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on Banking |
| By: | Craig, Ben R. (Federal Reserve Bank of Cleveland); Dinger, Valeriya (University of Osnabrueck and Leeds University Business School) |
| Abstract: | The paper presents the first empirical study of the relation between bank loan volume volatility and bank retail and wholesale liabilities. We argue that since the volume of retail deposits is inflexible, banks facing volatile loan demand tend to fund loans with larger shares of wholesale rather than retail liabilities. We empirically confirm this argument using a unique dataset constructed from the weekly financial reports of 104 large U.S. commercial banks. The high frequency of the data allows us to employ dynamic identification schemes which mitigate reverse causality and selection concerns. Our results imply that the introduction of regulatory limits on wholesale liabilities will increase the exposure of banks to loan demand shocks. Such a regulation will also inhibit the ability of the banking sector to service more volatile loans. This may smooth the lending cycles, but it will also slow recoveries of lending volume after a substantial recession. |
| Keywords: | wholesale funding; retail deposits; loan volume volatility |
| JEL: | E44 G21 |
| Date: | 2014–10–02 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedcwp:1417&r=ban |
| By: | António Miguel Martins (CIICESI, Escola Superior de Tecnologia e Gestão de Felgueiras, Instituto Politécnico do Porto); Ana Paula Serra (CEF.UP and Universidade do Porto); Francisco Vitorino Martins (FEP, Universidade do Porto); Simon Stevenson (School of Real Estate & Planning, Henley Business School, University of Reading) |
| Abstract: | Understanding the performance of banks is of the utmost importance due to the impact the sector may have on economic growth and financial stability. Residential mortgage loans constitute a large proportion of the portfolio of many banks and are one of the key assets in the determination of their performance. Using a dynamic panel model, we analyse the impact of residential mortgage loans on bank profitability and risk, based on a sample of 555 banks in the European Union (EU-15), over the period from 1995 to 2008. We find that an increase in residential mortgage loans seems to improve bank’s performance in terms of both profitability and credit risk in good market, pre-financial crisis, conditions. These findings may aid in explaining why banks rush to lend to property during booms because of the positive effect it has on performance. The results also show that credit risk and profitability are lower during the upturn in the residential property cycle. |
| Keywords: | Residential Property Prices; Mortgage Loans; Bank Performance; Dynamic Panel Estimation |
| URL: | http://d.repec.org/n?u=RePEc:rdg:repxwp:rep-wp2014-05&r=ban |
| By: | Plosser, Matthew (Federal Reserve Bank of New York) |
| Abstract: | This paper empirically investigates banks’ investment allocations over the recent business cycle. I identify unsolicited deposit shocks resulting from unconventional energy development and estimate bank allocations of these deposits. In the pre-recession period, banks lend 38 percent of incremental deposits; however, during the downturn, banks favor liquid assets and lending allocations fall to 22 percent. Banks with low risk tolerance or less access to liquidity are particularly sensitive to the decline in economic conditions, choosing securities and cash, respectively. The findings identify significant heterogeneity in the willingness of banks to allocate capital during adverse times. |
| Keywords: | financial intermediation; banks; business cycles |
| JEL: | E32 G21 |
| Date: | 2014–10–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:693&r=ban |
| By: | Eric Wong (Hong Kong Monetary Authority); Andrew Tsang (Hong Kong Monetary Authority); Steven Kong (Hong Kong Monetary Authority) |
| Abstract: | Using a regulatory dataset of foreign bank branches in Hong Kong, this study finds evidence of the international transmission of funding shocks from home countries of global banks through their internal capital markets during the 2007-08 financial crisis. Global banks are found to buffer parent-bank liquidity shocks by repatriating cross-border internal funding, leading to reductions in loan supply by branches in Hong Kong. Branches with a higher loan-to-asset ratio are estimated to cut loan supply sharper than their counterparts. More liquid assets held by parent banks and central bank liquidity are found to reduce the extent of shock transmission significantly |
| Keywords: | Global Banks, Internal Capital Market, Liquidity Management, Shock Transmission Number: 212014 |
| JEL: | E44 F36 G32 |
| Date: | 2014–08 |
| URL: | http://d.repec.org/n?u=RePEc:hkm:wpaper:212014&r=ban |
