nep-ban New Economics Papers
on Banking
Issue of 2015‒08‒19
twenty-one papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Systemic risk of European banks: Regulators and markets By Maarten van Oordt; Chen Zhou
  2. Securitization and lending standards: Evidence from the European wholesale loan market By Kara, Alper; Marques-Ibanez, David; Ongena, Steven
  3. SMEs and access to bank credit: Evidence on the regional propagation of the financial crisis in the UK By Degryse, Hans; Matthews, Kent; Zhao, Tianshu
  4. Convertible bonds and bank risk-taking By Natalya Martynova; Enrico Perotti
  5. Estimating Global Bank Network Connectedness By Mert Demirer; Francis X. Diebold; Laura Liu; Kamil Yilmaz
  6. Microfinance and credit rationing in Ghana: Does the microfinance type matter? By Díaz Serrano, Lluís; Sackey, Frank G.
  7. Bank funding constraints and the cost of capital of small firms By Oana Peia; Radu Vranceanu
  8. Un-Networking: The Evolution of Networks in the Federal Funds Market By Beltran, Daniel O.; Bolotnyy, Valentin; Klee, Elizabeth C.
  9. The rate elasticity of retail deposits in the United Kingdom: a macroeconomic investigation By Chiu, Ching-Wai (Jeremy); Hill, John
  10. Determinants of Bank Lending By Thi Hong Hanh Pham
  11. Financial Crises and Systemic Bank Runs in a Dynamic Model of Banking By Roberto Robatto
  12. Mortgage Interest Rate Types in Ireland By Kelly, Robert; Lyons, Paul; O'Toole, Conor
  13. External Shocks, Financial Volatility and Reserve Requirements in an Open Economy By Pierre-Richard Agénor; K. Alper; L. Pereira da Silva
  14. Inhomogeneous Financial Networks and Contagious Links * By Hamed Amini; Andreea Minca
  15. The synchronization of European credit cycles By Meller, Barbara; Metiu, Norbert
  16. Effectiveness of Macroprudential Policies in Developing Asia: An Empirical Analysis By Lee, Minsoo; Asuncion, Ruben Carlo; Kim, Jungsuk
  17. Financial Intermediation and Capital Reallocation By Kai Li; Fang Yang; Hengjie Ai
  18. Cash Providers: Asset Dissemination over Intermediation Chains By Colliard, Jean-Edouard; Demange, Gabrielle
  19. Bricolage of identity to cope with crisis. Bank employees in times of turmoil By Evelyne Rousselet; Sylvie Chevrier; Valérie Pallas-Saltiel
  20. Influence of Economic Factors on the Credit Rating Transitions and Defaults of Credit Insurance Business By Anisa Caja; Quentin Guibert; Frédéric Planchet
  21. Assessing the Interest Rate and Bank Lending Channels of ECB Monetary Policies By Jérôme Creel; Mathilde Viennot; Paul Hubert

  1. By: Maarten van Oordt; Chen Zhou
    Abstract: Rules and regulations may have different impacts on risk-taking by individual banks and on banks' systemic risk levels. That is why implementing prudential rules and policies requires careful consideration of their impact on bank risk and systemic risk. This chapter assesses whether market-based measures of systemic risk and recent regulatory indicators provide similar rankings on the systemically importance of large European banks. We find evidence that regulatory indicators of systemic importance are positively related to systemic risk. In particular, banks with higher scores on regulatory indicators have a stronger link to the system in the event of financial stress, rather than having a higher level of bank risk.
    Keywords: G-SIBs; financial stability; macroprudential regulation; systemic importance
    JEL: G01 G21 G28
    Date: 2015–07
  2. By: Kara, Alper (Hull University Business School); Marques-Ibanez, David (Board of Governors of the Federal Reserve System (U.S.)); Ongena, Steven (University of Zurich)
    Abstract: We assess the effect of securitization activity on banks' lending rates employing a uniquely detailed dataset from the euro-denominated syndicated loan market. We find that, in the run up to the 2007-2009 crisis banks that were more active at originating asset-backed securities did not price their loans more aggressively (i.e. with narrower lending spreads) than less-active banks. Using a unique feature of our dataset, we show that also within the set of loans that were previously securitized, the relative level of securitization activity by the originating bank is not related to narrower lending spreads. Our results suggest that while the credit cycle seems to have a major impact of lending standards, the effect of securitization activity appears to be very limited.
