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on Banking |
| By: | Stefano Puddu (Institute of economic research IRENE, Faculty of Economics, University of Neuchâtel, Switzerland); Andreas Waelchli (Studienzentrum Gerzensee (Study Center Gerzensee), Schweizerische Nationalbank (SNB) (Swiss National Bank); Department of Econometrics and Political Economy DEEP, Faculty of Economics, University of Lausanne, Switzerland) |
| Abstract: | Using a unique data set based on US commercial banks and county level loan origination for the period 2005-2010, we measure whether banks that benefited from the Troubled Asset Relief Program (TARP) increase small business loan originations. We propose an identification strategy which exploits the ownership structureof bank holding companies. We find that TARP banks provide on average 19% higher small business loan originations than NO TARP banks. The disaggregated data allows us to control for the potential demand side effects. When considering poverty and unemployment rates at a county level we show that TARP is effective only in counties suffering from unemployment. Several robustness checks confirm the main result. |
| Keywords: | TARP, Financial Crisis, Loan provision |
| JEL: | C23 E58 G21 G28 |
| URL: | http://d.repec.org/n?u=RePEc:irn:wpaper:15-06&r=ban |
| By: | Paul Glasserman (Columbia Business School, Columbia University); Peyton Young (Office of Financial Research) |
| Abstract: | Interconnections among financial institutions create potential channels for contagion and amplification of shocks to the financial system. We estimate the extent to which interconnections increase expected losses, with minimal information about network topology, under a wide range of shock distributions. Expected losses from network effects are small without substantial heterogeneity in bank sizes and a high degree of reliance on interbank funding. They are also small unless shocks are magnified by some mechanism beyond simple spillover effects; these include bankruptcy costs, fire sales, and mark-to-market revaluations of assets. We illustrate the results with data on the European banking system. |
| Keywords: | systemic risk, contagion, financial network |
| JEL: | D85 G21 |
| Date: | 2013–06–21 |
| URL: | http://d.repec.org/n?u=RePEc:ofr:wpaper:13-06&r=ban |
| By: | Francesco Aiello; Graziella Bonanno (Dipartimento di Economia, Statistica e Finanza, Università della Calabria) |
| Abstract: | Banking is increasingly a-spatial. However, the environment matters for small banks. Indeed, they are embedded in narrowed markets and hence benefit from proximity to their member-customers. By referring to multilevel approach, this article aims at measuring how much the performance of Italian mutual-cooperative banks is determined by both geographical (provincial level) and individual characteristics (small bank level). The effect of local markets explains 28.27% of bank heterogeneity in the empty multilevel model and 33% in the most extended model. Moreover, it is found that bank efficiency increases with market concentration and demand density and decreases with branching in local markets. |
| Keywords: | Multilevel model, mutual-cooperative banks, local markets, cost efficiency |
| JEL: | G21 C13 D00 R19 |
| Date: | 2015–05 |
| URL: | http://d.repec.org/n?u=RePEc:clb:wpaper:201503&r=ban |
| By: | Fabia A. de Carvalho; Marcos R. Castro |
| Abstract: | We investigate the transmission channel of reserve requirements, capital requirements, and risk weights of different types of credit in the computation of capital adequacy ratios and compare the power of each macroprudential instrument to counteract the impact of domestic and international shocks that potentially challenge financial stability. To this end, we model a small open economy that receives inflows of foreign direct investment, foreign portfolio investment, and issues foreign debt. The central bank manages international reserves, with an impact on the foreign exchange market and on the country risk premium. Shocks in international markets affect domestic credit even though foreign capital flows are directly destined to non-financial institutions. Banks operate in four distinct credit markets: consumer, housing and commercial– each of them facing default risk and having specific borrowing constraints– and safe export-related credit lines in the form of working capital loans to exporters. Consumer loans are granted based on banks’ expectations with respect to borrowers’ future labor income net of senior debt services. Banks optimize their balance sheet allocation facing frictions intended to reproduce banks’ incentives given regulatory constraints. The model is estimated with Bayesian techniques using data from Brazil |
| Date: | 2015–05 |
| URL: | http://d.repec.org/n?u=RePEc:bcb:wpaper:387&r=ban |
| By: | Barbara Fidanza (University of Macerata); Ottorino Morresi (Roma Tre University) |
