nep-ban New Economics Papers
on Banking
Issue of 2014‒12‒24
23 papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Banking Competition and Stability : The Role of Leverage By Freixas, X.; Ma, K.
  2. Holes in the Dike: the global savings glut, U.S. house prices and the long shadow of banking deregulation By Mathias Hoffmann; Iryna Stewen
  3. Corporate Governance and Bank Insolvency Risk : International Evidence By Anginer, D.; Demirguc-Kunt, Asli; Huizinga, H.P.; Ma, K.
  4. Shocks Abroad, Pain at Home? Bank-firm Level Evidence on the International Transmission of Financial Shocks By Ongena, S.; Peydro, J.L.; van Horen, N.
  5. Deglobalization of Banking: The World is Getting Smaller By Van Rijckeghem, Caroline; Weder di Mauro, Beatrice
  6. The economic consequences of including fair value adjustments to shareholders’ equity in regulatory capital calculations By Justin Chircop; Zoltán Novotny-Farkas
  7. Lending Standards, Credit Booms and Monetary Policy By Elena Afanasyeva; Jochen Güntner
  8. The Transmission of Real Estate Shocks Through Multinational Banks By Bertay, A.C.
  9. Indirect Contagion in an Originate-to-Distribute Banking Model By Andrea Pinna
  10. Empirical study on the correlation of corporate social responsibility with the banks efficiency and stability By T., Vasylieva; A., Lasukova
  11. Fresh Patterns of Liberalization, Bank Return and Return Uncertainty in Africa By Simplice Anutechia Asongu
  12. Mortgage-related Financial Difficulties: Evidence from Australian Micro-level Data By Matthew Read; Chris Stewart; Gianni La Cava
  13. Does Business Regulation Matter for Banks in the European Union? By Mamatzakis, E
  14. Modelling default transitions in the UK mortgage market By McCann, Fergal
  15. Do Credit Market Shocks affect the Real Economy? Quasi-Experimental Evidence from the Great Recession and ‘Normal’ Economic Times By Michael Greenstone; Alexandre Mas; Hoai-Luu Nguyen
  16. Banks, Government Bonds, and Default: What do the Data Say? By Gennaioli, Nicola; Martin, Alberto; Rossi, Stefano
  17. The effect of corporate governance on the performance of US investment banks. By mamatzakis, em
  18. The Liquidity Premium: Commercial Banks versus Microfinance Institutions By Carolina Laureti; Ariane Szafarz
  19. A Critical Evaluation of Bail-in as a Bank Recapitalisation Mechanism By Avgouleas, Emilios; Goodhart, Charles A
  20. Hometown Investment Trust Funds: An Analysis of Credit Risk By Yoshino, Naoyuki; Taghizadeh-Hesary, Farhad
  21. Loan loss forecasting: a methodological overview By Gaffney, Edward; Kelly, Robert; McCann, Fergal; Lyons, Paul
  22. Monetary and macroprudential policy with multi-period loans By Paolo Gelain; Marcin Kolasa; Michał Brzoza-Brzezina
  23. The household credit market after five years of crisis: evidence from the survey on income and wealth By Silvia Magri; Raffaella Pico

  1. By: Freixas, X.; Ma, K. (Tilburg University, Center For Economic Research)
    Abstract: This paper reexamines the classical issue of the possible trade-offs between banking competition and financial stability by highlighting different types of risk and the role of leverage. By means of a simple model we show that competition can affect portfolio risk, insolvency risk, liquidity risk, and systemic risk differently. The effect depends crucially on banks’ liability structure, on whether banks are financed by insured retail deposits or by uninsured wholesale debts, and on whether the indebtness is exogenous or endogenous. In particular we suggest that, while in a classical originate-to-hold banking industry competition might increase financial stability, the opposite can be true for an originate-to-distribute banking industry of a larger fraction of market short-term funding. This leads us to revisit the existing empirical literature using a more precise classification of risk. Our theoretical model therefore helps to clarify a number of apparently contradictory empirical results and proposes new ways to analyze the impact of banking competition on financial stability.
