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on Banking |
| By: | Banerjee, Ryan (Bank for International Settlements); Mio, Hitoshi (Bank of Japan) |
| Abstract: | We present the first study to estimate the causal effect of liquidity regulation on bank balance sheets. It takes advantage of the heterogeneous implementation of tighter liquidity regulation by the UK Financial Services Authority in 2010. We find that banks adjusted the composition of both assets and liabilities, increasing the share of high-quality liquid assets and non-financial deposits while reducing intra-financial loans and short-term wholesale funding. We do not find evidence that the tightening of liquidity regulation caused banks to shrink their balance sheets, nor reduce the amount of lending to the non-financial sector. |
| Keywords: | - |
| JEL: | E32 E51 F30 G21 G28 |
| Date: | 2015–07–24 |
| URL: | http://d.repec.org/n?u=RePEc:boe:boeewp:0536&r=ban |
| By: | Matej Kuc (Institute of Economic Studies, Faculty of Social Sciences, Charles University in Prague, Smetanovo nábreží 6, 111 01 Prague 1, Czech Republic); Petr Teply (Institute of Economic Studies, Faculty of Social Sciences, Charles University in Prague, Smetanovo nábreží 6, 111 01 Prague 1, Czech Republic) |
| Abstract: | Czech credit unions have been yet criticized by both academics and regulatory representatives for its business based on moral hazard and excessive risk taking. This paper empirically assesses financial performance of Czech credit unions in relation with other European cooperative banks in terms of profitability and stability. To do that, we created a unique dataset of 283 cooperative banks from 15 European countries in the 2006–2013 period. System GMM method is employed as a main instrument of our empirical analysis and alternative panel data methods are used as supplementary techniques. Results revealed poor performance of Czech credit unions in terms of both profitability and stability. Moreover, adverse trends in stability measures of Czech credit unions are in sharp contrast to the tendencies in the rest of cooperative banks in our sample. To conclude, we argue that bigger Czech credit unions will face serious financial problems in coming years. |
| Keywords: | credit union, cooperative banking, financial statements, moral hazard, credit risk, system GMM, Z-score |
| JEL: | C23 G21 L25 |
| Date: | 2015–06 |
| URL: | http://d.repec.org/n?u=RePEc:fau:wpaper:wp2015_18&r=ban |
| By: | Nicola Limodio (London School of Economics) |
| Abstract: | Abstract Does financial regulation promote financial development by restraining banks profitability? We test this hypothesis in a model with a monopolistic bank investing in branches over a geography and facing classical maturity mismatch. Financial regulation lowers profits by pushing the bank to hold more precautionary holdings and lend less. Because the default probability declines, the bank partly compensates the profit loss and take on more risk by opening new branches. The regulation cause an unambiguous decline in profits, increase in deposits, while two forces affect lending: loans become smaller in old branches (intensive margin); the number of loans increases because of new branches (extensive margin). We show conditions under which the second effect dominates and the regulation makes the bank bigger, safer and less profitable. Two empirical tests are presented: 1) a regulation change by the National Bank of Ethiopia in 2011; 2) the state roll-over of bank taxes in Antebellum USA (1800-1861). Analyzing bank balance sheets, we find that these policies lower profits and increase branches, deposits, loans and overall precautionary holdings. |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed015:355&r=ban |
| By: | Temesvary, Judit; Ongena, Steven; Owen, Ann L. |
| Abstract: | We examine how U.S. monetary policy affects the international activities of U.S. Banks. We access a rarely studied US bank-level dataset to assess at a quarterly frequency how changes in the U.S. Federal funds rate (before the crisis) and quantitative easing (after the onset of the crisis) affects changes in cross-border claims by U.S. banks across countries, maturities and sectors, and also affects changes in claims by their foreign affiliates. We find robust evidence consistent with the existence of a potent global bank lending channel. In response to changes in U.S. monetary conditions, U.S. banks strongly adjust their cross-border claims in both the pre and post-crisis period. However, we also find that U.S. bank affiliate claims respond mainly to host country monetary conditions. |
| Keywords: | bank lending channel; monetary transmission; global banking; cross-country analysis |
