter; bank regulator; banking supervision; ratings |
| Date: | 2014–03–05 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2014-20&r=ban |
| By: | Amel, Dean F. (Board of Governors of the Federal Reserve System (U.S.)); Prager, Robin A. (Board of Governors of the Federal Reserve System (U.S.)) |
| Abstract: | Community banks have long played an important role in the U.S. economy, providing loans and other financial services to households and small businesses within their local markets. In recent years, technological and legal developments, as well as changes in the business strategies of larger banks and non-bank financial service providers, have purportedly made it more difficult for community banks to attract and retain customers, and hence to survive. Indeed, the number of community banks and the shares of bank branches, deposits, banking assets, and small business loans held by community banks in the U.S. have all declined substantially over the past two decades. Nonetheless, many community banks have successfully adapted to their changing environment and have continued to thrive. This paper uses data from 1992 through 2011 to examine the relationships between community bank profitability and various characteristics of the banks and the local markets in which they operate. Bank characteristics examined include size, age, ownership structure, management quality, and portfolio composition; market characteristics include population, per capita income, unemployment rate, and banking market structure. We find that community bank profitability is strongly positively related to bank size; that local economic conditions have significant effects on bank profitability; that the quality of bank management matters a great deal to profitability, especially during times of economic stress; and that small banks that make major shifts to their lending portfolios tend to be less profitable than other small banks. Variables within managers' control account for between 70 percent and 96 percent of the total explanatory power of equations explaining variations in performance across community banks. |
| Keywords: | Banking; community banks; bank profitability; management quality |
| Date: | 2014–03–18 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2014-26&r=ban |
| By: | Bussière, M.; Camara, B.; Castellani, F.-D.; Potier, V.; Schmidt, J. |
| Abstract: | As part of the International Banking Research Network, the Banque de France contribution to the research project on liquidity risk transmission concentrates on the “outward”' transmission of shocks affecting French banking groups. Using a rich dataset on their international positions, we analyze which balance sheet vulnerabilities contribute to the international transmission of aggregate liquidity risk shocks. The geographical breakdown of lending allows us to control for demand effects and to concentrate on the external adjustments to shocks affecting the supply of loans. We find that a higher capital ratio is associated with higher growth of lending abroad when aggregate liquidity conditions deteriorate. We find that our results are mainly driven by cross-border lending to the financial sector whereas local lending by foreign affiliates is hardly affected by the balance sheet shocks that the overall banking group is experiencing. We also investigate to what extent the identified effects differ depending on whether banks accessed public liquidity during the crisis and find that our baseline results are sensitive to the inclusion of central bank liquidity assistance. |
| Keywords: | International banking, liquidity risk, shock transmission. |
| JEL: | D24 F36 G21 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:bfr:banfra:485&r=ban |
| By: | Gärtner, Stefan; Flögel, Franz |
| Abstract: | We are calling for comparisons of banking and banking systems from a spatial perspective. Therefore, this paper develops a classification identifying decentralized and centralized banking according to two characteristics: geographical market orientation (regional vs. supraregional) – to determine whether banks facilitate regional savings-investment cycles – and place of decision-making (proximity vs. distance) – to identify whether the flow of soft information is supported in SME lending. The degree of banks’ centralization is also approximated by the spatial concentration of bank employees and shows remarkable explanatory power in Germany, as de-centralized banks increase lending at the expense of centralized banks. -- |
| Keywords: | comparing banking systems,SME finance in Germany,savings and cooperative banks,decentralized vs. centralized banking |
| JEL: | G21 P51 R51 O16 |
| Date: | 2014–06–02 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:esprep:97512&r=ban |
| By: | O'Brien, James M. (Board of Governors of the Federal Reserve System (U.S.)); Szerszen, Pawel J. (Board of Governors of the Federal Reserve System (U.S.)) |
| Abstract: | We study the performance and behavior of Value at Risk (VaR) measures used by a number of large banks during and before the financial crisis. Alternative benchmark VaR measures, including GARCH-based measures, are also estimated directly from the banks' trading revenues and help to explain the bank VaR performance results. While highly conservative in the pre-crisis period, bank VaR exceedances were excessive and clustered in the crisis period. All benchmark VaRs were more accurate in the pre-crisis period with GARCH VaR measures the most accurate in the crisis period having lower exceedance rates with no exceedance clustering. Variance decompositions indicate a limited ability of the banks' VaR methodologies to adjust to the crisis-period market conditions. Despite their weaker performance, the bank VaRs exhibited greater predictive power for a measure of realized PnL volatility than benchmark VaR measures. Benchmark Expected Shortfall measures are also considered. |
| Keywords: | Market risk; value at risk; backtesting; profit and loss; financial crisis |
| Date: | 2014–03–07 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2014-21&r=ban |
| By: | Ionescu, Felicia (Board of Governors of the Federal Reserve System (U.S.)); Ionescu, Marius (Colgate University) |
