nep-ban New Economics Papers
on Banking
Issue of 2015‒09‒26
eight papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Euro area macro-financial stability: A flow-of-funds perspective By Beck, Günter W.; Kotz, Hans-Helmut; Zabelina, Natalia
  2. Learning Financial Shocks and the Great Recession By Jacek Suda; Patrick Pintus
  3. What drives bank-intermediated trade finance? Evidence from cross-country analysis By José María Serena Garralda; Garima Vasishtha
  4. On the roles of different foreign currencies in European bank lending By Signe Krogstrup; Cedric Tille
  5. Banks and Sovereign Risk: A Granular View By C. M. Buch; Michael Koetter; Jana Ohls
  6. 'Capital Controls and Welfare with Cross-Border Bank Capital Flows' By Pierre-Richard Agénor; Pengfei Jia
  7. Measuring Contagion-Induced Funding Liquidity Risk in Sovereign Debt Markets By Cho-Hoi Hui; Chi-Fai Lo; Xiao-Fen Zheng; Tom Fong
  8. The Maturity Structure of Inside Money By Ariel Zetlin-Jones; Burton Hollifield

  1. By: Beck, Günter W.; Kotz, Hans-Helmut; Zabelina, Natalia
    Abstract: The global financial crisis (as well as the European sovereign debt crisis) has led to a substantial redesign of rules and institutions - aiming in particular at underwriting financial stability. At the same time, the crisis generated a renewed interest in properly appraising systemic financial vulnerabilities. Employing most recent data and applying a variety of largely only recently developed methods we provide an assessment of indicators of financial stability within the Euro Area. Taking a "functional" approach, we analyze comprehensively all financial intermediary activities, regardless of the institutional roof - banks or non-bank (shadow) banks - under which they are conducted. Our results reveal a declining role of banks (and a commensurate increase in non-bank banking). These structural shifts (between institutions) are coincident with regulatory and supervisory reforms (implemented or firmly anticipated) as well as a non-standard monetary policy environment. They might, unintendedly, actually imply a rise in systemic risk. Overall, however, our analyses suggest that financial imbalances have been reduced over the course of recent years. Hence, the financial intermediation sector has become more resilient. Nonetheless, existing (equity) buffers would probably not suffice to face substantial volatility shocks.
    Keywords: bank and non-bank financial intermediation,shadow banking,financial stability,systemic risk,financial regulation
    Date: 2015
  2. By: Jacek Suda (National Bank of Poland); Patrick Pintus (Aix-Marseille School of Economics)
    Abstract: This paper develops a simple business-cycle model in which financial shocks have large macroeconomic effects when private agents are gradually learning their uncertain environment. When agents update their beliefs about the parameters that govern the unobserved process driving financial shocks to the leverage ratio, the responses of output and other aggregates under adaptive learning are significantly larger than under rational expectations. In our benchmark case calibrated using US data on leverage, debt-to-GDP and land value-to-GDP ratios for 1996Q1-2008Q4, learning amplifies leverage shocks by a factor of about three, relative to rational expectations. When fed with actual leverage innovations observed over that period, the learning model predicts a sizeable recession in 2008-10, while its rational expectations counterpart predicts a counter-factual expansion. In addition, we show that procyclical leverage reinforces the amplification due to learning and, accordingly, that macro-prudential policies enforcing countercyclical leverage dampen the effects of leverage shocks.
    Date: 2015
  3. By: José María Serena Garralda (Banco de España); Garima Vasishtha (Bank of Canada)
    Abstract: Empirical work on the underlying causes of the recent dislocations in bank-intermediated trade finance has been limited by the scant availability of hard data. This paper aims to analyse the key determinants of bank-intermediated trade finance using a novel dataset covering ten banking jurisdictions. It focuses on the role of global factors as well as country-specific characteristics in driving trade finance. Results indicate that country-specific variables, such as growth in trade flows and funds available for domestic banks, as well as global financial conditions and global import growth, are important determinants of trade finance. These results are robust to different model specifications. Further, we do not find that trade finance is more sensitive to global financial conditions than other loans to non-bank entities.
    Keywords: bank-intermediated trade finance, trade flows, global financial crisis
    JEL: F14 F19
    Date: 2015–09
  4. By: Signe Krogstrup (Swiss National Bank, Zürich); Cedric Tille (IHEID, The Graduate Institute of International and Development Studies, Geneva)
    Abstract: We draw on a new data set on the use of Swiss francs and other currencies by European banks to assess the patterns of foreign currency bank lending. We show that the patterns differ sharply across foreign currencies. The Swiss franc is used predominantly for lending to residents, especially households. It is sensitive to the interest rate differential, exchange rate developments, funding availability, and to some extent international trade. Lending in other currencies is more used in lending to resident nonfinancial firms, and mostly in cross-border lending, where it is sensitive to funding costs and trade. Policy measures aimed at foreign currency lending have a clear impact on lending to residents. Our analysis shows that not all foreign currencies are alike, and that any policy aimed at the use of foreign currencies needs to take this heterogeneity into account.