| By: | Craig, Ben R. (Federal Reserve Bank of Cleveland); Fecht, Falko (Frankfurt School of Finance and Management); Tumer-Alkan, Gunseli (VU University Amsterdam) |
| Abstract: | In this paper, we focus on the interconnectedness of banks and the price they pay for liquidity. We assess how the concentration of credit relationships and the position of a bank in the network topology of the system influence the bank’s ability to meet its liquidity demand. We use quarterly data of bilateral interbank credit exposures between all German banks from 2000 to 2008 to measure interbank relationships and the network characteristics. We match these data with the bids placed by the individual banks in the European Central Bank’s (ECB) weekly repo auctions. The bids measure each bank’s willingness to pay for liquidity since they had variable rate tenders with a “pay-your-bid” price. Controlling for bank characteristics and the daily fulfillment of reserve requirements, we find that banks with a more diversified borrowing structure in the interbank market bid significantly less aggressively and pay a lower price for liquidity in the ECB’s main refinancing operations. These findings suggest that incentives to diversify bank liquidity risk dominate the benefits of private information. When the network position of the bank is taken into account, we find that central lenders in the money market bid more aggressively in the auctions. |
| Keywords: | Interbank markets; liquidity; relationship lending; networks |
| JEL: | D44 D85 E58 G21 L14 |
| Date: | 2014–10–17 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedcwp:1421&r=ban |
| By: | Paola Brighi; Valeria Venturelli |
| Abstract: | This paper investigates whether the range of activities conducted by banks influences their performance and risk. Using an unbalanced panel dataset which includes 308 bank-year observations, for the period 2006-2011, corresponding to 52 Italian Bank Holding Companies in the last year, the core question is to analyse the effect of diversification across and within both traditional and non-traditional income and if the results have been affected by the financial crisis. The main results suggest that revenue diversification plays a role in determining bank performance. The relative effects appear, however, to be different in relation to banks’ size and capital ratio. The results have strategic implications both for bank managers, regulators and supervisors for the consequences on banks’ performance and stability. |
| Keywords: | Income diversification, Risk, Performance, Capital ratio, Panel data |
| JEL: | G21 |
| Date: | 2013–10 |
| URL: | http://d.repec.org/n?u=RePEc:mod:dembwp:0025&r=ban |
| By: | Tri Vi Dang (Columbia University and Hong Kong Institute for Monetary Research); Honglin Wang (Hong Kong Institute for Monetary Research); Aidan Yao (AXA Investment Managers) |
| Abstract: | In this paper, we provide a qualitative and theoretical framework to analyze the rapid growth of shadow banking in China. An important characteristic of the system is its close connection with traditional banks, making it very bank-centric. Our theoretical model employs the concept of "information sensitivity" - a measure of tail risks - by Dang, Gorton and Holmstrom (2013) and suggests that Chinese shadow banking is built on the asymmetric perception of information sensitivity among shadow banking entities, banks and investors. Compared to the US, we show that shadow banking in China is built on different mechanisms (implicit guarantees in China versus financial engineering in the US) and operates on different platforms (banks versus capital markets). |
| Keywords: | Number: 222014 |
| Date: | 2014–09 |
| URL: | http://d.repec.org/n?u=RePEc:hkm:wpaper:222014&r=ban |
| By: | Balasubramanyan, Lakshmi (Federal Reserve Bank of Cleveland) |
| Abstract: | In this paper, I attempt to amalgamate the study of leverage-ratio performance with the monitoring decisions of a profit-maximizing bank. Applying tools used in studying the industrial organization of banking, my paper serves as a first step to tying the performance differences between the leverage and risk-based constraints to the more fundamental issue of monitoring. Does a bank faced with a leveragebased capital constraint monitor its loans better than a bank under a risk-based capital constraint? In a market that is characterized by a dominant bank and fringe banks, I seek to understand if the dominant bank monitors its loan when faced with a Basel III–style leverage ratio. The results show that under certain parameter ranges, the dominant bank will monitor its portfolio when faced with a leverage-based capital constraint. The results also show that the dominant bank will not monitor its portfolio when faced with a risk-based capital constraint. |
| Keywords: | Differential capital requirements; dominant-bank model; bank loan monitoring |
| JEL: | G2 |
