nep-ban New Economics Papers
on Banking
Issue of 2015‒09‒05
fifteen papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Credit Growth and Capital Requirements: Binding or Not? By C. LABONNE; G. LAMÉ
  2. Bank Ownership Structure, SME Lending and Local Credit Markets By Hasan, Iftekhar; Jackowicz, Krzysztof; Kowalewski, Oskar; Kozlowski, Lukasz
  3. Depositor Discipline During Good and Bad Times: The Role of the Guarantor of Last Resort By Jackowicz, Krzysztof; Kowalewski, Oskar; Kozlowski, Lukasz
  4. What happened to profitability? Shocks, challenges and perspectives for euro area banks By Cheng, Gong; Mevis, Dirk
  5. Modelling the "Animal Spirits" of Bank's Lending Behaviour By Carl Chiarella; Corrado Di Guilmi; Tianhao Zhi
  6. Does Competition for Novice Borrowers Hurt Access to Finance? An Analysis in a Context of High Risk and Low Outreach By Verónica Balzarotti; Alejandra Anastasi
  7. Indicators used in setting the countercyclical capital buffer By Kalatie, Simo; Laakkonen, Helinä; Tölö, Eero
  8. Liquidity Creation without Banks By Simas Kucinskas
  9. High Liquidity Creation and Bank Failures By Zuzana Fungacova; Rima Turk; Laurent Weill
  10. Assessing systemic risk due to fire sales spillover through maximum entropy network reconstruction By Domenico Di Gangi; Fabrizio Lillo; Davide Pirino
  11. The Funding of the Irish Domestic Banking System During the Boom By Philip R. Lane;
  12. The Banking Industry By Scherer, F. M.
  13. Do Asymmetric Information and Ownership Structure Matter for Dividend Payout Decisions? Evidence from European Banks By Laetitia Lepetit; Celine Meslier; Leo Indra Wardhana
  14. The Rise of Shadow Banking in China: The Political Economy of Modern Chinese State Capitalism By Kellee Tsai
  15. Rethinking Financial Regulation: How Confusions Have Prevented Progress By Admati, Anat R.

  1. By: C. LABONNE (Autorité de contrôle prudentiel et de résolution); G. LAMÉ (Insee)
    Abstract: This paper examines the sensitivity of non-financial corporate lending to banks' capital ratio and their supervisory capital requirements. We use a unique database for the French banking sector between 2003 and 2011 combining confidential bank-level Bank Lending Survey answers with the discretionary capital requirements set by the supervisory authority. We find that on average, more capital means an acceleration of credit. But the elasticity of lending to capital depends on the intensity of the supervisory capital constraint. More supervisory capital-constrained banks tend to have a credit growth that is less sensitive to the capital ratio. Our results also show a similar effect for non-performing loans. When banks are constrained, credit growth is all the more sensitive to this type of assets as their share rises. However, both aforementioned effects weaken close to the supervisory minimum capital requirement.
    Keywords: Bank Lending, Bank Regulation, Capital
    JEL: G21 G28 G32
    Date: 2014
  2. By: Hasan, Iftekhar (Fordham University and Bank of Finland); Jackowicz, Krzysztof (Kozminski University); Kowalewski, Oskar (Institute of Economics, Polish Academy of Sciences); Kozlowski, Lukasz (Bank BGZ BNP Paribas SA)
    Abstract: In this paper, by employing a novel approach, we study the relationship between bank type and small-business lending in a post-transition country. Using a unique dataset on bank branches and firm-level data, we find that local cooperative banks lend more to small businesses than do large domestic banks and foreign-owned banks, even when controlling for the financial situation of the cooperative banks. Additionally, our results suggest that cooperative banks provide loans to small businesses at lower costs than foreign-owned banks or large domestic banks. Finally, we show that small and medium-sized firms perform better in counties with a large number of cooperative banks than in counties dominated by foreignowned banks or large domestic banks. Our results are important from a policy perspective, as they show that foreign bank entry and industry consolidation may raise valid concerns for small firms in developing countries.
