nep-ban New Economics Papers
on Banking
Issue of 2015‒01‒03
thirty papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. The Impact of the Global Financial Crisis on Banking Globalization By Claessens, Stijn; Van Horen, Neeltje
  2. Pro-cyclical capital regulation and lending By Behn, Markus; Haselmann, Rainer; Wachtel, Paul
  3. Estimation and Determinants of Chinese Banks’ Total Factor Efficiency: A New Vision Based on Unbalanced Development of Chinese Banks and Their Overall Risk By Shiyi Chen; Wolfgang K. Härdle; Li Wang;
  4. Regulatory Capture by Sophistication By Hakenes, Hendrik; Schnabel, Isabel
  5. What drives investment bank performance? the role of risk, liquidity and fees prior to and during the crisis. By Mamatzakis, E; bermpei, t
  6. Interaction Between Monetary Policy and Regulatory Capital Requirements By Du, Chuan; Miles, David K
  7. Banks Are Where The Liquidity Is By Hart, Oliver; Zingales, Luigi
  8. The effect of Credit Conditions on the Dutch Housing Market By Marc Francke; Alex van de Minne; Johan Verbruggen
  9. When Arm’s Length is Too Far : Relationship Banking over the Business Cycle By Beck, T.H.L.; Degryse, H.A.; de Haas, R.; van Horen, N.
  10. Asymmetric Transmission of a Bank Liquidity Shock By Rafael Felipe Schiozer; Raquel de Freitas Oliveira
  11. How the Euro-Area Sovereign-Debt Crisis Led to a Collapse in Bank Equity Prices By Heather D. Gibson; Stephen G. Hall; George S. Tavlas
  12. Equity Recourse Notes: Creating Counter-cyclical Bank Capital By Bulow, Jeremy I.; Klemperer, Paul
  13. Essays on relationship banking By Yu, Y.
  14. Inside and Outside Collateral: Implications for Financial Market Instability By Russell Cooper; Frédéric Boissay
  15. Financial Stability and Interacting Networks of Financial Institutions and Market Infrastructures By Léon, C.; Berndsen, R.J.; Renneboog, L.D.R.
  16. Cost-effectiveness analysis of Ukrainian banks using the DEA method By Kryklii, Olena; Pavlenko, Ludmila; Podvihin, Sergei
  17. Monetary Policy and Bank Lending Rates in Low-Income Countries: Heterogeneous Panel Estimates By Mishra, Prachi; Montiel, Peter J; Pedroni, Peter; Spilimbergo, Antonio
  18. Regulatory Capital Modelling for Credit Risk By Marek Rutkowski; Silvio Tarca
  19. The role of leverage in firm solvency: evidence from bank loans By Emilia Bonaccorsi di Patti; Alessio DÂ’Ignazio; Marco Gallo; Giacinto Micucci
  20. Regional and Ownership Drivers of Bank Efficiency By Natalya Zelenyuk; Valentin Zelenyuk
  21. Financial Shocks and Japan's Export Collapse during the Global Financial Crisis: Evidence from bank-firm matched data (Japanese) By UCHINO Taisuke
  22. The Joint Services of Money and Credit By William Barnett; Liting Su
  23. Race, Ethnicity and High Cost Mortgage Lending By Patrick Bayer; Fernando Ferreira; Stephen L. Ross
  24. Endogenous Liquidity and the Business Cycle By Saki Bigio
  25. Operational Risk Governance: The Basel Approach By Afanasyeva, Olga; Riabichenko, Dmitry
  26. Monetary and macroprudential policy with multi-period loans By Michal Brzoza-Brzezina; Paolo Gelain; Marcin Kolasa
  27. Credit Booms, Banking Crises, and the Current Account By Scott Davis; Adrienne Mack; Wesley Phoa; Anne Vandenabeele
  28. Credit Relationships and Business Bankruptcy During the Great Depression By Mary Eschelbach Hansen; Nicolas L. Ziebarth
  29. Optimal contracts, aggregate risk and the financial accelerator By Fuerst, Timothy; Carlstrom, Charles; Paustian, Matthias
  30. Getting to bail-in: Effects of creditor participation in European Bank restructuring By Schäfer, Alexander; Schnabel, Isabel; Weder di Mauro, Beatrice

  1. By: Claessens, Stijn; Van Horen, Neeltje
    Abstract: Although cross-border bank lending has fallen sharply since the crisis, extending our bank ownership database from 1995-2009 up to 2013 shows only limited retrenchment in foreign bank presence. While banks from OECD countries reduced their foreign presence (but still represent 89% of foreign bank assets), those from emerging markets and developing countries expanded abroad and doubled their presence. Especially advanced countries hit by a systemic crisis reduced their presence abroad, with far flung and relatively small investments more likely to be sold. Poorer and slower growing countries host fewer banks today, while large investments less likely expanded. Conversely, faster host countries’ growth and closeness to potential investors meant more entry. Lending by foreign banks locally grew more than cross-border bank claims did for the same home-host country combination, and each was driven by different factors. Altogether, our evidence shows that global banking is not becoming more fragmented, but rather is going through some important structural transformations with a greater variety of players and a more regional focus.
