nep-ban New Economics Papers
on Banking
Issue of 2015‒09‒18
eighteen papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Regulatory arbitrage in action: evidence from banking flows and macroprudential policy By Reinhardt, Dennis; Sowerbutts, Rhiannon
  2. Capital Requirements, Risk Choice, and Liquidity Provision in a Business Cycle Model By Juliane Begenau
  3. Optimal capital requirements over the business and financial cycles By Malherbe, Frederic
  4. Essays in empirical banking By Bai, Y.
  5. Strategic Opaqueness: A Cautionary Take on Securitization By Maryam Farboodi; Ana Babus
  6. Between capture and discretion - The determinants of distressed bank treatment and expected government support By Ignatowski, Magdalena; Korte, Josef; Werger, Charlotte
  7. A heterogeneous agent model for assessing the effects of capital regulation on the interbank money market under a corridor system By Jackson, Christopher; Noss, Joseph
  8. Banks’ Internal Capital Markets and Deposit Rates By Itzhak Ben-David; Ajay Palvia; Chester Spatt
  9. No Guarantees, No Trade: How Banks Affect Export Patterns By Tim Schmidt-Eisenlohr; Friederike Niepmann
  10. Sovereign risk, interbank freezes, and aggregate fluctuations By Engler, Philipp; Grosse Steffen, Christoph
  11. Monetary Shocks and Bank Balance Sheets By Sebastian Di Tella; Pablo Kurlat
  12. Gender bias and credit access By Ongena, Steven; Popov, Alexander
  13. Financing constraints, employment, and labor compensation: evidence from the subprime mortgage crisis By Popov, Alexander; Rocholl, Jörg
  14. Monetary policy effects on bank risk taking By Angela Abbate; Dominik Thaler
  15. Interest on Reserves, Interbank Lending, and Monetary Policy By Williamson, Stephen D.
  16. Credit Search and Credit Cycles By Dong, Feng; Wang, Pengfei; Wen, Yi
  17. Product design in microfinance By Carolina Laureti
  18. Derivatives Markets: From Bank Risk Management to Financial Stability By Guillaume Vuillemey

  1. By: Reinhardt, Dennis (Bank of England); Sowerbutts, Rhiannon (Bank of England)
    Abstract: We use a new database on macroprudential policy actions to examine whether macroprudential regulations affect international banking flows. We find evidence that borrowing by the domestic non-bank sector from foreign banks increases after home authorities take a macroprudential capital action. We find no increase in borrowing from foreign banks after an action which tightens lending standards (such as limits on loan-to-value ratios for house purchase). Evidence on reserve requirements is mixed. Differences in the application of regulation for lending standards and capital regulation for international banks mean that while there is a level playing field for lending standards regulation, this does not always apply for capital regulation, giving foreign branches regulated by their home authorities a competitive advantage. Our results are, at first sight, different from the literature on regulatory arbitrage: we find that foreign banks expand their lending into host countries where regulation is tightened. But this does not occur when regulations apply also to them. The results have implications for macroprudential instrument choice and calibration, and for reciprocating regulation internationally.
    Keywords: Macroprudential policies; cross-border banking flows; leakages.
    JEL: F32 F34 G21
    Date: 2015–09–11
  2. By: Juliane Begenau (Harvard Business School)
    Abstract: This paper presents a quantitative dynamic general equilibrium model in which households' liquidity preference change the standard intuition of how higher bank capital requirements affect the economy. The mechanism is that a reduction in the supply of safe and liquid assets in the form of bank debt increases bank lending through a general equilibrium effect. I embed this mechanism in a two-sector business cycle model in which banks provide liquidity and have excessive risk-taking incentives. I quantify this model using data from the National Income and Product Accounts and banks' regulatory filings. Welfare is maximized at 14% equity as a share of risk-weighted assets. This level of capital requirement trades-off a reduction in the provision of safe and liquid assets against an increase in lending and a reduction in risk-taking by banks.