    JEL: G21 G28
    Date: 2014–08
  3. By: Jackowicz, Krzysztof (Kozminski University); Kowalewski, Oskar (Institute of Economics, Polish Academy of Sciences); Kozlowski, Lukasz (Kozminski University)
    Abstract: In this paper, we investigate, for the first time in the literature, whether the ability of the public sector or government, for convenience purposes called the guarantor of last resort (GLR), to effectively help banks or guarantee bank liabilities affects the sensitivity of interest costs and deposit dynamics to banks' fundamentals. To test our hypothesis, we gathered a global bank sample covering the period from 1991 to 2012. We proxy for the GLR's risk using sovereign ratings, credit default swap spreads, bond yields and changes in macroeconomic indicators. Additionally, we observe the period subsequent to systemic financial crises. Regardless of the method we apply to describe the GLR's risk and the estimation procedure employed, we find that interest cost sensitivity to banks' fundamentals, especially equity capital, is generally an increasing function of the GLR's risk. Moreover, we provide evidence that the relationship between interest cost sensitivity to banks' fundamentals and the GLR's risk is non-linear and is even U-shaped in certain cases. Therefore, in economic terms, our results indicate that, paradoxically, moderate GLR risk levels may foster market monitoring by depositors.
    JEL: G21 G28
    Date: 2015–02
  4. By: Cheng, Gong; Mevis, Dirk
    Abstract: This paper uses a newly constructed dataset including financial statement information of 311 banks in the euro area to analyse the evolution of bank profitability before and after the Global Financial Crisis and the subsequent European crisis. We first document the general trends in the changes in banks' profitability with a particular focus on country and bank heterogeneity. We find that the profitability of banks in different parts of the monetary union was hit by multiple shocks of different nature. Based on this, we then propose an econometric analysis of the drivers behind the evolution of bank profitability by discriminating factors relative to macroeconomic conditions, bank funding and portfolio structures, and new banking regulations in the euro area.
    Keywords: bank, profit, return on asset, bank regulation, bank business model
    JEL: G21 G28 G33 L25
    Date: 2015–08–17
  5. By: Carl Chiarella (Finance Discipline Group, UTS Business School, University of Technology, Sydney); Corrado Di Guilmi (Economics Discipline Group, UTS Business School, University of Technology, Sydney); Tianhao Zhi (Finance Discipline Group, UTS Business School, University of Technology, Sydney)
    Abstract: The idea of “animal spirits” has been widely treated in the literature with particular reference to investment in the productive sector. This paper takes a different view and analyses from a theoretical perspective the role of banks’ collective behaviour in the creation of credit that, ultimately, determines the credit cycle. In particular, we propose a dynamic model to analyse how the transmission of waves of optimism and pessimism in the supply side of the credit market interacts with the business cycle. We adopt the Weidlich-Haag-Lux approach to model the opinion contagion of bankers. We test different assumptions on banks’ behaviour and find that opinion contagion and herding amongst banks play an important role in propagating the credit cycle and destabilizing the real economy. The boom phases trigger banks’ optimism that collectively lead the banks to lend excessively, thus reinforcing the credit bubble. Eventually the bubbles collapse due to an over-accumulation of debt, leading to a restrictive phase in the credit cycle.
    Keywords: animal spirits; contagion; pro-cyclical credit cycle; financial fragility
    JEL: E12 E17 E32 G21
    Date: 2015–08–01
  6. By: Verónica Balzarotti (Central Bank of Argentina); Alejandra Anastasi (Central Bank of Argentina)
    Abstract: The lack of access to financial services and to credit in particular is an issue in many developing countries. This paper studies the channels through which new borrowers get access to consumer loans and the effect of repayment data distribution both on that access and on subsequent bank switching by borrowers. We represent such dynamics with a simple model that incorporates different types of lenders and heterogeneity among individuals. The model assumptions are validated against data from the Argentinean banking system. The model yields a set of results that are characteristic of emerging markets: a significant share of the population is excluded from credit, including those who self-exclude, and lender type determines different lending conditions. Additionally, the model shows that distributing loan repayment data, by boosting competition for novice borrowers, may increase the share of the population with no access to credit. Following these findings, we advise focusing on improving available information for unbanked individuals, rather than expanding such information for individuals with a loan payment track record.
