nep-ban New Economics Papers
on Banking
Issue of 2015‒10‒10
nineteen papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. The determinants of long-term debt issuance by European banks: evidence of two crises By Adrian Van Rixtel; Luna Romo González; Jing Yang
  2. Fire Sale Bank Recapitalizations By Bertsch, Christoph; Mariathasan, Mike
  3. The cyclicality of leverage By Adrian, Tobias; Boyarchenko, Nina; Shin, Hyun Song
  4. Banking Leverage with Currency Diversification By Justine Pedrono
  5. Do Capital Requirements Affect Cost of Intermediation? Evidence from a Panel of South African Banks By Andrew Maredza
  6. SMS Financing by banks in East Africa: Taking stock of regional developments By Adeline Pelletier
  7. Reserve requirements and the bank lending channel in China By Fungácová , Zuzana; Nuutilainen , Riikka; Weill , Laurent
  8. Phasing out the GSEs By Tim Landvoigt; Stijn Van Nieuwerburgh; Vadim Elenev
  9. Macroprudential policy: case study from a tabletop exercise By Adrian, Tobias; de Fontnouvelle, Patrick; Yang, Emily; Zlate, Andrei
  10. Characterising the financial cycle: a multivariate and time-varying approach By Hiebert, Paul; Schüler, Yves S.; Peltonen, Tuomas A.
  11. The effectiveness of countercyclical capital requirements and contingent convertible capital: a dual approach to macroeconomic stability By Hylton Hollander
  12. The Rise of China's Shadow Banking System By Zheng Song; Kinda Hachem
  13. The influence of monetary policy on bank profitability By Claudio Borio; Leonardo Gambacorta; Boris Hofmann
  14. Sovereign debt exposure and the bank lending channel: impact on credit supply and the real economy By Margherita Bottero; Simone Lenzu; Filippo Mezzanotti
  15. Higher bank capital requirements and mortgage pricing: evidence from the Countercyclical Capital Buffer (CCB) By Christoph Basten; Catherine Koch
  16. Systemic risk rankings and network centrality in the European banking sector By De Bruyckere, Valerie
  17. Drivers of banks' cost of debt and long-term benefits of regulation - an empirical analysis based on EU banks By Galiay, Artus; Maurin, Laurent
  18. Beggar-thy-neighbor? The international effects of ECB unconventional monetary policy measures By Bluwstein, Kristina; Canova, Fabio
  19. Regulation and liquidity provision By Dudley, William

  1. By: Adrian Van Rixtel; Luna Romo González; Jing Yang
    Abstract: This paper is one of the first to investigate the determinants of bond issuance by European banks. We use a unique database of around 50,000 bonds issued by 63 banks from 14 European countries, allowing us to differentiate between different types of long-term debt securities. By investigating at the individual bank level, we are able to test explicitly a broad set of hypotheses from both the corporate finance and banking literature on the drivers of bond issuance. We use both country and bank-specific financial characteristics as explanatory variables. With respect to the country determinants, our findings suggest that "market timing" (low interest rates) drove issuance before but not during the crisis, when access to funding became more important than its cost. Moreover, during the crisis years, country-risk characteristics became drivers of bond issuance, while for banks from the euro area periphery central bank liquidity substituted for unsecured long-term debt. We also show that heightened financial market tensions were detrimental to bond issuance, and more strongly so during crisis episodes. Our results yield strongly significant coefficients for the bank-specific variables, with signs as expected. We find evidence of "leverage targeting" by issuing long-term debt during the crisis years. The positive and significant coefficient for the capital ratio supports the "risk absorption" hypothesis, suggesting that larger capital buffers enhanced the risk-bearing capacity of banks and allowed them to issue more debt. Moreover, banks with deposit supply constraints and relatively large loan portfolios issued more bonds, both before and since the crisis years. We also find that higher rated banks were more likely to issue bonds, also during the crisis period. Stronger banks issued especially unsecured debt, while weaker banks resorted more to issuance of covered bonds. Overall, our results suggest that stronger banks - including those from peripheral countries - maintained better access to longer-term funding markets, even during crisis periods. Our results pass several robustness tests. We present an additional aggregated country analysis in a separate appendix.