    Keywords: Banking Competition; Financial Stability; Leverage
    JEL: G21 G28
    Date: 2014
  2. By: Mathias Hoffmann; Iryna Stewen
    Abstract: We explore empirically how capital inflows into the US and financial deregulation within the United States interacted in driving the run-up (and subsequent decline) in US housing prices over the period 1990-2010. To obtain an ex ante measure of financial liberalization, we focus on the history of interstate-banking deregulation during the 1980s, i.e. prior to the large net capital inflows into the US from China and other emerging economies. Our re- sults suggest a long shadow of deregulation: in states that opened their banking markets to out-of-state banks earlier, house prices were more sensitive to capital inflows. We provide evidence that global imbalances were a major positive funding shock for US wide banks: different from local banks, these banks held a geographically diversified portfolio of mort- gages which allowed them to tap the global demand for safe assets by issuing private-label safe assets backed by the country-wide US housing market. This, in turn, allowed them to expand mortgage lending and lower interest rates, driving up housing prices.
    Keywords: House prices, savings glut, global imbalances, credit constraints, state banking deregulation
    JEL: G10 G21 G28 F20 F32 F40
    Date: 2014–12
  3. By: Anginer, D.; Demirguc-Kunt, Asli; Huizinga, H.P. (Tilburg University, Center For Economic Research); Ma, K. (Tilburg University, Center For Economic Research)
    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 2004-2008 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 non-performing 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: Corporate governance; Bank insolvency; Capitalization; Non-performing loans
    JEL: G21 M21
    Date: 2014
  4. By: Ongena, S. (Tilburg University, Center For Economic Research); Peydro, J.L.; van Horen, N.
    Abstract: Abstract: We study the international transmission of shocks from the banking to the real sector during the global financial crisis. For identification, we use matched bank-firm level data, including many small and medium-sized firms, in Eastern Europe and Central Asia. We find that internationally-borrowing domestic and foreign-owned banks contract their credit more during the crisis than domestic banks that are funded only locally. Firms that are dependent on credit and at the same time have a relationship with an internationally-borrowing domestic or a foreign bank (as compared to a locally-funded domestic bank) suffer more in their financing and real performance. Single-bank-relationship firms, small firms and firms with intangible assets suffer most. For credit-independent firms, there are no differential effects. Our findings suggest that financial globalization has intensified the international transmission of financial shocks with substantial real consequences.
    Keywords: international transmission; firm real effects; foreign banks; international wholesale funding; credit shock
    JEL: G01 G21 F23 F36
    Date: 2013
  5. By: Van Rijckeghem, Caroline; Weder di Mauro, Beatrice
    Abstract: Banks have been running for home. We investigate the pattern of this increasing home bias in the wake of the financial crisis and explore possible explanations. We estimate the strength of the flight home effect as the change in domestic credit extended by domestic banks that cannot be accounted for by recipient or lender effects. We find evidence of flight home for almost all banking systems with the notable exception of the US and Japan. In periods of calm, reversals of the home bias are small. The result is cumulative renationalization, with domestic lending growing on average 25% more than foreign lending during 2008-12. Sales and acquisitions of banks contributed to the home bias and the flight home was strong at the intensive margin as well. Deterioration of bank soundness explains some but not all of the effect, e.g. Germany and Switzerland had a strong flight home notwithstanding improving bank soundness during the eurocrisis. We also find evidence of the vicious circle between banks and sovereign balance sheets: sovereign stress paired with banking stress contributed to the renationalization of banking.
    Keywords: deglobalization; financial protectionism; international banking system
    JEL: E52 F34 G21
    Date: 2014–09
  6. By: Justin Chircop (Lancaster University Management School, Lancaster University, UK); Zoltán Novotny-Farkas (Lancaster University Management School, Lancaster University, UK)
    Abstract: We investigate the economic consequences of the implementation of a particular aspect of Basel III in the U.S. Specifically, the Basel III proposal and the corresponding U.S. rule (hereafter referred to as the removal of the AOCI filter) to make the inclusion of unrealized fair value gains and losses of available-for-sale (AFS) securities in regulatory capital mandatory for all banks was highly controversial. The regulators’ view that such an inclusion would result in greater bank regulatory discipline was met with the concern that the regulatory costs of such regulatory tightening would exceed any possible benefits. Specifically, opponents of this rule argue that the inclusion of unrealized gains and losses would result in unrealistic volatility in regulatory capital and would force banks to make costly changes to their investment and risk management behavior. Using a comprehensive sample of U.S. banks we provide three pieces of evidence: First, we find that inclusion of unrealized fair value gains and losses on AFS securities for the period 2009 to 2013 would have resulted in increased volatility of regulatory capital. Second, bank share prices reacted negatively (positively) to pronouncements that increased (decreased) the likelihood that this rule would be implemented and these market reactions are strongly positively related to the relative amount of unrealized gains and losses. Third, we find evidence that banks affected by the AOCI filter removal (i.e., advanced approaches banks) changed their investment portfolio management. Specifically, affected banks reduce the maturity of their investment portfolio and decrease the proportion of AFS securities more significantly than unaffected benchmark banks. Interestingly, our results also suggest that affected banks reduce the size of their illiquid investment securities held in the AFS category more than unaffected banks. Given that we observe these changes before the actual implementation date of the new rule, we believe our results speak to the ex ante effects of fair value accounting on banks' risk taking behavior.
