nep-ban New Economics Papers
on Banking
Issue of 2015‒02‒05
nineteen papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Systemic losses due to counterparty risk in a stylized banking system By Annika Birch; Tomaso Aste
  2. Drivers of Structural Change in Cross-Border Banking Since the Global Financial Crisis By Bremus, Franziska; Fratzscher, Marcel
  3. The determinants of systemic importance By Kyle Moore; Chen Zhou
  4. Banks Exposure to Interest Rate Risk and The Transmission of Monetary Policy By Landier, Augustin; Sraer, David; Thesmar, David
  5. A Dynamic Model of Banking with Uninsurable Risks and Regulatory Constraints By Mankart, Jochen; Michaelides, Alexander; Pagratis, Spyros
  6. Bailouts And Moral Hazard: How Implicit Government Guarantees Affect Financial Stability By Mariathasan, Mike; Merrouche, Ouarda; Werger, Charlotte
  7. Global Liquidity and Drivers of Cross-Border Bank Flows By Cerutti, Eugenio; Claessens, Stijn; Ratnovski, Lev
  8. Efficient Financial Crises By Ariel Zetlin-Jones
  9. Credit Supply and the Housing Boom By Alejandro Justiniano; Giorgio E. Primiceri; Andrea Tambalotti
  10. Monetary policy, bank bailouts and the sovereign-bank risk nexus in the euro area By Fratzscher, Marcel; Rieth, Malte
  11. Credit Supply and the Housing Boom By Justiniano, Alejandro; Primiceri, Giorgio E; Tambalotti, Andrea
  12. Option-Based Credit Spreads By Culp, Christopher L.; Nozawa, Yoshio; Veronesi, Pietro
  13. Risk-adjusted pricing of bank’s assets based on cash flow matching matrix By Voloshyn, Ihor; Voloshyn, Mykyta
  14. Betting the House By Oscar Jorda; Moritz Schularick; Alan M. Taylor
  15. A Note on Banking and Housing Crises and the Strength of Recoveries By Jens Boysen-Hogrefe; Nils Jannsen; Carsten-Patrick Meier
  16. Group lending without joint liability By Thiemo Fetzer; Jonathan de Quidt; Maitreesh Ghatak
  17. Network Formation and Systemic Risk, Second Version By Selman Erol; Rakesh Vohra
  18. The end of bank secrecy? An evaluation of the G20 tax haven crackdown By Niels Johannesen; Gabriel Zucman
  19. Who gains from credit granted between firms? Evidence from inter-corporate loan announcements made in China By He, Qing; Lu, Liping; Ongena , Steven

  1. By: Annika Birch; Tomaso Aste
    Abstract: We report a study of a stylized banking cascade model investigating systemic risk caused by counterparty failure using liabilities and assets to define banks' balance sheet. In our stylized system, banks can be in two states: normally operating or distressed and the state of a bank changes from normally operating to distressed whenever its liabilities are larger than the banks' assets. The banks are connected through an interbank lending network and, whenever a bank is distressed, its creditor cannot expect the loan from the distressed bank to be repaid, potentially becoming distressed themselves. We solve the problem analytically for a homogeneous system and test the robustness and generality of the results with simulations of more complex systems. We investigate the parameter space and the corresponding distribution of operating banks mapping the conditions under which the whole system is stable or unstable. This allows us to determine how financial stability of a banking system is influenced by regulatory decisions, such as leverage; we discuss the effect of central bank actions, such as quantitative easing and we determine the cost of rescuing a distressed banking system using re-capitalisation. Finally, we estimate the stability of the UK and US banking systems comparing the years 2007 and 2012 by using real data.
    Keywords: banking crisis; counterparty risk; random field ising model; systemic risk
    JEL: N0
    Date: 2014–09
  2. By: Bremus, Franziska; Fratzscher, Marcel
    Abstract: The paper analyzes the effects of changes to regulatory policy and to monetary policy on cross-border bank lending since the global financial crisis. Cross-border bank lending has decreased, and the home bias in the credit portfolio of banks has risen sharply, especially among banks in the euro area. Our results suggest that expansionary monetary policy in the source countries – as measured by the change in reserves held at central banks - has encouraged cross-border lending, both in euro area and non-euro area countries. Regarding regulatory policy, increases in financial supervisory power or independence of the supervisory authorities have encouraged credit outflows from source countries. The findings thus underline the importance of regulatory arbitrage as a driver of cross-border bank flows since the global financial crisis. However, in the euro area, arbitrage in capital stringency was linked to lower cross-border lending since the crisis.