| Abstract: | The Fama-French three-factor model (Fama and French, 1993) has been subject to extensive testing on samples of US and European non-financial firms over several time windows. The most accepted evidence is that size premium and value premium as well as market risk premium help explain time-series changes in stock returns. However, scholars have always paid little attention to the financial industry because of the intrinsic differences between financial and non-financial firms. The few studies that have tested the model on financial firms have found mixed evidence regarding the role of size and the book-to-market ratio in explaining stock returns. We find, on a sample of European banks, that size and book-to-market (B/M) ratio seem to be sources of undiversifiable risks and should therefore be included as risk premiums for estimating the expected returns of financial firms. Small and high-B/M banks seem to be more risky. Smaller banks are not systemically important financial institutions and therefore do not benefit from government protection. High-B/M banks are likely to be unprofitable, without growth opportunities, and close to financial distress. |
| Keywords: | Book-to-market ratio,Financial firm,Firm size,Asset pricing |
| JEL: | G12 G21 G3 |
| Date: | 2015–05 |
| URL: | http://d.repec.org/n?u=RePEc:mcr:wpaper:wpaper00047&r=ban |
| By: | Calabia, F. Christopher (Federal Reserve Bank of New York) |
| Abstract: | Remarks at the Community Bankers’ Conference, Federal Reserve Bank of New York, New York City |
| Keywords: | Community Depository Institutions Advisory Council (CDIAC); Daniel Tarullo; Regional Community and Foreign Institutions Supervision and Consumer Compliance Function (RCFI); risk-focused supervision; credit risk |
| JEL: | G21 |
| Date: | 2015–05–14 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsp:170&r=ban |
| By: | Lotz, Sebastien; Zhang, Cathy |
| Abstract: | This paper studies the choice of payment instruments in a simple model where both money and credit can be used as means of payment. We endogenize the acceptability of credit by allowing retailers to invest in a costly record-keeping technology. Our framework captures the two-sided market interaction between consumers and retailers, leading to strategic complementarities that can generate multiple steady-state equilibria. In addition, limited commitment makes debt contracts self-enforcing and yields an endogenous upper bound on credit use. So long as record-keeping is imperfect, money and credit coexist for a range of nominal interest rates. Our model captures the dependence of debt limits on monetary policy and explains how hold-up problems in technological adoption prevent retailers from accepting credit as consumers continue to coordinate on cash usage. With limited commitment, changes in monetary policy generate multiplier effects in the credit market due to complementarities between consumer borrowing and the adoption of credit by merchants. |
| Keywords: | money and credit, limited commitment, endogenous record-keeping |
| JEL: | E41 E51 |
| Date: | 2015–05 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:64535&r=ban |
| By: | Robert Engle (New York University Stern School of Business); Emil Siriwardane (Office of Financial Research) |
| Abstract: | We propose a new model of volatility where financial leverage amplifies equity volatility by what we call the "leverage multiplier." The exact specification is motivated by standard structural models of credit; however, our parametrization departs from the classic Merton (1974) model and can accommodate environments where the firm's asset volatility is stochastic, asset returns can jump, and asset shocks are nonnormal. In addition, our specification nests both a standard GARCH and the Merton model, which allows for a statistical test of how leverage interacts with equity volatility. Empirically, the Structural GARCH model outperforms a standard asymmetric GARCH model for approximately 74 percent of the financial firms we analyze. We then apply the Structural GARCH model to two empirical applications: the leverage effect and systemic risk measurement. As a part of our systemic risk analysis, we define a new measure called "precautionary capital" that uses our model to quantify the advantages of regulation aimed at reducing financial firm leverage. |
| Keywords: | Structural GARCH, Volatility, Leverage |
| Date: | 2014–10–23 |
| URL: | http://d.repec.org/n?u=RePEc:ofr:wpaper:14-07&r=ban |
| By: | Richard Bookstaber (Office of Financial Research); Paul Glasserman (Office of Financial Research); Garud Iyengar (Columbia University); Yu Luo (Columbia University); Venkat Venkatasubramanian (Columbia University); Zhizun Zhang (Columbia University) |