    Keywords: asymmetric information, bank competition, consumer credit, credit access, credit bureau, emerging markets, financial inclusion, information dissemination, poaching
    JEL: D82 D83 D43 G14 G21 G23 G28 G29
    Date: 2015–01
  7. By: Kalatie, Simo (Bank of Finland); Laakkonen, Helinä (Bank of Finland); Tölö, Eero (Bank of Finland, Financial Stability and Statistics Department)
    Abstract: According to EU legislation, the national authorities should use the principle of 'guided discretion' in setting the countercyclical capital buffer (CCB), which increases banks' resilience against systemic risk associated with periods of excessive credit growth. This means that the decision should be based on signals from a pre-determined set of early warning indicators, but that there should also be room for discretion, as there is always uncertainty associated with the use of early warning indicators. The European Systemic Risk Board (ESRB) recommends that the authorities use the deviation of the credit-to-GDP ratio from its long term trend value (credit-to-GDP gap) as the primary indicator in setting the CCB. In addition, designated authorities should use in their decision making indicators that measure private sector credit developments and debt burden, overvaluation of property prices, external imbalances, mispricing of risk, and strength of bank balance sheets. Based on an empirical analysis of data on EU countries and a large assortment of potential indicators, we propose a set of suitable early warning indicators for each of these categories.
    Keywords: countercyclical capital buffer; macroprudential policy; early warning indicators
    JEL: G01 G28
    Date: 2015–03–16
  8. By: Simas Kucinskas (VU University Amsterdam, the Netherlands)
    Abstract: I revisit the Diamond-Dybvig model of liquidity insurance in the presence of hidden trades. The key result is that in this environment deposit-taking banks are not necessary for the efficient provision of liquidity. Mutual funds are constrained efficient when supplemented with the same government liquidity regulation that is required to make a banking system constrained efficient. However, whereas banks are potentially subject to costly panics, mutual funds are not run-prone and hence superior from a welfare perspective if runs happen with a non-zero probability.
    Keywords: Liquidity creation; liquidity insurance; hidden trades; bank runs; mutual funds; narrow banking; financial stability
    JEL: D91 E61 G21 G23 G28
    Date: 2015–08–20
  9. By: Zuzana Fungacova; Rima Turk; Laurent Weill
    Abstract: We formulate the “High Liquidity Creation Hypothesis†(HLCH) that a proliferation in the core activity of bank liquidity creation increases failure probability. We test the HLCH in the context of Russian banking, which provides a natural field experiment due to numerous failures experienced over the past decade. Using Berger and Bouwman’s (2009) liquidity creation measures as a comprehensive proxy for overall bank output, we find that high liquidity creation significantly increases the probability of bank failure; this finding survives multiple robustness checks. Our results suggest that regulatory authorities can mitigate systemic distress and reduce the costs of bank failures to society through early identification of high liquidity creators and enhanced monitoring of their funding and investment activities.
    Keywords: Banking sector;Bank liquidity;Default;Russian Federation;Liquidity Creation, Bank Failures, bank, banks, loans, capital, Government Policy and Regulation,
    Date: 2015–05–06
  10. By: Domenico Di Gangi; Fabrizio Lillo; Davide Pirino
    Abstract: Assessing systemic risk in financial markets is of great importance but it often requires data that are unavailable or available at a very low frequency. For this reason, systemic risk assessment with partial information is potentially very useful for regulators and other stakeholders. In this paper we consider systemic risk due to fire sales spillover and portfolio rebalancing by using the risk metrics defined by Greenwood et al. (2015). By using the Maximum Entropy principle we propose a method to assess aggregated and single bank's systemicness and vulnerability and to statistically test for a change in these variables when only the information on the size of each bank and the capitalization of the investment assets are available. We prove the effectiveness of our method on 2001-2013 quarterly data of US banks for which portfolio composition is available.
    Date: 2015–09
  11. By: Philip R. Lane (Department of Economics, Trinity College Dublin);
    Abstract: This paper analyses the funding of the Irish domestic banking system during the boom period. We highlight: the shifting roles of deposit and bond funding; the prominence of foreign banks as funding counterparties; the role of interoffice funding; and the scale of US dollar and Sterling funding. From August 2007, the deterioration in funding conditions is clearly evident across a range of indicators.
