nep-ban New Economics Papers
on Banking
Issue of 2015‒06‒20
twenty papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Empirical Evidence for the Bank Lending Channel in Bosnia and Herzegovina: Does Lending Differ Between Large and Small Banks? By Dejan Kovacevic
  2. The Bank Capital Regulation (BCR) Model By Hyejin Cho
  4. Regulatory influence on market conditions in the banking union: The cases of macro-prudential instruments and the bail-in tool By Tröger, Tobias H.
  5. What Determines SMEs’ Funding Obstacles to Bank Loans and Trade Credits? By Sandra M. Leitner; Robert Stehrer
  6. Electoral cycles in savings bank lending By Englmaier, Florian; Stowasser, Till
  7. Banking Union as a Shock Absorber By Ansgar Belke; Daniel Gros
  8. Clearinghouse Loan Certificates as Interbank Loans By Christopher Hoag
  9. Captive Funds and Banks' Capital By Arayssi, Mahmoud
  10. Sovereign Debt, Domestic Banks and the Provision of Public Liquidity By Diego J. Perez
  11. The other (commercial) real estate boom and bust: the effects of risk premia and regulatory capital arbitrage By Duca, John V.; Ling, David C.
  12. Macro-prudential Policies, Moral Hazard and Financial Fragility By Carlos Arango; Oscar Valencia
  13. Customers and Investors: A Framework for Understanding Financial Institutions By Robert C. Merton; Richard T. Thakor
  14. Paper or plastic? Payment instrument choice in Uruguay By Rodrigo Lluberas; Joaquín Saldain
  15. Banking Integration and Fragmentation in the Interest Rate Channel By filippo gori
  16. Monetary Policy Transmission in China: A DSGE Model with Parallel Shadow Banking and Interest Rate Control By Michael Funke; Petar Mihaylovski; Haibin Zhu
  17. Banker Preferences, Interbank Connections, and the Enduring Structure of the Federal Reserve System By Jaremski, Matthew; Wheelock, David C.
  18. Leverage dynamics and the real burden of debt By Mikael Juselius; Mathias Drehmann
  19. Trade Intermediation, Financial Frictions, and the Gains from Trade By Jackie M.L. Chan
  20. Calculating optimal limits for transacting credit card customers By Jonathan K. Budd; Peter G. Taylor

  1. By: Dejan Kovacevic (Central bank of Bosnia and Herzegovina)
    Abstract: The paper investigates transmission of different foreign and domestic shocks to bank lending activity in Bosnia and Herzegovina through the bank lending channel. The bank lending channel is analyzed in a time series cross sectional data framework for the period 2006q1-2014q1, investigating reactions of small vs. large banks to those shocks. First, the evidence has been found that both groups of banks decreased their lending activity in the aftermath of the crisis. There is some evidence that liquidity shock after the onset of the crisis is mainly transmitted through large banks that are affiliates of the large Western European banking groups. Second, strong evidence is found that loosening of domestic monetary conditions through required reserves rate change had a positive effect on lending supply, especially for small banks operating in the country.
    Keywords: Financial crisis, monetary policy, bank lending channel, credit growth
    JEL: C13 C23 E58 E52
  2. 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: 2015–02
  3. By: Frederik Mergaerts; Rudi Vander Vennet (-)
    Abstract: This paper examines the effects of bank business models on performance and risk for a sample of more than 500 banks from 30 European countries over the period from 1998 to 2013. Since we analyze strategic or business model choices, our methodology is designed to identify the long-run effects and separates these from short-run time effects. Our findings confirm that business model characteristics are important deter- minants of performance, but that no specific bank type outperforms in all dimensions. We find that deposit funding, high asset quality, income diversification and capital adequacy positively affect performance, while size and the asset composition have a more ambiguous impact. We also report substantial variation of business model effects over different bank types. Our results lend support to the new capital and funding rules proposed in the Basel III framework, but we also argue that business model con- siderations should be more fundamentally integrated in the post-crisis regulatory and supervisory practice.