    Keywords: arbitrage; cross-border bank lending; financial integration; home bias; monetary policy; regulation
    JEL: F30 G11 G15 G28
    Date: 2014–12
  3. By: Kyle Moore; Chen Zhou
    Abstract: This paper empirically analyses the determinants of banks’ systemic importance. With applying a novel measure on the systemic importance to US bank holding companies in 2000–2010, we show that size is an important determinant of systemic importance, but banks with size above a certain threshold have equal systemic importance. On top of size, engaging heavily in non-traditional banking activities, such as relying on money market fund and generating non-interest income, is also related to high systemic importance. Therefore, in addition to “Too big to fail”, systemically important financial institutions can also be identified by a “Too non-traditional to fail” principle.
    Keywords: too-big-to-fail; systemic risk; extreme value theory
    JEL: J1
    Date: 2014–07–31
  4. By: Landier, Augustin; Sraer, David; Thesmar, David
    Abstract: We show that banks' cash flow exposure to interest rate risk, or income gap, plays a crucial role in their lending behavior following monetary policy shocks. In a first step, we show that the sensitivity of bank profits to interest rates increases significantly with their income gap, even when banks use interest rate derivatives. In a second step, we show that the income gap also predicts the sensitivity of bank lending to interest rates, both for commercial & industrial loans and for mortgages. Quantitatively, a 100 basis point increase in the Fed funds rate leads a bank at the 75th percentile of the income gap distribution to increase lending by about 1.6 percentage points annually relative to a bank at the 25th percentile. We conclude that banks' exposure to interest rate risk is an important determinant of the bank-level intensity of the lending channel.
    Keywords: bank lending; interest rate risk; monetary policy
    JEL: E44 E52 G21
    Date: 2014–12
  5. By: Mankart, Jochen; Michaelides, Alexander; Pagratis, Spyros
    Abstract: We estimate the structural parameters of a quantitative banking model featuring maturity transformation and endogenous failures in the presence of undiversifiable background risk and regulatory constraints. Pervasive balance sheet cross-sectional heterogeneity can be rationalized with idiosyncratic shocks and differential access to wholesale funding markets. Moreover, loans are highly procyclical, bank failures strongly countercyclical and increasing in leverage. Tightening capital requirements increases precautionary equity but results in higher failures because equity rises proportionately less than the capital ratio requirement change. The endogenous fall in the expected return on equity lowers the incentive to further increase precautionary equity.
    Keywords: bank failures; bank leverage; capital requirements; uninsurable risks
    JEL: E32 E44 G21
    Date: 2014–12
  6. By: Mariathasan, Mike; Merrouche, Ouarda; Werger, Charlotte
    Abstract: The recent crisis has shown that banks in distress can often expect to benefit from (implicit) government guarantees. This paper analyzes a panel of 781 banks from 90 countries to test whether the expectation of individual and systemic government support induces moral hazard. It shows that banks tend to be more leveraged, funded with capital of lower quality, more heavily invested in risky assets and exposed to more severe liquidity mismatch when they themselves -but also when their competitors- are perceived as being more likely to benefit from government support. We show that the default of Lehman Brothers in 2008 reduced moral hazard in the short-run, but not in the long-run, as the systemic consequences of Lehman’s failure became apparent. In addition, our large country coverage allows us to provide new results on policies, institutions, and regulations that can be put in place to reduce moral hazard induced by implicit guarantees to the banking sector.
    Keywords: bailout; banking; government guarantees; moral hazard
    JEL: G20 G21 G28
    Date: 2014–12
  7. By: Cerutti, Eugenio; Claessens, Stijn; Ratnovski, Lev
    Abstract: This paper studies the determinants of global liquidity using data on cross-border bank flows, with a longer time series and broader country sample than previous studies. We define global liquidity as non-price determinants of cross-border credit supply, consistent with its meaning as the “ease of financing” in international financial markets. We find that global liquidity is driven primarily by uncertainty (VIX), US monetary policy (term premia), and UK and Euro Area bank conditions (proxied by leverage and TED spreads). This expands on previous studies by highlighting non-US drivers of global liquidity, and is consistent with the dominant role of European banks in cross-border lending. We also show that borrowing countries can limit their exposures to global liquidity fluctuations through adapting their macro frameworks, capital flow management tools, and bank regulation.
    Keywords: Capital Flows; Global liquidity; International Banking
    JEL: F21 F34 G15 G18 G21 G28
    Date: 2014–12
  8. By: Ariel Zetlin-Jones (Carnegie Mellon University)
    Abstract: We analyze the optimal capital structure and investment strategy of banks and other financial institutions. We develop conditions under which banks optimally choose a fragile capital structure that is subject to runs. We show that when bank depositors have limited ability to commit to long-term lending arrangements, they strictly prefer to lend to banks using short-term debt rather than with long-term debt or equity. We argue that when there are multiple banks, the same limited commitment of depositors leads them to prefer a financial system in which banks pursue correlated, risky investments as opposed to one in which banks pursue independent, less risky investments. The optimal financial system features occasional crises in which all banks are subject to ex-post inefficient liquidations, and in this sense, financial crises are efficient.