    Keywords: bank funding, international capital flows, Irish crisis
    JEL: F36 E50
    Date: 2015–08
  12. By: Scherer, F. M. (Harvard University)
    Abstract: This paper, written as a chapter for the forthcoming 13th edition of the case study volume, The Structure of American Industry, examines the structure, conduct, and economic performance of the U.S. banking industry, focusing mainly on commercial and investment banking. It finds a strongly rising trend in the concentration of banking activity among the top ten banks despite weak evidence of scale economies. An intense merger history is a main reason. During the first decade of the 21st century, the conduct of U.S. banking firms left much to be desired. It precipitated the "great recession" of 2008, intensified consumption reductions, sustained diverse inter-bank collusive activity. The sharp increase in the financial industries' share of total U.S. corporation profits between the 1980s and the 2000s is analyzed, as is the extraordinary growth of financial employee compensation to roughly three times levels for college graduates employed in other sectors. Changes in banking regulation and governmental merger controls are examined.
    Date: 2014–09
  13. By: Laetitia Lepetit (LAPE - Laboratoire d'Analyse et de Prospective Economique - UNILIM - Université de Limoges - IR SHS UNILIM - Institut Sciences de l'Homme et de la Société); Celine Meslier (LAPE - Laboratoire d'Analyse et de Prospective Economique - UNILIM - Université de Limoges - IR SHS UNILIM - Institut Sciences de l'Homme et de la Société); Leo Indra Wardhana (LAPE - Laboratoire d'Analyse et de Prospective Economique - UNILIM - Université de Limoges - IR SHS UNILIM - Institut Sciences de l'Homme et de la Société)
    Abstract: We empirically examine whether banks' dividend decisions are influenced by their degree of opacity and ownership structure. We find that banks with concentrated or dispersed ownership structure pay lower dividends when they have high degrees of opacity. These results would be consistent with the entrenchment behavior hypothesis, with insiders (managers or majority shareholders) paying lower dividends to extract higher levels of private benefits when banks' opacity is high. Higher levels of shareholder protection and stronger supervisory regimes help to constrain entrenchment behavior of majority shareholders. Our findings have critical policy implications for the Basel 3 implementation of restrictions on dividend payouts.
    Date: 2015–08–13
  14. By: Kellee Tsai (Division of Social Science, Hong Kong University of Science and Technology; Institute for Emerging Market Studies, Hong Kong University of Science and Technology)
    Abstract: Kellee Tsai, Head & Chair Professor of HKUST's Division of Social Science, explores China’s response to the 2008 global financial crisis, after which time Chinese enterprises both large and small have engaged in unprecedented levels of off-balance sheet activities, which are now estimated to account for an astounding 26-69% of China's total GDP. Prof. Tsai analyses the major sources and scope of China's off-balance sheet lending, offering policy suggestions on how to reduce some of the risks associated with such "shadow banking" activities, such as increasing market access in the services sector and setting up channels for debt issuance by local governments.
    Keywords: China, state capitalism, informal finance, shadow banking, financial development
    JEL: G28 G21 G18 G01
    Date: 2015–08
  15. By: Admati, Anat R. (Stanford University)
    Abstract: Flawed and ineffective financial regulation fails to counter, and may exacerbate, distorted incentives within the financial system. The forces that lead to excessive fragility through unnecessary and dangerous levels of leverage, opacity, complexity and interconnectedness also distort credit markets and create other inefficiencies. In this chapter I focus on the failure to correct key flaws, which were evident in 2007-2009, in the design and implementation of capital regulations. These flaws include low equity levels, the risk-weighting system, allowing debt-like hybrids (under various titles, such as Total Loss Absorbing Capacity or TLACs) as substitutes for equity, and measurement issues, including poor accounting of risk exposures in derivatives markets and in the so-called shadow banking system. Confusions about the sources of the problems and about the tradeoffs associated with specific tools have muddled the policy debate and have allowed narrow interests and political forces to derail progress towards a safer and healthier financial system.
    Date: 2015–06

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