nep-ban New Economics Papers
on Banking
Issue of 2015‒08‒30
sixteen papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. The Role of Shadow Banking in the Monetary Transmission Mechanism and the Business Cycle By Falk Mazelis; ; ;
  2. Comparative Advantage and Specialization in Bank Lending By Veronica Rappoport; Philipp Schnabl; Daniel Paravisini
  3. Bank ownership and cost efficiency in Russia, revisited By Mamonov, Mikhail; Vernikov , Andrei
  4. Why Do Banks Practice Regulatory Arbitrage? Evidence from Usage of Trust Preferred Securities By Boyson, Nicole M.; Fahlenbrach, Rudiger; Stulz, Rene M.
  5. The Federal Reserve's Discount Window and TAF Programs: "Pushing on a String?" By Berger, Allen N.; Black, Lamont K.; Bouwman, Christa H. S.; Dlugosz, Jennifer
  6. Bank Risk Taking and Liquidity Creation Following Regulatory Interventions and Capital Support By Berger, Allen N.; Bouwman, Christa H. S.; Kick, Thomas; Schaeck, Klaus
  7. Why are bank runs sometimes partial? By Kiema, Ilkka; Jokivuolle, Esa
  8. Interest Rate Risk and Bank Equity Valuations By English, William B.; Van den Heuvel, Skander J.; Zakrajsek, Egon
  9. The Benefits of Geographic Diversification in Banking By Céline Meslier; Donald P. Morgan; Katherine Samolyk; Amine Tarazi
  10. Deposits and Bank Capital Structure By Allen, Franklin; Carletti, Elena; Marquez, Robert
  11. Heterogeneous Adjustments in Bank Leverage after Deposit Insurance Adoption By Mathias Lé
  12. Bank Sovereign Bond Holdings, Sovereign Shock Spillovers, and Moral Hazard durning the European Crisis By Beltratti, Andrea; Stulz, Rene M.
  13. Bank Capital for Operational Risk: A Tale of Fragility and Instability By Ames, Mark; Schuermann, Til; Scott, Hal S.
  14. Business Training Allocation and Credit Scoring: Theory and Evidence from Microcredit in France By Renaud Bourlès; Anastasia Cozarenco; Dominique Henriet; Xavier Joutard
  15. Second Liens and the Holdup Problem in Mortgage Renegotiation By Agarwal, Sumit; Amromin, Gene; Ben-David, Itzhak; Chomsisengphet, Souphala; Zhang, Yan
  16. Self-Reporting under SEC Reg AB and Transparency in Securitization: Evidence from Loan-Level Disclosure of Risk Factors in RMBS Deals By Mason, Joseph R.; Imerman, Michael B.; Lee, Hong

  1. By: Falk Mazelis; ; ;
    Abstract: This paper investigates the heterogeneous impact of monetary policy shocks on nancial in- termediaries. I distinguish between banks and shadow banks based on their funding constraints. Because credit creation by banks responds to economy-wide productivity endogenously, bank reaction to shocks corresponds to the balance sheet channel. Shadow banks are constrained by their available funding and their behavior is better explained by the lending channel. In line with empirical observations, shadow bank lending moves in the opposite direction to bank lending following monetary policy shocks, which mitigates aggregate credit responses. The propagation of real and nancial shocks is likewise altered when shadow banks are identied as a distinct sector among nancial intermediaries. Following estimation of the model using Bayesian methods, a historical shock decomposition highlights the roles of banks and shadow banks in the run-up to the 2007 - 08 nancial crisis.
    Keywords: Shadow Banking, Monetary Policy Transmission, Credit Channel, Bayesian Methods, Search Frictions
    JEL: E32 E44 E51 G20
    Date: 2015–08
  2. By: Veronica Rappoport (London School of Economics); Philipp Schnabl (NYU Stern); Daniel Paravisini (LSE)
    Abstract: We develop an empirical approach for identifying comparative advantages in bank lending. Using matched credit-export data from Peru, we first uncover patterns of bank specialization by export market: every country has a subset of banks with an abnormally large loan portfolio exposure to its exports. Using outliers to measure specialization, we use a revealed preference approach to show that bank specialization reflects a comparative advantage in lending. We show, in specifications that saturate all firm-time and bank-time variation, that firms that expand exports to a destination market tend to expand borrowing disproportionately more from banks specialized in that destination market. Bank comparative advantages increase with bank size in the cross section, and in the time series after mergers. Our results challenge the perceived view that, outside relationship lending, banks are perfectly substitutable sources of funding.
