nep-ban New Economics Papers
on Banking
Issue of 2015‒03‒13
twenty papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Securities Trading by Banks and Credit Supply: Micro-Evidence By Abbassi, Puriya; Iyer, Rajkamal; Peydró, José Luis; Tous, Francesc R.
  2. Credit Smoothing and Determinants of Loan Loss Reserves. Evidence from Europe, US, Asia and Africa By Ozili, Peterson K
  3. A dynamic network model of the unsecured interbank lending market By Francisco Blasques; Falk Bräuning; Iman van Lelyveld
  4. Cross-Border Liquidity, Relationships and Monetary Policy: Evidence from the Euro Area Interbank Crisis By Abbassi, Puriya; Bräuning, Falk; Fecht, Falko; Peydró, José Luis
  5. Loan Loss Provision: Some Empirical Evidence for Italian Banks By Guglielmo Maria Caporale; Matteo Alessi; Stefano Di Colli; Juan Sergio Lopez
  6. The Dark Side of the Four-Eyes Principle – Evidence from Bank Lending By Brown, Martin; Schaller, Matthias; Westerfeld, Simone; Heusler, Markus
  7. “Sovereigns and banks in the euro area: a tale of two crises” By Marta Gómez-Puig; Simón Sosvilla-Rivero; Manish K. Singh
  8. Asymmetric Information and Imperfect Competition in Lending Markets By Crawford, Gregory S; Pavanini, Nicola; Schivardi, Fabiano
  9. Bank networks: Contagion, systemic risk and prudential policy By Aldasoro, Iñaki; Delli Gatti, Domenico; Faia, Ester
  10. Market reactions to the ECB's Comprehensive Assessment By Cenkhan Sahin; Jakob de Haan
  11. Sovereign Default Risk and State-Owned Bank Fragility in Emerging Markets By Deev, Oleg; Hodula, Martin
  12. Do bank loans and local amenities explain Chinese urban house prices By Daisy J. Huang; Charles Ka Yui Leung; Baozhi Qu
  13. Forced Asset Sales and the Concentration of Outstanding Debt: Evidence from the Mortgage Market By Favara, Giovanni; Giannetti, Mariassunta
  14. The Determinants of Interest Rates in Microbanks: Age and Scale By Jacinta C. Nwachukwu; Simplice Asongu
  15. The Limits of Lending : Banks and Technology Adoption Across Russia By Bircan, Cagatay; de Haas, R.
  16. Can firms grow without credit?: evidence from the Euro Area, 2005-2011: a quantile panel analysis By Sophia Dimelis; Ioannis Giotopoulos; Helen Louri
  17. Stress tests and information disclosure By Goldstein, Itay; Leitner, Yaron
  18. Measuring Tail-Risk Cross-Country Exposures in the Banking Industry By Antonio Rubia Serrano; Lidia Sanchis-Marco
  19. The Importance of Reallocation for Productivity Growth: Evidence from European and US Banking By Bos, Jaap W.B.; van Santen, Peter C.
  20. Filtered historical simulation Value-at-Risk models and their competitors By Gurrola-Perez, Pedro; Murphy, David

