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on Banking |
| By: | Daniel C. Hardy; Philipp Hochreiter |
| Abstract: | A mechanism is proposed that aims to reduce the risk of a banking sector liquidity crisis—which is a quintessentially systemic event and thus the object of macroprudential policy—and moderate the effects of a crisis should one occur. The instrument would give banks more incentive to build up buffers of systemically liquid assets as a proportion of their total liabilities, yet these buffers would be usable in times of stress. The modalities of the instrument are considered with a view to making it effective, efficient, and robust. |
| Keywords: | Banking sector;Liquidity;Bank financing;Systemic risk;Banking crisis;Macroprudential policies and financial stability;Crisis management; |
| Date: | 2014–12–22 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:14/235&r=ban |
| By: | S. Gabrieli; C.-P. Georg |
| Abstract: | We study the liquidity allocation among European banks around the Lehman Brothers’ insolvency using a novel dataset of all interbank loans settled via the Eurosystem’s payment system TARGET2. Following the Lehman insolvency, lenders in the overnight segment become sensitive to counterparty characteristics and banks start hoarding liquidity by shortening the maturity of their interbank lending. This aggregate change in liquidity reallocation is accompanied by a substantial structural change that can best be characterized as a shrinking of the interbank network. Such a change is consequential: banks with higher centrality within the network have better access to liquidity and are able to charge larger intermediation spreads. Therefore, we show the existence of a sizeable interbank lending channel. |
| Keywords: | Interbank loans, network topology, financial stability. |
| JEL: | D85 E5 G1 G21 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:bfr:banfra:531&r=ban |
| By: | Hasan, Iftekhar (Fordham University and Bank of Finland); Liu, Liuling (Bowling Green State University); Zhang, Gaiyan (University of Missouri-St. Louis) |
| Abstract: | Using a sample of 161 global banks in 23 countries, we examine the applicability of structural models and bank fundamentals to price global bank credit risk. First, we find that variables predicted by structural models (leverage, volatility, and risk-free rate) are significantly associated with bank CDS spreads. Second, some CAMELS indicators, including asset quality, cost efficiency, and sensitivity to market risk, contain incremental information for bank CDS prices. Moreover, leverage and asset quality have had a stronger impact on bank CDS since the onset of the recent financial crisis. Banks in countries with lower stock market volatility and/or more financial conglomerates restrictions tend to have lower CDS spreads. Deposit insurance appears to have an adverse effect on CDS spreads, indicating a moral hazard problem. |
| Keywords: | bank credit default swaps; structural models; CAMELS; global banks |
| JEL: | G13 G15 G21 |
| Date: | 2014–12–15 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:bofrdp:2014_033&r=ban |
| By: | Sergio R. Stancato de Souza |
| Abstract: | This paper simulates the effects of credit risk, changes in capital requirements and price shocks on the Brazilian banking system. We perform the analysis within the context of a model that integrates data on bilateral exposures in the interbank market with information about the liquidity profile of each financial institution. Asset prices in the model are determined endogenously as a function of the total volume of fire sales, thus creating the possibility that marking to market may trigger new rounds of fire sales and downward asset price spirals. The simulation results show that the Brazilian banking system is robust, as relatively large increases in the delinquency rate lead to only modest losses in the system. We also compute the contribution of each financial institution to systemic losses under severe shocks and find that contributions from medium-sized banks can be significant. However, if shocks become more severe, only large banks will contribute significantly to systemic losses |
| Date: | 2014–12 |
| URL: | http://d.repec.org/n?u=RePEc:bcb:wpaper:375&r=ban |
| By: | Ozili, Peterson |
| Abstract: | This study, empirically, investigates the determinants of bank profitability. Overall, I find that the Basel capital regime had no significant effect on bank profitability. This result is significant because it lends support to the view that modified Basel accord in different countries might be aimed to meet other prudential objectives other than the intended objective - to reduce excessive bank risk-taking. Second, after employing NIM and ROA profitability metrics, I find that the determinants of bank profitability, and its significance, depends on the profitability metric employed. Third, I find that loan quality significantly influences bank interest margin while bank size and cost efficiency significantly influences return on asset. Finally, bank capital adequacy is observed to be a significant determinants of bank profitability. |
| Keywords: | Bank Profitabilty, Basel Capital Regulation |
| JEL: | E5 E58 G2 G21 N2 N20 N27 |
| Date: | 2015–01 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:61069&r=ban |