    Date: 2015
  3. By: Mamonov, Mikhail (BOFIT); Vernikov , Andrei (BOFIT)
    Abstract: This paper considers the comparative efficiency of public, private, and foreign banks in Russia, a transition economy with several unusual features. We perform stochastic frontier analysis (SFA) of Russian bank-level quarterly data over the period 2005–2013. The method of computation of comparative cost efficiency is amended to control for the effect of revaluation of foreign currency items in bank balance sheets. Public banks are split into core and other state-controlled banks. Employing the generalized method of moments, we estimate a set of distance functions that measure the observed differences in SFA scores of banks and bank clusters (heterogeneity in risk preference and asset structure) to explain changes in bank efficiency rankings. Our results for comparative Russian bank efficiency show higher efficiency scores, less volatility, and narrower spreads between the scores of different bank types than in previous studies. Foreign banks appear to be the least cost-efficient market participants, while core state banks on average are nearly as efficient as private domestic banks. We suggest that foreign banks gain cost-efficiency when they increase their loans-to-assets ratios above the sample median level. Core state banks, conversely, lead in terms of cost efficiency when their loans-to-assets ratio falls below the sample median level. The presented approach is potentially applicable to analysis of bank efficiency in other dollarized emerging markets.
    Keywords: banks; comparative efficiency; SFA; state-controlled banks; Russia
    JEL: G21 P23 P34 P52
    Date: 2015–07–27
  4. By: Boyson, Nicole M. (Northeastern University); Fahlenbrach, Rudiger (EPFL Lausanne and Swiss Finance Institute); Stulz, Rene M. (OH State University and ECGI, Brussels)
    Abstract: We propose a theory of regulatory arbitrage by banks and test it using trust preferred securities (TPS) issuance. From 1996 to 2007, U.S. banks in the aggregate increased their regulatory capital through issuance of TPS while their net issuance of common stock was negative due to repurchases. We assume that, in the absence of capital requirements, a bank has an optimal capital structure that depends on its business model. Capital requirements can impose constraints on bank decisions. If a bank's optimal capital structure also meets regulatory capital requirements with a sufficient buffer, the bank is unconstrained by these requirements. We expect that unconstrained banks will not issue TPS, that constrained banks will issue TPS and engage in other forms of regulatory arbitrage, and that banks with TPS will be riskier than other banks with the same amount of regulatory capital, and therefore, more adversely affected by the credit crisis. Our empirical evidence supports these predictions.
    Date: 2014–03
  5. By: Berger, Allen N. (University of SC and University of PA); Black, Lamont K. (DePaul University); Bouwman, Christa H. S. (Case Western Reserve University and University of PA); Dlugosz, Jennifer (Washington University in St Louis)
    Abstract: The Federal Reserve injected unprecedented liquidity into banks during the crisis using the discount window and Term Auction Facility. We examine these facilities' use and effectiveness. We find: small bank users were generally weak, large bank users were not; the funds substituted to a limited degree for other funds; these facilities increased aggregate lending which would have decreased in their absence. The funds enhanced lending of expanding banks and reduced the decline at contracting banks. Small banks increased small-firm lending, while large banks enhanced large-firm lending. Loan quality only improved at small banks, while both left loan contract terms unchanged.
    JEL: E58 G21 G28
    Date: 2014–04
  6. By: Berger, Allen N. (University of SC and University of PA); Bouwman, Christa H. S. (Case Western Reserve University and University of PA); Kick, Thomas (Deutsche Bundesbank); Schaeck, Klaus (Bangor University)
    Abstract: We present the first study that jointly examines how regulatory interventions and capital support affect troubled banks' risk taking and liquidity creation. Using instrumental variables, we document that regulatory interventions and capital support both succeed in reducing bank risk taking. Regulatory interventions also trigger decreases in liquidity creation, pointing towards potential social costs of making troubled banks safer. These effects materialize quickly, persist in the long run, and are not offset by competitors' actions. Our findings provide novel insights into how supervision affects bank conduct and informs the debate about the design of bank bailouts.