    Date: 2015
  3. By: Malherbe, Frederic
    Abstract: I study economies where banks do not fully internalize the social costs of default, which distorts their lending decisions. In all these economies, a common general equilibrium effect leads to aggregate over-investment. As a result, under laissez-faire, crises are too frequent and too costly from a social point of view. In response, the regulator sets a capital requirement to trade off expected output against financial stability. The capital requirement that ensures investment efficiency depends on the state of the economy. Because of the general equilibrium effect, the more aggregate banking capital the tighter the optimal requirement. A regulation that fails to take this effect into account exacerbates economic fluctuations and allows for excessive build-up of risk in the financial sector during booms. Government guarantees amplify this mechanism and, at the peak of a boom, even a small adverse shock can trigger a banking sector collapse, followed by an excessively severe credit crunch. JEL Classification: E44, G01, G21, G28
    Keywords: Basel regulation, capital requirement, countercyclical buffers, financial cycles, financial regulation, overinvestment
    Date: 2015–07
  4. By: Bai, Y. (Tilburg University, School of Economics and Management)
    Abstract: This dissertation consists of three essays on empirical banking. They study how do information and political activeness affect banks’ lending behavior, as well as the effect of lending relationship with banks on firms’ stock performance during interbank liquidity crunch. The first essay looks at a type of mortgage application in which applicants reject loan offers from banks and explores which type of applicants reject banks more and which type of banks are more likely to be rejected by applicants. We find that local banks with information advantage are more likely to be rejected by risky applicants and less likely to be rejected by creditworthy applicants. Chapter 3 studies how are firms’ stock performances affected by their lending relationships with banks that suffer liquidity crisis, using an event study of the interbank liquidity crunch in June 2013 in China. We find that firms that have lending relationships with banks outperform others in the stock market. Chapter 4 provides supporting evidence for the positive relationship between banks’ political activeness and their involvements in lending to disaster counties.
    Date: 2015
  5. By: Maryam Farboodi (Princeton University); Ana Babus (Chicago FED)
    Abstract: We explore a model in which banks strategically securitize assets and create opaque portfolios that interferes with investors' decisions and leads to more banking crises. In our set-up, banks borrow funds from investors in order to finance risky projects. When debt is issued, the banks, as well as the investors are uninformed about the outcome of the projects. Before maturity, however, investors observe a signal about their bank's project, and can decide whether they liquidate their debt early against a redemption value. Ex-ante, each bank can affect how investors use their information by securitizing a fraction of their project in exchange for another bank's project. This way, banks can create an optimal degree of information asymmetry such that investors continue their debt contract only in those states that are most favorable to banks. Thus, while traditionally securitization arises as a strategic response of the borrower who has better information than the lender, in our model securitization itself is the source of information asymmetry. We characterize banks' optimal portfolio allocation. We show that when securitization takes places in equilibrium, banking crises are more likely to occur and welfare is lower. Our model is suggestive that government interventions and bailout policies can only increase the probability of banking crises by further distorting banks' incentives, and thus are inefficient.