    Keywords: Banks, business model, bank performance, risk-taking, profitability
    JEL: G20 G21 G28
    Date: 2015–06
  4. By: Tröger, Tobias H.
    Abstract: This paper looks into the specific influence that the European banking union will have on (future) bank client relationships. It shows that the intended regulatory influence on market conditions in principle serves as a powerful governance tool to achieve financial stability objectives. From this vantage, it analyzes macro-prudential instruments with a particular view to mortgage lending markets - the latter have been critical in the emergence of many modern financial crises. In gauging the impact of the new European supervisory framework, it finds that the ECB will lack influence on key macro-prudential tools to push through more rigid supervisory policies vis-à-vis forbearing national authorities. Furthermore, this paper points out that the current design of the European bail-in tool supplies resolution authorities with undue discretion. This feature which also afflicts the SRM imperils the key policy objective to re-instill market discipline on banks' debt financing operations. The latter is also called into question because the nested regulatory technique that aims at preventing bail-outs unintendedly opens additional maneuvering space for political decision makers.
    Keywords: banking union,macro-prudential supervision,real estate lending,bail-in,market discipline
    JEL: E44 G01 G18 G21 G28 K22 K23
    Date: 2015
  5. By: Sandra M. Leitner (The Vienna Institute for International Economic Studies, wiiw); Robert Stehrer (The Vienna Institute for International Economic Studies, wiiw)
    Abstract: A Comparative Analysis of EU-15 and NMS-13 Countries This paper analyses bank credits and trade loans as the two most important sources of external finance of firms and identifies particular firm and country characteristics that determine the ease with which both external funding sources can be accessed. It focuses on SMEs in EU Member States and uses ECB/EU SAFE microdata, which differentiate between various degrees of external funding constraints. The results show that innovators of both products and processes have a harder time raising sufficient funds from banks. Further, smaller and younger firms and firms that are part of an enterprise are more likely to face stronger obstacles from banks. Moreover, it points to the important role previous bank loan and trade credit histories plays for successful application processes and demonstrates that banks and suppliers respond asymmetrically to changes in a firm’s financial and economic situation. Finally, it points to the importance of the state and structure of a country’s banking sector for successful bank loan and trade credit application processes.
    Keywords: funding obstacles, bank loans, trade credits, small and medium-sized enterprises
    JEL: G21 G23 O16
    Date: 2015–05
  6. By: Englmaier, Florian; Stowasser, Till
    Abstract: We provide evidence that German savings banks – where local politicians are by law involved in their management – systematically adjust lending policies in response to local electoral cycles. The different timing of county elections across states and the existence of a control group of cooperative banks – that are very similar to savings banks but lack their political connectedness – allow for clean identification of causal effects of county elections on savings banks’ lending. These effects are economically meaningful and robust to various specifications. Moreover, politically induced lending increases in incumbent party entrenchment and in the contestedness of upcoming elections.
    Keywords: Bank lending cycles; political business cycles; political connectedness; public banks; government ownership of firms
    JEL: G21 D72 D73
    Date: 2013–11–29
  7. By: Ansgar Belke; Daniel Gros
    Abstract: This study investigates the shock-absorbing properties of a banking union by providing a detailed comparison between the way regional financial shocks have been absorbed at the federal level in the US, but have led to severe regional (national) financial dislocation and tensions in the euro area. The extent to which the institutions of the banking union, which is now emerging in the euro area, should increase its capacity to deal with future regional boom and bust cycles is also discussed. Cross-border capital flows in the form of equity appear to be much more stable than those taking the form of credit, especially inter-bank credit. Moreover, credit booms and bust leave a debt overhang and losses can materialise only via insolvencies, whereas equity flows absorb automatically losses in case of a bust and provide the cross border owner with incentives to continue to provide financing. It follows that cross-border banks can absorb regional shocks. But large banks pose the ‘too big to fail’ problem and they would also propagate regional shocks, especially if they originate in large countries, to the entire area.
    Keywords: Child health; health behavior; communication; intergenerational transmission; socioeconomic inequality; continuous treatment effect
    JEL: C31 D83 I12 I14
    Date: 2015–04
  8. By: Christopher Hoag (Department of Economics, Trinity College)
    Abstract: Before the founding of the Federal Reserve, bank clearinghouse associations served as a lender of last resort during the National Bank Era (1863-1913). This paper clarifies the operation of clearinghouse loan certificates during panic periods. If clearinghouse loan certificates are prohibited from circulating among the general public, then clearinghouse loan certificates should be viewed as interbank loans among clearinghouse member banks and not loans from a central clearinghouse organization to individual members.