| Abstract: | Financial instability often results from positive feedback loops intrinsic to the operation of the financial system. The challenging task of identifying, modeling, and analyzing the causes and effects of such feedback loops requires a proper systems engineering perspective lacking in the remedies proposed in recent literature. We propose that signed directed graphs (SDG), a modeling methodology extensively used in process systems engineering, is a useful framework to address this challenge. The SDG framework is able to represent and reveal information missed by more traditional network models of financial system. This framework adds crucial information to a network model about the direction of influence and control between nodes, providing a tool for analyzing the potential hazards and instabilities in the system. This paper also discusses how the SDG framework can facilitate the automation of the identification and monitoring of potential vulnerabilities, illustrated with an example of a bank/dealer case study. |
| Keywords: | Process Systems Engineering, Systemic Risk, Financial Networks |
| Date: | 2015–02–11 |
| URL: | http://d.repec.org/n?u=RePEc:ofr:wpaper:15-01&r=ban |
| By: | Meraj Allahrakha (Office of Financial Research); Paul Glasserman (Office of Financial Research); Peyton Young (Office of Financial Research) |
| Abstract: | The authors used a new dataset collected by the Federal Reserve System to evaluate the systemic importance of the largest U.S. bank holding companies by comparing their scores on size, interconnectedness, complexity, global activity, and dominance in certain customer services (known as "substitutability"). They also applied an OFR financial connectivity index to the data to measure interconnectedness. Overall, the analysis reinforces the need for measuring, monitoring, and evaluating multiple aspects of systemic importance. |
| Keywords: | Systemic Importance, Bank Holding Companies |
| Date: | 2015–02–12 |
| URL: | http://d.repec.org/n?u=RePEc:ofr:briefs:15-01&r=ban |
| By: | Siakoulis, Vasilios |
| Abstract: | This paper employs a duration based approach in order to model the inter-arrival times of bank failures in the US banking system for the period 1934 - 2014. Conditional duration models that allow duration between bank failures to depend linearly or nonlinearly on its past history are estimated and evaluated. We find evidence of strong persistence along with non-monotonic hazard rates which imply a financial contagion pattern according to which, a high frequency of bank failures generates turbulence which shortly after leads to additional fails, whereas prolonged periods without abnormal events signify the absence of contagious dependence which increases the relative periods between bank failure appearance. In addition, we find that mean duration levels of tranquility spells or equivalently the bank fail events intensity is subject to long run shifts. Further, we obtain statistical significant results when we allow duration to depend linearly on past information variables that capture systemic bank crisis factors along with stock and bond market effects. |
| Keywords: | Autoregressive Conditional Duration; Bank Failures; Financial Contagion; Structural breaks |
| JEL: | C22 C41 G01 G12 |
| Date: | 2015–05–21 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:64526&r=ban |
| By: | Zoltan Pozsar (Office of Financial Research) |
| Abstract: | This paper presents an accounting framework for measuring the sources and uses of short-term funding in the global financial ecosystem. We introduce a dynamic map of global funding flows to show how dealer banks emerged as intermediaries between two types of asset managers: cash pools searching for safety via collateralized cash investments and levered portfolio managers searching for yield via funded securities portfolios and derivatives. We argue that the monetary aggregates (M0, M1, M2, etc.) and the Financial Accounts of the United States (formerly the Flow of Funds) do not adequately reflect the institutional realities of the modern financial ecosystem, and should be updated to allow policymakers to better analyze and monitor the shadow banking system and its potential contributions to financial instability. The monetary aggregates, used mainly to inform the aggregate demand management aspects of monetary policy, do not include the instruments that asset managers use as money, particularly repos. Asset managers' money demand is not driven by transaction needs in the real economy but in the financial economy: in this sense, repo-based money dealing activities in the shadow banking system are about the provision of working capital for asset managers, much like real bills provided working capital for merchants and manufacturers in Bagehot's world over 150 years ago. These developments should be systematically captured in a new set of Flow of Collateral, Flow of Risk and Flow of Eurodollar satellite accounts to supplement the Financial Accounts. The accounting framework presented with this paper also explains how the Federal Reserve's reverse repo facility helps reduce interconnections within the financial system and how they could evolve into minimum liquidity requirements for shadow banks and a tool to control market-based credit cycles. The global macro drivers behind the secular rise of cash pools and leveraged portfolio managers in the asset management complex are identical with the real economy drivers behind the idea of secular stagnation. As such, one way to interpret shadow banking is as the financial economy reflection of real economy imbalances caused by excess global savings, slowing potential growth, and the rising share of corporate profits relative to wages in national income. |