    Keywords: bank funding, bond issuance, banking crisis, Europe
    Date: 2015–10
  2. By: Bertsch, Christoph (Research Department, Central Bank of Sweden); Mariathasan, Mike (University of Vienna)
    Abstract: We develop a general equilibrium model of banks’ capital structure, featuring heterogeneous portfolio risk and an imperfectly elastic supply of bank equity stemming from financial market segmentation. In our model, equity is costly and serves as a buffer against insolvency. Banks are ex-ante identical, but may need to recapitalize by selling equity claims after their portfolio risk becomes public knowledge. When the need to issue outside equity arises simultaneously in a large number of banks, the market for equity becomes crowded. Reminiscent of asset fire sales, banks do not fully internalize the effect of their individual equity issuance on the endogenous cost of equity and their future ability to recapitalize. As a result, they are inefficiently under-capitalized in equilibrium, and the incidence of insolvency is inefficiently high. This constrained inefficiency provides a new rationale for macroprudential capital regulation that arises despite the absence of deposit insurance, moral hazard, and asymmetric information; it also has implications for the regulation of payout policies and the design of bank stress testing.
    Keywords: Macroprudential policy; capital regulation; capital structure; financial market segmentation; incomplete markets; constrained inefficiency
    JEL: D50 D60 G21 G28
    Date: 2015–09–01
  3. By: Adrian, Tobias (Federal Reserve Bank of New York); Boyarchenko, Nina (Federal Reserve Bank of New York); Shin, Hyun Song (Bank for International Settlements)
    Abstract: This paper studies the question of the economic scale of financial institutions. We show that banks actively smooth book equity by adjusting payouts to achieve a desired trajectory of book equity. The countercyclical nature of net payouts of financial institutions leads to procyclical book leverage, while market leverage is nearly entirely reflective of movements in book-to-market ratios. There is an apparent structural break after the 2008 crisis, indicated by the banking sector’s subdued growth rate relative to pre-crisis levels. Market volatility dampens the intermediary leverage cycle. We draw conclusions for theories of financial intermediation and for capital regulation.
    Keywords: financial intermediation; market volatility; macro-finance
    JEL: E02 E32 G00 G28
    Date: 2015–10–01
  4. By: Justine Pedrono (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)
    Abstract: The brutal adjustments of global banks' balance sheet regarding economic activity have rekindled discussions about the procyclicality of the banking leverage. During economic bursts, the collateral value of banks decreases and their risk-taking capacity is reduced. Banks raise less funds and their leverage - defined as total asset over equity - goes down: the leverage is pro-cyclical. The paper investigates the procyclicality of bank leverage when banks can borrow and invest in two different currencies, as it is the case especially for European banks. To the extent that shocks are asymmetric, we find that currency diversification may reduce the procyclicality of the leverage and that floating exchange rate increases the risk-taking capacity of banks.
    Keywords: procyclical leverage,global banks,currency diversification,collateral
    Date: 2015–07
  5. By: Andrew Maredza
    Abstract: Since the 2007 sub-prime financial crisis, world bank capital ratios have increased. In this paper, we investigate the impact of increased bank capital requirements introduced under the Basel Accord framework on the costs of intermediation. We attempt to answer this central question by running panel regressions using 2001 – 2012 annual bank-level data for ten banks constituting inter alia the four largest South African banks. We conclude that high capital requirements are associated with increased costs of intermediation. Our fixed effects estimations show that a one percent increase in capital requirements lead on average to a range of 12 – 14 basis points increase in the cost of intermediation during our period of analysis. We also find evidence that the Basel II capital requirements effected from 1 January 2008 contributed to increased cost of intermediation by an average 7 basis points for the period 2008 – 2012. We therefore caution that while maintaining adequate capital levels is crucial for obvious reasons, there is need for supervisory authorities to ensure that such regulation is effective and well-balanced to guarantee safety and stability of the sector without endangering the ability of the banks to service the economy.
    Keywords: Bank performance, bank capital, Basel accord, Capital adequacy ratio, Financial Regulation, Intermediation costs
    JEL: C33 G21 G28
    Date: 2015
  6. By: Adeline Pelletier (London School of Economics (LSE) in London)
    Abstract: The banking sector in East Africa has evolved considerably over the last 10-15 years with the regional expansion of African banks, coupled with financial innovations and regulatory changes. As a result, the banking landscape is marked by the co-existence of several types of banks: global banks from developed countries, emerging banks (mainly from Asian countries), foreign regional African banks and domestic African banks. Given the difficulty of access to credit experienced by SMEs, in a context of low transparency and information on borrowers, the expansion of regional African banks could have an important impact on the financial and economic development of the region. Indeed, if these regional banks are better able to evaluate SME credit risk than global banks, they might offer more loans to SMEs, thus fostering a sector which is the backbone of East African economies. In a constrained institutional setting, with a large unbanked population and little information available on borrowers, how do foreign and domestic banks screen and monitor borrowers? To what extent do regional African banks’ lending practices and perception of the business environment differ from that of domestic African banks and of global banks? What is the impact of the regional expansion of African banks on SME financing?