    Keywords: Securitization; bank lending rates; syndicated loans
    JEL: G21 G28
    Date: 2015–08–06
  3. By: Degryse, Hans; Matthews, Kent (Cardiff Business School); Zhao, Tianshu
    Abstract: We study the sensitivity of banks’ credit supply to small and medium size enterprises (SMEs) in the UK to banks’ financial condition before and during the financial crisis. Employing unique data on the geographical location of all bank branches in the UK, we connect firms’ access to bank credit to the financial condition (i.e., bank health and the use of core deposits) of all bank branches in the vicinity of the firm over the period 2004-2011. Before the crisis, banks’ local financial conditions did not influence credit availability irrespective of the functional distance (i.e., the distance between bank branch and bank headquarters). However, during the crisis, we find that SMEs with in their vicinity banks that have stronger financial condition face greater credit availability when the functional distance is low. Our results point to a “flight to headquarters” effect during the financial crisis.
    Keywords: financial crisis; credit supply; flight to headquarters; flight to quality; bank organization
    JEL: G21 G29 L14
    Date: 2015–06
  4. By: Natalya Martynova; Enrico Perotti
    Abstract: We study how contingent capital that converts in equity ahead of default affects bank risk-shifting. Going concern conversion restores equity value in highly levered states, thus reducing heightened risk incentives. In contrast, conversion at default for traditional bail-inable debt has no effect on endogenous risk. The main beneficial effect comes from reduced leverage at conversion. In contrast to traditional convertible debt, equity dilution under going concern conversion has the opposite effect. The negative effect of dilution is tempered by any value transfer at conversion. We find that CoCo capital may be less risky than bail-inable debt when lower priority is compensated by lower endogenous risk, which is beneficial as a lower bond yield improves incentives. The risk reduction effect of CoCo debt depends critically on the informativeness of the trigger, but is always inferior to pure equity.
    Keywords: Banks; Contingent Capital; Risk-shifting; Financial Leverage
    JEL: G13 G21 G28
    Date: 2015–08
  5. By: Mert Demirer (MIT); Francis X. Diebold (University of Pennsylvania); Laura Liu (University of Pennsylvania); Kamil Yilmaz (Koc University)
    Abstract: We use lasso methods to shrink, select and estimate the network linking the publicly-traded subset of the world's top 150 banks, 2003-2014. We characterize static network connectedness using full-sample estimation and dynamic network connectedness using rolling-window estimation. Statistically, we find that global banking connectedness is clearly linked to bank location, not bank assets. Dynamically, we find that global banking connectedness displays both secular and cyclical variation. The secular variation corresponds to gradual increases/decreases during episodes of gradual increases/decreases in global market integration. The cyclical variation corresponds to sharp increases during crises, involving mostly cross-country, as opposed to within-country, bank linkages.
    Keywords: Systemic risk, connectedness, systemically important financial institutions, vector autoregression, variance decomposition, lasso, elastic net, adaptive lasso, adaptive elastic net.
    JEL: C32 G21
    Date: 2015–08
  6. By: Díaz Serrano, Lluís; Sackey, Frank G.
    Abstract: This study sets out to examine the extent to which access to credit and credit rationing are influenced by the microfinance type based on the major factors determining micro, small and medium enterprises’ access to credit from microfinance institutions in the era of financial liberalization. The data for the study were gleaned from the microfinance institutions’ credit and loan records consisting of the various pieces of information provided by the borrowers in the application process. Our results are puzzling and show that credit rationing is not influenced by the microfinance types but by the individual microfinance institutions. Keywords: Microfinance, Ghana, Credit Rationing. JEL codes: G21
    Keywords: Microfinances, Crèdit, Ghana, 336 - Finances. Banca. Moneda. Borsa,
    Date: 2015
  7. By: Oana Peia (THEMA - Théorie économique, modélisation et applications - Université de Cergy Pontoise - CNRS, ESSEC Business School - Essec Business School); Radu Vranceanu (Economics Department - Essec Business School)
    Abstract: This paper analyzes how banks' funding constraints impact the access and cost of capital of small firms. Banks raise external finance from a large number of small investors who face co-ordination problems and invest in small, risky businesses. When investors observe noisy signals about the true implementation cost of real sector projects, the model can be solved for a threshold equilibrium in the classical global games approach. We show that a "socially optimal" interest rate that maximizes the probability of success of the small firm is higher than the risk-free rate, because higher interest rates relax the bank's funding constraint. However, banks will generally set an interest rate higher than this socially optimal one. This gives rise to a built-in inefficiency of banking intermediation activity that can be corrected by various policy measures.
    Date: 2015–01
  8. By: Beltran, Daniel O. (Board of Governors of the Federal Reserve System (U.S.)); Bolotnyy, Valentin (Harvard University); Klee, Elizabeth C. (Board of Governors of the Federal Reserve System (U.S.))