  1. By: Abbassi, Puriya; Iyer, Rajkamal; Peydró, José Luis; Tous, Francesc R.
    Abstract: We analyze securities trading by banks and the associated spillovers to the supply of credit. Empirical analysis has been elusive due to the lack of securities register for banks. We use a unique, proprietary dataset that has the investments of banks at the security level for 2005-2012 in conjunction with the credit register from Germany. Analyzing data at the security level for each bank in each period, we find that during the crisis, banks with higher trading expertise increase their overall investments in securities, especially in those that had a larger price drop. The quantitative effects are largest for trading-expertise banks with higher capital and in securities with lower rating and long-term maturity. In fact, there are no differential effects for triple-A rated securities. Moreover, banks with higher trading expertise reduce their overall supply of credit in crisis times – i.e., for the same borrower at the same time, trading-expertise banks reduce lending relative to other banks. This effect is more pronounced for trading-expertise banks with higher capital, and the credit reduction is binding at the firm level. Finally, these differential effects for trading-expertise banks are not present outside the crisis period
    Keywords: bank capital; banking; credit supply; investments; risk-taking
    JEL: G01 G21 G28
    Date: 2015–03
  2. By: Ozili, Peterson K
    Abstract: This study provides a link between accounting, managerial discretion and monetary policy. Monetary authorities encourage banking institutions to supply credit to the economy. Increased bank supply of credit is a good thing but too much of a good can be a bad thing. This paper investigates under what circumstances excessive loan supply ceases to be a good thing and how bank managers react to this. After examining 82 bank samples, I find that (i) bank underestimate the level of reserves to boost credit supply in line with expectations of monetary authorities, particularly, in Asia and UK (ii) consistent with the credit smoothing hypothesis, US and Chinese banks smooth credit supply to minimize unintended stock market signaling; (iii) managerial priority during a recession is to smooth credit over time rather than to boost credit supply; (iv) non-performing loans, bank portfolio risk and loan portfolio size are significant determinants of the level of loan loss reserves; and (v) credit risk, proxy by loan growth, do not have a significant impact on loan loss reserves but tend to have some significant effect during a recession, particularly, when change in loans is negative. The implications of these findings are two-fold: (i) bank managers use their discretion over reserves to influence bank credit supply; (ii) bank supply of credit is not solely driven by loan demand but by a combination of several factors, particularly, capital market concerns, the need to avoid scrutiny from monetary authorities, and country-specific factors.
    Keywords: Credit Risk, Monetary Policy, Loan Loss Reserves, Credit Smoothing, Accounting, Signaling, Bank supervision.
    JEL: E52 E58 G21 G28 M41
    Date: 2015–03–07
  3. By: Francisco Blasques; Falk Bräuning; Iman van Lelyveld
    Abstract: We introduce a structural dynamic network model of the formation of lending relationships in the unsecured interbank market. Banks are subject to random liquidity shocks and can form links with potential trading partners to bilaterally Nash bargain about loan conditions. To reduce credit risk uncertainty, banks can engage in costly peer monitoring of counterparties. We estimate the structural model parameters by indirect inference using network statistics of the Dutch interbank market from 2008 to 2011. The estimated model accurately explains the high sparsity and stability of the lending network. In particular, peer monitoring and credit risk uncertainty are key factors in the formation of stable interbank lending relationships that are associated with improved credit conditions. Moreover, the estimated degree distribution of the lending network is highly skewed with a few very interconnected core banks and many peripheral banks that trade mainly with core banks. Shocks to credit risk uncertainty can lead to extended periods of low market activity, amplified by a reduction in peer monitoring. Finally, our monetary policy analysis shows that a wider interest rate corridor leads to a more active market through a direct effect on the outside options and an indirect multiplier effect by increasing banks' monitoring and search efforts.
    Keywords: Interbank liquidity, financial networks, credit risk uncertainty, peer monitoring, monetary policy, trading relationships, indirect parameter estimation
    Date: 2015–02
  4. By: Abbassi, Puriya; Bräuning, Falk; Fecht, Falko; Peydró, José Luis
    Abstract: We analyze the impact of financial crises and monetary policy on the supply of wholesale funding liquidity, and also on the compositional supply effects through cross-border and relationship lending. For empirical identification, we draw on the proprietary bank-to-bank European interbank dataset extracted from Target2 and also exploit the Lehman and sovereign crisis shocks as well as the main Eurosystem non-standard monetary policy measures. The robust results imply that the crisis shocks lead to worse access, volumes and spreads (in both the overnight and longer-term maturities). The quantitative impact on interbank access and volume is stronger than on spreads. Liquidity supply restrictions are exacerbated for cross-border lending after the Lehman failure; for banks headquartered in periphery countries, the impact is quantitatively stronger in the sovereign debt crisis. Moreover, the interbank market – unlike other credit markets – allows to exploit the price dispersion from different lenders on identical credit contracts, i.e. overnight uncollateralized loans in the same morning for the same borrower. This price dispersion increases massively with the crisis, and even more for riskier borrowers. Cross-border and previous relationship lenders charge higher prices for identical contracts in the crisis. Importantly, this price dispersion substantially decreases when the Eurosystem promises unlimited access to liquidity at a fixed price in October 2008 and announces the 3-year LTRO in December 2011, with economically stronger effects for borrowers in weaker countries.