    Keywords: bank, lender of last resort, loan certificates
    JEL: G21 G28 N21
    Date: 2015–05
  9. By: Arayssi, Mahmoud
    Abstract: A simple leverage ratio restriction is not efficient because it does not discriminate between risky and safe banks.We use a structural and comprehensive model of the firm’s asset growth to describe the equity buyout portfolios’ stylized facts for two types of banks.We derive a leverage ratio that depends on the level of risky investments, and balances between the spread on such investments, the cost of capital and the overall power of the supervisor to enforce the capital requirements. This method is more transparent and requires fewer parameters than other commonly used methods. We obtain an incentive-compatible constraint on banks to carry the minimal adequate amount of capital. This constraint enhances the supervisors’ ability to enforce the rules ex post, and provide banks with a further incentive to reveal their risk type truthfully.
    Keywords: private equity; captive funds; banks; capital requirements; leveraged ratio restriction; Basel II; Basel III
    JEL: G21 G28
    Date: 2015–05–01
  10. By: Diego J. Perez (Stanford University)
    Abstract: This paper explores two mechanisms through which a sovereign default can disrupt the domestic economy via its banking system. First, a sovereign default creates a negative balance-sheet effect on banks, which reduces their ability to raise funds and prevents the flow of resources to productive investments. Second, default undermines internal liquidity as banks replace government securities with less productive investments. I quantify the model using Argentinean data and find that these two mechanisms can generate a deep and persistent fall in output post-default, which accounts for the government’s commitment necessary to explain observed levels of external public debt. The balance-sheet effect is more important because it generates a larger output cost of default and a stronger ex-ante commitment for the government. Post-default bailouts of the banking system, although desirable ex-post, are welfare reducing ex-ante since they weaken government’s commitment. Imposing a minimum public debt requirement on banks is welfare improving as it enhances commitment by increasing the output cost of default.
    Keywords: Sovereign default, public debt, banks, liquidity.
    Date: 2015–06
  11. By: Duca, John V. (Federal Reserve Bank of Dallas); Ling, David C. (University of Florida)
    Abstract: The last decade’s boom and bust in U.S. commercial real estate (CRE) prices was at least as large as that in the housing market and also had a large effect on bank failures. Nevertheless, the role of CRE in the Great Recession has received little attention. This study estimates cohesive models of short-run and long-run movements in capitalization rates (rent-to-price-ratio) and risk premiums across the four major types of commercial properties. Results indicate that CRE price movements were mainly driven by sharp declines in required risk premia during the boom years, followed by sharp increases during the bust phase. Using decompositions of estimated long-run equilibrium factors, our results imply that much of the decline in CRE risk premiums during the boom was associated with weaker regulatory capital requirements. The return to normal risk premia levels in 2009 and 2010 was first driven by a steep rise in general risk premia that occurred after the onset of the Great Recession and later by a tightening of effective capital requirements on commercial mortgage-backed securities (CMBS) resulting from the Dodd-Frank Act. In contrast to the mid-2000s boom, the recovery in CRE prices since 2010 has been mainly driven by declines in real Treasury yields to unusually low levels. Our findings have important implications for the channels through which macro-prudential regulation may or may not be effective in limiting unsustainable increases in asset prices.
    Keywords: Asset pricing; Equity premiums; Bank deregulation; Institutional investors; Alternative asset classes; Commercial real estate
    JEL: G12 G18 G21 G23 R33
    Date: 2015–06–01
  12. By: Carlos Arango (Central Bank of Colombia); Oscar Valencia (Central Bank of Colombia)
    Abstract: This paper presents a DSGE model with banks that face moral hazard in management. Banks receive demand deposits and fund investment projects. Banks are subject to potential withdrawals by depositors which may force them into early liquidation of their investments. The likelihood of this happening depends on the bank management efforts to keep the bank financially sound and the degree of bank leverage. We study the properties of this model under different monetary and macro-prudential policy arrangements. Our model is able to replicate the pro-cyclicality of leverage, and provides insights on the interplay between bank leverage and bank management incentives as a result of monetary, productivity and financial shocks. We find that a combination of pro-cyclical capital requirements and a standard monetary policy are well suited to contain the effects on output and prices of a downturn, keeping the financial system in check. Yet, in an expansionary phase (i.e. a productivity shock) this policy combinat on may produce desirable results for some macro-variables but at the expense of a deterioration in other macro-financial indicators.