| Keywords: | Shadow Banking |
| Date: | 2014–07–02 |
| URL: | http://d.repec.org/n?u=RePEc:ofr:wpaper:14-04&r=ban |
| By: | Lopez, Claude; Markwardt, Donald; Savard, Keith |
| Abstract: | As many central banks contemplate the normalization of monetary policy, their focus is turning to the promise of macroprudential policy as a tool to manage possible future systemic risk in financial markets. Janet Yellen and Mario Draghi, among others, are pinning much of their hopes for managing financial stability in the context of Basel III on macroprudentialism. Despite central banks’ clear intention that this policy will play a significant role in developed economies, few policymakers or financial players know what macroprudential policy is, much less how to assess its efficacy or necessity. Our report aims to clarify the concept of macroprudential policy for a broader audience, cultivating a better understanding of these tools and their implications for broader monetary policy going forward. The report also advocates the use of more refined indicators for financial cycles as benchmarks for policy discussions on macroprudential policy. |
| Keywords: | macroprudential policy, non-core liabilities, Basel III |
| JEL: | E6 F3 |
| Date: | 2015–05 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:64499&r=ban |
| By: | Dominique Guegan (Centre d'Economie de la Sorbonne); Bertrand K Hassani (Grupo Santander et Centre d'Economie de la Sorbonne) |
| Abstract: | This paper discusses the regulatory requirement (Basel Committee, ECB-SSM and EBA) to measure financial institutions' major risks, for instance Market, Credit and Operational, regarding the choice of the risk measures, the choice of the distributions used to model them and the level of confidence. We highlight and illustrate the paradoxes and the issues observed implementing an approach over another and the inconsistencies between the methodologies suggested and the goal to achieve. This paper make some recommendations to the supervisor and proposes alternative procedures to measure the risks |
| Keywords: | Risk measures; Sub-additivity; Level of confidence; Extreme value distributions; Financial regulation |
| JEL: | C1 C6 |
| Date: | 2015–05 |
| URL: | http://d.repec.org/n?u=RePEc:mse:cesdoc:15046&r=ban |
| By: | Dirk Schoenmaker (Faculty of Economics and Business Administration, VU University Amsterdam, Duisenberg school of finance, the Netherlands); Peter Wierts (Duisenberg school of finance, the Netherlands) |
| Abstract: | We propose a regulatory approach for restricting debt financing as an amplification mechanism across the financial system. A small stylised model illustrates the trade-off between static and time varying limits on leverage in dampening the financial cycle. The policy section proposes its application to highly leveraged entities and activities across the financial system. Whereas the traditional view on regulation focuses on capital as a buffer against exogenous risks, our approach focuses instead on debt financing, endogenous feedback mechanisms and resource allocation. It explicitly addresses the boundary problem in entity-based financial regulation and provides a motivation for substantially lower levels of leverage – and thereby higher capital buffers – than in the traditional approach. |
| Keywords: | Financial cycle; macroprudential regulation; financial supervision; (shadow) banking |
| JEL: | E58 G10 G18 G20 |
| Date: | 2015–05–18 |
| URL: | http://d.repec.org/n?u=RePEc:tin:wpaper:20150057&r=ban |
| By: | Chia-Lin Chang (National Chung Hsing University, Taichung, Taiwan); Juan-Ángel Jiménez-Martín (Complutense University of Madrid, Spain); Esfandiar Maasoumi (Emory University, United States); Michael McAleer (National Tsing Hua University, Taiwan, Erasmus School of Economics, Erasmus University Rotterdam,Tinbergen Institute, The Netherlands, Complutense University of Madrid, Spain); Teodosio Pérez-Amaral (Complutense University of Madrid, Spain) |