| JEL: | E44 E52 F42 G15 G21 |
| Date: | 2015–08–01 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:65913&r=ban |
| By: | Foulis, Angus (Bank of England); Nelson, Benjamin (Bank of England); Tanaka, Misa (Bank of England) |
| Abstract: | We construct an overlapping generations macroeconomic model with which to study the causes, consequences and remedies to ‘credit traps’ — prolonged periods of stagnant real activity accompanied by low productivity, financial sector undercapitalisation, and the misallocation of credit. In our model, credit traps arise when shocks to bank equity capital tighten banks’ borrowing constraints, causing them to allocate credit to easily collateralisable but low productivity projects. Low productivity weakens bank capital generation, reinforcing tight borrowing constraints, sustaining the credit trap steady state. We use the model to study policy options, both ex ante(avoiding credit traps) and ex post (escaping them). Ex ante, restrictions on bank leverage can help to enhance the economy’s resilience to the shocks that can cause credit traps. Further, a policymaker focused on maximising the economy’s resilience to credit traps would set leverage countercyclically, allowing an expansion of leverage in minor downturns and reducing leverage in upswings. However, ex post, relaxing a leverage cap will not help escape the trap. Instead, a range of unconventional policies are needed. We study publicly intermediated lending, discount window lending, and recapitalisation, and compare the efficacy of these policies under different conditions. |
| Keywords: | Unconventional credit policy; leverage regulation; financial intermediation; financial crisis. |
| JEL: | E58 G01 G21 |
| Date: | 2015–07–31 |
| URL: | http://d.repec.org/n?u=RePEc:boe:boeewp:0539&r=ban |
| By: | Guillaume Arnould (Centre d'Economie de la Sorbonne - Labex Régulation Financière (Réfi)); Salim Dehmej (Centre d'Economie de la Sorbonne - Labex Régulation Financière (Réfi)) |
| Abstract: | The results of the Comprehensive Assessment (CA) conducted by the ECB seem to attest the soundness of the European banking system since only 8 of 130 assessed banks still need to raise €6 billion. However it would be a mistake to conclude that non failing banks are completely healthy. Using data provided by the ECB and the ECB and the EBA after the CA, we assess the capital shortfalls for each banks by considering the transitional arrangements, an implementation of Basel III sovereign debt requirements and an enhancement of the leverage ratio. In addition we show, that if the CA has been a very complex exercise, it is not the best lens through which the soundness of the eurozone banking system should be evaluated. The assumptions used for the Asset Quality Review (AQR) and the stress-tests lead to week scenarios and requirements that undermine the reliability of the results. Finally we show that the low profitability, the massive dividend distribution and the incurred fines, give rise to concern on the ability of eurozone banks to meet the incoming capital requirements |
| Keywords: | financial stability; stress tests; banking; financial regulation; Basel III |
| JEL: | G21 G28 |
| Date: | 2015–07 |
| URL: | http://d.repec.org/n?u=RePEc:mse:cesdoc:15061&r=ban |
| By: | Carlo Altavilla (European Central Bank and CSEF); Marco Pagano (University of Naples "Federico II", CSEF and EIEF); Saverio Simonelli (University of Naples "Federico II" and CSEF) |
| Abstract: | The domestic sovereign exposures have amplified the transmission of sovereign stress to the solvency risk of banks and to their lending activity, both during and after the Euro debt crisis. We estimate the magnitude of this amplification mechanism relying on novel ECB monthly data on sovereign exposures and lending policies of 245 euro-area banks from 2007 to 2015. For the median bank in stressed countries, the amplification due to sovereign exposures almost doubled the response of the bank’s CDS premium to the sovereign CDS premium, and the response of its loan rate to the sovereign yield. Moreover, the losses on domestic sovereign holdings associated with a 1-standard-deviation rise of the 10-year sovereign yield account for 9% of the actual drop in total loans in stressed countries. No such amplification effects are detected in non-stressed countries. Finally, both yield-seeking and moral suasion motives appear to have affected banks’ portfolio choices in stressed countries: in response to higher domestic sovereign yields, banks increased their domestic sovereign holdings more if public- than private-owned, domestic- than foreign-owned, and poorly than well-capitalized. |
| Keywords: | sovereign exposures, sovereign risk, credit risk, bank lending, euro debt crisis |