| By: | Peter Lindner; Sung Eun Jung |
| Abstract: | The financial performance of India's corporate sector has been under pressure since the Global Financial Crisis. Balance-sheet data on a large cross-section of Indian non-financial corporates show that the growth in their leverage over the last 15 years has been associated with a notable increase in the vulnerabilities of firms carrying high interest payment burdens. Gauged by the debt carried by the most vulnerable component of firms, the Indian corporate sector’s vulnerability to severe systemic shocks has increased to levels not seen since 2001. Progress on the macroeconomic front, together with improved credit appraisals and stricter impairment standards on the bank side, will be critical to help India's banks resume their role as economic growth drivers. |
| Keywords: | Corporate sector;India;External shocks;Banking sector;Loans;Credit risk;Financial crisis, firm resilience, bank-corporate dependencies, leverage, corporate performance, India. |
| Date: | 2014–12–19 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:14/232&r=ban |
| By: | Hajime Tomura (Graduate School of Economics, University of Tokyo) |
| Abstract: | This paper presents a three-period model to analyze the endoge- nous need for bank reserves in the presence of Treasury securities. The model highlights the fact that the interbank market is an over- the-counter market. It characterizes the large value payment system operated by the central bank as an implicit contract, and shows that the contract requires less liquidity than decentralized settlement of bank transfers. In this contract, bank reserves are the balances of liquid collateral pledged by banks. The optimal contract is equiva- lent to the floor system. A private clearing house must commit to a time-inconsistent policy to provide the contract. |
| Date: | 2014–12 |
| URL: | http://d.repec.org/n?u=RePEc:upd:utppwp:036&r=ban |
| By: | Patrick Bayer (Duke University); Francisco Ferreira; 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. |
| Keywords: | mortgage, cost of credit, race, ethnicity, subprime, credit score, neighborhood |
| JEL: | G21 I28 J15 J71 R21 |
| Date: | 2014–12 |
| URL: | http://d.repec.org/n?u=RePEc:hka:wpaper:2014-023&r=ban |
| By: | Patrick Bayer; Fernando Ferreira; Stephen L. Ross |
| 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. |
| JEL: | G0 G21 R21 R3 |
| Date: | 2014–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:20762&r=ban |
| By: | Andolfatto, David (Federal Reserve Bank of St. Louis); Nosal, Ed (Federal Reserve Bank of Chicago); Sultanum, Bruno (Pennsylvania State University) |
| Abstract: | Diamond and Dybvig (1983) is commonly understood as providing a formal rationale for the existence of bank-run equilibria. It has never been clear, however, whether bank-run equilibria in this framework are a natural byproduct of the economic environment or an artifact of suboptimal contractual arrangements. In the class of direct mechanisms, Peck and Shell (2003) demonstrate that bank-run equilibria can exist under an optimal contractual arrangement. The difficulty of preventing runs within this class of mechanism is that banks cannot identify whether withdrawals are being driven by psychology or by fundamentals. Our solution to this problem is an indirect mechanism with the following two properties. First, it provides depositors an incentive to communicate whether they believe a run is on or not. Second, the mechanism threatens a suspension of convertibility conditional on what is revealed in these communications. Together, these two properties can eliminate the prospect of bank-run equilibria in the Diamond-Dybvig environment. |
| Keywords: | Bank runs; optimal deposit contract; financial fragility |
| JEL: | D82 E58 G21 |
| Date: | 2014–09–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedhwp:wp-2014-19&r=ban |
| By: | Anton Korinek; Damiano Sandri |
| Abstract: | We examine the effectiveness of capital controls versus macroprudential regulation in reducing financial fragility in a small open economy model in which there is excessive borrowing because of externalities associated with financial crises and contractionary exchange rate depreciations. We find that both types of instruments play distinct roles: macroprudential regulation reduces the indebtedness of leveraged borrowers whereas capital controls induce more precautionary behavior for the economy as a whole, including for savers. This reduces crisis risk by shoring up aggregate net worth and mitigating the transfer problem that occurs during crises. In advanced countries where the risk of large contractionary depreciations is more limited, the role for capital controls subsides. However, macroprudential regulation remains essential in our model to mitigate booms and busts in asset prices. |
| JEL: | E44 F34 F41 |
| Date: | 2014–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:20805&r=ban |
| By: | Jorda, Oscar (Federal Reserve Bank of San Francisco); Schularick, Moritz (Department of Economics, University of Bonn); Taylor, Alan M. (Department of Economics, University of California,Davis) |