| Abstract: | We analyze the interactions between two different forms of unsecured credit and their implications for default behavior of young U.S. households. One type of credit mimics credit cards in the United States and the default option resembles a bankruptcy filing under Chapter 7; the other type of credit mimics student loans in the United States and the default option resembles Chapter 13. In the credit card market a financial intermediary offers a menu of interest rates based on individual default risk, which account for borrowing and repayment behavior in both markets. In the student loan market, the government sets the interest rate and chooses a wage garnishment to pay for the cost associated with default. We prove the existence of a steady-state equilibrium and characterize the circumstances under which a household defaults on each of these loans. We demonstrate that the institutional differences between the two markets make borrowers prefer to default on student loans rather than on credit card debt. We find that the increase in student loan debt together with the expansion of the credit card market fully explains the increase in the default rate for student loans in recent normal years (2004-2007). Worse labor outcomes for young borrowers during the Great Recession (2008-2009) significantly amplified student loan default, whereas credit card market contraction during this period helped reduce this effect. At the same time, the accumulation of student loan debt did not affect much the default risk in the credit card market during normal times, but significantly increased it during the Great Recession. An income contingent repayment plan for student loans completely eliminates the default risk in the credit card market and induces important redistribution effects. This policy is beneficial (in a welfare improving sense) during the Great Recession but not during normal times. |
| Keywords: | Default; student loans; credit cards; Great Recession |
| Date: | 2014–02–03 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2014-14&r=ban |
| By: | Kandrac, John (Board of Governors of the Federal Reserve System (U.S.)) |
| Abstract: | Whether bank failures have adverse effects on local economies is an important question for which there is conflicting and relatively scarce evidence. In this study, I use county-level data to examine the effect of bank failures and resolutions on local economies. Using quasi-experimental techniques as well as cross-sectional variation in bank failures, I show that recent bank failures lead to lower income and compensation growth, higher poverty rates, and lower employment. Additionally, I find that the structure of bank resolution appears to be important. Resolutions that include loss-sharing agreements tend to be less deleterious to local economies, supporting the notion that the importance of bank failure to local economies stems from banking and credit relationships. Finally, I show that markets with more inter-bank competition are more strongly affected by bank failure. |
| Keywords: | Bank failure; relationship lending; bank regulation; financial crisis |
| Date: | 2014–05–23 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2014-41&r=ban |
| By: | Cipriani, Marco (Federal Reserve Bank of New York); Martin, Antoine (Federal Reserve Bank of New York); McCabe, Patrick E. (Board of Governors of the Federal Reserve System (U.S.)); Parigi, Bruno (University of Padova) |
| Abstract: | We build a model of a financial intermediary, in the tradition of Diamond and Dybvig (1983), and show that allowing the intermediary to impose redemption fees or gates in a crisis--a form of suspension of convertibility--can lead to preemptive runs. In our model, a fraction of investors (depositors) can become informed about a shock to the return of the intermediary's assets. Later, the informed investors learn the realization of the shock and can choose their redemption behavior based on this information. We prove two results: First, there are situations in which informed investors would wait until the uncertainty is resolved before redeeming if redemption fees or gates cannot be imposed, but those same investors would redeem preemptively, if fees or gates are possible. Second, we show that for the intermediary, which maximizes expected utility of only its own investors, imposing gates or fees can be ex post optimal. These results have important policy implications for intermediaries that are vulnerable to runs, such as money market funds, because the preemptive runs that can be caused by the possibility of gates or fees may have damaging negative externalities. |
| Keywords: | Banks; money market funds; runs; preemptive runs; gates; fees |
| Date: | 2014–04–03 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2014-30&r=ban |
| By: | Florian LEON |
| Abstract: | Many studies have attempted to investigate the determinants and implications of competition in the banking industry. The literature on the measurement of competition can be divided between the structural and non-structural approaches. The structural approach infers the degree of competition from the structure of the market. The non-structural approach, based on the New Empirical Industrial Organization, assesses the degree of competition directly by observing behavior of firms in the market. This paper reviews the most frequently-used structural and non structural measures of competition in banking. It highlights their strengths and weaknesses, especially for studies based on a limited number of observations. |
| Keywords: | competition, Bank, HHI, Lerner index, Conjectural variation model, Panzar-Rosse model, Boone indicator |
| JEL: | O55 L13 L11 G21 D4 |
| URL: | http://d.repec.org/n?u=RePEc:cdi:wpaper:1569&r=ban |
| By: | Haltenhof, Samuel (University of Michigan); Lee, Seung Jung (Board of Governors of the Federal Reserve System (U.S.)); Stebunovs, Viktors (Board of Governors of the Federal Reserve System (U.S.)) |