| Date: | 2014–10–02 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedcwp:1415&r=ban |
| By: | Marianna Caccavaio (Banca d'Italia); Luisa Carpinelli (Banca d'Italia); Giuseppe Marinelli (Banca d'Italia); Enrico Sette (Banca d'Italia) |
| Abstract: | This paper studies what impact liquidity shocks have on liquid assets and domestic and cross-border lending. In particular, we look for differences across banks depending on their international exposure and we account for the effects of the sovereign debt crisis and the ECBÂ’s non-conventional monetary policy measures. Our main findings are that liquid assets are important drivers of lending adjustment to liquidity risk and that this effect is significant for domestic lending but not for foreign lending even considering the characteristics of the destination market. Differences in banksÂ’ international exposure play a limited role in the way liquidity shocks are transmitted. Creation-Date: 2014-09 |
| Keywords: | liquidity shock, cross-border lending, international banks |
| JEL: | G20 G21 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:opques:qef_232_14&r=ban |
| By: | Alfred Janc (Poznan University of Economics); Pawel Marszalek (Poznan University of Economics) |
| Abstract: | The paper aims at short synthesis of the Polish regulatory framework referring to the financial sector with special attention paid to the banking system. We describe origins of the financial regulations in Poland, as well as their further evolution. Then, in the context of changes in the EU directives, we present changes in the Polish regulation resulting from the necessity of adjustments. |
| Keywords: | financial regulation, Poland, integration, financial crisis |
| JEL: | G21 G28 |
| Date: | 2014–09–01 |
| URL: | http://d.repec.org/n?u=RePEc:fes:wpaper:wpaper61&r=ban |
| By: | Giampaolo Gabbi (University of Siena); Alesia Kalbaska (University of Siena); Alessandro Vercelli (University of Siena) |
| Abstract: | This contribution attempts to explain the recent financial crisis and the subsequent Great Recession from the point of view of incentives that change as a consequence of securitization and contagion processes. It provides a critical analysis of the basic principles of the Asymmetric Information Approach and its two branches that view differently the evolution of banking and the role of securitization in it. The former focuses on its impact on the traditional model of commercial banking, whereas the latter sees the role of securitization in the emergence of a parallel banking system (shadow banking). This divergence between the two approaches leads to different policy implications that can be drawn from the analysis of the crisis, advocating respectively the elimination (or heavy mitigation) of securitization and shadow banking, and the strict regulation of shadow banking and all the credit transfer processes. The paper is organized in three parts: the first finds out the crisis and the contagion within the financial system; the second is focused on the securitization process, describing the agents involved and the associated risks; finally, the third part is devoted to the theoretical analysis, particularly within the asymmetric information framework. |
| Keywords: | Financialisation, Great Recession, Financial Crisis, shadow banking, securitization |
| JEL: | D52 D53 D82 G21 G24 |
| Date: | 2014–09–01 |
| URL: | http://d.repec.org/n?u=RePEc:fes:wpaper:wpaper56&r=ban |
| By: | Badics, Judit; Kiss, Karoly Miklos; Stenger, Zsolt; Szikszai, Szabolcs |
| Abstract: | The paper aims to study the evolution of the financial regulation and supervision in Hungary from 1987, the year when the foundations of the two-tier banking system were laid. After a brief overview of the history of the Hungarian financial system we turn our attention to the history of the financial regulation. We investigate systematically the main areas of the national financial regulation and discuss the implementation of the financial directives of the European Union in Hungary. Our analysis on the development of the Hungarian legal system concludes that it is almost fully harmonized with the European legislation. |
| Keywords: | banking system, Hungary, financial crisis, financial institution, financial system, regulation |
| JEL: | G01 G20 G21 G23 G28 N24 |
| Date: | 2014–09–01 |
| URL: | http://d.repec.org/n?u=RePEc:fes:wpaper:wpaper64&r=ban |
| By: | Fulford, Scott L. (Boston College) |