    Keywords: credit rationing; credit supply; euro area; financial crises; financial globalization; information asymmetry; interbank liquidity; monetary policy
    JEL: E44 E58 G01 G21 G28
    Date: 2015–03
  5. By: Guglielmo Maria Caporale; Matteo Alessi; Stefano Di Colli; Juan Sergio Lopez
    Abstract: This paper uses data from a panel of more than 400 Italian banks for the period 2001 – 2012 to examine the main determinants of loan loss provision (LLP), which are classified as either discretionary (income smoothing, capital management,signalling) or non-discretionary (related to the business cycle). The results suggest that LLP in Italian banks is driven mainly by non-discretionary components, especially during the recession of 2008-2012, and is consistent with a countercyclical behavior of LLP. Further, it is generally less pro–cyclical (although not during the recent economic crisis) in the case of local banks: since their loans are more collateralised, their behaviour is more strongly affected by supervisory activity, their initial coverage ratio being lower than for other banks.
    Keywords: Loan loss provision, bank lending, financial system cyclicality
    JEL: G21 G28
    Date: 2015
  6. By: Brown, Martin; Schaller, Matthias; Westerfeld, Simone; Heusler, Markus
    Abstract: In small business lending the four-eyes principle leads loan officers to propose inflated credit ratings for their clients. Inflated ratings are, however, anticipated and corrected by the credit officers responsible for approving credit assessments. More experienced loan officers inflate those parameters of a credit rating which are least likely to be corrected by credit officers. Our analysis is based on administrative data covering 10,568 internal ratings for 3,661 small business clients at 6 retail banks. Our results provide empirical support to theories suggesting that internal control can induce strategic communication of information in organizations when decision proposers and decision makers have diverging interests. Our findings also point to the limits of the four-eyes principle as a risk-management tool in financial institutions.
    Keywords: Four-Eyes Principle, Authority, Information, Small Business Lending
    JEL: D23 G21 G34 L20 M2
    Date: 2015–02
  7. By: Marta Gómez-Puig (Faculty of Economics, University of Barcelona); Simón Sosvilla-Rivero (Universidad Complutense de Madrid); Manish K. Singh (Faculty of Economics, University of Barcelona)
    Abstract: This study attempts to identify and trace inter-linkages between sovereign and banking risk in the euro area. To this end, we use an indicator of banking risk in each country based on the Contingent Claim Analysis literature, and 10-year government yield spreads over Germany as a measure of sovereign risk. We apply a dynamic approach to testing for Granger causality between the two measures of risk in 10 euro area countries, allowing us to check for contagion in the form of a significant and abrupt increase in short-run causal linkages. The empirical results indicate that episodes of contagion vary considerably in both directions over time and within the different EMU countries. Significantly, we find that causal linkages tend to strengthen particularly at the time of major financial crises. The empirical evidence suggests the presence of contagion, mainly from banks to sovereigns.