    Date: 2014
  9. By: Alejandro Justiniano; Giorgio E. Primiceri; Andrea Tambalotti
    Abstract: The housing boom that preceded the Great Recession was due to an increase in credit supply driven by looser lending constraints in the mortgage market. This view on the fundamental drivers of the boom is consistent with four empirical observations: the unprecedented rise in home prices and household debt, the stability of debt relative to house values, and the fall in mortgage rates. These facts are difficult to reconcile with the popular view that attributes the housing boom to looser borrowing constraints associated with lower collateral requirements. In fact, a slackening of collateral constraints at the peak of the lending cycle triggers a fall in home prices in our framework, providing a novel perspective on the possible origins of the bust.
    JEL: E32 E44
    Date: 2015–01
  10. By: Fratzscher, Marcel; Rieth, Malte
    Abstract: The paper analyses the empirical relationship between bank risk and sovereign credit risk in the euro area. Using structural VAR with daily financial markets data for 2003-13, the analysis confirms two-way causality between shocks to sovereign risk and bank risk, with the former being overall more important in explaining bank risk, than vice versa. The paper focuses specifically on the impact of non-standard monetary policy measures by the European Central Bank and on the effects of bank bailout policies by national governments. Testing specific hypotheses formulated in the literature, we find that bank bailout policies have reduced solvency risk in the banking sector, but partly at the expense of raising the credit risk of sovereigns. By contrast, monetary policy was in most, but not all cases effective in lowering credit risk among both sovereigns and banks. Finally, we find spillover effects in particular from sovereigns in the euro area periphery to the core countries.
    Keywords: bank bailout; banks; credit risk; heteroscedasticity; monetary policy; sovereigns; spillovers
    JEL: E52 E60 G10
    Date: 2015–01
  11. By: Justiniano, Alejandro; Primiceri, Giorgio E; Tambalotti, Andrea
    Abstract: The housing boom that preceded the Great Recession was due to an increase in credit supply driven by looser lending constraints in the mortgage market. This view on the fundamental drivers of the boom is consistent with four empirical observations: the unprecedented rise in home prices and household debt, the stability of debt relative to house values, and the fall in mortgage rates. These facts are difficult to reconcile with the popular view that attributes the housing boom to looser borrowing constraints associated with lower collateral requirements. In fact, a slackening of collateral constraints at the peak of the lending cycle triggers a fall in home prices in our framework, providing a novel perspective on the possible origins of the bust.
    Keywords: collateral constraints; house prices; housing and credit boom; leverage restrictions
    JEL: E32 E44
    Date: 2015–01
  12. By: Culp, Christopher L.; Nozawa, Yoshio; Veronesi, Pietro
    Abstract: Theoretically, corporate debt is economically equivalent to safe debt minus a put option on the firm’s assets. We empirically show that indeed portfolios of long Treasuries and short traded put options ("pseudo bonds") closely match the properties of traded corporate bonds. Pseudo bonds display a credit spread puzzle that is stronger at short horizons, unexplained by standard risk factors, and unlikely to be solely due to illiquidity. Our option-based approach also offers a novel, model-free benchmark for credit risk analysis, which we use to run empirical experiments on credit spread biases, the impact of asset uncertainty, and bank-related rollover risk.
    Keywords: credit spreads; default; Merton model; options
    JEL: G1 G12 G13 G21 G24 G3
    Date: 2014–12
  13. By: Voloshyn, Ihor; Voloshyn, Mykyta
    Abstract: To price bank’s assets correctly, it is important to know cost of funds. But funding cost calculation is complicated due to the fact that banks fund long term assets through short-term liabilities. As a result, assets with a given time to maturity are usually financed by several liabilities with different maturities. To calculate funding cost it needs to know how cash flows are matched between assets and liabilities. For this it`s used cash flow matching matrix or funding matrix. In the paper, a new algorithm of filling of a two-dimensional funding matrix that is based on the golden rule of banking and modified RAROC approach is proposed. It provides positive definiteness and uniqueness of the matrix. The matrix shows terms to maturity and amounts of liability cash flows which fund the asset cash flow with a given term to maturity. Examples of partially and fully filled matrices are presented. It is proposed an approach to risk-adjusted pricing that is based on this funding matrix and RAROC-approach adapted to cash flows. The developed approach to pricing integrates organically credit and liquidity risks. It takes into consideration expected credit losses and economic capital (unexpected credit losses) for all lifetime of asset cash flows and not one-year period traditionally used in RAROC.