| JEL: | E44 F3 G01 G21 H63 |
| Date: | 2015–07–30 |
| URL: | http://d.repec.org/n?u=RePEc:sef:csefwp:410&r=ban |
| By: | Zwick, Lina |
| Abstract: | After two decades of increased financial market integration, particularly driven by the banking sector, during the recent financial crisis capital flows decreased sharply, and especially banking flows were affected. At the same time loan volume in Euro Area countries slowed down, evoking concerns that domestic banks might have restricted their domestic lending activities due to international liquidity shortages. To probe this explanation, this paper analyzes the macroeconomic effects of adverse international liquidity shocks for eleven Euro Area countries between 2003 and 2013 on a quarterly basis. The international liquidity shocks are identified by applying a panel vector autoregressive (VAR) model with sign restrictions. The analysis reveals no significant decline in loan volume after such a shock. Rather, domestic banks presumably react by withdrawing money from abroad, thereby buffering the impact of the sharp decrease of capital inflows on the domestic economy. |
| Keywords: | international capital flows,Panel VAR,loan supply restrictions,home bias |
| JEL: | F32 F34 G21 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:rwirep:564&r=ban |
| By: | Dräger, Lena; Proaño, Christian R. |
| Abstract: | Against the background of the recent housing boom and bust in countries such as Spain and Ireland, we investigate in this paper the macroeconomic consequences of cross-border banking in monetary unions such as the euro area. For this purpose, we incorporate in an otherwise standard two-region monetary union DSGE model a banking sector module along the lines of Gerali et al. (2010), accounting for borrowing constraints of entrepreneurs and an internal constraint on the bank's leverage ratio. We illustrate in particular how different lending standards within the monetary union can translate into destabilizing spill-over effects between the regions, which can in turn result in a higher macroeconomic volatility. This mechanism is modeled by letting the loanto-value (LTV) ratio that banks demand of entrepreneurs depend on either regional productivity shocks or on the productivity shock from one dominating region. Thereby, we demonstrate a channel through which the financial sector may have exacerbated the emergence of macroeconomic imbalances within the euro area. Additionally, we show the effects of a monetary policy rule augmented by the loan rate spread as in Cúrdia and Woodford (2010) in a two-country monetary union context. |
| Keywords: | cross-border banking,euro area,monetary unions,DSGE,monetary policy |
| JEL: | F41 F34 E52 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubdps:212015&r=ban |
| By: | Iveta Palečková (Department of Finance and Accounting, School of Business Administration, Silesian University) |
| Abstract: | The aim of this paper is to apply the Data Envelopment Analysis (DEA) window analysis on the data of the Czech and Slovak commercial banks and to examine the banking efficiency of the Czech Republic and Slovakia during the period 2004-2013. The paper employed an extended DEA approach, specifically DEA window analysis for the efficiency assessment of commercial banks in the Czech Republic and Slovakia. It is based on panel data for the period from 2004 to 2013. In the Czech banking sector, the average efficiency under constant return to scale reached 66-79% and average efficiency under variable return to scale reached 77-90%. The most efficient bank were GE Money Bank and Sberbank. The lowest efficient bank was Československá obchodní banka. The group of large bank (Československá obchodní banka, Česká spořitelna and Komerční banka) was lower efficient than other banks in the banking sector. In Slovakia, the average efficiency under constant return to scale reached 77-91% and average efficiency under variable return to scale reach 83-94%. The most efficient banks were OTP, Postova banka, UniCredit Bank and Istrobanka. The lowest efficient banks were found Privatbanka and Citibank. Whereas during the period 2003-2008 the average efficiency was increasing, during the period 2010-2011 the average efficiency decreased as a result of financial crisis. |
| Keywords: | data envelopment analysis; window analysis; banking sector; Czech Republic; Slovakia; commercial bank |
| JEL: | G21 C50 |
| Date: | 2015–07–31 |
| URL: | http://d.repec.org/n?u=RePEc:opa:wpaper:0012&r=ban |
| By: | Eddie Gerba; Dawid Zochowski |