    Keywords: sovereign debt crisis, banking crisis, Granger-causality, time-varying approach, “distance-to-default”, euro area. JEL classification: C22, E44, G01, G13, G21
    Date: 2015–01
  8. By: Crawford, Gregory S; Pavanini, Nicola; Schivardi, Fabiano
    Abstract: We measure the consequences of asymmetric information and imperfect competition in the Italian market for small business lines of credit. We provide evidence that a bank’s optimal price response to an increase in adverse selection varies depending on the degree of competition in its local market. More adverse selection causes prices to increase in competitive markets, but can have the opposite effect in more concentrated ones, where banks trade off higher markups and the desire to attract safer borrowers. This implies both that imperfect competition can moderate the welfare losses from an increase in adverse selection, and that an increase in adverse selection can moderate the welfare losses from market power. Exploiting detailed data on a representative sample of Italian firms, the population of medium and large Italian banks, individual lines of credit between them, and subsequent defaults, we estimate models of demand for credit, loan pricing, loan use, and firm default to measure the extent and consequences of asymmetric information in this market. While our data include a measure of observable credit risk available to a bank during the application process, we allow firms to have private information about the underlying riskiness of their project. This riskiness influences banks’ pricing of loans as higher interest rates attract a riskier pool of borrowers, increasing aggregate default probabilities. We find evidence of adverse selection in the data, and increase it with a policy experiment to evaluate its importance. As predicted, in the counterfactual equilibrium prices rise in more competitive markets and decline in more concentrated ones, where we also observe an increase in access to credit and a reduction in default rates. Thus market power may serve as a shield against the negative effects of an increase in adverse selection.
    Keywords: assymetric information; credit markets; imperfect competition; lending markets
    JEL: G14 G21 L13
    Date: 2015–03
  9. By: Aldasoro, Iñaki; Delli Gatti, Domenico; Faia, Ester
    Abstract: We present a network model of the interbank market in which optimizing risk averse banks lend to each other and invest in non-liquid assets. Market clearing takes place through a tâtonnement process which yields the equilibrium price, while traded quantities are determined by means of a matching algorithm. We compare three alternative matching algorithms: maximum entropy, closest matching and random matching. Contagion occurs through liquidity hoarding, interbank interlinkages and fire sale externalities. The resulting network configurations exhibits a core-periphery structure, dis-assortative behavior and low clustering coefficient. We measure systemic importance by means of network centrality and input-output metrics and the contribution of systemic risk by means of Shapley values. Within this framework we analyze the effects of prudential policies on the stability/efficiency trade-off. Liquidity requirements unequivocally decrease systemic risk but at the cost of lower efficiency (measured by aggregate investment in non-liquid assets); equity requirements tend to reduce risk (hence increase stability) without reducing significantly overall investment.
    Keywords: banking networks,centrality metrics,systemic risk
    Date: 2015
  10. By: Cenkhan Sahin; Jakob de Haan
    Abstract: Using an event study approach, we examine financial markets' reactions to the publication of the ECB's Comprehensive Assessment of banks in the euro area. Our results suggest that banks' stock market prices and CDS spreads generally did not react to the publication of the results of the Comprehensive Assessment. This conclusion also holds for banks with a capital shortfall. Only for banks in some countries do we find weak evidence for (mixed) effects on stock prices, while CDS spreads for German banks declined.
    Keywords: ECB Comprehensive Assessment; stress tests; bank equity returns; CDS Spreads
    JEL: G21 G28
    Date: 2015–02
  11. By: Deev, Oleg; Hodula, Martin
    Abstract: In this paper we investigate the interdependence of the sovereign default risk and banking system fragility in two major emerging markets, China and Russia, using credit default swaps as a proxy for default risk. Both countries’ banking industries have strong ties with their governments and public sector, even after a series of significant reforms in the last two decades. Our analysis is built on the case studies of each country’s two biggest banks. We employ bivariate vector autoregressive (VAR) and vector error correction (VECM) framework to analyse the short- and long-run dynamics of the chosen CDS prices. We use Granger causality to describe the direction of the discovered dynamics. We find evidence of a stable long-run relationship between sovereign and bank CDS spreads in the chosen time period. The more stable relationship is found in cases, where biggest state-owned universal banks in emerging markets are closely managed by the government. But the fragility of those banks does not directly affect the state of public finance. However, in cases, where state-owned banks directly participate in large governmental projects, the banking fragility may result in deteriorations of state funds, while raising the risk of sovereign default.