    Abstract: Using a network approach to characterize the evolution of the federal funds market during the Great Recession and financial crisis of 2007-2008, we document that many small federal funds lenders began reducing their lending to larger institutions in the core of the network starting in mid-2007. But an abrupt change occurred in the fall of 2008, when small lenders left the federal funds market en masse and those that remained lent smaller amounts, less frequently. We then test whether changes in lending patterns within key components of the network were associated with increases in counterparty and liquidity risk of banks that make up the core of the network. Using both aggregate and bank-level network metrics, we find that increases in counterparty and liquidity risk are associated with reduced lending activity within the network. We also contribute some new ways of visualizing financial networks.
    Keywords: Banks; credit unions; and other financial institutions; counterparty credit risk; data visualization; network models
    JEL: E50 G20
    Date: 2015–07–16
  9. By: Chiu, Ching-Wai (Jeremy) (Bank of England); Hill, John (Bank of England)
    Abstract: This paper quantitatively studies the behaviour of major banks’ household deposit funding in the United Kingdom. We estimate a panel of Bayesian vector autoregressive models on a unique data set compiled by the Bank of England, and identify deposit demand and supply shocks, both to individual banks and in aggregate, using micro-founded sign restrictions. Based on the impulse responses, we estimate how much banks would be required to increase their deposit rates by to cover a deposit gap caused by funding shocks. Banks generally find it costly to bid-up for deposits to cover a funding gap in the short run. The elasticity of household deposits with respect to the interest rate paid are typically of the order of 0.3, indicating that retail deposits are rate-inelastic. But this varies across banks and the types of shock conditioned on. We also show evidence that banks are more vulnerable to deposit supply shocks than deposit demand shocks. Historical decompositions uncover plausible shock dynamics in the historical data.
    Keywords: Retail deposits behaviour; Bayesian panel-VAR; sign restrictions.
    JEL: C11 E40 G21
    Date: 2015–08–07
  10. By: Thi Hong Hanh Pham (LEMNA - Laboratoire d'économie et de management de Nantes Atlantique - UN - Université de Nantes)
    Abstract: This article aims to empirically investigate the determinants of bank credit by using a large data set covering 146 countries at different levels of economic development over the period 1990-2013. We find evidence of the country specific effect of economic growth on bank credit. Our empirical results also suggest that the health of domestic banking system plays a relevant role in boosting bank lending. By contrast, the dependence on foreign capital inflows of a country can make its domestic banking sector more vulnerable to external shock and then to face credit boom-bust cycles.
    Date: 2015–05–30
  11. By: Roberto Robatto (University Wisconsin-Madison)
    Abstract: I present a new dynamic general equilibrium model of banking to analyze monetary policy during financial crises. A novel channel gives rise to multiple equilibria. In the good equilibrium, all banks are solvent. In the bad equilibrium, many banks are insolvent and subject to runs. The bad equilibrium is also characterized by deflation and a flight to liquidity. Some central bank interventions are more effective than others at eliminating the bad equilibrium. Interventions that do not eliminate the bad equilibrium still counteract deflation and reduce the losses of insolvent banks, but, for some parameter values, amplify the flight to liquidity.
    Date: 2015
  12. By: Kelly, Robert (Central Bank of Ireland); Lyons, Paul (Central Bank of Ireland); O'Toole, Conor (Central Bank of Ireland)
    Abstract: This letter profiles interest rate types across the Irish mortgage market. We attempt to answer the following questions: (1) what interest rate types were contracted between borrowers and banks at loan origination and how have these evolved over time? (2) for each distinct interest rate type, are there differences in the loan and borrower characteristics and did these change over the credit cycle? and (3) how do mortgage burdens of households differ across interest rate types?. We find that the choice of fixed rate loans at origination is greater for younger, first time borrowers. The fixed rate is typically less than 5 years with 81 per cent transitioning to variable rates after the expiry of the agreed fixed rate term. In comparison, loans originating on variable contracts exhibit a low propensity to change rate type. A special variable rate with fixed margin over a reference rate ("Tracker") dominates the mortgage market at the height of the boom with the largest loans and greatest proportion of self-employed borrowers. Since Tracker loans have benefited most from the low interest rate environment, we analyse if there are differences across rate type in terms of mortgage servicing costs. We find while Tracker loans are associated with lower median installments, differences vis-a-vis fixed and SVR installments vary by mortgage origination year and current house prices.