    Keywords: cross-border banking; financial fragmentation; financial globalization; foreign banks; global financial crisis
    JEL: F21 F23 G21
    Date: 2014–10
  2. By: Behn, Markus; Haselmann, Rainer; Wachtel, Paul
    Abstract: We use a quasi-experimental research design to examine the effect of model-based capital regulation introduced under the Basel II agreement on the pro-cyclicality of bank lending and firms' access to funds during a recession. In response to an exogenous shock to credit risk in the German economy, loans subject to modelbased, time-varying capital charges were reduced by 3.5 percent more than loans under the traditional approach to capital regulation. The effect is even stronger when we examine aggregate firm borrowing, suggesting that the pro-cyclical effect of model-based capital charges is not offset by substitution to other banks which use the traditional approach.
    Keywords: capital regulation,credit crunch,financial crisis
    JEL: G01 G21 G28
    Date: 2014
  3. By: Shiyi Chen; Wolfgang K. Härdle; Li Wang;
    Abstract: The development of shadow banking system in China catalyzes the expansion of banks’ off-balance-sheet activities, resulting in a distortion of China’s traditional credit expansion and underestimation of its commercial banks’ overall risk. This paper is the first to incorporate banks’ overall risk, endogenously into bank’s production process as undesirable by-product for the estimation of banks’ total factor efficiency (TFE) as well as TFE of each production factor. A unique data sample of 171 Chinese commercial banks, which is the largest data sample concerning with Chinese banking efficiency issues until now as far as we know, making our results more convincing and meaningful. Our results show that, compared with a model incorporated with banks’ overall risk, a model considering on-balance-sheet lending activities only may over-estimate the overall average TFE and under-estimate TFE volatility as a whole. Higher overall risk taking of banks tends to decrease bank TFE through ‘diverting effect’. However, significant heterogeneities of bank integrated TFE (TFIE) and TFE of each production factor exist among banks of different types or located in different regions, as a result of still prominent unbalanced development of Chinese commercial banks today. Based on newly estimated TFIE, the paper also investigates the determinants of bank efficiency, and finds that a model with risk-weighted assets as undesirable outputs can better capture the impact of shadow banking involvement.
    Keywords: Total Factor Efficiency, Unbalanced Development, Shadow Banking, Global SBM
    JEL: C14 C33 G21
    Date: 2014–11
  4. By: Hakenes, Hendrik; Schnabel, Isabel
    Abstract: One explanation for the poor performance of regulation in the recent financial crisis is that regulators had been captured by the financial sector. We present a micro-founded model with rational agents in which banks capture regulators by their sophistication. Banks can search for arguments of differing complexity against tighter regulation. Finding such arguments is more difficult for weaker banks, which the regulator wants to regulate more strictly. However, the more sophisticated a bank is, the more easily it can produce arguments that a regulator does not understand. Reputational concerns prevent regulators from admitting this, hence they rubber-stamp weak banks, which leads to inefficiently low levels of regulation. Bank sophistication and reputational concerns of regulators lead to capture, and thus to worse regulatory decisions.