    Keywords: sovereign default risk, bank default risk, CDS, emerging markets, risk transfer, financial stability
    JEL: G18 G21
    Date: 2014–12
  12. By: Daisy J. Huang; Charles Ka Yui Leung; Baozhi Qu
    Abstract: Based on Chinese city-level data from 1999 to 2012 and controlling for geological, environmental, and social diversity, this study suggests that credit plays a significant role in driving up house prices after the Great Recession, whereas property prices only influence bank lending before 2008. Local amenities such as higher education, green infrastructure, healthcare, and climate also positively affect house prices. Moreover, the impacts of bank loans on housing prices tend to be related to the level of amenities, suggesting an integrated approach (i.e. combining macroeconomic and urban economic variables) of housing market for the future research.
    Date: 2015–03
  13. By: Favara, Giovanni; Giannetti, Mariassunta
    Abstract: We provide evidence that lenders differ in their ex post incentives to internalize price-default externalities associated with the liquidation of collateralized debt. Using the mortgage market as a laboratory, we conjecture that lenders with a large share of outstanding mortgages on their balance sheets internalize the negative spillovers associated with the liquidation of defaulting mortgages and are thus less inclined to foreclose. We find that zip codes with higher concentration of outstanding mortgages experience fewer foreclosures, more renegotiations of delinquent mortgages, and smaller house prices declines. These results are not driven by prior local economic conditions, mortgage securitization or unobservable lender characteristics.
    Keywords: bank concentration; fire sales; foreclosures; house prices
    JEL: G01 G21 R31 R38
    Date: 2015–03
  14. By: Jacinta C. Nwachukwu (University of Huddersfield, UK); Simplice Asongu (Yaoundé/Cameroun)
    Abstract: This study investigates the legitimacy of the relatively high interest rates charged by those microfinance institutions (MFIs) which have been transformed into regulated commercial banks using information garnered from a panel of 1232 MFIs from 107 developing countries. Results show that formally regulated micro banks have significantly higher average portfolio yields than their unregulated counterparts. By contrast, large-scale MFIs with more than eight years of experience have succeeded in lowering interest rates, but only up to a certain cut-off point. The implication is that policies which help nascent small-scale MFIs to overcome their cost disadvantages form a more effective pricing strategy than do initiatives to transform them into regulated institutions.
    Keywords: Microfinance, microbanks, non-bank financial institutions, interest rates, age, economies of scale, developing countries
    JEL: G21 G23 G28 E43 N20
    Date: 2015–02
  15. By: Bircan, Cagatay; de Haas, R. (Tilburg University, Center For Economic Research)
    Abstract: We exploit historical and contemporaneous variation in local credit markets across Russia to identify the impact of credit constraints on firm-level innovation. We find that access to bank credit helps firms to adopt existing products and production processes that are new to them. They introduce these technologies either with the help of suppliers and clients or by acquiring external know-how. We find no evidence that bank credit also stimulates firm innovation through in-house R&D. This suggests that banks can facilitate the discussion of technologies within developing countries but that their role in pushing the technological frontier is limited.
    Keywords: Credit Constraints; firn innovation; technological change
    JEL: D22 G21 O12 O31
    Date: 2015
  16. By: Sophia Dimelis; Ioannis Giotopoulos; Helen Louri
    Abstract: This paper explores the effects of bank credit on firm growth before and after the recent financial crisis, taking into account different structural characteristics of banking sectors and domestic economies. Panel quantile analysis is used on a sample of 2075 euro area firms in 2005-2011. The post-2008 credit crunch is found to seriously affect only small, slow-growth firms and especially those operating in concentrated and domestic-dominated banking systems, and in riskier and less financially developed economies. Large, high-growth firms seem to be able to find alternative financial sources and, thus, may act as carriers and facilitators of a credit-less recovery.