| Abstract: | We study the impact of uncertainty on financial stability and the business cycle. We extend the work of Boz and Mendoza (2014) by endogenizing credit production, modifying learning mechanism into an adaptive set-up, as well as including financial and monetary policies. In our model households are (intrinsically) rational but take economic decisions under incomplete information. The incompleteness is not caused by their cognitive limitations, as in rational inattention theory (Sims, 2003). Households `learn by doing' and once a sufficient number of realizations of the state variable have materialized, and the incomplete information set is completed. This learning set-up is incorporated into a New Keynesian model with credit market frictions, extended to include uncertainty, where a share of households needs external financing to consume. Because of limited enforceability of financial contracts, households are required to provide collateral for their loans, and so the relationship between the bank and household is tightened for many periods ahead. We find in our framework the build up of risk, leverage, increase in consumption and price of collateral takes longer than in other DSGEs with standard financial friction models. We also find that both the frequency and the amplitude of expansions and contractions are asymmetric - recessions are less frequent and deeper than expansions. Moreover, we find that boom-bust cycles occur as rare events. Using the Cogley and Sargant's (2008) definition of a severe(or systemic) crisis, we find on average two such events per century. We also find that, different from standard boom-bust cycles, a systemic crisis can be followed by a sequence of subsequent contractions, as it makes the economy more unstable. The result is asymmetric distributions of key macroeconomic and financial variables, with high skewness and fat tails. Lastly, we also find that, by reducing the amount of borrowing and leverage in upturns, the LTV-ratio regulation is effective in smoothing the cycles and reducing the effects of a deep contraction on the real-financial variables. We also discuss the role of macroprudential policy in reducing information incompleteness by generating information that helps the agent learn faster the new environment, or provide a smoother transition to the new economic environment. |
| Keywords: | uncertainty; financial engeneering; deregulation; leverage forecasting; macroprudential policy |
| JEL: | E44 E58 G14 G21 G32 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:ehl:lserod:62812&r=ban |
| By: | Parveneh Shahnoori (Eastern Mediterranean University, North Cyprus); Glenn P. Jenkins (Queen’s University, Canada and Eastern Mediterranean University, North Cyprus) |
| Abstract: | Policy makers in many countries encourage small and medium-sized enterprises (SMEs) to become more engaged in international trade activities. A complementary element to international trade is access to low-cost banking services. For policy makers and bank regulatory agencies it is important to know the value that SMEs place on alternative types of online banking services (e-banking). Using a choice experiment and a mixed logit model, we evaluate the value to these businesses of attributes of online banking, namely travel time saved, waiting time saved, unlimited 24/7 accessibility, and a high level of security. From this analysis an estimate is made of the willingness to pay for alternative packages of such services used by the SMEs in the United Arab Emirates free-trade zones. The results of this research show that 24/7 accessibility to banking services and a high level of security are statistically highly significant and valuable to these enterprises. |
| Keywords: | willingness to pay, online banking, SME, free-trade zone, mixed logit model |
| JEL: | G21 D61 |
| Date: | 2015–09 |
| URL: | http://d.repec.org/n?u=RePEc:qed:dpaper:281&r=ban |
| By: | Martin Hellwig (Max Planck Institute for Research on Collective Goods) |
| Abstract: | The paper gives an overview over issues concerning the role of financial stability in monetary policy. Historically, financial stability has figured highly among central banks’ objectives, with policy measures ranging from interest rate stabilization to serving as a lender of the last resort. With the ascent of macroeconomics, these traditional tasks of central banks have been displaced by macroeconomic objectives, price stability, full employment, growth. The financial crisis has shifted the focus back to financial stability concerns. Along with these developments, the shift from a specie standard to a pure fiat money system has widened the scope for central bank policies, which are no longer constrained by legal obligations attached to central bank money. The paper first surveys the evolution of financial-stability and macroeconomic-stability concerns in central banking and monetary policy. Then it discusses two major challenges: (i) What should be done to assess the relevance of financial stability concerns in any given situation? How should one deal with the fact that systemic interdependence takes multiple forms and is changing all the time and that many contagion risks cannot be measured? (ii) What is the relation between financial-stability and macroeconomic-stability objectives? To what extent do they coincide, to what extent are they in conflict? How should tradeoffs be handled and what can be done to reduce the risk of the central bank’s succumbing to financial dominance? |
