nep-ban New Economics Papers
on Banking
Issue of 2014‒11‒28
thirteen papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Bank Ownership and Credit Growth in Emerging Markets During and After the 2008–09 Financial Crisis — A Cross-Regional Comparison By Guodong Chen; Yi Wu
  2. Bank lines of credit as contingent liquidity: A study of covenant violations and their implications By Acharya, Viral; Almeida, Heitor; Ippolito, Filippo; Perez, Ander
  3. Determinants of Banks' Net Interest Margins in Honduras By Koffie Ben Nassar; Edder Martinez; Anabel Pineda
  4. Wealth shocks, credit-supply shocks, and asset allocation: evidence from household and firm portfolios By Kick, Thomas; Onali, Enrico; Ruprecht, Benedikt; Schaeck, Klaus
  5. Contagious herding and endogenous network formation in financial networks By Georg, Co-Pierre
  6. Financial fragility of euro area households By Ampudia, Miguel; van Vlokhoven, Has; Żochowski, Dawid
  7. Consumer cash usage: a cross-country comparison with payment diary survey data By Bagnall, John; Bounie, David; Huynh, Kim P.; Kosse, Anneke; Schmidt, Tobias; Schuh, Scott; Stix, Helmut
  8. Real and Financial Vulnerabilities from Crossborder Banking Linkages By Kyunghun Kim; Srobona Mitra
  9. Overleveraging in the banking sector: Evidence from Europe By Schleer, Frauke; Semmler, Willi; Illner, Julian
  10. Regulating Capital Flows at Both Ends: Does it Work? By Atish R. Ghosh; Mahvash Saeed Qureshi; Naotaka Sugawara
  11. The Role of Card Acceptance in the Transaction Demand for Money By Kim Huynh; Philipp Schmidt-Dengler; Helmut Stix
  12. Credit, Bankruptcy, and Aggregate Fluctuations By Makoto Nakajima; José-Víctor Ríos-Rull
  13. Performance-sensitive debt: The intertwined effects of performance measurement and pricing grid asymmetry By Bannier, Christina E.; Wiemann, Markus

  1. By: Guodong Chen; Yi Wu
    Abstract: This paper examines bank credit growth in emerging markets before, during, and after the 2008-09 financial crisis using bank-level data, focusing on the role of bank ownership. Credit growth by foreign banks lagged behind that of domestic banks in 2009 in Asia, and in 2010 in Latin America and emerging Europe. State-owned banks instead played a counter-cyclical role during the crisis in particular in Latin America and emerging Europe, and credit by stateowned banks also grew faster than that of private banks after the crisis in Latin America. Expansionary monetary policy on average led to higher credit growth. Banks in Latin America and Asia that relied more on retail funding had higher credit growth, in particular during the crisis. Better-capitalized banks and banks with more liquid assets also had faster credit growth. Finally, banks in countries with stronger banking regulation had higher credit growth during the crisis.
    Keywords: Bank credit;Asia;Latin America;Central and Eastern Europe;Credit expansion;Emerging markets;Foreign banks;Global Financial Crisis 2008-2009;Cross country analysis;Credit Growth; Bank Ownership; Financial Crisis
    Date: 2014–09–15
  2. By: Acharya, Viral; Almeida, Heitor; Ippolito, Filippo; Perez, Ander
    Abstract: We study how the consequences of violations of covenants associated with bank lines of credit to firms vary with the financial health of lenders. Following a violation banks restrict usage of lines of credit by raising spreads, shortening maturities, tightening covenants, or cancelling the line or reducing its size. Even though the frequency of covenant violations is fairly stable during the period 2002-2011, the reaction of banks to violations became significantly more restrictive during the recent crisis. Banks in worse financial health are more likely to restrict access to credit lines following a violation, and violations driven by lender health have capital structure and real implications for firms. This behavior is at the heart of a new bank liquidity channel. This channel complements the traditional bank lending channel, which focuses on small financially constrained firms, because credit lines are commonly used by large, high credit quality firms to provide insurance against loss of access to external finance. JEL Classification: G21, G31, G32, E22, E5
    Keywords: bank financial health, covenant violations, firm financial constraints, lines of credit
    Date: 2014–08
  3. By: Koffie Ben Nassar; Edder Martinez; Anabel Pineda
    Abstract: This paper analyzes the determinants of banks’ net interest margins in Honduras during 1998 to 2013—a period characterized by increasing banks’ net interest margins, foreign bank participation and consolidation. In line with findings in the previous literature, we find that operating costs are the most important drivers of banks’ net interest margins. We also find that competition among banks has led to higher concentration and that funding by parent banks positively impacts foreign banks’ net interest margins. Together, these results suggest that banks, particularly foreign banks, are under pressure to consolidate and reduce operating costs in order to offer competitive interest margins. We conclude that further structural reforms and consolidation may lower banks’ net interest margins.