| Abstract: | The Basel Committee on Banking Supervision (BCBS) (2013) recently proposed shifting the quantitative risk metrics system from Value-at-Risk (VaR) to Expected Shortfall (ES). The BCBS (2013) noted that “a number of weaknesses have been identified with using VaR for determining regulatory capital requirements, including its inability to capture tail risk” (p. 3). For this reason, the Basel Committee is considering the use of ES, which is a coherent risk measure and has already become common in the insurance industry, though not yet in the banking industry. While ES is mathematically superior to VaR in that it does not show “tail risk” and is a coherent risk measure in being subadditive, its practical implementation and large calculation requirements may pose operational challenges to financial firms. Moreover, previous empirical findings based only on means and standard deviations suggested that VaR and ES were very similar in most practical cases, while ES could be less precise because of its larger variance. In this paper we find that ES is computationally feasible using personal computers and, contrary to previous research, it is shown that there is a stochastic difference between the 97.5% ES and 99% VaR. In the Gaussian case, they are similar but not equal, while in other cases they can differ substantially: in fat-tailed conditional distributions, on the one hand, 97.5%-ES would imply higher risk forecasts, while on the other, it provides a smaller down-side risk than using the 99%-VaR. It is found that the empirical results in the paper generally support the proposals of the Basel Committee. |
| Keywords: | Stochastic dominance; Value-at-Risk; Expected Shortfall; Optimizing strategy; Basel III Accord |
| JEL: | C53 C22 G32 G11 G17 |
| Date: | 2015–05–18 |
| URL: | http://d.repec.org/n?u=RePEc:tin:wpaper:20150056&r=ban |
| By: | RACHDI, Houssem; Hakimi, Abdelaziz; Hamdi, Helmi |
| Abstract: | The main purpose of this study is to investigate the interaction between financial liberalization, banking crisis and economic growth by taking into consideration the role of institutions. Our sample covers ten Middle East and North African (MENA henceforth) observed during the period 1990-2013. Using a dynamic panel data framework, our findings reveal that financial liberalization increases the likelihood of systemic banking crisis at the initial stages of financial reform, but there is a threshold level after which financial liberalization can have a positive impact on economic growth by reducing the probability of crisis. The results also suggest that all indicators of institutions play a less significant role in economic growth. |
| Keywords: | Economic growth, financial liberalization, institutions and MENA countries |
| JEL: | E44 F36 G21 G28 |
| Date: | 2015–05–23 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:64562&r=ban |
| By: | Mark D. Flood (Office of Financial Research); Victoria L. Lemieux (University of British Columbia); Margaret Varga (University of Oxford); B.L. William Wong (Middlesex University) |
| Abstract: | This paper provides an overview of visual analytics -- the science of analytical reasoning enhanced by interactive visualizations tightly coupled with data analytics software -- and discusses its potential benefits in monitoring systemic financial stability. Macroprudential supervisors face a daunting challenge with at least three facets of the financial system. First, the financial system is complex, enormous, highly diverse, and constantly changing. Second, the set of financial and econometric models proposed to help comprehend threats to financial stability is large, diverse, and growing. Third, certain regulatory activities, such as rulemaking and decision-making, generate special requirements for transparency and accountability that can complicate or restrict the choices of tools and approaches. This paper explores these challenges in the context of visual analytics. Visual analytics can increase supervisors' comprehension of the data stream, helping to transform it into actionable knowledge to support decision- and policy-making. The paper concludes with suggestions for a research agenda. |
| Keywords: | Financial stability, macroprudential supervision, monitoring, systemic risk, visual analytics |
| Date: | 2014–05–09 |
| URL: | http://d.repec.org/n?u=RePEc:ofr:wpaper:14-02&r=ban |
| By: | Rick Bookstaber (Office of Financial Research); Jill Cetina (Office of Financial Research); Greg Feldberg (Office of Financial Research); Mark Flood (Office of Financial Research); Paul Glasserman (Columbia Business School, Columbia University) |
| Abstract: | Stress testing, which has its roots in risk management, should be adapted to support financial stability monitoring and to incorporate the interconnections and dynamics of the financial system. Since the 2008 financial crisis, bank supervisors have honed their financial stability monitoring tools and significantly expanded the use of stress testing in the supervision of the largest financial institutions. This article describes areas in which further research could contribute to the development of best practices in stress testing and how bank supervisory stress tests can be made more useful for macroprudential supervision. We discuss both near-term and longer-term objectives. |
| Keywords: | Stress Tests, Financial Stability |
| Date: | 2013–07–18 |
| URL: | http://d.repec.org/n?u=RePEc:ofr:wpaper:13-07&r=ban |