    Date: 2015
  6. By: Ignatowski, Magdalena; Korte, Josef; Werger, Charlotte
    Abstract: In this paper, we analyze how sources of political influence relate to the actual regulatory treatment of distressed banks and to the expectation of bank support provided by the government. We assemble a unique dataset that links U.S. banks’ sources of influence (e.g., lobbying expenditures, proximity to the relevant legislative committee, prior affiliation with regulatory or government institutions) to bank financial data, actual bank supervisory actions, and market-inferred expected government support. Employing this novel data, we cast some light on how regulatory decision making is affected by these sources of influence. Our findings suggest that banks’ influence matters for the regulatory treatment of distressed banks, as well as for the expectation of support regardless of bank distress. Several conditions increase the effectiveness of sources of influence in actual regulatory treatment: Lobbying activities are more effective with increasing lobbying expenditures, deteriorating capital ratios, and with the aid of former politicians. JEL Classification: D72, G21, G28
    Keywords: bank regulation, bank sources of influence, lobbying, Prompt Corrective Action, regulatory discretion
    Date: 2015–08
  7. By: Jackson, Christopher (Bank of England); Noss, Joseph (Bank of England)
    Abstract: Money markets play an important role in the implementation of monetary policy. Their structure and dynamics have, however, changed significantly in recent years. In particular, a number of new banking regulations will affect the behaviour of money market participants, and so have the potential to affect money market interest rates. This paper offers a model to examine how prudential regulation might affect interbank overnight interest rates where the central bank implements monetary policy using a corridor system. Combined with a set of assumptions as to the cost banks might incur in meeting regulatory capital requirements, it offers a framework with which to explore how such prudential regulation might affect the dynamics of overnight interest rates. The results — which are illustrative — estimate the interest rates at which banks might borrow and lend reserves overnight in the presence of prudential regulation. They suggest that risk-weighted capital requirements might increase the average level of overnight interbank interest rates, while the regulatory minimum leverage ratio might decrease it. If applied to real-world data on central bank reserves balances and regulatory metrics, this model also offers an insight into how central bank policymakers could — if they so choose — amend their operational frameworks to account for the effects of regulation.
    Keywords: Monetary policy implementation; money markets; bank regulation; central bank operations.
    JEL: E43 E43 E58 G12
    Date: 2015–09–11
  8. By: Itzhak Ben-David; Ajay Palvia; Chester Spatt
    Abstract: A common view is that deposit rates are determined primarily by supply: depositors require higher deposit rates from risky banks, thereby creating market discipline. An alternative perspective is that market discipline is limited (e.g., due to deposit insurance and/or enhanced capital regulation) and that internal demand for funding by banks determines rates. Using branch-level deposit rate data, we find little evidence for market discipline as rates are similar across bank capitalization levels. In contrast, banks’ loan growth has a causal effect on deposit rates: e.g., branches’ deposit rates are correlated with loan growth in other states in which their bank has some presence, suggesting internal capital markets help reallocate the bank's funding.
    JEL: G21
    Date: 2015–09
  9. By: Tim Schmidt-Eisenlohr (University of Illinois at Urbana-Champaign); Friederike Niepmann (Federal Reserve Bank of New York)
    Abstract: How relevant are financial instruments to manage risk in international trade for exporting? Employing a unique dataset of U.S. banks' trade finance claims by country, this paper estimates the effect of shocks to the supply of letters of credit on U.S. exports. Our identification strategy relies on two observations. First, banks vary in their importance as providers of letters of credit across countries. Second, a reduction in the supply of letters of credit by a bank should have a larger effect on exports to those destinations where the bank takes a larger share of the trade finance market. We show that a one-standard deviation negative shock to a country's supply of letters of credit reduces U.S. exports by 1.5 percentage points. This effect is stronger for smaller and poorer destinations. It more than doubles during crisis times, suggesting a non-negligible role for finance in explaining the Great Trade Collapse.
    Date: 2015
  10. By: Engler, Philipp; Grosse Steffen, Christoph
    Abstract: This paper studies the bank-sovereign link in a dynamic stochastic general equilibrium set-up with strategic default on public debt. Heterogeneous banks give rise to an interbank market where government bonds are used as collateral. A default penalty arises from a breakdown of interbank intermediation that induces a credit crunch. Government borrowing under limited commitment is costly ex ante as bank funding conditions tighten when the quality of collateral drops. This lowers the penalty from an interbank freeze and feeds back into default risk. The arising amplification mechanism propagates aggregate shocks to the macro-economy. The model is calibrated using Spanish data and is capable of reproducing key business cycle statistics alongside stylized facts during the European sovereign debt crisis. JEL Classification: E43, E44, F34, H63
    Keywords: Bank-sovereign link, Domestic debt, Interbank market, Non-Ricardian effects, Occasionally binding constraint, Secondary markets, Sovereign default
    Date: 2015–08
  11. By: Sebastian Di Tella (Stanford GSB); Pablo Kurlat (Stanford University)
    Abstract: We propose a model to explain why banks' balances sheets are exposed to interest rate risk despite the existence of markets where that risk can be hedged. A rise in nominal interest rates raises the opportunity cost of holding currency; since bank liabilities are close substitutes of currency, demand for bank liabilities rises and banks earn higher spreads. If risk aversion is higher than 1, the optimal dynamic hedging strategy is to sustain capital losses when nominal interest rates rise and, conversely, capital gains when they fall. A traditional bank balance sheet with long duration nominal assets achieves that.