| Abstract: | Is there a link between loose monetary conditions, credit growth, house price booms, and financial instability? This paper analyzes the role of interest rates and credit in driving house price booms and busts with data spanning 140 years of modern economic history in the advanced economies. We exploit the implications of the macroeconomic policy trilemma to identify exogenous variation in monetary conditions: countries with fixed exchange regimes often see fluctuations in short-term interest rates unrelated to home economic conditions. We use novel instrumental variable local projection methods to demonstrate that loose monetary conditions lead to booms in real estate lending and house prices bubbles; these, in turn, materially heighten the risk of financial crises. Both effects have become stronger in the postwar era. |
| JEL: | C14 C38 E32 E37 E42 E44 E51 E52 F41 G01 G21 N10 N20 |
| Date: | 2014–12 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedfwp:2014-28&r=ban |
| By: | Chaudhary, Dinesh |
| Abstract: | Scenario Analysis (SA) plays a key role in determination of operational risk capital under Basel II Advanced Measurement Approach. However, operational risk capital based on scenario data may exhibit high sensitivity or wrong-way sensitivity to scenario inputs. In this paper, we first discuss scenario generation using quantile approach and parameter estimation using quantile matching. Then we use single-loss approximation (SLA) to examine sensitivity of scenario based capital to scenario inputs. |
| Keywords: | Operational risk; Sensitivity analysis; Scenario analysis; Advanced Measurement Approach |
| JEL: | D81 G21 G32 |
| Date: | 2014–12–29 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:60996&r=ban |
| By: | Vadim Arzamasov (National Research University Higher School of Economics); Henry Penikas (National Research University Higher School of Economics) |
| Abstract: | The recent global financial crisis significantly affected world economies and revealed a problem of the clear financial stability measures absence. The construction of an integral index is highly desirable to track the financial stability level over time and diminish the probability of financial instability through the recognition of its sources. The novelty of the current research is that such an index is being built for various countries at the same time and the quantitative measures are being introduced to select the best model by comparing the behavior of different models with the benchmark. It was shown that data non-stationarity plays a significant role in the best predictors’ selection. Therefore, the best model is that built on the first differences of initial indicators. The best model contains “Return on Assets” and “Regulatory Capital to Risk-Weighted Assets” as financial stability predictors. |
| Keywords: | financial stability, integral index, economic resilience, IMD, early warning system |
| JEL: | G01 G21 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:hig:wpaper:75/ec/2014&r=ban |
| By: | Nicholas Economides (Stern School of Business, New York University); Przemyslaw Jeziorski (Haas School of Business, UC Berkeley) |
| Abstract: | In developing countries with sparse retail banking branches, mobile telecom net- works have emerged as major providers of financial services bypassing traditional banks. Using individual-level mobile money transaction data in Tanzania, we find that the vast majority of these transactions can be classified as either (i) transferring money to others, (ii) transporting money for short distances, or (iii) storing money for short to medium periods of time. We find that the demand for long-distance transfers is less elastic than for short-distance transfers suggesting that the mobile networks compete with traditional cash transportation by bus drivers, in addition to competing with each other. Using the revealed preferences for transportation and storage transactions, we monetize the economic damage caused by a high level of crime. We estimate the willingness to pay to avoid walking with cash an extra kilometer and to avoid storing money at home for an extra day to be 1.1% and 1% of an average transaction, respectively. We propose a Pareto superior price discrimination scheme where cash-out fees that follow a transfer are set to zero, while otherwise cash-out fees are set a bit below transfer fees. |
| Date: | 2014–12 |
| URL: | http://d.repec.org/n?u=RePEc:net:wpaper:1424&r=ban |
| By: | Sergey Chernenko; Samuel G. Hanson; Adi Sunderam |
| Abstract: | Collateralized debt obligations (CDOs) and private-label mortgage-backed securities (MBS) backed by nonprime loans played a central role in the recent financial crisis. Little is known, however, about the underlying forces that drove investor demand for these securitizations. Using micro-data on insurers’ and mutual funds’ bond holdings, we find considerable heterogeneity in investor demand for securitizations in the pre-crisis period. We argue that both investor beliefs and incentives help to explain this variation in demand. By contrast, our data paints a more uniform picture of investor behavior in the crisis. Consistent with theories of optimal liquidation, investors largely traded in more liquid securities such as government-guaranteed MBS to meet their liquidity needs during the crisis. |
| JEL: | G01 G12 G22 G23 |
| Date: | 2014–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:20777&r=ban |