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on Banking |
| By: | Iosifidi, Maria; Kokas, Sotirios |
| Abstract: | This paper exploits a unique data set on bank-firm relationships based on syndicated loan deals to examine the effect of banks’ credit risk and capital on firms’ risk and performance. Our data set is a multilevel cross-section, which essentially allows controlling for all bank and firm characteristics through respective fixed effects, thus avoiding concerns regarding omitted variables. We find that banks with higher credit risk are associated with more risky firms, with lower profitability and market value. In turn, we find that banks with higher risk-weighted capital ratios lend to riskier firms with less market value. Our results are indicative of a strong adverse selection mechanism and highlight the need to monitor the risky banks more closely, especially as we consider large and influential syndicated loan deals. |
| Keywords: | Bank-firm relationships; Risk; Performance; Syndicated loans |
| JEL: | G20 G21 G30 G32 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:61942&r=ban |
| By: | Makoto Nirei; Julián Caballero; Vladyslav Sushko |
| Abstract: | Loan syndication increases bank interconnectedness through co-lending relationships. We study the financial stability implications of such dependency on syndicate partners in the presence of shocks to banks' capital. Model simulations in a network setting show that such shocks can produce rare events in this market when banks have shared loan exposures while also relying on a common risk management tool such as value-at-risk (VaR). This is because a withdrawal of a bank from a syndicate can cause ripple effects through the market, as the loan arranger scrambles to commit more of its own funds by also pulling back from other syndicates or has to dissolve the syndicate it had arranged. However, simulations also show that the core-periphery structure observed in the empirical network may reduce the probability of such contagion. In addition, simulations with tighter VaR constraints show banks taking on less risk ex-ante. |
| Keywords: | Syndicated lending, systemic risk, network externalities, value at risk, bank capital shocks, rare event risk |
| Date: | 2015–01 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:484&r=ban |
| By: | Kauko, Karlo (Bank of Finland Research) |
| Abstract: | The NSFR regulation reduces banks’ liquidity risks by encouraging the use of deposit funding. Deposit money is created by lending, but the requirement restricts possibilities to grant loans. This contradiction may be destabilising if there is a substantial foreign debt. |
| Keywords: | net stable funding ratio; endogenous money; liquidity regulation |
| JEL: | E51 G21 G28 |
| Date: | 2015–01–26 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:bofrdp:2015_001&r=ban |
| By: | Alejandro Jara; Daniel Oda |
| Abstract: | In this paper, we apply a multivariate method to classify banks according to their degree of similarity, known as cluster analysis. Using balance sheets data for the period 2008-2013 on a set of 23 banks in Chile, we find that the banking industry can be clustered into seven groups of homogeneous institutions: (i) large multi-banks, (ii) medium size multi-banks, (iii) medium size specialized banks, (iv) retail banks, (v) treasury banks, (vi) foreign trade banks, and (vii) banks dedicated to financial services. Additionally, we show that this classification of banks is stable over time, and that can contribute to improve the banking system surveillance in Chile. |
| Date: | 2015–01 |
| URL: | http://d.repec.org/n?u=RePEc:chb:bcchwp:744&r=ban |
| By: | Wilko Bolt; David Humphrey |
| Abstract: | We assess the competitiveness of the $400 billion dollar U.S. bank consumer loan market by comparing results from different competition measures-HHI, Lerner Index, H-Statistic along with three others, two of which are related to frontier analysis. These measures are typically weakly related to one another and only half of them identify banks with the highest loan price and spread as also being the least competitive. This is the opposite of what would be expected. The states where the most and least competitive banks are located are noted. The most populous states with the largest banks are underrepresented. |
| Keywords: | consumer loans; bank competition; frontier analysis |
| JEL: | G21 L80 L00 |
| Date: | 2015–01 |
| URL: | http://d.repec.org/n?u=RePEc:dnb:dnbwpp:457&r=ban |
| By: | Toshinao Yoshiba (Director and Senior Economist, Institute for Monetary and Economic Studies, Bank of Japan (E-mail: toshinao.yoshiba@boj.or.jp)) |
| Abstract: | This paper surveys several applications of parametric copulas to market portfolios, credit portfolios, and enterprise risk management in the banking industry, focusing on how to capture stressed conditions. First, we show two simple applications for market portfolios: correlation structures for returns on three stock indices and a risk aggregation for a stock and bond portfolio. Second, we show two simple applications for credit portfolios: credit portfolio risk measurement in the banking industry and the application of copulas to CDO valuation, emphasizing the similarity to their application to market portfolios. In this way, we demonstrate the importance of capturing stressed conditions. Finally, we introduce practical applications to enterprise risk management for advanced banks and certain problems that remain open at this time. |