    Keywords: Swiss franc lending, foreign currency lending, cross-border transmission of shocks, European bank balance sheets.
    JEL: F32 F34 F36
    Date: 2015–06–31
  5. By: C. M. Buch; Michael Koetter; Jana Ohls
    Abstract: We identify the determinants of all German banks’ sovereign debt exposures between 2005 and 2013 and test for the implications of these exposures for bank risk. Larger, more capital market affine, and less capitalised banks hold more sovereign bonds. Around 15% of all German banks never hold sovereign bonds during the sample period. The sensitivity of sovereign bond holdings by banks to eurozone membership and inflation increased significantly since the collapse of Lehman Brothers. Since the outbreak of the sovereign debt crisis, banks prefer sovereigns with lower debt ratios and lower bond yields. Finally, we find that riskiness of government bond holdings affects bank risk only since 2010. This confirms the existence of a nexus between government debt and bank risk.
    Keywords: sovereign debt, bank-level heterogeneity, bank risk
    JEL: G01 G11 G21
    Date: 2015–09
  6. By: Pierre-Richard Agénor; Pengfei Jia
    Abstract: This paper studies the performance of time-varying capital controls on cross-border bank borrowing in an open-economy, dynamic stochastic general equilibrium model with credit market frictions and imperfect capital mobility. The model is calibrated for a middle-income country and is shown to replicate the main stylized facts associated with a fall in world interest rates (capital inflows, real appreciation, credit boom, asset price pressures, and output expansion). A capital controls rule, which is fundamentally macroprudential in nature, is defined in terms of either changes in bank foreign borrowing or cyclical output. An optimal, welfare-maximizing rule is established numerically. The analysis is then extended to solve jointly for optimal countercyclical reserve requirements and capital controls rules. These instruments are complements in the sense that both are needed to maximize welfare. However, a more aggressive reserve requirement rule (which responds to the credit-output ratio) also induces less reliance on capital controls. Thus, at the margin, countercyclical reserve requirements and capital controls are partial substitutes in maximizing welfare.
    Date: 2015
  7. By: Cho-Hoi Hui (Hong Kong Monetary Authority); Chi-Fai Lo (The Chinese University of Hong Kong); Xiao-Fen Zheng (The Chinese University of Hong Kong); Tom Fong (Hong Kong Monetary Authority)
    Abstract: The euro-area sovereign debt crisis demonstrated how liquidity shocks can build up in a sovereign debt market due to contagion. This paper proposes a model based on the probability density associated with the dynamics of sovereign bond spreads to measure contagion-induced systemic funding liquidity risk in the market. The two risk measures with closed-form formulas derived from the model, are (1) the rate of change of the probability of triggering a liquidity shock determined by the joint sovereign bond spread dynamics of the systemically important countries (i.e., Italy and Spain) and small country (i.e., Portugal); and (2) the distress correlation between bond spreads, which can provide forward-looking signals of such risk. A signal of the rate of change of the joint probability appeared in April 2011 before the liquidity shock occurred in November 2011. There exist endogenous critical levels of sovereign spreads, above which the signal materializes. The empirical results show that when funding cost, risk aversion and equity prices pass through certain levels, the rate of change of the joint probability will rise sharply.
    Keywords: European Sovereign Debt Crisis, Liquidity Risk, Contagion
    JEL: F30 G13
    Date: 2015–08
  8. By: Ariel Zetlin-Jones (Carnegie Mellon University); Burton Hollifield (Carnegie Mellon University)
    Abstract: In practice, bank liablities circulate, acting as inside money. What are the implications of the usefulness of these liabilities to facilitate trade for the bank's choice of maturity structure? Suppose that a bank finances illiquid long term real assets with long and short term financial claims. The households purchasing these claims use them as inside money to trade in a sequence of decentralized markets. Trade in decentralized markets is subject to search frictions as in Rocheteau and Wright (2005). The maturity structure of the bank's financial claims impacts their usefulness in facilitating trade and the bank's costs from liquidating long term real assets. Too much short-term money leads to excessive early liquidation of real long term assets, reducing the ability of inside money to facilitate trade in decentralized markets. Too much long-term money leads to too little costly liquidation of real assets, also reducing the ability of the inside money to facilitate decentralized exchange. The optimal maturity structure minimizes the cost of asset liquidation and maximizes the usefulness of the bank's claims in facilitating trade. We examine how the severity of the search frictions, the cost of early reversals, and the riskiness of the long-term real assets impact optimal maturity of the bank's inside money.
    Date: 2015

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