    Keywords: credit crunch; firm growth; credit-less recovery; financial crisis; panel quantile regressions
    JEL: E51 L1 L25
    Date: 2015–02
  17. By: Goldstein, Itay (The Wharton School of the University of Pennsylvania); Leitner, Yaron (Federal Reserve Bank of Philadelphia)
    Abstract: Supersedes Working Paper 13-26<p>. We study an optimal disclosure policy of a regulator that has information about banks’ ability to overcome future liquidity shocks. We focus on the following tradeoff: Disclosing some information may be necessary to prevent a market breakdown, but disclosing too much information destroys risk-sharing opportunities (the Hirshleifer effect). We find that during normal times, no disclosure is optimal, but during bad times, partial disclosure is optimal. We characterize the optimal form of this partial disclosure. We relate our results to the Bayesian persuasion literature and to the debate on disclosure of stress test results.
    Keywords: Bayesian persuasion; Optimal disclosure; Stress tests
    Date: 2015–02–18
  18. By: Antonio Rubia Serrano (Universidad de Alicante); Lidia Sanchis-Marco (Dpto. Análisis Económico y Finanzas)
    Abstract: In this paper we analyze the state-dependent risk-spillover in different economic areas. To this end, weapply the quantile regression-based methodology developed in Adams, Füss and Gropp (2014)approach to examine the spillover in conditional tails of daily returns of indices of the banking industryin the US, BRICs, Peripheral EMU, Core EMU, Scandinavia, the UK and Emerging Markets. Thismethodology allows us to characterize size, direction and strength of financial contagion in a networkof bilateral exposures to address cross-border vulnerabilities under different states of the economy. Thegeneral evidence shows as the spillover effects are higher and more significant in volatile periods thanin tranquil ones. There is evidence of tail spillovers of which much is attributable to a spillover from theUS on the rest of the analyzed regions, especially on European countries. In sharp contrast, the USbanking system shows more financial resilience against foreign shocks.
    Keywords: Spillover effects, Bank contagion, SDSVaR, Expected Shortfall, VaR, Expectiles.
    JEL: C23 G15 Q43
    Date: 2015–02
  19. By: Bos, Jaap W.B. (Maastricht University School of Business and Economics); van Santen, Peter C. (Research Department, Central Bank of Sweden)
    Abstract: To what extent has input reallocation contributed to aggregate productivity growth in the banking sectors of Europe and the United States? Interestingly, under-performing banks capture market share, while more productive banks lose market share, in particular in the US. The pattern of reallocation is markedly different between the geographical regions: European productivity has grown by reallocating inputs through the first half of the sample period, at the same time when reallocation diminished growth in the US. The long-run positive effects of creative destruction are especially apparent in the US, where reallocation is an important driver of increases in productivity.
    Keywords: reallocation; productivity growth; efficiency; banking
    JEL: C24 D24 O30 O47
    Date: 2015–02–01
  20. By: Gurrola-Perez, Pedro (Bank of England); Murphy, David (Bank of England)
    Abstract: Financial institutions have for many years sought measures which cogently summarise the diverse market risks in portfolios of financial instruments. This quest led institutions to develop Value-at-Risk (VaR) models for their trading portfolios in the 1990s. Subsequently, so-called filtered historical simulation VaR models have become popular tools due to their ability to incorporate information on recent market returns and thus produce risk estimates conditional on them. These estimates are often superior to the unconditional ones produced by the first generation of VaR models. This paper explores the properties of various filtered historical simulation models. We explain how these models are constructed and illustrate their performance, examining in particular how filtering transforms various properties of return distribution. The procyclicality of filtered historical simulation models is also discussed and compared to that of unfiltered VaR. A key consideration in the design of risk management models is whether the model’s purpose is simply to estimate some percentile of the return distribution, or whether its aims are broader. We discuss this question and relate it to the design of the model testing framework. Finally, we discuss some recent developments in the filtered historical simulation paradigm and draw some conclusions about the use of models in this tradition for the estimation of initial margin requirements.
    Keywords: Value-at-Risk; filtered historical simulation; conditional volatility; volatility scaling; risk model backtesting
    JEL: C58 G18 G32
    Date: 2015–03–06

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