    Keywords: banking regulation; complexity; financial stability; regulatory capture; reputational concerns; sophistication; special interests
    JEL: G21 G28 L51 P16
    Date: 2014–08
  5. By: Mamatzakis, E; bermpei, t
    Abstract: This paper examines factors that affect the performance of investment banks in the G7 and Switzerland. In particular, we focus on the role of risk, liquidity and investment banking fees. Panel analysis shows that those variables significantly impact upon performance as derived from stochastic frontier analysis (SFA). Given our sample also comprises the financial crisis, we further test for regimes switches using dynamic panel threshold analysis. Results show different underlying regimes, in particular over the financial crisis. In addition, a strong positive effect of Z-Score on performance for banks in the regime of low default risk is reported, whilst fee-income ratio has also a positive impact for banks with low level of fees. On the other hand, liquidity exerts a negative impact. Notably, there is a clear trend of mobility of banks across the two identified threshold regimes with regards to risk a year before the financial crisis. Our results provide evidence that recent regulation reforms regarding capital adequacy and liquidity requirements are on the right track and could enhance performance.
    Keywords: Investment Banking, Risk, Liquidity, Fees, Dynamic Panel Threshold Analysis.
    JEL: G1 G18 G21
    Date: 2014–11–14
  6. By: Du, Chuan; Miles, David K
    Abstract: Banks’ behaviour can be influenced by both monetary policy and regulatory capital requirements. This paper explores the interaction between these two policy tools in promoting better lending decisions by banks. We develop and calibrate a model of bank lending to examine what an optimal combination of monetary policy and regulatory capital requirements might look like. We find that as prudential standards strengthen globally in the aftermath of the financial crises, it is likely that the that equilibrium level of central bank policy rates should be lower than they had been prior to the crisis.
    Keywords: capital requirements; macro prudential policy; monetary policy
    JEL: E52 E58 G21 G28
    Date: 2014–10
  7. By: Hart, Oliver; Zingales, Luigi
    Abstract: What is so special about banks that their demise often triggers government intervention? In this paper we show that, 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. 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.
    Keywords: bailout; banking; Liquidity
    JEL: E41 E51 G21
    Date: 2014–06
  8. By: Marc Francke; Alex van de Minne; Johan Verbruggen
    Abstract: It is widely perceived that the supply of mortgages, especially since the extensive liberalization of the mortgage market since the 1980s, has had implications for the Dutch housing market. In this paper we introduce a new method to estimate a credit condition index (CCI). The credit conditions index represents changes in the supply of credit over time, apart from changes in interest rates and income. Examples of these changes include (1) the development of markets for financial futures, options, swaps, securitized loans and synthetic securities which allowed for easy access to credit for financial intermediaries, (2) more sophisticated risk management, for example improved initial credit scoring, (3) changes in risk-perception by financial intermediaries due to changes in the macro-economic environment, like rate of unemployment, (4) introduction of new mortgage products, (5) reduced transaction costs and asymmetric information with innovations of IT, telephony and data management and (6) financial liberation. Financial liberation is the relaxation or tightening of credit controls like liquidity ratios on banks, down-payment requirements, maximum repayment periods, allowed types of mortgages, loan-to-value and loan-to-income ratios, etc. The credit conditions index is estimated as an unobserved component in an error-correction model in which the average amount of mortgage is explained by the borrowing capacity and additional control variables. The model is estimated on data representing first time buyers. For first time buyers we can assume that the housing and non-housing wealth is essentially zero. The credit condition index is subsequently used in an error-correction model for house prices representing not only first time buyers, but all households. The models are estimated using quarterly data from 1995 to 2012. The estimated credit condition index has a high correlation with the Bank Lending Survey, a quarterly survey in which banks are asked whether there is a tightening or relaxation of (mortgage) lending standards compared to the preceding period. The credit condition index has explanatory power in the error-correction model for housing prices. In real terms house prices declined about 25% from 2009 to 2012. The estimation results show that 12% point of this decline can be attributed to a decline in the credit conditions index.
