nep-ban New Economics Papers
on Banking
Issue of 2015‒06‒05
fifteen papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. The role of investment banking in systemic risk profiles. Evidence from a panel of EU banking sectors By Renata Karkowska
  2. Does Loan Maturity Matter in Risk-Based Pricing? Evidence from Consumer Loan Data By Gabriela Kuvikova
  3. The Bank Capital Regulation (BCR) Model By Hyejin Cho
  4. Banks are not intermediaries of loanable funds – and why this matters By Jakab, Zoltan; Kumhof, Michael
  5. Did the Financial Reforms of the Early 1990s Fail? A Comparison of Bank Failures and FDIC Losses in the 1986-92 and 2007-13 Periods By Balla, Eliana; Prescott, Edward Simpson; Walter, John R.
  6. The 2012 Eurozone Crisis and the ECB’s OMT Program: A Debt-Overhang Banking and Sovereign Crisis Interpretation The 2012 Eurozone Crisis and the ECB’s OMT Program: A Debt-Overhang Banking and Sovereign Crisis Interpretation By Occhino, Filippo
  7. Do bank loans and local amenities explain Chinese urban house prices? By Huang, Daisy J.; Leung, Charles Ka Yui; Qu, Baozhi
  8. Interest rates, money, and banks in an estimated euro area model By Christoffel, Kai; Schabert, Andreas
  9. Repaying Microcredit Loans: A Natural Experiment on Liability Structure By Mahreen Mahmud
  10. Ending over-lending: assessing systemic risk with debt to cash flow By Ramsay, Bruce A.; Sarlin, Peter
  11. Leading indicators of systemic banking crises: Finland in a panel of EU countries By Laina, Patrizio; Nyholm, Juho; Sarlin, Peter
  12. Policy mandates for macro-prudential and monetary policies in a new Keynesian framework By Levine, Paul; Lima, Diana
  13. Invariance, existence and uniqueness of solutions of nonlinear valuation PDEs and FBSDEs inclusive of credit risk, collateral and funding costs By Damiano Brigo; Marco Francischello; Andrea Pallavicini
  14. Financal frictions and policy cooperation: a case with monopolistic banking and staggered loan contracts By Fujiwara, Ippei; Teranishi, Yuki
  15. Credit segmentation in general equilibrium By Sebastián Cea-Echenique; Juan Pablo Torres-Martínez

  1. By: Renata Karkowska (University of Warsaw, Faculty of Management)
    Abstract: The goal of this study is to identify empirically how non-traditional activities affect directly the risk profiles and profitability of the banking sector. Through a dataset that covers 2678 European banks spanning the period 1996–2011 and the methodology of panel regression, the empirical findings document that investment banks have a negative effect on systemic risk in the banking sector. To show the heterogeneity of systemic risk determinants, the study sample was divided according to the economic development of a country into two groups: advanced and developing countries. We examine the implications of banks’ activity and risk-taking that manifest themselves as spreading and growing instability in the banking system. Then we explore the implications of the interaction between banking risk and structural, macroeconomic and financial market determinants. The findings have implications for both bank risk management and regulators. This paper advances the agenda of making macroprudential policy operational.
    Keywords: systemic risk, investment banking, emerging markets, credit risk, liquidity, bank solvency, instability
    JEL: F36 G21 G32 G33
    Date: 2015–05
  2. By: Gabriela Kuvikova
    Abstract: This paper investigates the role of loan contract terms in the performance of consumer credit. Taking advantage of a sample of accepted and rejected consumer loans from a Czech commercial bank, I estimate the elasticity of loan demand and find that borrowers with a high probability of default are more responsive to maturity than interest rate changes. I also argue that risk-based pricing may lead to an increase in loan maturity and loan default, rather than alleviating the adverse selection present on the lending market. Empirical evidence suggests that loan performance is time-dependent and default depends on the choice of loan duration.