| Abstract: | We study the existence and economic significance of bank lending channels that affect employment in U.S. manufacturing industries. In particular, we address the question of how a dramatic worsening of firm and consumer access to bank credit, such as the one observed over the Great Recession, translates into job losses in these industries. To identify these channels, we rely on differences in the degree of external finance dependence and of asset tangibility across manufacturing industries and in the sensitivity of these industries' output to changes in the supply of consumer credit. We show that household access to bank loans matters more for employment than firm access to local bank loans. Our results suggest that, over the recent financial crisis, tightening access to commercial and industrial loans and consumer installment loans explains jointly about a quarter of the drop in employment in the manufacturing sector. In addition, a decrease in the availability of home equity loans explains an extra one-tenth of the drop. |
| Keywords: | Bank credit channels; bank lending standards; home equity extraction; credit crunch; employment; job losses; Great Recession |
| Date: | 2013–10–29 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2014-06&r=ban |
| By: | Lainà, Patrizio (Department of Political and Economic Studies, University of Helsinki, Finland); Nyholm, Juho (Department of Political and Economic Studies, University of Helsinki, Finland); Sarlin, Peter (Center of Excellence SAFE at Goethe University Frankfurt, Germany, and RiskLab Finland at IAMSR, Abo Akademi University and Arcada University of Applied Sciences, Finland) |
| Abstract: | This paper investigates leading indicators of systemic banking crises in a panel of 11 EU countries, with a particular focus on Finland. We use quarterly data from 1980Q1 to 2013Q2, in order to create a large number of macro-financial indicators, as well as their various transformations. We make use of univariate signal extraction and multivariate logit analysis to assess what factors lead the occurrence of a crisis and with what horizon the indicators lead a crisis. We find that loans-to-deposits and house price growth are the best leading indicators. Growth rates and trend deviations of loan stock variables also yield useful signals of impending crises. While the optimal lead horizon is three years, indicators generally perform well with lead times ranging from one to four years. We also tap into unique long time-series of the Finnish economy to perform historical explorations into macro-financial vulnerabilities. |
| Keywords: | leading indicators; macro-financial indicators; banking crisis; signal extraction; logit analysis |
| JEL: | C43 E44 F30 G01 G15 |
| Date: | 2014–06–13 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:bofrdp:2014_014&r=ban |
| By: | Ryan, Robert M. (Central Bank of Ireland); O'Toole, Conor M. (Central Bank of Ireland); McCann, Fergal (Central Bank of Ireland) |
| Abstract: | This paper examines the extent to which bank market power alleviates or magnifies SME credit constraints using a large panel dataset of more than 118,000 SMEs across 20 European countries over the period 2005-2008. To our knowledge, this is the first study to examine bank market power and SME credit constraints in an international, developed economy setting. More- over, our study is the first to address a number of econometric considerations simultaneously, in particular by controlling for the availability of profitable investment opportunities using a structural Q model of investment. Our results strongly support the market power hypothesis, namely, that increased market power results in increased financing constraints for SMEs. Ad- ditionally, we find that the relationship exhibits heterogeneity across firm size and opacity in a manner that suggests that the true relationship between bank market power and financing constraints might not be fully explained by the existing theory. Finally, we find that the effect of bank market power on financing constraints increases in financial systems that are more bank dependent. |
| Keywords: | Bank Competition, Bank Concentration, Financing Constraints, Tobin's Q, Firmlevel Investment |
| JEL: | G21 G31 G32 F34 |
| Date: | 2014–02 |
| URL: | http://d.repec.org/n?u=RePEc:cbi:wpaper:03/rt/14&r=ban |
| By: | Altınok, Ahmet; Sever, Can |
| Abstract: | Peer-group mechanisms have been widely used by micro-credit institutions to minimize default risk. However, there are costs associated with establishing and maintaining liability groups. In the case when output is fully observable, we propose a dynamic individual lending mechanism. Assuming that risky borrowers discount the future costs and benefits relatively higher, our mechanism performs equally well in repayment rates, distinguishes safe and risky borrowers through differentiated interest rates and payment schedules. In case of unobservable types, it is able to eliminate adverse selection problem, and it reaches the first best outcome of the case that types of borrowers are publicly known. It improves wealth of individuals, and hence achieves a net welfare-superior outcome when compared with joint liability. Individual lending further saves from internal costs of group formation, and broadens the fractions of society into which microfinance institutions penetrate. We also identify unique welfare maximizing contract in our mechanism. Finally, we introduce a history dependent success probabilities, and show existence of efficient individual contract in that environment. |
| Keywords: | Microfinance, Graamen bank, joint liability, adverse selection, microlending, group lending, individual lending |
| JEL: | D60 D86 G21 O1 O12 |
| Date: | 2014–05–11 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:56598&r=ban |
| By: | Kelly, Jane (Central Bank of Ireland); O'Donnell, Nuala (Central Bank of Ireland); Sherman, Martina (Central Bank of Ireland); Woods, Maria (Central Bank of Ireland) |
| Abstract: | The recent nancial crisis highlighted the importance of stable funding and, in particular, customer deposits for the Irish banking sector. To ensure future viability, the domestic banks must maintain and grow their household deposit books. This letter focuses on the Irish household deposit market, describing some of the key developments in this segment during the crisis. It also tests if deposit movements are aected by dierences in deposit rates across the banks, over the period 2003Q1 through 2013Q2. The key ndings are that Irish householders are sensitive to dierences in rates across the banks, but this relationship only holds in the pre-crisis period (i.e., up to 2007Q4). |
| Date: | 2014–04 |
| URL: | http://d.repec.org/n?u=RePEc:cbi:ecolet:02/el/14&r=ban |