    Date: 2015–07
  13. By: Pierre-Richard Agénor; K. Alper; L. Pereira da Silva
    Abstract: The performance of a countercyclical reserve requirement rule is studied in a dynamic stochastic model of a small open economy with financial frictions, imperfect capital mobility, a managed float regime, and sterilized foreign exchange market intervention. Bank funding sources, domestic and foreign, are imperfect substitutes. The model is calibrated and used to study the effects of a temporary drop in the world risk-free interest rate. Consistent with stylized facts, the shock triggers an expansion in domestic credit and activity, asset price pressures, and a real appreciation. A credit-based reserve requirement rule helps to mitigate both macroeconomic and financial volatility, with the latter defined both in terms of a narrow measure based on the credit-to-output ratio, the ratio of capital flows to output, and interest rate spreads, and a broader measure that includes real asset prices as well. An optimal rule, based on minimizing a composite loss function, is also derived. Sensitivity tests, related to the intensity of sterilization, the degree of exchange rate smoothing, and the rule used by the central bank to set the cost of bank borrowing, are also performed, both in terms of the transmission process and the optimal rule
    Date: 2015–08
  14. By: Hamed Amini (Swiss Finance Institute, EPFL - Ecole Polytechnique Fédérale de Lausanne - EPFL - Ecole Polytechnique Fédérale de Lausanne); Andreea Minca (Cornell University - Cornell University)
    Abstract: We propose a framework for testing the possibility of large cascades in financial networks. This framework accommodates a variety of specifications for the probabilities of emergence of 'contagious links', where a contagious link leads to the default of a bank following the default of its counterparty. These are the first order contagion probabilities and depend on the shock propagation mechanism under consideration. When the cascade represents an insolvency cascade, and under complete observation of balance sheets, the first order contagion probabilities follow from the distribution of recovery rates. Under general contagion mechanisms and incomplete information, the financial network is modeled as an inhomogenous random graph in which only some of the banks' character-istics are observable. We give bounds on the size of the first order contagion and testable conditions for it to be small. For power-law financial networks, we also give a condition so that the higher order cascade dies out.
    Date: 2014–10–31
  15. By: Meller, Barbara; Metiu, Norbert
    Abstract: We study the synchronization of credit booms and busts among 12 major European economies and the United States between 1972-2011. We propose a regression-based procedure to test whether boom-bust phases of credit cycles coincide across countries and to cluster countries with positively synchronized credit cycles. We find strong evidence against the existence of a common credit cycle across all countries. Instead, the credit cycles of Austria, Belgium, Germany, Ireland, and the Netherlands are clustered together, while Denmark, Finland, France, Italy, Spain, Sweden, the UK, and the US belong to another distinct cluster. Overall, the relationship among credit cycles is found to be stable over time. However, within each of the two clusters, credit cycles have been converging at least since the last decade. Using a simultaneous equations model, we find that deeper financial integration and a higher degree of business cycle co-movement are associated with stronger credit cycle synchronization.
    Keywords: Business cycles,Credit booms,Financial cycles,Financial integration,Synchronization
    JEL: C32 F34 G15
    Date: 2015
  16. By: Lee, Minsoo (Asian Development Bank); Asuncion, Ruben Carlo (Asian Development Bank); Kim, Jungsuk (Sogang University)
    Abstract: The global financial crisis highlighted the need for national bank supervisory authorities to improve surveillance systems and to detect early on the buildup of macroeconomic risks that could threaten the entire financial system. This paper presents an empirical framework for analyzing how effective macroprudential policies control credit growth, leverage growth, and housing price appreciation. Two significant findings emerge. Broadly, macroprudential policies can indeed promote financial stability in Asia. More specifically, different types of macroprudential policies are more effective against different types of macroeconomic risks.
    Keywords: developing Asia; financial stability; macroprudential policy
    JEL: G01 G28 L51
    Date: 2015–07–01
  17. By: Kai Li (HKUST); Fang Yang (Louisiana State University); Hengjie Ai (University of Minnesota)
    Abstract: We develop a general equilibrium framework to quantify the importance of intermediated capital reallocation in affecting macroeconomic fluctuations and asset returns. In our model, financial intermediaries intermediate capital reallocation between low productivity firms with excess capital and high productivity firms who need credit. Because lending contracts cannot be perfectly enforced, capital misallocation lowers aggregate productivity when intermediaries are financially constrained. As a result, shocks originated from the financial sector manifest themselves as fluctuations in total factor productivity and account for most of the business cycle variations in macroeconomic quantities. Our model produces a pro-cyclical capital reallocation and is consistent with the stylized fact that the volatilities of productivity are counter-cyclical at both the firm and the aggregate level. On the asset pricing side, our model matches well moments of interest rate spreads in the data and successfully generates a high and counter-cyclical equity premium.