| Keywords: | financial stability, Systemic Risk, monetary policy, central banking |
| JEL: | E58 E44 E42 E52 |
| Date: | 2015–10 |
| URL: | http://d.repec.org/n?u=RePEc:mpg:wpaper:2015_10&r=ban |
| By: | Díaz Serrano, Lluís |
| Abstract: | During the first decade of this century, Spain experienced the most important economic and housing boom in its recent history. This situation led the lending industry to dramatically expand through the mortgage market. The high competition among lenders caused a dramatic lowering of credit standards. During this period, lenders operating in the Spanish mortgage market artificially inflated appraised home values in order to draw larger mortgages. By doing this, lenders gave financially constrained households access to mortgage credit. In this paper, we analyze this phenomenon for this first time. To do so, we resort to a unique dataset of matched mortgage-dwelling-borrower characteristics covering the period 2004–2010. Our data allow us to construct an unbiased measure of property’s over-appraisal, since transaction prices in our data also includes any potential side payment in the transactions. Our findings indicate that i) in Spain, appraised home values were inflated on average by around 30% with respect to transaction prices; ii) creditconstrained households were more likely to be involved in mortgages with inflated house values; and iii) a regional indicator of competition in the lending market suggests that inflated appraisal values were also more likely to appear in more competitive regional mortgage markets. Keywords: Housing demand, appraisal values, house prices, housing bubble, credit constraints, mortgage market. JEL Classification: R21, R31 |
| Keywords: | Habitatges -- Oferta i demanda, Espanya, Mercat immobiliari, Crèdit, Habitatge -- Preus, Préstecs hipotecaris, 332 - Economia regional i territorial. Economia del sòl i de la vivenda, |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:urv:wpaper:2072/247804&r=ban |
| By: | L. Cycon; Michael Koetter |
| Abstract: | With a unique loan portfolio maintained by a top-20 universal bank in Germany, this study tests whether unconventional monetary policy by the European Central Bank (ECB) reduced corporate borrowing costs. We decompose corporate lending rates into refinancing costs, as determined by money markets, and markups that the bank is able to charge its customers in regional markets. This decomposition reveals how banks transmit monetary policy within their organizations. To identify policy effects on loan rate components, we exploit the co-existence of eurozone-wide security purchase programs and regional fiscal policies at the district level. ECB purchase programs reduced refinancing costs significantly, even in an economy not specifically targeted for sovereign debt stress relief, but not loan rates themselves. However, asset purchases mitigated those loan price hikes due to additional credit demand stimulated by regional tax policy and enabled the bank to realize larger economic margins. |
| Keywords: | unconventional monetary policy, asset purchase programs, ECB, interest rate channel, internal capital markets |
| JEL: | G01 G21 E42 E43 E52 |
| Date: | 2015–07 |
| URL: | http://d.repec.org/n?u=RePEc:iwh:dispap:9-15&r=ban |
| By: | Hana Hejlova (Institute of Economic Studies, Faculty of Social Sciences, Charles University in Prague, Smetanovo nábreží 6, 111 01 Prague 1, Czech Republic) |
| Abstract: | This paper tries to explain different nature of the dynamics during the upward and downward part of the last house price cycle in Spain. Covered bonds are introduced as an instrument which may accelerate a house price boom, while it may also serve as a source of correction to overvalued house prices in downturn, where important rigidities may be present In a serious economic stress, lack of investment opportunities motivates investors to buy covered bonds due to the strong guarantees provided, which may in turn help to revitalize the credit and housing markets. To address such regime shift, house price dynamics is modelled within a framework of mutually related house price, credit and business