    Keywords: Finance, Kenya, Development
    Date: 2014
  7. By: Fungácová , Zuzana (BOFIT); Nuutilainen , Riikka (BOFIT); Weill , Laurent (BOFIT)
    Abstract: This paper examines how reserve requirements influence the transmission of monetary policy through the bank lending channel in China while also taking into account the role of bank ownership. The implementation of Chinese monetary policy is characterized by the reliance on the reserve requirements as a regular policy tool with frequent adjustments. Using a large dataset of 170 Chinese banks for the period 2004–2013, we analyze the reaction of loan supply to changes in reserve requirements. We find no evidence of the bank lending channel through the use of reserve requirements. We observe, nonetheless, that changes in reserve requirements influence loan growth of banks. The same findings hold true for other monetary policy instruments. Further, we show that the bank ownership format influences transmission of monetary policy.
    Keywords: Chinese banks; bank lending channel; bank ownership
    JEL: E52 G21 P52
    Date: 2015–09–21
  8. By: Tim Landvoigt (UT Austin); Stijn Van Nieuwerburgh (NYU Stern School of Business); Vadim Elenev (NYU Stern)
    Abstract: We develop a new model of the mortgage market where both borrowers and lenders can default. Risk tolerant savers (risk takers) act as intermediaries between risk averse depositors and impatient borrowers. The government provides mortgage guarantees and deposit insurance. Underpriced government guarantees lead to risky mortgage origination and excessive financial sector leverage. Mortgage crises frequently turn into financial crises and government bailouts due to the fragility of the intermediaries' balance sheets. Increasing the price of the mortgage guarantee crowds in the private sector, reduces financial fragility, leads to less and safer mortgage lending, lowers house prices, raises mortgage rates and risk-free interest rates. It also makes all agents in the economy strictly better off. The welfare gains are particularly large for the risk takers so that the private market solution increases wealth inequality.
    Date: 2015
  9. By: Adrian, Tobias (Federal Reserve Bank of New York); de Fontnouvelle, Patrick (Federal Reserve Bank of Boston); Yang, Emily (Federal Reserve Bank of New York); Zlate, Andrei (Federal Reserve Bank of Boston)
    Abstract: Since the global financial crisis of 2007-09, policy makers and academics around the world have advocated the use of prudential tools for macroprudential purposes. This paper presents a macroprudential tabletop exercise that was aimed at confronting Federal Reserve Bank Presidents with a plausible, albeit hypothetical, macro-financial scenario that would lend itself to macroprudential considerations. In the tabletop exercise, the primary macroprudential objective was to reduce the likelihood and severity of possible future financial disruptions associated with the unwinding of the hypothetical overheating scenario. The scenario provided a path for key macroeconomic and financial variables that were assumed to be observed through 2016:Q4, as well as the corresponding hypothetical projections for the interval from 2017:Q1 to 2018:Q4. Prudential tools under consideration included capital-based tools such as the leverage ratios, countercyclical capital buffer, and sectoral capital requirements; liquidity-based tools such as the liquidity coverage and net stable funding ratios; credit-based tools such as caps on loan-to-value ratios and margins; capital and liquidity stress testing; and supervisory guidance and moral suasion. In addition, participants were asked to consider using monetary policy tools for financial stability purposes. This paper presents the hypothetical macro-financial scenario, the set of macroprudential tools, and their transmission mechanism, as well as an account of the participants’ assessment of vulnerabilities and potential policy actions under the scenario. The tabletop exercise abstracted from governance issues within the Federal Reserve System, focusing instead on economic mechanisms of alternative tools.