| Abstract: | Credit limit variability is a crucial aspect of the consumption, savings, and debt decisions of households in the United States. Using a large panel, this paper first demonstrates that individuals gain and lose access to credit frequently and often have their credit limits reduced unexpectedly. Credit limit volatility is larger than most estimates of income volatility and varies over the business cycle. While typical models of intertemporal consumption fix the credit limit, I introduce a model with variable credit limits. Variable credit limits create a reason for households to hold both high interest debts and low interest savings at the same time, since the savings act as insurance. Simulating the model using the estimates of credit limit volatility, I show that it explains all of the credit card puzzle: why around a third of households in the United States hold both debt and liquid savings at the same time. The approach also offers an important new channel through which financial system uncertainty affects household decisions. |
| Keywords: | credit card puzzle; intertemporal consumption; precaution; credit limits; household finance |
| JEL: | D14 D91 E21 |
| Date: | 2010–06–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedbwp:14-8&r=ban |
| By: | Santiago Carbo-Valverde (Bangor Business School); Francisco Rodriguez-Fernandez (University of Granada) |
| Abstract: | This paper analyses the regulatory framework of the financial system in Spain. Particular attention is paid to the adoption of the EU directives and the way they have been transposed to Spain from 1986 to present, including the regulatory developments in the last few years from the onset of the financial crisis. The Spanish case appears particularly interesting as it has shown one of the most significant transformations during the period considered in the structure of regulation. This paper surveys the implementation of the most important EU regulations since the early 1980s to present. Overall, the implementation has been successful and has been timely. The implementation has been particularly intense and fast in what the solvency regulation is concerned. However, some other regulations, in particular those concerning capital markets, have normally required more time to be transposed or have had to be gradually implemented. The financial crisis has brought a number of significant changes beyond EU regulations for Spanish banks and it has shown that there was still substantial room for improvement in supervision and prudential regulations. The reaction has been significant as the recapitalization and restructuring process, have brought a number of regulatory changes beyond EU Directives. |
| Keywords: | Financial regulation, Spain, EU Directives, crisis, restructuring |
| JEL: | G18 G28 G38 |
| Date: | 2014–09–01 |
| URL: | http://d.repec.org/n?u=RePEc:fes:wpaper:wpaper59&r=ban |
| By: | Hitczenko, Marcin (Federal Reserve Bank of Boston); Tai, Mingzhu (Federal Reserve Bank of Boston) |
| Abstract: | Recent evidence suggests that the use of prepaid cards is growing in the United States. The study of how prepaid cards fit into the existing payments market requires accurate data about the adoption of prepaid cards among consumers. This paper describes several experiments conducted by the Consumer Payments Research Center that compare the efficacy of various question forms regarding reported adoption rates. A primary focus is on the effect of "disaggregation" or asking about adoption of a number of prepaid card categories sequentially rather than asking about adoption of prepaid cards as a whole. We find strong evidence that increases in the number of categories yield higher adoption rates. Findings about the robustness of responses with changes in a few aspects of the question are also discussed. |
| Keywords: | survey design; disaggregation; Survey of Consumer Payment Choice |
| JEL: | B4 |
| Date: | 2014–06–18 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedbwp:14-9&r=ban |
| By: | Anton Korinek; Jonathan Kreamer |
| Abstract: | Financial regulation is often framed as a question of economic efficiency. This paper, by contrast, puts the distributive implications of financial regulation at center stage. We develop a formal model in which the financial sector benefits from financial risk-taking by earning greater expected returns. However, risk-taking also increases the incidence of large losses that lead to credit crunches and impose negative externalities on the real economy. We describe a Pareto frontier along which different levels of risk-taking map into different levels of welfare for the two parties, pitting Main Street against Wall Street. A regulator has to trade off efficiency in the financial sector, which is aided by deregulation, against efficiency in the real economy, which is aided by tighter regulation and a more stable supply of credit. We also show that financial innovation, asymmetric compensation schemes, concentration in the banking system, and bailout expectations enable or encourage greater risk-taking and allocate greater surplus to Wall Street at the expense of Main Street. |
| Keywords: | financial regulation, distributive conflict, rent extraction, growth of the financial sector |
| Date: | 2014–10 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:468&r=ban |