    Date: 2015
  18. By: Colliard, Jean-Edouard; Demange, Gabrielle
    Abstract: Many financial assets are disseminated to final investors via chains of over-the-counter transactions between intermediaries (dealers). We model such an intermediation process as a game with successive take-it-or-leave-it offers: An agent buying some units of an asset can offer to sell part of the volume to another OTC partner, and so on. At the equilibrium of this game, the length of intermediation chains, the terms of trade (prices and units sold) and their pattern along a chain are endogenously determined. Our model thus gives a framework to analyze how intermediation chains impact an asset's market liquidity, its issuance, and who ultimately holds the asset.
    Keywords: dealer markets; intermediation chains; liquidity; OTC markets
    JEL: C78 D85 G21 G23
    Date: 2015–07
  19. By: Evelyne Rousselet (IRG - Institut de Recherche en Gestion - UPEC UP12 - Université Paris-Est Créteil Val-de-Marne - Paris 12 - UPEM - Université Paris-Est Marne-la-Vallée); Sylvie Chevrier (IRG - Institut de Recherche en Gestion - UPEC UP12 - Université Paris-Est Créteil Val-de-Marne - Paris 12 - UPEM - Université Paris-Est Marne-la-Vallée); Valérie Pallas-Saltiel (IRG - Institut de Recherche en Gestion - UPEC UP12 - Université Paris-Est Créteil Val-de-Marne - Paris 12 - UPEM - Université Paris-Est Marne-la-Vallée)
    Abstract: Financial crisis has damaged the image of the banking sector. Bank employees are in the front line to cope with this crisis of reputation. This article is based upon an exploratory empirical research among bank employees. First, it reveals the difficult situations related to this crisis that employees live and how they impair their professional identity. Second, drawing upon the notion of bricolage, this paper unveils different forms of identity work that bank employees mobilize to restore a respected professional identity. However most of these bricolages of identity appear to be fragile and may have serious consequences for the management of the banking sector.
    Date: 2015–06
  20. By: Anisa Caja (SAF - Laboratoire de Sciences Actuarielle et Financière - UCBL - Université Claude Bernard Lyon 1); Quentin Guibert (SAF - Laboratoire de Sciences Actuarielle et Financière - UCBL - Université Claude Bernard Lyon 1); Frédéric Planchet (SAF - Laboratoire de Sciences Actuarielle et Financière - UCBL - Université Claude Bernard Lyon 1)
    Abstract: This paper presents a model for the determination and forecast of the number of defaults and credit changes by estimating a reduced-form ordered regression model with a large data set from a credit insurance portfolio. Similarly to banks with their classical credit risk management techniques, credit insurers measure the credit quality of buyers with rating transition matrices depending on the economical environment. Our approach consists in modeling stochastic transition matrices for homogeneous groups of firms depending on macroeconomic risk factors. One of the main features of this business is the close monitoring of covered firms and the insurer’s ability to cancel or reduce guarantees when the risk changes. As our primary goal is a risk management analysis, we try to account for this leeway and study how this helps mitigate risks in case of shocks. This specification is particularly useful as an input for the Own Risk Solvency Assessment (ORSA) since it illustrates the kind of management actions that can be implemented by an insurer when the credit environment is stressed.
    Date: 2015–07–20
  21. By: Jérôme Creel (OFCE - OFCE - Sciences Po); Mathilde Viennot (ENS Cachan - École normale supérieure - Cachan); Paul Hubert (OFCE - OFCE - Sciences Po)
    Abstract: This paper assesses the transmission of ECB monetary policies, conventional and unconventional, to both interest rates and lending volumes for the money market, sovereign bonds at 6-month, 5-year and 10-year horizons, loans inferior and superior to 1M€ to non-financial corporations, cash and housing loans to households, and deposits, during the financial crisis and in the four largest economies of the Euro Area. We first identify two series of ECB policy shocks at the euro area aggregated level and then include them in country-specific structural VAR. The main result is that only the pass-through from the ECB rate to interest rates has been really effective, consistently with the existing literature, while the transmission mechanism of the ECB rate to volumes and of quantitative easing (QE) operations to interest rates and volumes has been null or uneven over this sample. One argument to explain the differentiated pass-through of ECB monetary policies is that the successful pass-through from the ECB rate to interest rates, which materialized as a huge decrease in interest rates during the sample period, had a negative effect on the supply side of loans, and offset itself its potential positive effects on lending volumes.
    Date: 2013–12

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