| Keywords: | copula, multivariate distribution, tail dependence, risk aggregation, economic capital |
| JEL: | G17 G21 G32 |
| Date: | 2015–01 |
| URL: | http://d.repec.org/n?u=RePEc:ime:imedps:15-e-01&r=ban |
| By: | Landier, Augustin; Sraer, David; Thesmar, David |
| Abstract: | The correlation across US states in house price growth increased steadily between 1976 and 2000. This paper shows that the contemporaneous geographic integration of the US banking market, via the emergence of large banks, was a primary driver of this phenomenon. To this end, we first theoretically derive an appropriate measure of banking integration across state pairs and document that house price growth correlation is strongly related to this measure of financial integration. Our IV estimates suggest that banking integration can explain up to one third of the rise in house price correlation over the period. |
| Keywords: | banking deregulation; comovement; real estate |
| JEL: | G10 G21 R30 |
| Date: | 2014–12 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:10295&r=ban |
| By: | Gur Huberman; Rafael Repullo |
| Abstract: | We present a model of the maturity of a bank’s uninsured debt. The bank borrows funds and chooses afterwards the riskiness of its assets. This moral hazard problem leads to an excessive level of risk. Short-term debt may have a disciplining effect on the bank’s risk-shifting incentives, but it may lead to inefficient liquidation. We characterize the conditions under which short-term and long-term debt are feasible, and show circumstances under which only short-term debt is feasible and under which short-term debt dominates long-term debt when both are feasible. Thus, short-term debt may have the salutary effect of mitigating the moral hazard problem and inducing lower risk-taking. The results are consistent with key features of the common narrative of the period preceding the 2007-2009 financial crisis. |
| Keywords: | Short-term debt; long-term debt; optimal financial contracts; risk-shifting; rollover risk; inefficient liquidation. |
| JEL: | F3 G3 |
| Date: | 2014–06–13 |
| URL: | http://d.repec.org/n?u=RePEc:ehl:lserod:59294&r=ban |
| By: | Paolo Tasca; Stefano Battiston |
| Abstract: | This paper contributes to a growing literature on the pitfalls of diversification by shedding light on a new mechanism under which, full risk diversification can be sub-optimal. In particular, banks must choose the optimal level of diversification in a market where returns display a bimodal distribution. This feature results from the combination of two opposite economic trends that are weighted by the probability of being either in a bad or in a good state of the world. Banks have also interlocked balance sheets, with interbank claims marked-to-market according to the individual default probability of the obligor. Default is determined by extending the Black and Cox (1976) first-passage-time approach to a network context. We find that, even in the absence of transaction costs, the optimal level of risk diversification is interior. Moreover, in the presence of market externalities, individual incentives favor a banking system that is over-diversified with respect to the level of socially desirable diversification. |
| Keywords: | naive diversification; leverage; default probability |
| JEL: | F3 G3 |
| Date: | 2014–01–20 |
| URL: | http://d.repec.org/n?u=RePEc:ehl:lserod:59297&r=ban |
| By: | Gelain, Paolo (Norges Bank); Lansing, Kevin J. (Federal Reserve Bank of San Francisco); Natvik, Gisele J. (BI Norwegian Business School) |
| Abstract: | We use a simple quantitative asset pricing model to “reverse-engineer” the sequences of stochastic shocks to housing demand and lending standards that are needed to exactly replicate the boom-bust patterns in U.S. household real estate value and mortgage debt over the period 1995 to 2012. Conditional on the observed paths for U.S. disposable income growth and the mortgage interest rate, we consider four different specifications of the model that vary according to the way that household expectations are formed (rational versus moving average forecast rules) and the maturity of the mortgage contract (one-period versus long-term). We find that the model with moving average forecast rules and long-term mortgage debt does best in plausibly matching the patterns observed in the data. Counterfactual simulations show that shifting lending standards (as measured by a loan-to-equity limit) were an important driver of the episode while movements in the mortgage interest rate were not. Our results lend support to the view that the U.S. housing boom was a classic credit-fueled bubble involving over-optimistic projections about future housing values, relaxed lending standards, and ineffective mortgage regulation. |