    Keywords: Banking sector;Honduras;Commercial banks;Profit margins;Foreign banks;Bank reforms;Banks' interest margins; Commercial banks; Panel corrected standard errors (PCSE)
    Date: 2014–09–09
  4. By: Kick, Thomas; Onali, Enrico; Ruprecht, Benedikt; Schaeck, Klaus
    Abstract: We use a unique dataset with bank clients’ security holdings for all German banks to examine how macroeconomic shocks affect asset allocation preferences of households and non-financial firms. Our analysis focuses on two alternative mechanisms which can influence portfolio choice: wealth shocks, which are represented by the sovereign debt crisis in the Euro area, and credit-supply shocks which arise from reductions in borrowing abilities during bank distress. While households with large holdings of securities from stressed Euro area countries (Greece, Ireland, Italy, Portugal, and Spain) decrease the degree of concentration in their security portfolio as a result of the Euro area crisis, non-financial firms with similar levels of holdings from stressed Euro area countries do not. Credit-supply shocks at the bank level result in lower concentration, for both households and non-financial corporations. Only shocks to corporate credit bear ramifications on bank clients’ portfolio concentration. Our results are robust to falsification tests, and instrumental variables estimation. JEL Classification: D12, D13, G11, G21
    Keywords: asset allocation, bank distress, credit-supply shocks, sovereign debt crisis
    Date: 2014–04
  5. By: Georg, Co-Pierre
    Abstract: When banks choose similar investment strategies, the financial system becomes vulnerable to common shocks. Banks decide about their investment strategy ex-ante based on a private belief about the state of the world and a social belief formed from observing the actions of peers. When the social belief is strong and the financial network is fragmented, banks follow their peers and their investment strategies synchronize. This effect is stronger for less informative private signals. For endogenously formed interbank networks, however, less informative signals lead to higher network density and less synchronization. It is shown that the former effect dominates the latter.
    Keywords: social learning,endogenous financial networks,multi-agent simulations,systemic risk
    JEL: G21 C73 D53 D85
    Date: 2014
  6. By: Ampudia, Miguel; van Vlokhoven, Has; Żochowski, Dawid
    Abstract: We propose a novel framework to identify distressed households by taking account of both the solvency and the liquidity situation of an individual household. Using the data from the Household Finance and Consumption Survey and the country-level data on non-performing loans we calibrate our metric of distress and estimate stress-test elasticities in response to an interest rate shock, an income shock and a house price shock. We find that, albeit euro area households are relatively resilient as a whole, there are large discrepancies in the impact of macroeconomic shocks across countries. Furthermore, while losses given default as calculated using our framework are low, they are sensitive to house prices changes. Hence, any factors hindering the seizure of the collateral or lowering its value, such as inefficient legal systems, moratoria on foreclosures or bottlenecks in judicial procedures may significantly increase losses facing banks. Finally, we demonstrate that our framework could be used for macroprudential purposes, in particular for the calibration of country level loan-to-value ratio caps. JEL Classification: D10, D14, G21
    Keywords: financial stability, household finance, household indebtedness, stress testing
    Date: 2014–10
  7. By: Bagnall, John; Bounie, David; Huynh, Kim P.; Kosse, Anneke; Schmidt, Tobias; Schuh, Scott; Stix, Helmut
    Abstract: We measure consumers’ use of cash by harmonizing payment diary surveys from seven countries. The seven diary surveys were conducted in 2009 (Canada), 2010 (Australia), 2011 (Austria, France, Germany and the Netherlands), and 2012 (the United States). Our paper finds cross-country differences – for example, the level of cash usage differs across countries. Cash has not disappeared as a payment instrument, especially for low-value transactions. We also find that the use of cash is strongly correlated with transaction size, demographics, and point-of-sale characteristics such as merchant card acceptance and venue. JEL Classification: E41, D12, E58
    Keywords: harmonization, money demand, payment systems
    Date: 2014–06
  8. By: Kyunghun Kim; Srobona Mitra
    Abstract: This paper looks at the vulnerabilities stemming from banking sector linkages between countries and their macroeconomic effects. It finds that credit risks (from a banking system’s claims on other countries) and funding risks (from a banking system’s liabilities to another) have declined over the past five years. It also finds that funding vulnerabilities have real effects. During normal times, funding vulnerabilities are associated with significant positive GDP growth surprises. During crisis times, funding vulnerabilities are associated with significant negative GDP growth surprises. The results tell us that policymakers should pay more attention to understanding crossborder funding risks.
    Keywords: Banking systems;Cross-border banking;Interconnectedness;Credit risk;External shocks;Cross country analysis;Network Linkages; Banking; Funding Risks; Credit Risks; GDP surprises.