    JEL: G21 G28
    Date: 2014–04
  7. By: Kiema, Ilkka (Labour Institute For Economic Research); Jokivuolle, Esa (Bank of Finland Research)
    Abstract: Concern that government may not guarantee bank deposits in a future crisis can cause a bank run. The government may break its guarantee during a severe crisis because of time-inconsistent preferences regarding the use of public resources. However, as deposits are with-drawn during the bank run, the size of the government’s liability to guarantee the remaining deposits is gradually reduced, which increases the government’s incentive to provide the promised guarantee. This in turn reduces depositors’ incentive to withdraw, which may explain why bank runs sometimes remain partial. Our model yields an endogenously determined probability and size of a partial bank run. These depend on a common signal as to the future state of the economy, the cost of liquidity provision to banks, and the government’s reputational cost of breaking the deposit guarantee. We apply the model to a multi-country deposit insurance scheme, an idea that has been aired in the context of the European Banking Union.
    Keywords: bank crises; information induced bank runs; deposit guarantee; bank regulation
    JEL: G21 G28
    Date: 2015–04–09
  8. By: English, William B. (Federal Reserve Board); Van den Heuvel, Skander J. (Federal Reserve Board and University of PA); Zakrajsek, Egon (Federal Reserve Board)
    Abstract: Because they engage in maturity transformation, a steepening of the yield curve should, all else equal, boost bank profitability. We re-examine this conventional wisdom by estimating the reaction of bank stock returns to exogenous fluctuations in interest rates induced by monetary policy announcements. We construct a new measure of the mismatch between the repricing time or maturity of bank assets and liabilities and analyze how the reaction of stock returns varies with the size of this mismatch and other bank characteristics. The results indicate that bank stock prices decline substantially following an unanticipated increase in the level of interest rates or a steepening of the yield curve. A large maturity gap, however, significantly attenuates the negative reaction of returns to a slope surprise, a result consistent with the role of banks as maturity transformers. Share prices of banks that rely heavily on core deposits decline more in response to policy-induced interest rate surprises, a reaction that primarily reflects ensuing deposit disintermediation. Results using income and balance sheet data highlight the importance of adjustments in quantities--as well as interest margins--for understanding the reaction of bank equity values to interest rate surprises.
    JEL: E43 E52 G21
    Date: 2014–04
  9. By: Céline Meslier (LAPE - Laboratoire d'Analyse et de Prospective Economique - unilim - Université de Limoges - Institut Sciences de l'Homme et de la Société); Donald P. Morgan (Federal Reserve Bank of New-York - Federal Reserve Bank of New-York); Katherine Samolyk (Consumer Financial Protection Bureau - Consumer Financial Protection Bureau); Amine Tarazi (LAPE - Laboratoire d'Analyse et de Prospective Economique - unilim - Université de Limoges - Institut Sciences de l'Homme et de la Société)
    Abstract: We estimate the benefits of intrastate and interstate geographic diversification for bank risk and return, and assess whether such benefits could be shaped by differences in bank size and disparities in economic conditions within states or across U.S. states. For small banks, only intrastate diversification is beneficial in terms of risk-adjusted returns but for very large institutions both intrastate and interstate expansions are rewarding. However, in all cases the relationship is hump-shaped for both intrastate and interstate diversification indicating limits for banks of all size. Moreover, we also find geographic expansion to reduce bank risk. Our results indicate that both small banks and very large banks could still benefit in terms of risk-adjusted returns from further geographic diversification. Disparities in economic conditions as measured by the dispersion in unemployment rates either across counties or states impact the benefits of diversification. At initially low levels of intrastate diversification, expanding in new markets allows small banks to further reduce their risk in the presence of higher economic disparities. However, when they get more diversified, this effect is reduced.