    Keywords: Lending Standards; Financial Liberation; Housing Prices;
    JEL: C32 E44 E51 G21
    Date: 2014–11
  9. By: Beck, T.H.L. (Tilburg University, Center For Economic Research); Degryse, H.A. (Tilburg University, Center For Economic Research); de Haas, R. (Tilburg University, Center For Economic Research); van Horen, N.
    Abstract: Using a novel way to identify relationship and transaction banks, we study how banks’ lending techniques affect funding to SMEs over the business cycle. For 21 countries we link the lending techniques that banks use in the direct vicinity of firms to these firms’ credit constraints at two contrasting points of the business cycle. We show that relationship lending alleviates credit constraints during a cyclical downturn but not during a boom period. The positive impact of relationship lending in an economic downturn is strongest for smaller and more opaque firms and in regions where the downturn is more severe.
    Keywords: relationship banking; credit constraints; business cycle
    JEL: F36 G21 L26 O12 O16
    Date: 2014
  10. By: Rafael Felipe Schiozer; Raquel de Freitas Oliveira
    Abstract: We investigate whether banks that receive a positive liquidity shock make up for the reduction in the loan supply by banks that suffer a negative liquidity shock. For identification, we use the exogenous shock to the Brazilian banking system caused by the international turmoil of 2008 that sparked a run on small and medium banks towards the systemically important banks. We find that a reduction in liquidity causes banks to strongly decrease their loan supply, whereas a positive liquidity shock has a small (if any) effect on the loan supply. Our findings are consistent with the theories that predict that borrowers face switching costs, and that agents tend to hold on to liquidity during periods of systemic uncertainty. In addition, we find that the shock causes small and medium companies to obtain less bank financing, compared to large firms, possibly because international and domestic capital markets dry out during the crisis. Our evidence suggests that the asymmetric effect of liquidity on loan supply derives mostly from the extensive, rather than the intensive margin. Nonetheless, because we do not identify the exact mechanism driving bank behavior, we cannot predict under which conditions we would find a similar effect should a new shock occur
    Date: 2014–11
  11. By: Heather D. Gibson; Stephen G. Hall; George S. Tavlas
    Abstract: We quantify the linkages among banks’ equity performance and indicators of sovereign stress by using panel GMM to estimate a three-equation system that examines the impact of sovereign stress, as reflected in both sovereign spreads and sovereign ratings, on bank share prices. We use data for a panel of five euro-area stressed countries. Our findings indicate that a long-run recursive relationship between sovereigns and banks operated during the euro-area crisis. Specifically, for the five crisis countries considered shocks to sovereign spreads fed-through to sovereign ratings, which affected commercial banks. Our results also point to the importance of using levels of equity prices -- rather than rates of return -- in measuring banks’ performance. The use of levels allows us to derive the determinants of long-run equity prices.
    Keywords: euro-area financial crisis, sovereign-bank linkages, banks’ performance, banking stability
    JEL: E3 G01 G14 G21
    Date: 2014–12
  12. By: Bulow, Jeremy I.; Klemperer, Paul
    Abstract: We propose a new form of hybrid capital for banks, Equity Recourse Notes (ERNs), which ameliorate booms and busts by creating counter-cyclical incentives for banks to raise capital, and so encourage bank lending in bad times. They avoid the flaws of existing contingent convertible bonds (cocos)--in particular, they convert more credibly--so ERNs also help solve the too-big-to-fail problem: rather than forcing banks to increase equity, we should require the same or larger capital increase but permit it to be in the form of either equity or ERNs--this also gives some choice to those who claim (rightly or wrongly) that equity is more costly than debt. ERNs can be introduced within the current regulatory system, but also provide a way to reduce the existing system’s heavy reliance on measures of regulatory-capital.