    Date: 2014–07–25
  9. By: Schleer, Frauke; Semmler, Willi; Illner, Julian
    Abstract: Overleveraging of the banking sector has been considered as one of the main causes of the 2007-09 financial crisis and the subsequent great recession. It was also of major concern for the subsequent BIS regulatory policies resulting in Basel III and its request for higher capital requirements. It has now become highly relevant for the planned European banking union. Overleveraging of the banking sector exposes the financial sector and the macroeconomy to vulnerabilities, but also, as critics state, seems to constrain credit flows to the private sector. We present here a measure of overleveraging, defined as the difference of actual and sustainable debt, conduct an empirical study on overleveraging for 40 banks in Europe, and study the vulnerabilities and credit contractions that can arise subsequently. Before the year 2004 overleveraging has not been a serious problem as leverage was on a sustainable level. However, in the run-up to the financial crisis, actual and optimal debt ran apart and the banking sector began to suffer from overleveraging. We use a nonlinear Vector STAR model to evaluate the hypothesis that periods of increasing debt levels are accompanied by more severe credit constraints than periods of low leveraging. We demonstrate this for country groups across Europe.
    Keywords: Overleveraging,banking sector,Vector STAR,real economy,credit flows,regime switch
    JEL: C61 E32 G01
    Date: 2014
  10. By: Atish R. Ghosh; Mahvash Saeed Qureshi; Naotaka Sugawara
    Abstract: This paper examines whether cross-border capital flows can be regulated by imposing capital account restrictions (CARs) in both source and recipient countries, as was originally advocated by John Maynard Keynes and Harry Dexter White. To this end, we use data on bilateral cross-border bank flows from 31 source to 76 recipient (advanced and emerging market) countries over 1995–2012, and combine this information with a new and comprehensive dataset on various outflow and inflow related capital controls and prudential measures in these countries. Our findings suggest that CARs at either end can significantly influence the volume of cross-border bank flows, with restrictions at both ends associated with a larger reduction in flows. We also find evidence of cross-border spillovers whereby inflow restrictions imposed by countries are associated with larger flows to other countries. These findings suggest a useful scope for policy coordination between source and recipient countries, as well as among recipient countries, to better manage potentially disruptive flows.
    Keywords: Capital flows;Capital account;Cross-border banking;Spillovers;Capital inflows;Capital controls;cross-boder bank flows, capital controls, prudential measures
    Date: 2014–10–17
  11. By: Kim Huynh; Philipp Schmidt-Dengler; Helmut Stix
    Abstract: The use of payment cards, either debit or credit, is becoming more and more widespread in developed economies. Nevertheless, the use of cash remains significant. We hypothesize that the lack of card acceptance at the point of sale is a key reason why cash continues to play an important role. We formulate a simple inventory model that predicts that the level of cash demand falls with an increase in card acceptance. We use detailed payment diary data from Austrian and Canadian consumers to test this model while accounting for the endogeneity of acceptance. Our results confirm that card acceptance exerts a substantial impact on the demand for cash. The estimate of the consumption elasticity (0.23 and 0.11 for Austria and Canada, respectively) is smaller than that predicted by the classic Baumol-Tobin inventory model (0.5). We conduct counterfactual experiments and quantify the effect of increased card acceptance on the demand for cash. Acceptance reduces the level of cash demand as well as its consumption elasticity.
    Keywords: Bank notes, E-Money, Econometric and statistical methods, Financial services
    JEL: C C3 C35 C8 C83 E E4 E41
    Date: 2014
  12. By: Makoto Nakajima; José-Víctor Ríos-Rull
    Abstract: We ask two questions related to how access to credit affects the nature of business cycles. First, does the standard theory of unsecured credit account for the high volatility and procyclicality of credit and the high volatility and countercyclicality of bankruptcy filings found in U.S. data? Yes, it does, but only if we explicitly model recessions as displaying countercyclical earnings risk (i.e., rather than having all households fare slightly worse than normal during recessions, we ensure that more households than normal fare very poorly). Second, does access to credit smooth aggregate consumption or aggregate hours worked, and if so, does it matter with respect to the nature of business cycles? No, it does not; in fact, consumption is 20 percent more volatile when credit is available. The interest rate premia increase in recessions because of higher bankruptcy risk discouraging households from using credit. This finding contradicts the intuition that access to credit helps households to smooth their consumption.
    JEL: D91 E21 E32 E44 K35
    Date: 2014–10
  13. By: Bannier, Christina E.; Wiemann, Markus
    Abstract: This paper studies the use of performance pricing (PP) provisions in debt contracts and compares accounting-based with rating-based pricing designs. We find that rating-based provisions are used by volatile-growth borrowers and allow for stronger spread increases over the credit period. Accounting-based provisions are employed by opaque-growth borrowers and stipulate stronger spread reductions. Further, a higher spread-increase potential in rating-based contracts lowers the spread at the loan's inception and improves the borrower's performance later on. In contrast, a higher spread-decrease potential in accounting-based contracts lowers the initial spread and raises the borrower's leverage afterwards. The evidence indicates that rating-based contracts are indeed employed for different reasons than accounting-based contracts: the former to signal a borrower's quality, the latter to mitigate investment inefficiencies.
    Keywords: Performance pricing,performance-sensitive debt,accounting data,credit ratings,underinvestment,collateral
    JEL: G30 M40
    Date: 2014

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