cycles using smooth transition vector autoregressive model, in which volume of covered bonds issued is included. Linear behaviour of such system is rejected, indicating the need to model house prices in a nonlinear framework. Also, importance of modelling house prices in the context of credit and business cycl es is confirmed and causality from issuance of covered bonds to house price dynamics is found in this nonlinear structure. Finally, potential threat to financial stability resulting from rising asset encumbrance both in the upward and downward part of the house price cycle is identified. It is suggested that the collateral valuation used for the dynamic adjustment of the cover pool is done using forward looking predictions of house prices and that the rate of asset encumbrance is monitored jointly with stress testing the house prices. |
| Keywords: | House price dynamics, credit cycle, asymmetric behaviour, rigidities on housing market, covered bonds, smooth transition vector autoregressive models |
| JEL: | E32 G21 G23 E44 E58 C32 |
| Date: | 2015–06 |
| URL: | http://d.repec.org/n?u=RePEc:fau:wpaper:wp2015_17&r=ban |
| By: | Sari Pekkala Kerr (Wellesley College); William R. Kerr (Harvard Business School, Entrepreneurial Management Unit); Ramana Nanda (Harvard Business School, Entrepreneurial Management Unit) |
| Abstract: | We examine the relationship between house prices and entrepreneurship using micro data from the US Census Bureau. Increases in house prices are often thought to drive entrepreneurship through unlocking the collateral channel for bank loans, but this interpretation is challenged by worries regarding omitted variable biases (e.g., rising local demand) or wealth effects (i.e., that people with more valuable homes are more likely to enter entrepreneurship for reasons other than access to collateral). We construct an empirical environment that utilizes very localized price changes, exploits variations in initial home values across residents in the same zip code, and embeds multiple comparisons (e.g., owners vs. renters, homestead exemption laws by state). For the United States during the 2000-2004 period, the link of home prices to the rate of entrepreneurship through home equity channels is modest in economic magnitude. This is despite a focus on a time period that experienced the largest concentration of US home price growth over the last two decades. Even when we do connect home equity to entrepreneurship, part of the effect is linked to an increased demand for entrepreneurship. While housing collateral plays a role in the entry that we observe, it does not seem to be a major barrier to entrepreneurship in our context. |
| Keywords: | house prices, mortgages, collateral channel, entrepreneurship, entry |
| JEL: | E44 G21 L26 M13 R12 R31 R32 |
| Date: | 2015–02 |
| URL: | http://d.repec.org/n?u=RePEc:hbs:wpaper:15-069&r=ban |
| By: | Eric Zwick (University of Chicago) |
| Abstract: | We estimate the effect of the 2009 and 2010 First Time Homebuyers Tax Credit program on house purchases and prices using variation across local geographies in ex ante exposure to the program. Using data from individual income tax returns, we measure a local area's exposure by the fraction of the population that was eligible for the credit. We combine this measure with tax return data from the program window to confirm that places with higher ex ante exposure saw more people claim the credit. Using this instrument and a difference-in-differences design, we present three findings. First, the program induced a cumulative increase in home purchases in high exposure counties nearly double that of low exposure counties. The extension of the program in December 2009 and expiration in June 2010 allow us to rule out omitted variable concerns. Second, high exposure areas see house prices grow by 4% cumulatively relative to low exposure areas. This pattern is persistent and not driven by pre-policy trends. Third, we find little evidence of a sharp reversal in the post period; instead, demand appears to come from several years in the future. To show this, we construct counterfactual samples of first time homebuyers in years prior to the credit. Relative to these samples, those who claim the credit are on average three years younger, less likely to be married, and richer. We combine our estimates with a simple model of intertemporal choice in timing durable goods purchases. The implied interest rate elasticity of demand, a key parameter in macroeconomic models of monetary policy, is substantial. Estimates from the literature of house price externalities imply that the value of the program likely exceeded its cost. |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed015:322&r=ban |