    Keywords: DSGE modeling, financial frictions, moral hazard, macro-prudential policies
    JEL: G11 D86
    Date: 2015–03–13
  13. By: Robert C. Merton; Richard T. Thakor
    Abstract: Financial institutions have both investors and customers. Investors, such as those who invest in stocks and bonds or private/public-sector guarantors of institutions, expect an appropriate risk-adjusted return in exchange for the financing and risk-bearing that they provide. Customers of a financial intermediary, in contrast, provide financing in exchange for a specific set of services, and do not want the fulfillment of these services to be contingent on the credit risk of the intermediary, even when they are not small, uninformed agents lacking in sophistication. This paper develops a framework that defines the roles of customers and investors in intermediaries, and uses the framework to provide an economic foundation for the aversion to intermediary credit risk on the part of its customers. It further explores the implications of this customer-investor nexus for a host of issues related to how contracts between financial intermediaries and their customers are structured and how risks are shared between them, as well as the consequences of (unexpected) deviations from the ex ante optimal contractual arrangement. We show that the optimality of insulating the customer from the credit risk of the intermediary explains various contractual arrangements, institutions, and regulatory practices observed in practice. Moreover, customers and investors are often intertwined in practice, and so this intertwining provides insights into the adoption of “too-big-to-fail” policies and bailouts by regulators in general. Finally, the approach taken here shows that financial crises may be a consequence of observed but unexpected deviations from the ex ante optimal risk-sharing arrangement between financial intermediaries and their customers.
    JEL: D81 D83 G01 G20 G21 G23 G28 H12 H81
    Date: 2015–06
  14. By: Rodrigo Lluberas (Banco Central del Uruguay); Joaquín Saldain (Banco Central del Uruguay)
    Abstract: We study the drivers of Uruguayan households payment instrument choice using a new dataset from the Survey of Uruguayan Household Finances. Survey data and payment system aggregate data show that households are intensive in their use of cash while the use of credit and debit cards is low and stable. Our results show that household characteristics are important drivers of payment instrument choice: income, age and education increase the probability of using plastic. Access to financial services is an important determinant of using plastic over cash. Supply side conditions, like card acceptance at stores, also play a role.
    Abstract: Estudiamos los determinantes de la elección de medios de pago que realizan los hogares uruguayos utilizando los datos de la Encuesta Financiera de los Hogares Uruguayos. Esta encuesta y las estadísticas agregadas del sistema de pagos muestran que los hogares realizan sus pagos con efectivo mayormente, mientras que el uso de tarjetas de crédito y débito es bajo y estable. Nuestros resultados indican que las características de los hogares son determinantes de la elección de medio de pago: el nivel de ingreso, edad y nivel educativo aumentan la probabilidad de usar medios electrónicos. El acceso a servicios financieros es un determinante importante del uso de medios electrónicos sobre el efectivo. Las condiciones de la oferta, como la aceptación de tarjetas en las tiendas, también juega un rol.
    Keywords: Payment systems, payment instruments, multihoming; Sistema de pago, medios de pago, multihoming
    JEL: G20 D12 D14
    Date: 2014
  15. By: filippo gori (IHEID, The Graduate Institute of International and Development Studies, Geneva)
    Abstract: At the forefront of the economic consolidation of the euro area, banking integration came to a stall following the beginning of the 2008 crisis. Since then European banks started retrenching their asset holdings within national borders, effectively reducing the scale of their European operations. This paper explores the link between banking integration and fragmentation in the interest rate channel in the eurozone. Using a rolling VAR, I estimate the overtime evolution of the interest rate pass-through across European countries, and then I relate this evidence to banking integration dynamics. The results support the existence of a statistically significant and negative link between banking integration and cross-country differentials in the interest rate channel.
    Keywords: Monetary policy, banking integration, financial fragmentation.