    Date: 2015–05–26
  10. By: Allen, Franklin (University of PA); Carletti, Elena (Bocconi University); Marquez, Robert (University of CA, Davis)
    Abstract: In a model with bankruptcy costs and segmented deposit and equity markets, we endogenize the cost of equity and deposit finance for banks. Despite risk neutrality, equity capital earns a higher expected return than direct investment in risky assets. Banks hold positive capital to reduce bankruptcy costs, but there is a role for capital regulation when deposits are insured. Banks may no longer use capital when they lend to firms rather than invest directly in risky assets. This depends on whether the firms are public and compete with banks for equity capital, or private with exogenous amounts of capital.
    JEL: G21 G32 G33
    Date: 2014–05
  11. By: Mathias Lé (ACPR - Autorité de Contrôle Prudentiel et de Résolution - Autorité de Contrôle Prudentiel et de Résolution, PSE - Paris-Jourdan Sciences Economiques - CNRS - Institut national de la recherche agronomique (INRA) - EHESS - École des hautes études en sciences sociales - ENS Paris - École normale supérieure - Paris - École des Ponts ParisTech (ENPC), EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics)
    Abstract: This paper empirically investigates the bank leverage adjustments after deposit insurance adoption. Banks are found to increase significantly their leverage after the introduction of deposit insurance. However, the banks’ responses appear to be heterogenous. The magnitude of the change in bank leverage decreases with (i) the size, (ii) the systemicity and (iii) the initial capitalisation of banks so that the most systemic and the most highly leveraged banks are unresponsive to deposit insurance. As a result, implementing a deposit insurance scheme could have important competitive effects.
    Date: 2014–10–16
  12. By: Beltratti, Andrea (Bocconi University); Stulz, Rene M. (OH State University and ECGI, Brussels)
    Abstract: From 2010 to 2012, the relation between bank stock returns from European Union (EU) countries and the returns on sovereign CDS of peripheral (GIIPS) countries is negative. We use days with tail sovereign CDS returns of peripheral countries to identify the effects of shocks to the cost of borrowing of these countries on EU banks from other countries. A CDS tail return affects banks with greater exposure to the country experiencing that return more, but it has an impact on banks regardless of exposure. Shocks to peripheral countries that are more pervasive impact the returns of banks from countries that experience no shock more than shocks to small individual peripheral countries. In general, the impact of tail returns is asymmetric in that banks suffer less from adverse shocks to peripheral countries than they gain from favourable shocks to such countries.
    JEL: F34 G12 G15 G21 H63
    Date: 2015–04
  13. By: Ames, Mark (Oliver Wyman); Schuermann, Til (Oliver Wyman and University of PA); Scott, Hal S. (Harvard University)
    Abstract: Operational risk is fundamentally different from all other risks taken on by a bank. It is embedded in every activity and product of an institution, and in contrast to the conventional financial risks (e.g. market, credit) is harder to measure and model, and not straight forwardly eliminated through simple adjustments like selling off a position. Operational risk tends to be about 9-13% of the total risk pie, though growing rapidly since the 2008-09 crisis. It tends to be more fat-tailed than other risks, and the data are poorer. As a result, models are fragile--small changes in the data have dramatic impacts on modeled output--and thus required operational risk capital is unstable. Yet the regulatory capital regime is, surprisingly, more rigidly model focused for this risk than for any other, at least in the U.S. We are especially concerned with the absence of incentives to invest in and improve business control processes through the granting of regulatory capital relief. We make four, not mutually exclusive policy suggestions. First, address model fragility through anchoring of key model parameters, yet allow each bank to scale capital to their data using robust methodologies. Second, relax the current tight linkage between statistical model output and required regulatory capital, incentivizing prudent risk management through joint use of scenarios and control factors in addition to data-based statistical models in setting regulatory capital. Third, provide allowance for real risk transfer through an insurance credit to capital, encouraging more effective risk sharing through future product innovation. Fourth, expand upon the standard taxonomy of event type and business line to include additional explanatory variables (such as product type, flags for litigated events, etc.) that would allow more effective inter-bank sharing and learning from experience. Until our understanding of operational risks increases, required regulatory capital should be based on methodologies that are simpler, more standardized, more stable and more robust.