    Keywords: macroprudential policy; monetary policy; tabletop exercise
    JEL: E58 G01 G18
    Date: 2015–09–01
  10. By: Hiebert, Paul; Schüler, Yves S.; Peltonen, Tuomas A.
    Abstract: We introduce a methodology to characterise financial cycles combining a novel multivariate spectral approach to identifying common cycle frequencies across a set of indicators, and a time varying aggregation emphasising systemic developments. The methodology is applied to 13 European Union countries as well a synthetic euro area aggregate, based on a quarterly dataset spanning 1970-2013. Results suggest that credit and asset prices share cyclical similarities, which, captured by a synthetic financial cycle, outperform the credit-to-GDP gap in predicting systemic banking crises on a horizon of up to three years. Financial cycles tend to be long, particularly in upswing phases and with important dispersion across country cases. Concordance of financial and business cycles is observed only 2/3 of the time. While a similar degree of concordance for financial cycles is apparent across countries, heterogeneity is high – whereby a cluster of countries tends to exhibit a high synchronisation in their financial cycle phases. JEL Classification: E30, E40, C54
    Keywords: financial cycle, macroprudential policy, power cohesion, spectral analysis
    Date: 2015–09
  11. By: Hylton Hollander
    Abstract: This paper studies the effectiveness of countercyclical capital requirements and contingent convertible capital (CoCos) in limiting financial instability, and its associated influence on the real economy. To do this, I augment both features into a standard real business cycle framework with an equity market and a banking sector. The model is calibrated to real U.S. data and used for simulations. The findings suggest that CoCos effectively re-capitalize the banking sector and foster the objectives of countercyclical capital requirements (i.e., Basel III). Under financial shocks, CoCos provide an effective automatic stabilization effect on the financial cycle and the real economy. Conversely, a countercyclical capital adequacy rule dominates CoCos in the stabilization of real shocks.
    Keywords: Contingent convertible debt, bank capital, bank regulation, Basel
    JEL: G28 G38 E44
    Date: 2015
  12. By: Zheng Song (The University of chicago); Kinda Hachem (University of Chicago)
    Abstract: Shadow banking in China has grown very rapidly during the past decade. This paper studies the causes and impending consequences. We begin by documenting important differences in the cross-section of Chinese banks to isolate the regulatory triggers for shadow banking. We then build a model that rationalizes the facts and use it to conduct policy experiments. We find that asymmetric competition between banks is both a short-run stabilizer and a long-run risk, with new regulations potentially exacerbating the tipping point.
    Date: 2015
  13. By: Claudio Borio; Leonardo Gambacorta; Boris Hofmann
    Abstract: This paper investigates how monetary policy affects bank profitability. We use data for 109 large international banks headquartered in 14 major advanced economies for the period 1995-2012. Overall, we find a positive relationship between the level of short-term rates and the slope of the yield curve (the "interest rate structure", for short), on the one hand, and bank profitability - return on assets - on the other. This suggests that the positive impact of the interest rate structure on net interest income dominates the negative one on loan loss provisions and on non-interest income. We also find that the effect is stronger when the interest rate level is lower and the slope less steep, ie that non-linearities are present. All this suggests that, over time, unusually low interest rates and an unusually flat term structure erode bank profitability.
    Keywords: monetary policy, bank profitability, financial crisis
    Date: 2015–10
  14. By: Margherita Bottero (Bank of Italy); Simone Lenzu (University of Chicago); Filippo Mezzanotti (Harvard University)
    Abstract: We study the impact of sovereign market tensions on the real economy through the bank lending channel. Using a large matched bank-firm panel data set that tracks credit relations in Italy over the period 2009-2011, we show that the Greek bailout in the spring of 2010 had a negative impact on the riskiness of government securities held in the portfolio of financial intermediaries, which in turn led to a tightening in credit supply to firms. Firms, especially riskier ones, were unable to smooth out the credit shortage. We estimate that the shock to sovereign bonds led, via the lending channel, to a drop in aggregate bank lending to corporations of almost 2 percent over the subsequent year which translated in a reduction of investment by smaller firms.
    Keywords: sovereign debt, bank lending channel, lending supply, real effects, firm investment
    JEL: E51 G21
    Date: 2015–09
  15. By: Christoph Basten; Catherine Koch
    Abstract: How has the CCB affected mortgage pricing after Switzerland became the first country to activate this Basel III macroprudential tool? By analyzing a database with several offers per mortgage request, we construct a picture of mortgage supply and demand. We find, first, that the CCB changes the composition of mortgage supply, as relatively capital-constrained and mortgage-specialized banks raise prices more than their competitors do. Second, risk-weighting schemes linked to borrower risk do not amplify the CCB's effect. To conclude, changes in the supply composition suggest that the CCB has achieved its intended effect in shifting mortgages from less resilient to more resilient banks, but stricter capital requirements do not appear to have discouraged less resilient banks from risky mortgage lending.