    Keywords: bail-in; bank; bank capital; capital requirements; coco; contingent capital; contingent convertible bond; SIFI
    JEL: G10 G21 G28 G32
    Date: 2014–10
  13. By: Yu, Y. (Tilburg University, School of Economics and Management)
    Abstract: This dissertation consists of three essays on relationship banking. The first chapter introduces the whole thesis. The second chapter studies how professional connections between firm and bank influence their banking relationships. Particularly, by focusing on the directors’ past employment with firms or banks, the study verifies that connections lower the information barrier and facilitate the transfer of firm-specific information. The third chapter is motivated by an exogenous shock to the CDS market called “small bang”. Exploiting lending and CDS data at firm-bank level, the study examines how changes in CDS positions as well as newly commenced CDS trading between a firm and bank increased bank’s lending exposures to the referenced firms. The last chapter introduces a still-overlooked element, the number of industries the firm operates in, to the wide and on-going empirical investigation on firm-bank relationships. Estimating a three-stage selection model, the results show that a higher number of industries the firm operates in corresponds to a higher likelihood of relationship multiplicity and a higher number of bank relationships. The dissertation introduces less-investigated elements to the relationship banking literature. By looking at how these elements play a role in firm-bank relationships, the dissertation confirms the effect of relationship banking as a method to reduce information asymmetry and monitor firm risks.
    Date: 2014
  14. By: Russell Cooper; Frédéric Boissay
    Abstract: This paper studies the fragility of interbank markets. Due to moral hazard and asymmetric information problems, collateral along with borrowing constraints are needed to provide appropriate incentives for banks. A key element of the analysis is the distinction between collateral based upon assets created outside of the banking system (e.g. government debt) and assets created through the lending process (e.g. cash flows). While active interbank markets help reallocate deposits across heterogeneous banks, because of incentive problems these flows are constrained and the markets are fragile, i.e. there are multiple equilibria. This paper explores the mechanism for the multiplicity, emphasizing its dependence upon inside and outside collateral. It also relates a `crisis' in the model to recent financial events in the US economy.
    JEL: E44 E51 G21 G23
    Date: 2014–11
  15. By: Léon, C.; Berndsen, R.J. (Tilburg University, Center For Economic Research); Renneboog, L.D.R. (Tilburg University, Center For Economic Research)
    Abstract: An interacting network coupling financial institutions’ multiplex (i.e. multi-layer) and financial market infrastructures’ single-layer networks gives an accurate picture of a financial system’s true connective architecture. We examine and compare the main properties of Colombian multiplex and interacting financial networks. Coupling financial institutions’ multiplex networks with financial market infrastructures’ networks removes modularity, which enhances financial instability because the network then fails to isolate feedbacks and limit cascades while it retains its robust-yet-fragile features. Moreover, our analysis highlights the relevance of infrastructure-related systemic risk, corresponding to the effects caused by the improper functioning of FMIs or by FMIs acting as conduits for contagion.
    Keywords: multiplex networks; interacting networks; financial stability; contagion; financial market infrastructures
    JEL: D85 D53 G20 L14
    Date: 2014
  16. By: Kryklii, Olena; Pavlenko, Ludmila; Podvihin, Sergei
    Abstract: The purpose of this study is to determine the scale, technical and overall efficiency of the banking system of Ukraine using the DEA method in dynamics in the post-crisis period. The DEA method belongs to the group of non-parametric methods based on front’s technology analysis and allows considering the totality of impacts both the input parameters (resources) and output (products / services). The structure of banks included 24 banks of Ukraine with total assets amounted to 806.7 billion UAH (72 % of banking system assets). Banks were classified into state-owned banks and banks in which the state has a controlling interest, banks with domestic capital, banks with Russian capital and banks with foreign capital (excluding Russia). Empirical data analysis demonstrated that over the period of analysis the effectiveness of large-scale banks increased, while pure technical remained at a moderate level. Most of the banks included in the sample operate with average effective or ineffective.
    Keywords: the scale, technical and overall efficiency; the banking system; DEA method.