    Keywords: Banks, Fair Value Accounting, Prudential regulation, Regulatory Capital
    JEL: G21 M41
    Date: 2014–11
  7. By: Elena Afanasyeva; Jochen Güntner
    Abstract: This paper investigates the risk channel of monetary policy on the asset side of banks' balance sheets. We use a factoraugmented vector autoregression (FAVAR) model to show that aggregate lending standards of U.S. banks, such as their collateral requirements for firms, are significantly loosened in response to an unexpected decrease in the Federal Funds rate. Based on this evidence, we reformulate the costly state verification (CSV) contract to allow for an active financial intermediary, embed it in a New Keynesian dynamic stochastic general equilibrium (DSGE) model, and show that - consistent with our empirical findings - an expansionary monetary policy shock implies a temporary increase in bank lending relative to borrower collateral. In the model, this is accompanied by a higher default rate of borrowers.
    Keywords: Bank lending standards, Credit supply, Monetary policy, Risk channel
    JEL: E44 E52
    Date: 2014–10
  8. By: Bertay, A.C. (Tilburg University, Center For Economic Research)
    Abstract: Abstract: This paper investigates the credit supply of banks in response to domestic and foreign real estate price changes. Using a large international dataset of multinational banks, we find evidence of a significant transmission of domestic real estate shocks into lending abroad. A 1% decrease in real estate prices in home country, in particular, leads to a 0.2-0.3% decrease in credit growth in the foreign subsidiary. This response, however, is asymmetric: only negative house price changes are transmitted. Stricter regulation of activities of parent banks can reduce this effect, indicating a role for regulation in alleviating the transmission of real estate shocks. Further, the analysis of the impact of real estate shocks on foreign subsidiary funding indicates that shocks are transmitted through changes in long-term debt funding and equity.
    Keywords: Internal capital markets; multinational banking; transmission of real estate shocks
    JEL: F23 F36 G21
    Date: 2014
  9. By: Andrea Pinna (Free University of Bozen-Bolzano, Faculty of Economics and Management, Italy.)
    Abstract: In a model of Originate-To-Distribute (OTD) banking, I show that contagion may spread before any preference shock, fire sale, or change in haircuts takes place. The drivers of contagion are opaqueness of collateral and roll-over frequency. Complexity of structured finance and poor screening of borrowers induce both originators and investors at different stages of the OTD chain to develop heterogeneous expectations on the future value of securitized debt. When new information on the value of collateral is suffciently bad, creditors in the money market have to write down their loans to overoptimistic banks and shrink liquidity supply in the short-term. Banks with accurate pricing models are unable to roll over and go bankrupt for illiquidity reasons. I provide a set of conditions under which the industry is able to prevent contagion and policy makers shall commit to limit their intervention.
    Keywords: Financial crises, Originate to distribute, Opaque securities, Shadow banking, Crisis resolution
    JEL: G01 G32
    Date: 2014–12
  10. By: T., Vasylieva; A., Lasukova
    Abstract: The aim of this paper is to investigate the relationship between the corporate social responsibility concept and the most important characteristics of the banking – efficiency and stability in a sample of twelve Ukrainian banks, which are the biggest one in Ukraine according the National bank of Ukraine (NBU) classification. Our research covers the period from 2006 to 2012. Drawing on the literature review, we pointed out two main hypothesis related to the impact on the corporate social responsibility concept (CSR) of the following independent variables: 1 – efficiency (as a short term period characteristics of banking), 2 – stability (as a long term characteristics of banking).