    Keywords: banks, macroprudential policy, capital requirements, mortgage pricing
    Date: 2015–09
  16. By: De Bruyckere, Valerie
    Abstract: This paper presents a methodology to calculate the Systemic Risk Ranking of financial institutions in the European banking sector using publicly available information. The pro- posed model makes use of the network structure of financial institutions by including the stock return series of all listed banks in the financial system. Furthermore, a wide set of common risk factors (macroeconomic risk factors, sovereign risk, financial risk and housing price risk) is included to allow these factors to affect the banks. The model uses Bayesian Model Averaging (BMA) of Locally Weighted Regression models (LOESS), i.e. BMA-LOESS. The network structure of the financial sector is analysed by computing measures of network centrality (degree, closeness and betweenness) and it is shown that this information can be used to provide measures of the systemic importance of institutions. Using data from 2005 (2nd quarter) to 2013 (3rd quarter), this paper provides further insight into the time-varying importance of risk factors and it is shown that the model produces superior conditional out-of-sample forecasts (i.e. projections) than a classical linear Bayesian multi-factor model. JEL Classification: C52, C58, G15, G21
    Keywords: bank stock returns, Bayesian model averaging, financial networks, locally weighted regression, systemic risk
    Date: 2015–09
  17. By: Galiay, Artus; Maurin, Laurent
    Abstract: Based on a sample of EU listed banks, we estimate the sensitivity of banks’ marginal cost of debt and analyse the potential impact of the post-crisis regulatory package. We build synthetic estimates of risk in banks’ books and the macroeconomic environment and argue that regulatory changes alter the transmission of these risks to banks’ market funding costs. To circumvent the fact that new regulations are not observable, we also construct indices for each of the new regulatory packages, (1) capital and leverage, (2) liquidity and funding, and (3) banks’ structural perimeter (which seeks to separate real economy lending form market activities). Those are based on the variables reported insample which are most correlated with the regulatory targets. We find evidence of a dampening effect of banks’ capital base on the transmission of risks to market funding costs: a 1 standard deviation increase in the capital and leverage index reduces the transmission of a 1 standard deviation shock to macroeconomic risk by up to 20 basis points (bps). Based on a different sample and obtained from a different methodology, our results for capital are comparable to those of Babihuga and Spaltro (2014). We also find evidence of a dampening effect for funding and liquidity regulations, with a 1 standard deviation increase in the index reducing the transmission of a 1 standard deviation shock to macroeconomic risk by up to 34 bps. However, we do not reach a clear conclusion regarding the impact of structural perimeter regulations. JEL Classification: G01, G21
    Keywords: Bank balance sheet, bank funding costs, Bank structural perimeter, Basel III regulations, Capital and leverage, cross section estimates, CRR and CRD IV, dynamic estimates, factor based indices, Funding and liquidity, risk
    Date: 2015–09
  18. By: Bluwstein, Kristina; Canova, Fabio
    Abstract: The effects that European Central Bank unconventional monetary policy measures have on nine European countries not adopting the Euro are examined with a novel Bayesian mixed frequency Structural Vector Autoregressive technique. The technique accounts for the fact that macro, monetary and financial data have different frequencies. Unconventional monetary policy disturbances generate important domestic fluctuations. The wealth, the risk, and the portfolio rebalancing channels matter for international propagation; the credit channel does not. International spillovers are larger in countries with more advanced financial systems and a larger share of domestic banks. A comparison with conventional monetary policy disturbances and with announcement surprises is provided.
    Keywords: Bayesian Mixed Frequency SVAR; Financial Spillovers; International Transmission; Unconventional Monetary Policy
    JEL: C11 C32 E52 F42 G15
    Date: 2015–10
  19. By: Dudley, William (Federal Reserve Bank of New York)
    Abstract: Remarks at the SIFMA Liquidity Forum, New York City.
    Keywords: bank regulation; capital requirements; regulatory requirements; liquidity standards; liquidity measurement; supplementary leverage ratio (SLR); Comprehensive Capital Analysis and Review (CCAR)
    JEL: E58
    Date: 2015–09–30

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