    JEL: C14 G21
    Date: 2013–12
  17. By: Mishra, Prachi; Montiel, Peter J; Pedroni, Peter; Spilimbergo, Antonio
    Abstract: This paper studies the transmission of monetary shocks to lending rates in a large sample of advanced, emerging, and low-income countries. Transmission is measured by the impulse response of bank lending rates to monetary policy shocks. Long-run restrictions are used to identify such shocks. Using a heterogeneous structural panel VAR approach, we find that there is wide variation in the response of bank lending rates to a monetary policy innovation across countries. Monetary policy shocks are more likely to affect bank lending rates in the theoretically expected direction in countries that have better institutional frameworks, more developed financial structures, and less concentrated banking systems. Low-income countries score poorly along all of these dimensions, and we find that such countries indeed exhibit much weaker transmission of monetary policy shocks to bank lending rates than do advanced and emerging economies
    Keywords: bank lending; monetary policy; structural panel VAR
    JEL: E5 O11 O16
    Date: 2014–11
  18. By: Marek Rutkowski; Silvio Tarca
    Abstract: The Basel II internal ratings-based (IRB) approach to capital adequacy for credit risk plays an important role in protecting the Australian banking sector against insolvency. We outline the mathematical foundations of regulatory capital for credit risk, and extend the model specification of the IRB approach to a more general setting than the usual Gaussian case. It rests on the proposition that quantiles of the distribution of conditional expectation of portfolio percentage loss may be substituted for quantiles of the portfolio loss distribution. We present a more economical proof of this proposition under weaker assumptions. Then, constructing a portfolio that is representative of credit exposures of the Australian banking sector, we measure the rate of convergence, in terms of number of obligors, of empirical loss distributions to the asymptotic (infinitely fine-grained) portfolio loss distribution. Moreover, we evaluate the sensitivity of credit risk capital to dependence structure as modelled by asset correlations and elliptical copulas. Access to internal bank data collected by the prudential regulator distinguishes our research from other empirical studies on the IRB approach.
    Date: 2014–12
  19. By: Emilia Bonaccorsi di Patti (Bank of Italy); Alessio DÂ’Ignazio (Bank of Italy); Marco Gallo (Bank of Italy); Giacinto Micucci (Bank of Italy)
    Abstract: The two recessions that have hit Italy since the end of 2008 have raised the share of non-performing loans to businesses in banksÂ’ portfolios substantially. In this paper we evaluate to what extent the deterioration of credit quality was due not only to the decline in firmsÂ’ sales during the contraction of economic activity, but also to the level of firmsÂ’ financial debt at the onset of the first recession. Our results show that, other things being equal, a ten percentage point increase in leverage is associated with a higher probability of default of almost one percentage point. Moreover, the adverse impact of a fall in sales on a firmÂ’s solvency is almost four times greater for firms in the highest quartile of the leverage distribution than for firms in the first quartile. These findings confirm that firmsÂ’ financial structure can be a powerful amplifier of macroeconomic shocks. A higher level of leverage reduces firmsÂ’ resilience during a recession, and this in turn weakens the balance-sheets of banks and thus their ability to provide credit.
    Keywords: economic and financial crisis, firms leverage, banks non-performing loans, insolvency; data on international trade and FDI, foreign direct investment
    JEL: G01 G21 G31 G33
    Date: 2014–10
  20. By: Natalya Zelenyuk (Business School, The University of Queensland); Valentin Zelenyuk (School of Economics, The University of Queensland)
    Abstract: The banking sector plays a major role in any economy, and it played a critical role in transition of Ukraine to a market economy. In this work, we investigate the hypothesis that, despite the tremendous growth and apparent prosperity that existed before the country was hit by the global financial crisis, the Ukrainian banking industry already suffered from significant inefficiencies. We estimate the intermediation-type efficiency of individual banks, and analyze how various bank- specific factors (e.g., type of ownership, regional aspects, level of risk as per Basel Accords, business model, size, etc.) explain the differences in the estimated levels of inefficiency across banks. Among other results, we find strong support for the conclusions from the agency theory: we find that banks that were 100% foreign- owned were significantly more efficient than locally owned and partially foreign- owned banks, on average and ceteris paribus and, in particular, regardless whether they were headquartered in the capital city or in a region, in the East or in the West of the country.