    Keywords: bank, corporate social responsibility, efficiency, stability, sustainable development
    JEL: C33 C58 G21 M14
    Date: 2013
  11. By: Simplice Anutechia Asongu (Association of African Young Economists)
    Abstract: This chapter complements exiting African liberalization literature by providing fresh patterns of two main areas. First, it assesses whether African banking institutions have benefited from liberalization policies in terms of bank returns. Second, it models bank return and return uncertainty in the context of openness policies to examine fresh patterns for the feasibility of common policy initiatives. The empirical evidence is based on 28 African countries for the period 1999-2010. Varying non-overlapping intervals and autoregressive orders are employed for robustness purposes. The findings show that, while trade openness has increased bank returns and return uncertainties, financial openness and institutional liberalization have decreased bank returns and reduced return uncertainty respectively. But for some scanty evidence of convergence in return on equity, there is overwhelming absence of catch-up among sampled countries. Implications for regional integration and portfolio diversification are discussed.
    Keywords: Liberalization policies, Capital return, Africa
    JEL: D6 F30 F41 F50 O55
    Date: 2014–08
  12. By: Matthew Read (Reserve Bank of Australia); Chris Stewart (Reserve Bank of Australia); Gianni La Cava (Reserve Bank of Australia)
    Abstract: We investigate the factors associated with the incidence of mortgage-related financial difficulties in Australia. We use two complementary micro-level datasets: loan-level data on residential mortgages from two Australian banks, which we use to analyse the factors associated with entering 90+ day housing loan arrears; and household-level data from the Household, Income and Labour Dynamics in Australia (HILDA) Survey, which we use to explore the factors associated with households missing mortgage payments. The loan-level analysis indicates that the probability of entering arrears increases with the loan-to-valuation ratio (LVR) at origination, and is particularly high for loans with an LVR above 90 per cent. In contrast, the probability of entering arrears is lower for loans that are repaid relatively quickly. Additionally, the probability of entering arrears varies across different loan types; for example, low-documentation loans are more likely to enter arrears, even after controlling for whether the borrower was self-employed. The likelihood of entering arrears increases with the contract interest rate, which is consistent with lenders setting higher interest rates for riskier borrowers. The household-level analysis suggests that the probability of missing a mortgage payment is particularly high for households with relatively high debt-servicing ratios. Households that have previously missed a payment are also much more likely to miss subsequent payments than households with unblemished payment histories.
    Keywords: household surveys; loan-level data; mortgage default
    JEL: G21 R29 R31
    Date: 2014–11
  13. By: Mamatzakis, E
    Abstract: This paper provides a comprehensive analysis of the impact of business and financial specific regulations on banks in the EU-27 over the 2004-2010 periods. We employ for the first time in the banking literature a unique dataset of a wide range of regulation indices from the “Doing Business” project of the World Bank. Results for the credit regulation indices show that the strength of creditor rights is negatively related to bank performance as measured by cost efficiency, although this effect becomes less resilient during the recent crisis period (2008-2010). On the other hand, credit information sharing improves performance, a result that is further magnified during the crisis. Tax-compliance costs and entry regulation constrain bank performance. More stringent regulation of labour, in terms of minimum wage and dismissal costs, and insolvency regulation are positively associated with performance. Furthermore, regulation that protects investors from management expropriation, such as the extent of director liability, exerts a positive impact on bank performance and more so in the crisis years. Finally, we use interaction terms between the business regulation variables and institutional quality as measured by the rule of law and corruption. Results show that there are cases that institutional quality influences positively or negatively the individual effects of specific types of business regulation on bank performance.
    Keywords: regulation of business; bank performance; European Union.
    JEL: G21
    Date: 2014–11–14
  14. By: McCann, Fergal (Central Bank of Ireland)
    Abstract: Using a large panel data set on the population of UK mortgage loans by Irish-headquartered banks, this paper presents a transitions-based model of mortgage default. The estimation departs from cross-sectional methods typically used in mortgage default models, in that the transition both into and out of mortgage default is predicted. Housing equity, regional unemployment and loan interest rates are found to impact the probability of transition into default, while housing equity, interest rates and the time spent in default all significantly aect the probability that a loan transitions out of default ("cures"). The latter finding is indicative of a hysteresis effect in mortgage markets, whereby the longer a mortgage spends in default, the less likely it is that the obligor will begin repayment. This finding provides important impetus for mortgage modication programmes which aim to tackle mortgage arrears at as early a stage as possible. In an extension, the default transitions of owner-occupiers are shown to be far less sensitive to changes in housing equity than those of Buy-to-Let investors. This finding suggests that instances of "strategic default" are uncommon among UK homeowners, but investors may well exercise the "put option" implicit in their contract when house price falls leave them "out of the money".