    Keywords: credit scoring; consumer loans, asymmetric information
    JEL: D12 D14 D82 G21
    Date: 2015–04
  3. By: Hyejin Cho (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS)
    Abstract: The motivation of this article is to induce the bank capital management solution for banks and regulation bodies on commercial banks. The goal of the paper is intended to mitigate the risk of a banking area and also provide the right incentive for banks to support the real economy.
    Date: 2014–09–22
  4. By: Jakab, Zoltan (International Monetary Fund); Kumhof, Michael (Bank of England)
    Abstract: In the intermediation of loanable funds model of banking, banks accept deposits of pre-existing real resources from savers and then lend them to borrowers. In the real world, banks provide financing through money creation. That is they create deposits of new money through lending, and in doing so are mainly constrained by profitability and solvency considerations. This paper contrasts simple intermediation and financing models of banking. Compared to otherwise identical intermediation models, and following identical shocks, financing models predict changes in bank lending that are far larger, happen much faster, and have much greater effects on the real economy.
    Keywords: Banks; financial intermediation; loanable funds; money creation; loans; deposits; leverage; spreads
    JEL: E44 E52 G21
    Date: 2015–05–29
  5. By: Balla, Eliana (Federal Reserve Bank of Richmond); Prescott, Edward Simpson (Federal Reserve Bank of Richmond); Walter, John R. (Federal Reserve Bank of Richmond)
    Abstract: Two of the most significant banking reforms to come out of the banking problems in the late 1980s and early 1990s were the increase in capital requirements from Basel 1 and the prompt corrective action (PCA) provisions of the Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA). The PCA provisions require regulators to shut down banks before book capital becomes negative. We compare failures and FDIC losses on commercial banks in the pre-FDICIA commercial bank crisis of the mid-1980s to early 1990s with that in the recent financial crisis. Using a sample of community and mid-sized banks, we find that almost all the same bank characteristics predict failure and high losses in the two crises. Our results imply that for these classes of banks, the two crises were very similar. We find that the failure rate in the recent period was driven more by severe economic conditions than by the increased concentrations in real estate lending. The analysis suggests that the combination of PCA with higher capital levels helped reduce failure rates in the recent period. In contrast, the analysis suggests that the reforms did not help with FDIC losses. FDIC losses on failed commercial banks were approximately 14% of failed bank assets over the 1986-92 period but increased to approximately 24% over the 2007-13 period. We find that the increased losses are not explained by variations in bank balance sheets or local economic conditions. Finally, we find that a discretionary accounting variable, interest accrued but not yet received, is predictive of both failure and higher FDIC losses.
    JEL: G21 G28
    Date: 2015–05–15
  6. By: Occhino, Filippo (Federal Reserve Bank of Cleveland)
    Abstract: This paper develops a model to interpret the 2012 eurozone crisis and the ECB’s policy response. In the model, bank lending is distorted by debt overhang, banks hold sovereign bonds, and the government guarantees the bailout of bank creditors. A self-fulfilling pessimistic view of the economy can trigger a banking and sovereign crisis: with pessimistic economic expectations, the value of sovereign bonds declines, the bank risk of default rises, and the debt overhang distortion worsens; this leads to a contraction in bank lending and to a decline in economic activity, which confi rms the initial pessimistic expectations. A commitment by the central bank to purchase the sovereign bonds at pre-crisis market spreads manages to eliminate the crisis equilibrium.
    Keywords: Debt overhang; multiple equilibria; self-fulfilling expectations; financial fragility; systemic risk
    JEL: G01
    Date: 2015–06–02
  7. By: Huang, Daisy J. (Hong Kong University of Science and Technology); Leung, Charles Ka Yui (City University of Hong Kong); Qu, Baozhi (China Merchants Group)
    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.