    Date: 2014–11
  21. By: UCHINO Taisuke
    Abstract: To elucidate the relationship between the great trade collapse of 2008-09 and financial shocks, existing literature has focused on the channel of trade credit. Because exporting activities are more working-capital dependent than domestic sales, firms may reduce their exports when their banks' ability to provide trade credit is deteriorated by financial shocks. Based on the above-mentioned hypothesis, this paper aims to investigate whether adverse shocks to banks explain Japan's export collapse during the crisis. To this end, I construct bank-firm matched data by utilizing the Basic Survey of Japanese Business Structure and Activities conducted by the Ministry of Economy, Trade, and Industry. The panel data analyses of this paper, in which firm-, year-, destination-, and industry-fixed effects are fully controlled for, demonstrate that the growth rate of exports was significantly lower for firms with unhealthy banks, and this tendency was strengthened during the crisis. However, it also comes to light that exports by financially affected firms account for only a small part of Japan's total exports, and the industry- and destination-common-effects explain the large parts of the decline. Putting the empirical results of this paper together, the existence of a trade credit channel is empirically supported, but its impact was quantitatively minor in explaining Japan's export collapse.
    Date: 2014–11
  22. By: William Barnett (Department of Economics, The University of Kansas; Center for Financial Stability, New York City; IC2 Institute, University of Texas at Austin); Liting Su (Department of Economics, The University of Kansas)
    Abstract: While credit cards provide transaction services, as do currency and demand deposits, credit cards have never been included in measures of the money supply. The reason is accounting conventions, which do not permit adding liabilities, such as credit card balances, to assets, such as money. But economic aggregation theory and index number theory are based on microeconomic theory, not accounting, and measure service flows. We derive theory needed to measure the joint services of credit cards and money. The underlying assumption is that credit card services are not weakly separable from the services of monetary assets. Carried forward rotating balances are not included, since they were used for transactions services in prior periods. The theory is developed for the representative consumer, who pays interest for the services of credit cards during the period used for transactions. In the transmission mechanism of central bank policy, our results raise potentially fundamental questions about the traditional dichotomy between money and some forms of short term credit, such as checkable lines of credit. We do not explore those deeper issues in this paper, which focuses on measurement..
    Keywords: credit cards, money, credit, aggregation theory, index number theory, Divisia index, risk, asset pricing.
    JEL: C43 E01 E3 E40 E41 E51 E52 E58
    Date: 2014–12
  23. By: Patrick Bayer (Duke University); Fernando Ferreira (University of Pennsylvania); Stephen L. Ross (University of Connecticut)
    Abstract: This paper examines how high cost mortgage lending varies by race and ethnicity. It uses a unique panel data that matches a representative sample of mortgages in seven large metropolitan markets between 2004 and 2008 to public records of housing transactions and proprietary credit reporting data. The results reveal a significantly higher incidence of high costs loans for African-American and Hispanic borrowers even after controlling for key mortgage risk factors: they have a 7.7 and 6.2 percentage point higher likelihood of a high cost loan, respectively, in the home purchase market relative to an overall incidence of 14.8 percent among all home purchase mortgages. Significant racial and ethnic differences are widespread throughout the market – they are present (i) in each metro area, (ii) across high and low risk borrowers, and (iii) regardless of the age of the borrower. These differences are reduced by 60 percent with the inclusion of lender fixed effects, implying that a significant portion of the estimated market-wide racial differences can be attributed to differential access to (or sorting across) mortgage lenders.
    Date: 2014–12
  24. By: Saki Bigio (Columbia Business School)
    Abstract: I study an economy where asymmetric information about the quality of capital endogenously determines liquidity. Liquid funds are key to relaxing financial constraints on investment and employment. These funds are obtained by selling capital or using it as collateral. Liquidity is determined by balancing the costs of obtaining liquidity under asymmetric information against the benefits of relaxing financial constraints. Aggregate fluctuations follow increases in the dispersion of capital quality, which raise the cost of obtaining liquidity. An estimated version of the model can generate patterns for quantities and credit conditions similar to the Great Recession.
    Keywords: Liquidity, Asymmetric Information, Business Cycles
    JEL: D82 E32 E44 G01 G21
    Date: 2014–11
  25. By: Afanasyeva, Olga; Riabichenko, Dmitry
    Abstract: This paper analyses key documents of Basel Committee which concern operational risk governance and identifies the interconnectedness between risk source, type of the event leading to losses, loss type and its distribution by business lines. The comparative characteristic of the main operational risk governance stages is provided and the relationships between governance bodies are overviewed.