| Keywords: | Housing bubbles; Mortgage debt; Borrowing constraints; Lending standards; macroprudential policy. |
| JEL: | D84 E32 E44 G12 O40 R31 |
| Date: | 2015–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedfwp:2015-02&r=ban |
| By: | Canals-Cerda, Jose J. (Federal Reserve Bank of Philadelphia); Kerr, Sougata (Federal Reserve Bank of Philadelphia) |
| Abstract: | The Great Recession offers a unique opportunity to analyze the performance of credit risk models under conditions of economic stress. We focus on the performance of models of credit risk applied to risk-segmented credit card portfolios. Specifically, we focus on models of default and loss and analyze three important sources of model risk: model selection, model specification, and sample selection. Forecast errors can be significant along any of these three model-risk dimensions. Simple linear regression models are not generally outperformed by more complex or stylized models. The impact of macroeconomic variables is heterogeneous across risk segments. Model specifications that do not consider this heterogeneity display large projection errors across risk segments. Prime segments are proportionally more severely impacted by a downturn in economic conditions relative to the subprime or near-prime segments. The sensitivity of modeled losses to macroeconomic factors is conditional on the model development sample. Models estimated over a period that does not incorporate a significant period of the Great Recession may fail to project default rates, or loss rates, consistent with those experienced during the Great Recession. |
| Keywords: | Credit cards; Credit risk; Stress test; Risk segmentation; |
| JEL: | G20 G32 G33 |
| Date: | 2015–02–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedpwp:15-8&r=ban |
| By: | Carlos Garriga; Finn E. Kydland; Roman Šustek |
| Abstract: | Mortgage loans are a striking example of a persistent nominal rigidity. As a result, under incomplete markets, monetary policy affects decisions through the cost of new mortgage borrowing and the value of payments on outstanding debt. Observed debt levels and payment to income ratios suggest the role of such loans in monetary transmission may be important. A general equilibrium model is developed to address this question. The transmission is found to be stronger under adjustable- than fixed-rate contracts. The source of impulse also matters: persistent inflation shocks have larger effects than cyclical fluctuations in inflation and nominal interest rates. |
| Keywords: | mortgages; debt servicing costs; monetary policy; transmission mechanism; housing investment |
| JEL: | E32 E52 G21 R21 |
| Date: | 2013–12–05 |
| URL: | http://d.repec.org/n?u=RePEc:ehl:lserod:58248&r=ban |
| By: | Cussen, Mary (Central Bank of Ireland); O'Brien, Martin; Onorante, Luca (Central Bank of Ireland); O'Reilly, Gerard (Central Bank of Ireland; Central Bank of Ireland) |
| Abstract: | This Letter attempts to assess the potential impact of implementing the recently proposed proportionate loan-to-value ratio on the wider housing market. Using a dual micro and macro simulation strategy, we find evidence for some moderate negative impacts of the LTV cap on house prices and mortgage interest rates, with a proportionately larger impact on housing supply. These can, however, be considered to be close to the maximum possible impacts given the conservative assumptions and empirical strategies underlying our analysis. |
| Date: | 2015–01 |
| URL: | http://d.repec.org/n?u=RePEc:cbi:ecolet:03/el/15&r=ban |
| By: | José Miguel Matus |
| Abstract: | This paper describes the main regulatory changes regarding the provisions for credit risk in the local bank industry. In doing so, this article focuses its analysis in the 1975 - 2014 period, were some major advances and regulatory changes occurred; not only in the regulation of credit risk provision, but also in supervisory systems that were implemented by the Superint endency. Furthermore, it describes the main changes implemented in the accounting standards of credit risk provisions. |
| Date: | 2015–01 |
| URL: | http://d.repec.org/n?u=RePEc:chb:bcchee:110&r=ban |
| By: | Perignon , Christophe; Yeung , Stanley; Hurlin, Christophe; Iseli, Grégoire |
| Abstract: | As most Exchange-Traded Funds (ETFs) engage in securities lending or are based on total return swaps, they expose their investors to counterparty risk. To mitigate the funds' exposure, their counterparties must pledge collateral. In this paper, the authors present a framework to study collateral risk and provide empirical estimates for the $40.9 billion collateral portfolios of 164 funds managed by a leading ETF issuer. Overall, our findings contradict the allegations made by international agencies about the high collateral risk of ETFs. Finally, the authors theoretically show how to construct an optimal collateral portfolio for an ETF. |
| Keywords: | Asset management; passive investment; derivatives; optimal collateral portfolio; systemic risk |
| JEL: | G20 G23 |
| Date: | 2014–08–10 |
| URL: | http://d.repec.org/n?u=RePEc:ebg:heccah:1050&r=ban |