    JEL: G21 O18 R11
    Date: 2015–03–01
  8. By: Christoffel, Kai; Schabert, Andreas
    Abstract: This paper examines monetary transmission and macroeconomic shocks in a medium scale macroeconomic model with costly banking estimated for euro area data. In addition to data on measures of real activity and prices, we include data on bank loans, loan rates, and reserves for the estimation of the model with Bayesian techniques. We find that loans and holdings of reserves affect banking costs to a small but significant extent. Furthermore, shocks to reserve holdings are found to contribute more to variations in the policy rate, inflation and output than shocks to the feedback rule for the policy rate. Hence, holdings of central bank money, which is typically neglected in the literature, plays a substantial role for macroeconomics dynamics. The analysis further shows that exogenous shifts in banking costs hardly play a role for fluctuations in real activity and prices, even during the recent financial crisis. JEL Classification: C54, E52, E32
    Keywords: Bayesian estimation, central bank money supply, costly banking, financial shocks
    Date: 2015–05
  9. By: Mahreen Mahmud
    Abstract: Microcredit loans were traditionally extended to groups of people. However, there is no clear evidence that joint liability does lead to better borrower performance and recent years have seen a shift towards individual liability lending. Utilizing the exogenous shift from individual to joint liability lending by a microfinance organization in Pakistan, we find evidence of significant improvement in borrower discipline. Borrowers are about 0.6 times as likely to miss a payment in any given month under joint liability relative to individual liability. We also use the exogenous variation in number of months borrowers had till the expiry of their individual liability loans at the time of the shift to study the kind of groups they formed. More time that borrowers had, the more likely they were to form groups with people they knew from before and met weekly. The time that borrower had to form group also correlated positively with borrower discipline.
    Keywords: Microfinance; Group lending; Joint liability
    JEL: D71 D82 G21
    Date: 2015–05
  10. By: Ramsay, Bruce A.; Sarlin, Peter
    Abstract: This paper introduces the ratio of debt to cash flow (D/CF) of nations and their economic sectors to macroprudential analysis, particularly as an indicator of systemic risk and vulnerabilities. While leverage is oftentimes linked to the vulnerability of a nation, the stock of total debt and the flow of gross savings is a less explored measure. Cash flows certainly have a well-known connection to corporations' ability to service debt. This paper investigates whether the D/CF provides a means for understanding systemic risks. For a panel of 33 nations, we explore historic D/CF trends, and apply the same procedure to economic sectors. In terms of an early-warning indicator, we show that the D/CF ratio provides a useful additional measure of vulnerability to systemic banking and sovereign crises, relative to more conventional indicators. As a conceptual framework, the assessment of financial stability is arranged for presentation within four vulnerability zones, and exemplified with a number of illustrative case studies. JEL Classification: E21, F34, G01, H63
    Keywords: debt to cash flow, early-warning indicator, systemic risk, total debt to gross savings
    Date: 2015–03
  11. By: Laina, Patrizio; Nyholm, Juho; Sarlin, Peter
    Abstract: This paper investigates leading indicators of systemic banking crises in a panel of 11 EU countries, with a particular focus on Finland. We use quarterly data from 1980Q1 to 2013Q2, in order to create a large number of macro-financial indicators, as well as their various transformations. We make use of univariate signal extraction and multivariate logit analysis to assess what factors lead the occurrence of a crisis and with what horizon the indicators lead a crisis. We find that loans-to-deposits and house price growth are the best leading indicators. Growth rates and trend deviations of loan stock variables also yield useful signals of impending crises. While the optimal lead horizon is three years, indicators generally perform well with lead times ranging from one to four years. We also tap into unique long time-series of the Finnish economy to perform historical explorations into macro-financial vulnerabilities. JEL Classification: E44, F30, G01, G15, C43
    Keywords: banking crisis, leading indicators, logit analysis, macro-financial indicators, signal extraction
    Date: 2015–02
  12. By: Levine, Paul; Lima, Diana