    Date: 2015
  12. By: Ongena, Steven; Popov, Alexander
    Abstract: This paper studies the causal effect of gender bias on access to bank credit. We extract an exogenous measure of gender bias from survey responses by descendants of US immigrants on questions about the role of women in society. We then use data on 6,000 small business firms from 17 countries and find that in countries with higher gender bias, female-owned firms are more frequently discouraged from applying for bank credit and more likely to rely on informal finance. At the same time, loan rejection rates and terms on granted loans do not vary between male and female firm owners. These results are not driven by credit risk differences between female- and male-owned firms or by any idiosyncrasies in the set of countries in our sample. Overall, the evidence suggests that in high-gender bias countries, female entrepreneurs are more likely to opt out of the loan application process, even though banks do not appear to discriminate against females that apply for credit. JEL Classification: G21, J16, N32, Z13
    Keywords: Bank credit, Cultural bias, Female-owned firms, Gender-based discrimination
    Date: 2015–07
  13. By: Popov, Alexander; Rocholl, Jörg
    Abstract: This paper identifies the effect of financing constraints on firms’ labor demand. We exploit exogenous funding shocks to German savings banks during the US mortgage crisis that are unrelated to local conditions. We find that firms with credit relationships with affected banks experienced a significant decline in employment and in labor compensation relative to firms whose credit relationships were with healthy banks. We also find that the employment effect increases, and the wage effect decreases with firm size. The decline in employment at firms attached to affected banks appears to be more long-lasting than the decline in labor compensation. JEL Classification: D92, G01, G21, J23, J31
    Keywords: Credit constraints, employment, financial crisis, labor compensation
    Date: 2015–06
  14. By: Angela Abbate (Deutsche Bundesbank and European University Institute, Department of Economics); Dominik Thaler (European University Institute, Department of Economics)
    Abstract: Motivated by VAR evidence on the risk-taking channel in the US, we develop a New Keynesian model where low levels of the risk-free rate induce banks to grant credit to riskier borrowers. In the model an agency problem between depositors and equity holders incentivizes banks to take excessive risk. As the real interest rate declines these incentives become stronger and risk taking increases. We estimate the model on US data using Bayesian techniques and assess optimal monetary policy conduct in the estimated model, assuming that the interest rate is the only available instrument. Our results suggest that in a risk taking channel environment, the monetary authority should seek to stabilize the path of the real interest rate, trading off more inflation volatility in exchange for less interest rate and output volatility.
    Keywords: Bank Risk; Monetary policy; DSGE Models
    JEL: E12 E44 E58
    Date: 2015–09
  15. By: Williamson, Stephen D. (Federal Reserve Bank of St. Louis)
    Abstract: A two-sector general equilibrium banking model is constructed to study the functioning of a floor system of central bank intervention. Only retail banks can hold reserves, and these banks are also subject to a capital requirement, which creates “balance sheet costs” of holding reserves. An increase in the interest rate on reserves has very different qualitative effects from a reduction in the central bank’s balance sheet. Increases in the central bank’s balance sheet can have redistributive effects, and can reduce welfare. A reverse repo facility at the central bank puts a floor un- der the interbank interest rate, and is always welfare improving. However, an increase in reverse repos outstanding can increase the margin between the interbank interest rate and the interest rate on government debt.