    JEL: E31 E44 E52 F36
    Date: 2014–03–05
  16. By: Michael Funke (Hamburg University, CESifo, Munich, and Hong Kong Institute for Monetary Research); Petar Mihaylovski (Hamburg University); Haibin Zhu (JP Morgan Chase Bank)
    Abstract: The paper sheds light on the interplay between monetary policy, the commercial banking sector and the shadow banking sector in mainland China by means of a nonlinear stochastic general equilibrium (DSGE) model with occasionally binding constraints. In particular, we analyze the impacts of interest rate liberalization on monetary policy transmission as well as the dynamics of the parallel shadow banking sector. Comparison of various interest rate liberalization scenarios reveals that monetary policy results in increased feed-through to the lending and investment under complete liberalization. Furthermore, tighter regulation of interest rates in the commercial banking sector in China leads to an increase in loans provided by the shadow banking sector.
    Keywords: DSGE Model, Monetary Policy, Financial Market Reform, Shadow Banking, China
    JEL: E32 E42 E52 E58
    Date: 2015–05
  17. By: Jaremski, Matthew (Department of Economics, Colgate University); Wheelock, David C. (Federal Reserve Bank of St. Louis)
    Abstract: Established by a three person Reserve Bank Organization Committee (RBOC) in 1914, the structure of the Federal Reserve System has remained essentially unchanged ever since, despite criticism at the time and over ensuing decades. This paper examines the selection of cities for Reserve Banks and branches, and of district boundaries. We show that each aspect of the Fed’s structure reflected the preferences of national banks, including adjustments of district boundaries after the Fed was established. Further, using newly-collected information on the locations of each national bank’s correspondents, we find that banker preferences mirrored established interbank connections. The Federal Reserve was thus formed on top of the structure that it was meant to replace.
    Keywords: Federal Reserve System; Federal Reserve Banks; Reserve Bank Organization Committee; interbank networks; correspondent banking.
    JEL: E58 N21 N22
    Date: 2015–06–09
  18. By: Mikael Juselius; Mathias Drehmann
    Abstract: In addition to leverage, the aggregate debt service burden is an important link between financial and real developments. Using US data from 1985 to 2013, we find that it has sizable negative effects on credit and expenditure growth. Strong interactions between leverage and the debt service burden lead to large and protracted cycles in credit and expenditure that match the stylised facts of credit booms and busts. Even with real-time estimates, the predicted adjustment to leverage and the debt service burden from 2005 onwards imply paths for credit and expenditure that closely match actual developments before and during the Great Recession.
    Keywords: business cycle, credit boom, leverage, debt service burden, financial-real interactions, financial stability
    Date: 2015–05
  19. By: Jackie M.L. Chan (Stanford University)
    Abstract: This paper develops a heterogeneous firm model of international trade with trade intermediation and financial frictions. Indirect exporting through intermediaries entails lower fixed costs but larger variable costs, and thus intermediaries alleviate financial frictions which magnify the fixed cost of exporting. The model finds strong empirical support in firm-level data on indirect exports for 118 countries as well as country-level data on entrepôt trade through Hong Kong for over 50 countries. Financially more constrained exporting firms and financially less developed countries are more likely to use trade intermediaries. Both of these effects are stronger in financially more vulnerable industries. Calibrating a two-country version of the model in general equilibrium for China and US reveals important gains from trade intermediation. When indirect exporting is eliminated from China, welfare, exports, and the share of exporting firms fall by 0.24%, 18%, and 59% respectively.
    Keywords: intermediaries, indirect exports, financial constraints, gains from trade, Hong Kong.
    JEL: F10 F14 F36 G20
    Date: 2015–06
  20. By: Jonathan K. Budd; Peter G. Taylor
    Abstract: We present a model of credit card profitability, assuming that the card-holder always pays the full outstanding balance. The motivation for the model is to calculate an optimal credit limit, which requires an expression for the expected outstanding balance. We derive its Laplace transform, assuming that purchases are made according to a marked point process and that there is a simplified balance control policy in place to prevent the credit limit being exceeded. We calculate optimal limits for a compound Poisson process example and show that the optimal limit scales with the distribution of the purchasing process and that the probability of exceeding the optimal limit remains constant. We establish a connection with the classic newsvendor model and use this to calculate bounds on the optimal limit for a more complicated balance control policy. Finally, we apply our model to real credit card purchase data.
    Date: 2015–06

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