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on Banking |
| By: | Javier Bianchi (Federal Reserve Bank of Minneapolis, University of Wisconsin, NBER); Saki Bigio (Columbia University) |
| Abstract: | We develop a new framework to study the implementation of monetary policy through the banking system. Banks finance illiquid loans by issuing deposits. Deposit transfers across banks must be settled using central bank reserves. Transfers are random and therefore create liquidity risk, which in turn determines the supply of credit and the money multiplier. We study how different shocks to the banking system and monetary policy affect the economy by altering the trade-off between profiting from lending and incurring greater liquidity risk. We calibrate our model to study quantitatively why banks have recently increased their reserve holdings but have not expanded lending despite policy efforts. Our analysis underscores an important role of disruptions in interbank markets, followed by a persistent credit demand shock. |
| Keywords: | Banks, monetary policy, liquidity, capital requirements |
| JEL: | G1 E44 E51 E52 |
| Date: | 2014–09 |
| URL: | http://d.repec.org/n?u=RePEc:apc:wpaper:2014-018&r=ban |
| By: | Cortes, Kristle Romero (Federal Reserve Bank of Cleveland); Strahan, Philip E. (Federal Reserve Bank of Cleveland) |
| Abstract: | Multi-market banks reallocate capital when local credit demand increases after natural disasters. Following such events, credit in unaffected but connected markets declines by about 50 cents per dollar of additional lending in shocked areas, but most of the decline comes from loans in areas where banks do not own branches. Moreover, banks increase sales of more-liquid loans in order to lessen the impact of the demand shock on credit supply. Larger, multi-market banks appear better able than smaller ones to shield credit supplied to their core markets (those with branches) by aggressively cutting back lending outside those markets. |
| Keywords: | Financial Integration; Branch Banking; Securitization |
| JEL: | G20 G21 |
| Date: | 2014–09–12 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedcwp:1411&r=ban |
| By: | Bianchi, Javier (Federal Reserve Bank of Minneapolis); Bigio, Saki (Columbia University) |
| Abstract: | We develop a new framework to study the implementation of monetary policy through the banking system. Banks finance illiquid loans by issuing deposits. Deposit transfers across banks must be settled using central bank reserves. Transfers are random and therefore create liquidity risk, which in turn determines the supply of credit and the money multiplier. We study how different shocks to the banking system and monetary policy affect the economy by altering the trade-off between profiting from lending and incurring greater liquidity risk. We calibrate our model to study quantitatively why banks have recently increased their reserve holdings but have not expanded lending despite policy efforts. Our analysis underscores an important role of disruptions in interbank markets, followed by a persistent credit demand shock. |
| Keywords: | Monetary policy; Liquidity; Capital requirements |
| JEL: | E44 E51 E52 G1 |
| Date: | 2014–09–08 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedmsr:503&r=ban |
| By: | Anginer, Deniz; Demirguc-Kunt, Asli; Huizinga, Harry; Ma, Kebin |
| Abstract: | This paper finds that shareholder-friendly corporate governance is positively associated with bank insolvency risk, as proxied by the Z-score and the Merton's distance to default measure, for an international sample of banks over the 2004-08 period. Banks are special in that"good"corporate governance increases bank insolvency risk relatively more for banks that are large and located in countries with sound public finances, as banks aim to exploit the financial safety net. Good corporate governance is specifically associated with higher asset volatility, more nonperforming loans, and a lower tangible capital ratio. Furthermore, good corporate governance is associated with more bank risk-taking at times of rapid economic expansion. Consistent with increased risk-taking, good corporate governance is associated with a higher valuation of the implicit insurance provided by the financial safety net, especially in the case of large banks. These results underline the importance of the financial safety net and too-big-to-fail policies in encouraging excessive risk-taking by banks. |
| Keywords: | Banks&Banking Reform,Emerging Markets,Bankruptcy and Resolution of Financial Distress,Debt Markets,Governance Indicators |
| Date: | 2014–09–01 |
| URL: | http://d.repec.org/n?u=RePEc:wbk:wbrwps:7017&r=ban |
| By: | Adam, Tim R.; Streitz, Daniel |