    Keywords: asset pricing, funding matrix, economic capital, cash flow at risk,risk-adjusted return on capital (RAROC), cash flow matching, interest rate, asset, liability
    JEL: G12 G21
    Date: 2013–12–31
  14. By: Oscar Jorda (Federal Reserve Bank of San Francisco and University of California, Davis); Moritz Schularick (University of Bonn and Centre for Economic Policy Research and Hong Kong Institute for Monetary Research); Alan M. Taylor (University of California, Davis and National Bureau of Economic Research and Centre for Economic Policy Research)
    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.
    Keywords: Financial Crises, Monetary Policy, Leverage, Credit, House Prices, Local Projections, Instrumental Variables
    JEL: C14 C38 E32 E37 E42 E44 E51 E52 F41 G01 G21 N10 N20
    Date: 2014–12
  15. By: Jens Boysen-Hogrefe; Nils Jannsen; Carsten-Patrick Meier
    Abstract: We investigate whether recoveries following normal recessions differ from recoveries following recessions that are associated with either banking crises or housing crises. Using a parametric panel framework that allows for a bounce-back in the level of output during the recovery, we find that normal recessions are followed by strong recoveries in advanced economies. This bounce-back is absent following recessions associated with banking crises and housing crises. Consequently, the permanent output losses of recessions associated with banking crises and housing crises are considerably larger than those of normal recessions
    Keywords: Business cycle; recovery; banking crisis; housing crisis
    JEL: E32 C33
    Date: 2015–01
  16. By: Thiemo Fetzer; Jonathan de Quidt; Maitreesh Ghatak
    Abstract: This paper contrasts individual liability lending with and without groups to joint liability lending. By doing so, we shed light on an apparent shift away from joint liability lending towards individual liability lending by some microfinance institutions First we show that individual lending with or without groups may constitute a welfare improvement so long as borrowers have sufficient social capital to sustain mutual insurance. Second, we explore how a purely mechanical argument in favor of the use of groups - namely lower transaction costs - may actually be used explicitly by lenders to encourage the creation of social capital. We also carry out some simulations to evaluate quantitatively the welfare impact of alternative forms of lending, and how they relate to social capital.
    Keywords: microfinance; group lending; joint liability; mutual insurance
    JEL: J1
    Date: 2013–07
  17. By: Selman Erol (Department of Economics, University of Pennsylvania); Rakesh Vohra (Department of Economics, and Department of Electrical & Systems Engineering, University of Pennsylvania)
    Abstract: This paper introduces a model of endogenous network formation and systemic risk. In it, strategic agents form networks that efficiently trade-off the possibility of systemic risk with the benefits of trade. Efficiency is a consequence of the high risk of contagion which forces agents to endogenize their externalities. Second, fundamentally ‘safer’ economies generate much higher interconnectedness, which in turn leads to higher systemic risk. Third, the structure of the network formed depends crucially on whether the shocks to the system are believed to be correlated or independent of each other. This underlines the importance of specifying the shock structure before investigating a given network as a particular network and shock structure could be incompatible.
    Keywords: Network Formation, Systemic Risk, Contagion, Rationalizability, Core
    JEL: D85 G01
    Date: 2014–08–29
  18. By: Niels Johannesen; Gabriel Zucman
    Abstract: During the financial crisis, G20 countries compelled tax havens to sign bilateral treaties providing for exchange of bank information. Policymakers have celebrated this global initiative as the end of bank secrecy. Exploiting a unique panel dataset, our study is the first attempt to assess how the treaties affected bank deposits in tax havens. Rather than repatriating funds, our results suggest that tax evaders shifted deposits to havens not covered by a treaty with their home country. The crackdown thus caused a relocation of deposits at the benefit of the least compliant havens. We discuss the policy implications of these findings.
    JEL: G21 G28 H26 H87 K34
    Date: 2014–02
  19. By: He, Qing (BOFIT); Lu, Liping (BOFIT); Ongena , Steven (BOFIT)
    Abstract: Who gains from inter-corporate credit? To answer this question we investigate the reactions of the stock prices of both the issuing and receiving firms to the announcements of 719 inter-corporate loans that took place between 2005 and 2012 in China. We find that the average abnormal return for the issuers of inter-corporate loans is significantly negative, whereas the corresponding return for those firms receiving credit is positive. Investors may worry that issuing firms may have run out of other worthwhile projects to finance, while at the same time they may view credit-receiving firms as being certified as worthy borrowers. The issuance of intra-group loans, especially those with higher interest rates, is associated with lower returns overall since such loans may signal a spreading of financial distress to the rest of the group. After issuing inter-corporate loans, firms are also found to have lower accounting performance, which confirms the aforementioned signaling interpretation.
    Keywords: entrusted loan; inter-corporate loan; credit misallocation; certification
    JEL: G14 G21 G30
    Date: 2015–01–17

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