    Keywords: Mortgages, default, credit risk, Markov multi-state model.
    JEL: D14 G21
    Date: 2014–11
  15. By: Michael Greenstone; Alexandre Mas; Hoai-Luu Nguyen
    Abstract: We estimate the effect of the reduction in credit supply that followed the 2008 financial crisis on the real economy. We predict county lending shocks using variation in pre-crisis bank market shares and estimated bank supply-shifts. Counties with negative predicted shocks experienced declines in small business loan originations, indicating that it is costly for these businesses to find new lenders. Using confidential microdata from the Longitudinal Business Database, we find that the 2007-2009 lending shocks accounted for statistically significant, but economically small, declines in both small firm and overall employment. Predicted lending shocks affected lending but not employment from 1997-2007.
    JEL: D22 D53 G01 G1 G21 J01 J23
    Date: 2014–11
  16. By: Gennaioli, Nicola; Martin, Alberto; Rossi, Stefano
    Abstract: We analyze holdings of public bonds by over 20,000 banks in 191 countries, and the role of these bonds in 20 sovereign defaults over 1998-2012. Banks hold many public bonds (on average 9% of their assets), particularly in less financially-developed countries. During sovereign defaults, banks increase their exposure to public bonds, especially large banks and when expected bond returns are high. At the bank level, bondholdings correlate negatively with subsequent lending during sovereign defaults. This correlation is mostly due to bonds acquired in pre-default years. These findings shed light on alternative theories of the sovereign defaultbanking crisis nexus.
    Keywords: government bonds; sovereign default; sovereign risk
    JEL: F34 F36 G15 H63
    Date: 2014–06
  17. By: mamatzakis, em
    Abstract: This paper focuses on the impact of the corporate governance, using a plethora of measures, on the performance of US investment banks over the 2000-2012 period. This time period offers a unique set of information, related to the credit crunch, that we model using a dynamic threshold analysis to reveal new insights into the relationship between corporate governance and bank performance. Results show that the board size asserts a negative effect on performance consistent with the ‘agency cost hypothesis’, particularly for banks with board size higher than ten members. Threshold analysis reveals that in the post-crisis period most of investment banks opt for boards with less than ten members, aiming to decrease agency conflicts that large boards suffer from. We also find a negative association between operational complexity and performance. Moreover, CEO power asserts a positive effect on performance consistent with the ‘stewardship hypothesis’. In addition, an increase in the bank ownership held by the board has a negative impact on performance for banks below a certain threshold. On the other hand, for banks with board ownership above the threshold value this effect turns positive, indicating an alignment between shareholders’ and managers’ incentives.
    Keywords: Investment Banking, Corporate governance, Performance, Board size, CEO power, Board Ownership.
    JEL: G18 G2 G21 G3 G38
    Date: 2014–11–14
  18. By: Carolina Laureti; Ariane Szafarz
    Abstract: Using data from Bangladesh, this paper finds that the liquidity premium—the difference between the interest paid on illiquid and liquid savings accounts—is higher in commercial banks than in microfinance institutions. One possible interpretation lies in the higher prevalence of time-inconsistency among the poor. The observed difference in liquidity premia could be due to poor time-inconsistent agents willing to forgo interest on illiquid savings accounts in order to discipline their future selves.
    Keywords: liquidity premium; time-inconsistency; banks; microfinance; Bangladesh
    JEL: G21 G00 D14 D53 O16
    Date: 2014–11–26
  19. By: Avgouleas, Emilios; Goodhart, Charles A
    Abstract: Many of the world’s developed economies have introduced, or are planning to introduce, bank bail-in regimes. Both the planned EU resolution regime and the European Stability Mechanism Treaty involve the participation of bank creditors in bearing the costs of bank recapitalization via the bail-in process as one of the (main) mechanisms for restoring a failing bank to health. There is a long list of actual or hypothetical advantages attached to bail-in centred bank recapitalizations. Most importantly the bail-in tool involves replacing the implicit public guarantee, on which fractional reserve banking has operated, with a system of private penalties. The bail-in tool may, indeed, be much superior in the case of idiosyncratic failure. Nonetheless, there is need for a closer examination of the bail-in process, if it is to become a successful substitute to the unpopular bailout approach. This paper discusses some of its key potential shortcomings. It explains why bail-in regimes will fail to eradicate the need for an injection of public funds where there is a threat of systemic collapse, because a number of banks have simultaneously entered into difficulties, or in the event of the failure of a large complex cross-border bank, except in those cases where failure was clearly idiosyncratic.