    JEL: E4 E5
    Date: 2015–09–13
  16. By: Dong, Feng (Shanghai Jiao Tong University); Wang, Pengfei (Hong Kong University of Science and Technology); Wen, Yi (Federal Reserve Bank of St. Louis)
    Abstract: The supply and demand of credit are not always well aligned and matched, as is reflected in the countercyclical excess reserve-to-deposit ratio and interest spread between the lending rate and the deposit rate. We develop a search-based theory of credit allocations to explain the cyclical fluctuations in both bank reserves and the interest spread. We show that search frictions in the credit market can not only naturally explain the countercyclical bank reserves and interest spread, but also generate endogenous business cycles driven primarily by the cyclical utilization rate of credit resources, as long conjectured by the Austrian school of the business cycle. In particular, we show that credit search can lead to endogenous local increasing returns to scale and variable capital utilization in a model with constant returns to scale production technology and matching functions, thus providing a micro-foundation for the indeterminacy literature of Benhabib and Farmer (1994) and Wen (1998).
    Keywords: Search Frictions; Credit Utilization; Credit Rationing; Self-fulfilling Prophecy. Business Cycles.
    JEL: E1 E2 E3 E4
    Date: 2015–08–01
  17. By: Carolina Laureti
    Abstract: The poor need a range of financial services to cope with shocks, to manage day-to-day transactions, and to grasp business opportunities, among others. To be successful in reaching the poor, microfinance institutions should offer products that meet the poor’s needs. Product design, therefore, is becoming a very important topic. “Behavioral” product design pinpoints the importance of individuals’ behavioral anomalies, such as procrastination behavior and lack of self-control. Financial products are seen as commitment devices to help individuals diverting money from immediate consumption to savings and investment.<p>This doctoral thesis contributes to this recent research stream by first surveying the literature on product design in microfinance, and then providing an empirical and a theoretical contribution. Precisely, the thesis is structured in four chapters. Chapter 1 and Chapter 2 are both reviewing the literature. Chapter 1, titled “Product Flexibility in Microfinance: A Survey”, reviews the academic literature on product flexibility in microfinance and offers a categorization scheme of flexible microfinance products. Chapter 2, titled “Innovative Flexible Products in Microfinance”, scrutinizes nine real-life practices covering microcredit, micro-savings and micro-insurance services that mix flexible features and commitment devices. Chapter 3, titled “The Debt Puzzle in Dhaka’s Slums: Do Liquidity Needs Explain Co-Holding?”, examines the use of flexible savings-and-loan accounts by SafeSave’s clients and tests whether the need for liquidity explains why the poor save and borrow simultaneously. Lastly, Chapter 4, titled “Having it Both Ways: A Theory of the Banking Firm with Time-consistent and Time-inconsistent Depositors,” proposes a theoretical model to determine the liquidity premium offered by a monopolistic bank to a pool of depositors composed of time-consistent and time-inconsistent agents.
    Keywords: Microfinance; Financial institutions; Microfinance; Institutions financières; financial services; behavioural economics; microfinance
    Date: 2014–08–27
  18. By: Guillaume Vuillemey (Département d'économie)
    Abstract: Dans sa première partie, cette thèse étudie l’utilisation optimale des produits dérivés par les intermédiaires financiers dans leur gestion du risque, en prêtant spécifiquement attention au marché des dérivés de taux d’intérêt. En modélisant la structure de capital optimale d’une banque, le premier chapitre montre comment l’usage optimal des dérivés affecte certaines décisions souvent étudiées en finance d’entreprise : l’offre de crédit, la transformation de maturité, la politique de dividendes ou les probabilités de défaut. La seconde partie de la thèse étudie au contraire le marché des dérivés comme un système à part entière. Le second chapitre utilise une base de données nouvelle et unique d’expositions bilatérales sur des contrats CDS afin d’offrir une description détaillée de la structure du réseau des expositions. Le troisième chapitre a pour objet la régulation des marchés de produits dérivés. Il étudie la compensation centrale des produits dérivés standardisés, et la demande de collatéral induite par cette réforme à l’échelle mondiale, sous une variété d’hypothèses concernant la microstructure du marché.
    Keywords: Produits dérivés, Intermédiation financière, Compensation centrale, Risque systémique, Derivatives, Financial intermediation, Central clearing, Systemic risk
    Date: 2015–07

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