    Date: 2014–02
  14. By: Renaud Bourlès (AMSE - Aix-Marseille School of Economics - EHESS - École des hautes études en sciences sociales - Centre national de la recherche scientifique (CNRS) - Ecole Centrale Marseille (ECM) - AMU - Aix-Marseille Université); Anastasia Cozarenco (CERMi - Centre for European Research in Microfinance, ULB - Université Libre de Bruxelles [Bruxelles] - ULB - Université Libre de Bruxelles, SBS-EM, Centre Emile Bernheim - SBS-EM - Université Libre de Bruxelles (ULB)); Dominique Henriet (AMSE - Aix-Marseille School of Economics - EHESS - École des hautes études en sciences sociales - Centre national de la recherche scientifique (CNRS) - Ecole Centrale Marseille (ECM) - AMU - Aix-Marseille Université); Xavier Joutard (UL2 - Université Lumière - Lyon 2, GATE - GATE Lyon Saint-Étienne - Groupe d'analyse et de théorie économique - ENS Lyon - École normale supérieure - Lyon - UL2 - Université Lumière - Lyon 2 - UCBL - Université Claude Bernard Lyon 1 - Université Jean Monnet - Saint-Etienne - PRES Université de Lyon - CNRS)
    Abstract: The microcredit market, where inexperienced micro-borrowers meet experienced microfinance institutions (MFIs), is subject to reversed asymmetric information. Thus, MFIs' choices can shape borrowers' beliefs and their behavior. We analyze how this mechanism may influence microfinance institution decisions to allocate business training. By means of a theoretical model, we show that superior information can lead the MFI not to train (or to train less) riskier borrowers. We then investigate whether this mechanism is empirically relevant, using data from a French MFI. Confirming our theoretical reasoning, we find a non-monotonic relationship between the MFI's decision to train and the risk that micro-borrowers represent.
    Date: 2015–07
  15. By: Agarwal, Sumit (National University of Singapore); Amromin, Gene (Federal Reserve Bank of Chicago); Ben-David, Itzhak (OH State University); Chomsisengphet, Souphala (US Office of the Comptroller of the Currency); Zhang, Yan (US Office of the Comptroller of the Currency)
    Abstract: Loss mitigation actions (e.g., liquidation or renegotiation) for delinquent mortgages might be hampered by the conflicting goals of claim holders with different levels of seniority. Although similar agency problems arise in corporate bankruptcies, the mortgage market is unique because in a large share of cases junior claimants, in their role as servicers, exercise operational control over loss mitigation actions on mortgages owned by senior claimants. We show that servicers are less likely to act on the first lien mortgage owned by investors when they themselves own the second lien claim secured by the same property. When they do act, such servicers' choices are skewed towards actions that maximize the value of their junior claims, favoring modification over liquidation and short sales and deeds-in-lieu over foreclosures. We also show that such servicers find it more difficult to avoid taking actions on second lien loans when first liens are modified and that they do not modify their second lien loans on more concessionary terms. We show that these actions transfer wealth from first to second liens and moderately increase borrower welfare.
    JEL: G21
    Date: 2014–02
  16. By: Mason, Joseph R. (LA State University); Imerman, Michael B. (Lehigh University); Lee, Hong (LA State University)
    Abstract: This paper is designed to illustrate the limitations and potential bias in using loan-level data on securitized residential mortgage for studying the risk of RMBS during and around the time of the financial crisis. Using trustee data on mortgage characteristics provided by BlackBox Logic (BBx), we examine the extent to which undisclosed mortgage characteristics distort the available data and impact risk analysis of RMBS collateral pools. Our findings illustrate that substantial amounts of loan characteristic data in crucial fields like Occupancy, Property Type, Loan Purpose, and FICO are missing from the trustee data. The frequency of missing values is staggering, ranging from just under 9% for Property Type to 29% for FICO, up to almost 85% for Originator Name, all variables used in recent studies. The omissions are correlated to some degree with the securitization sponsor and even more dramatically with the identity of the deal trustee. There are profound implications for both empirical research as well as policy decisions in the post-crisis era. First, any analysis of RMBS collateral should be built not upon the entirety of mortgage databases, but on stratified samples and should otherwise control for important sponsor and trustee fixed effects. Furthermore, the revisions for Regulation AB which require loan-level disclosure should be adopted in order to standardize mortgage disclosure.
    Date: 2014–06

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