| Abstract: | We examine whether performance-sensitive debt (PSD) is used to reduce hold-up problems in long-term lending relationships. We find that the use of PSD is more common in the presence of a long-term lending relationship and if the borrower has fewer financing alternatives available. In syndicated deals, however, the presence of a relationship lead arranger reduces the use of PSD, which is consistent with hold-up being of lesser concern in such cases. Further, supporting our hypothesis that hold-up concerns motivate the use of PSD, we find a substitution effect between the use of PSD and the tightness of financial covenants. |
| Keywords: | Performance-sensitive debt; relationship lending; hold-up; holdout; syndicated debt; covenants |
| JEL: | G21 G31 G32 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:trf:wpaper:476&r=ban |
| By: | Toyoichiro Shirota (Bank of Japan) |
| Abstract: | This paper examines the major determinant of the cross-border credit flows from global banks toward 70 vis-a-vis countries in seven regions of the world. Employing a Bayesian dynamic latent factor model, we decompose the volatilities of banking flows into the contribution of the global-common factor, the regional-common factor, and the national-specific factor. The results indicate that the global-common factor explains 36.4 percent of volatilities in overall cross-border banking flow, suggesting that the international propagations of shocks through global banks are quantitatively important. Especially, the contribution of the global-common factor is increasing in the 2000s. At the same time, main determinants are largely heterogeneous across countries. This heterogeneity implies that the desirable policy response to credit inflows could be different for each host country. |
| Keywords: | International Capital Flows; Dynamic Latent Factor; Bayesian Estimation |
| JEL: | C11 F3 |
| Date: | 2013–03–19 |
| URL: | http://d.repec.org/n?u=RePEc:boj:bojwps:13-e-5&r=ban |
| By: | Adrian, Tobias (Federal Reserve Bank of New York); Liang, J. Nellie |
| Abstract: | In the conduct of monetary policy, there exists a risk-return trade-off between financial conditions and financial stability, which complements monetary policy’s traditional trade-off between inflation and real activity. The trade-off exists even if monetary policy does not target financial stability considerations independently of its inflation and real activity goals, because risks to future financial stability are increased by the buildup of financial vulnerabilities from persistent accommodative monetary policy when the economy is close to potential. We review monetary policy transmission channels and financial frictions that give rise to this trade-off between financial conditions and financial stability, within a monitoring program across asset markets, banking firms, shadow banking, and the nonfinancial sector. We focus on vulnerabilities that affect monetary policy’s risk-return trade-off, including 1) pricing of risk, 2) leverage, 3) maturity and liquidity mismatch, and 4) interconnectedness and complexity. We also discuss the extent to which structural and time-varying macroprudential policies can counteract the buildup of vulnerabilities, thus mitigating monetary policy’s risk-return trade-off. |
| Keywords: | risk-taking channel of monetary policy; monetary policy transmission; monetary policy rules; financial stability; financial conditions; macroprudential policy |
| JEL: | E52 G01 G28 |
| Date: | 2014–09–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:690&r=ban |
| By: | Finn E. Kydland (Department of Economics, University of California-Santa Barbara (UCSB); National Bureau of Economic Research (NBER)); Peter Rupert (Department of Economics, University of California-Santa Barbara (UCSB)); Roman Sustek (School of Economics and Finance Queen Mary; Centre for Macroeconomics (CFM)) |
| Abstract: | Housing construction, measured by housing starts, leads GDP in a number of countries. Measured as residential investment, the lead is observed only in the US and Canada; elsewhere, residential investment is coincident. Variants of existing theory, however, predict housing construction lagging GDP. In all countries in the sample, nominal interest rates are low ahead of GDP peaks. Introducing fully-amortizing mortgages and an estimated process for nominal interest rates into a standard model aligns the theory with the observations on starts; one-period loans are insu±cient to generate the lead. Longer time to build then makes residential investment cyclically coincident. |
| Keywords: | Residential investment, housing starts, business cycle, mortgage costs, time to build |
| JEL: | E22 E32 R21 R31 |
| Date: | 2014–08 |
| URL: | http://d.repec.org/n?u=RePEc:cfm:wpaper:1423&r=ban |