    Abstract: In the aftermath of the financial crisis, the role of monetary policy and macro-prudential regulation in promoting financial stability is under discussion. The old debate concerning whether monetary policy should respond to credit and asset price bubbles was revived, whereas macro-prudential regulation is being assessed as an alternative macroeconomic tool to deal with financial imbalances. The paper explores both sides of the debate in a New Keynesian framework with financial frictions by comparing the welfare and stabilisation impacts of distinct policy regimes. First, we investigate whether there is a welfare benefit from monetary policy leaning against financial instability. We show that monetary policy rules of this type perform better than conventional monetary rules. Second, by introducing macro-prudential regulation in the model, results from optimal policy analysis suggest also that there are welfare gains, even in the case in which monetary and macro-prudential authorities are independent and react to their own policy goal. JEL Classification: E30, E50, G28
    Keywords: DSGE, financial frictions, macro-prudential policy, monetary policy
    Date: 2015–04
  13. By: Damiano Brigo; Marco Francischello; Andrea Pallavicini
    Abstract: We study conditions for existence, uniqueness and invariance of the comprehensive nonlinear valuation equations first introduced in Pallavicini et al (2011). These equations take the form of semilinear PDEs and Forward-Backward Stochastic Differential Equations (FBSDEs). After summarizing the cash flows definitions allowing us to extend valuation to credit risk and default closeout, including collateral margining with possible re-hypothecation, and treasury funding costs, we show how such cash flows, when present-valued in an arbitrage free setting, lead to semi-linear PDEs or more generally to FBSDEs. We provide conditions for existence and uniqueness of such solutions in a viscosity and classical sense, discussing the role of the hedging strategy. We show an invariance theorem stating that even though we start from a risk-neutral valuation approach based on a locally risk-free bank account growing at a risk-free rate, our final valuation equations do not depend on the risk free rate. Indeed, our final semilinear PDE or FBSDEs and their classical or viscosity solutions depend only on contractual, market or treasury rates and we do not need to proxy the risk free rate with a real market rate, since it acts as an instrumental variable. The equations derivations, their numerical solutions, the related XVA valuation adjustments with their overlap, and the invariance result had been analyzed numerically and extended to central clearing and multiple discount curves in a number of previous works, including Pallavicini et al (2011), Pallavicini et al (2012), Brigo et al (2013), Brigo and Pallavicini (2014), and Brigo et al (2014).
    Date: 2015–06
  14. By: Fujiwara, Ippei (Keio University and Australian National University); Teranishi, Yuki (Keio University)
    Abstract: Do financial frictions call for policy cooperation? This paper investigates the implications of simple financial frictions, monopolistic banking together with staggered loan contracts, for monetary policy in open economies in the linear quadratic (LQ) framework. Welfare analysis shows that policy cooperation improves social welfare in the presence of such financial frictions. There also exist long-run gains from cooperation in addition to these by jointly stabilizing inefficient fluctuations over the business cycle, that are usually found in models with price rigidities. The Ramsey optimal steady states differ between cooperation and noncooperation. Such gains from cooperation arise irrespective of the existence of international lending or borrowing.
    JEL: E50 F41
    Date: 2015–04–01
  15. By: Sebastián Cea-Echenique (EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics, CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS); Juan Pablo Torres-Martínez (Department of Economics, Faculty of Economics and Business - University of Chile)
    Abstract: We build a general equilibrium model with endogenous borrowing constraints compatible with credit segmentation. There are personalized trading restrictions connecting prices with both portfolio constraints and consumption possibilities, a setting which has not thoroughly been addressed by the literature. Our approach is general enough to be compatible with incomplete market economies where there exist wealth-dependent and/or investment-dependent credit access, borrowing constraints precluding bankruptcy, or assets backed by physical collateral. To prove equilibrium existence, we assume that transfers implementable in segmented markets can be super-replicated by investments in non-segmented markets. We prove that equilibrium exists because of this super-replication property, which is satisfied if either (i) all individuals have access to borrow at a risk-free rate; or (ii) financial contracts make real promises in terms of non-perishable commodities; or (iii) promises are backed by physical collateral.
    Date: 2014–12

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