    Keywords: bail-in; bank recapitalisation; bank regulation; creditor flight; moral hazard
    JEL: G18 G28 K20 L51
    Date: 2014–07
  20. By: Yoshino, Naoyuki (Asian Development Bank Institute); Taghizadeh-Hesary, Farhad (Asian Development Bank Institute)
    Abstract: In Asia, small and medium-sized enterprises (SMEs) account for a major share of employment and dominate the economy. Asian economies are often characterized as having bank-dominated financial systems and underdeveloped capital markets, in particular venture capital markets. Hence, looking for new methods of financing for SMEs is crucial. Hometown investment trust funds (HIT) are a new form of financial intermediation that has now been adopted as a national strategy in Japan. In this paper, we explain the importance of SMEs in Asia and describe about HITs. We then provide a scheme for the credit rating of SMEs by employing two statistical analysis techniques, principal components analysis and cluster analysis, and applying various financial variables to 1,363 SMEs in Asia. Adoption of this comprehensive and efficient method would enable banks to group SME customers based on financial health, adjust interest rates on loans, and set lending ceilings for each group. Moreover, this method is applicable to HITs around the world.
    Keywords: smes; credit risk; hometown investment trust funds; venture capital markets; asian capital markets
    JEL: G21 G24 G28
    Date: 2014–12–03
  21. By: Gaffney, Edward (Central Bank of Ireland); Kelly, Robert (Central Bank of Ireland); McCann, Fergal (Central Bank of Ireland); Lyons, Paul (Central Bank of Ireland)
    Abstract: This Letter provides an overview of the Central Bank of Ireland's Loan Loss Forecasting framework. This framework, which utilises detailed loan-level data provided on a six-monthly basis by domestic Irish banks, includes internally- developed probability of default (PD) models and a cash ow engine which produces expected loss estimates. The PD models provide estimates of the probability of transition into and out of loan default. Exposure at Default (EAD) is calculated on an annual basis using PD estimates and loan-level information on term, interest rate and balance. Loss Given Default (LGD) is calculated using loan-level collateral value data and can be adjusted in residential mortgage models using an internally-developed algorithm which models lenders' choice between mortgage modication and repossession.
    Date: 2014–11
  22. By: Paolo Gelain (Norges Bank); Marcin Kolasa (National Bank of Poland); Michał Brzoza-Brzezina (National Bank of Poland)
    Abstract: We study the implications of multi-period loans for monetary and macroprudential policy, considering several realistic modifications -- variable vs. fixed loan rates, non-negativity constraint on newly granted loans, and occasionally binding collateral constraint -- to an otherwise standard DSGE model with housing and financial intermediaries. In line with the literature, we find that monetary policy is less effective when contracts are multi-period, but only under fixed rate mortgages or when borrowers cannot be forced to accelerate repayment of their loans. Moreover, the probability that the collateral constraint becomes slack depends on loan maturity only for fixed rate mortgages while the probability that the non-negativity constraint becomes binding grows with loan maturity regardless of the contract type. As a result, muti-period loans not only weaken monetary and macroprudential policy, but also introduce asymmetry into their transmission.
    Date: 2014
  23. By: Silvia Magri; Raffaella Pico (Bank of Italy)
    Abstract: Half a decade of crisis has had a substantial impact on the market for credit to Italian households. From 2008 through 2012 the share of indebted households decreased by 4 percentage points, to 23 per cent; among young households it fell by 12 points. The decline involved consumer credit and occurred between 2010 and 2012. Overall, the share of households with mortgage loans did not change; however, it fell among low-income households and increased among those in the third quartile of income. The demand for loans decreased sharply except among young households. The reduction in indebtedness was due to the drastic tightening of credit supply conditions in the period. The indicators of debt sustainability, in particular the ratio of debt to income, began to worsen in 2010; for mortgage credit the decline has involved households headed by self-employed workers and those in the third income quartile. For these households, repayment arrears have increased; arrears are more frequent for mortgages granted before the crisis. The share of households with high debt service and below-median income is about the same as in 2008, and our simulations suggest that it will change only slightly in 2014-2015.
    Keywords: household indebtedness; financial crises; supply and demand; vulnerability
    JEL: D12 D91 I32
    Date: 2014–10

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