    Keywords: operational risk, corporate governance, Basel Committee on Banking Supervision, board of directors, banking
    JEL: E5 E58 G2
    Date: 2014
  26. By: Michal Brzoza-Brzezina (Narodowy Bank Polski and Warsaw School of Economics); Paolo Gelain (Norges Bank (Central Bank of Norway) and BI Norwegian Business School); Marcin Kolasa (Narodowy Bank Polski and Warsaw School of Economics)
    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 possibility for the collateral constraint to become slack - to an otherwise standard DSGE model with housing and financial intermediaries. Our general finding is that multiperiodicity affects the working of both policies, though in substantially different ways. We show that multiperiod contracts make the monetary policy less effective, but only under fixed rate mortgages, and do not generate significant asymmetry to its transmission. In contrast, the effects of macroprudential policy do not depend much on the type of interest payments, but exhibit strong asymmetries, with tightening having stronger effects than easening, especially for short and medium maturities.
    Keywords: Multi-period contracts, Monetary policy, Macroprudential policy
    JEL: E44 E51 E52
    Date: 2014–11–27
  27. By: Scott Davis (Hong Kong Institute for Monetary Research and Federal Reserve Bank of Dallas); Adrienne Mack (Federal Reserve Bank of Dallas); Wesley Phoa (The Capital Group Companies); Anne Vandenabeele (The Capital Group Companies)
    Abstract: A number of papers have shown that rapid growth in private sector credit is a strong predictor of a banking crisis. This paper will ask if credit growth is itself the cause of a crisis, or is it the combination of credit growth and external deficits? This paper estimates a probabilistic model to find the marginal effect of private sector credit growth on the probability of a banking crisis. The model contains an interaction term between credit growth and the level of the current account, so the marginal effect of private sector credit growth may itself be a function of the level of the current account. We find that the marginal effect of rising private sector debt levels depends on an economy's external position. When the current account is in balance, the marginal effect of an increase in debt is rather small. However, when the economy is running a sizable current account deficit, implying that any increase in the debt ratio is financed through foreign borrowing, this marginal effect is large.
    Keywords: Banking Crises, Credit Booms, Current Account
    JEL: E51 F32 F40
    Date: 2014–11
  28. By: Mary Eschelbach Hansen; Nicolas L. Ziebarth
    Abstract: Credit relationships are sticky. Stickiness makes relationships beneficial for borrowers in distress, but potentially problematic for them when lenders face distress. To examine stickiness in a time of distress, we exploit a natural experiment during the Depression that generated differences in banking outcomes. Using a new dataset from Dun & Bradstreet and original bankruptcy filings, we show that greater distress increased exit by up to 16 percent. Distress did not generate more bankruptcies, but it changed the geographical distribution of creditors of bankrupt businesses. This is consistent with a contraction of business-to-business credit where there was greater distress.
    Date: 2014
  29. By: Fuerst, Timothy (University of Notre Dame and Federal Reserve Bank of Cleveland); Carlstrom, Charles (Federal Reserve Bank of Cleveland); Paustian, Matthias (Federal Reserve Board)
    Abstract: This paper derives the optimal lending contract in the financial accelerator model of Bernanke, Gertler and Gilchrist (BGG). The optimal contract includes indexation to the aggregate return on capital, household consumption, and the return to internal funds. This triple indexation results in a dampening of fluctuations in leverage and the risk premium. Hence, compared to the contract originally imposed by BGG, the privately optimal contract implies essentially no financial accelerator.
    Keywords: financial accelerator; optimal contracts; aggregate risk
    JEL: C32 E32
    Date: 2014–11–28
  30. By: Schäfer, Alexander; Schnabel, Isabel; Weder di Mauro, Beatrice
    Abstract: [Introduction ...]This paper is structured as follows. The next chapter outlines the selected bail-in cases and formulates the hypotheses regarding expected market reactions. Chapter 3 covers the methodology. We introduce our identification procedure for the event selection, comment on the data sample and describe our empirical model. The fourth chapter contains the results for the bail-in events in chronological order, while chapter 5 provides a robustness analysis. Chapter 6 summarizes and concludes.
    Date: 2014

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