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on Banking |
| By: | Pierre-Olivier Weill (UCLA); Saki Bigio (Columbia GSB) |
| Abstract: | In this paper, we study the manner in which banks design and issue liabilities that facilitate trade amongst their customers. A bank mitigates a lemon problem by offering ex-ante lines of credit to their customers. Ex-post, some of these customers find it optimal to use their line of credit by pledging and revealing private information about their collateral. In exchange, these customers receive a deposit-like bank liability, which they subsequently use as a means of payment. In the optimal banking contract, the bank remains opaque about the private information; the liability is less risky than the underlying collateral; and the bank uses its capital to absorb losses in bad states of the world. We show that, with multiple banks, liabilities circulate and are guaranteed by the assets of the banking systems. We find that negative shocks to collateral value may propagate in the entire banking system. |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed015:1478&r=ban |
| By: | Toni Beutler; Robert Bichsel; Adrian Bruhin; Jayson Danton |
| Abstract: | In this paper, we empirically analyze the transmission of realized interest rate risk – the gain or loss in bank economic capital due to movements in interest rates – to bank lending. We exploit a unique panel data set that contains supervisory information on the repricing maturity profiles of Swiss banks and provides us with an individual measure of interest rate risk exposure net of hedging. Our analysis yields three main results. First, our estimates indicate that a year after a permanent 1 percentage point upward shock in nominal interest rates, the average bank of 2013Q3 would ceteris paribus reduce its cumulative loan growth by approximately 170 basis points. An estimated 28% of this reduction would be the result of realized interest rate risk exposure weakening the bank’s economic capital. Second, due to the banks’ heterogeneity in interest rate risk exposure, the effect of the shock would differ across institutions and could be redistributive across regions. Finally, bank lending seems to be mainly driven by capital rather than liquidity, suggesting that a higher capitalized banking system can better shield its creditors from shocks in interest rates. |
| Keywords: | Interest Rate Risk; Bank Lending; Monetary Policy Transmission |
| JEL: | E44 E51 E52 G21 |
| Date: | 2015–09 |
| URL: | http://d.repec.org/n?u=RePEc:lau:crdeep:15.09&r=ban |
| By: | Kilian Huber |
| Abstract: | This paper analyses the effects of bank lending on GDP and employment. Following losses on international financial markets in 2008/09, a large German bank cut its lending to the German economy. I exploit variation in dependence on this bank across counties. To address the correlation between county GDP growth and dependence on this bank, I use the distance to the closest of three temporary, historic bank head offices as instrumental variable. The results show that the effects of the lending cut were persistent, and resembled the growth patterns of developed economies during and after the Great Recession. For two years, the lending cut reduced GDP growth. Thereafter, affected counties remained on a lower, parallel trend. The firm results exhibit similar dynamics, and show that the lending cut primarily affected capital expenditures. Overall, the lending cut reduced aggregate German GDP in 2012 by 3.9 percent, and employment by 2.3 percent. This shows that a single bank can persistently shape macroeconomic growth. |
| Keywords: | Banking crisis, financial frictions, lending, GDP, growth, employment |
| JEL: | D22 D53 E24 E44 G01 G21 J01 J23 J30 O16 O40 O47 |
| Date: | 2015–11 |
| URL: | http://d.repec.org/n?u=RePEc:cep:cepdps:dp1389&r=ban |
| By: | Alex van de Minne; Federica Teppa |
| Abstract: | This paper estimates demand and supply of mortgage credit by using a hierarchical trend model. The empirical analysis is based on loan-level data covering the years 2005-2014 in the Netherlands. We find that high-income households take out higher loan amounts and have higher collateral values. Interest rates are negatively related to both loan amounts and collateral values. The common trend in the loan equation, a proxy for the changes in demand and supply of mortgage credit over time, suggests a large decline in mortgage demand and supply after 2007. The common trend in the collateral value equation is highly correlated with the common trend in the loan equation, suggesting a high pass-through rate of changes in credit conditions from loan to value. We also find that young household cohorts can afford to buy better quality houses in 2014 than in 2005, even if they could borrow less. On the contrary, older household cohorts take out higher loans in 2014 than in 2005, but their collateral values do not change. We argue that younger households took up less mortgage debt as they became more credit constraint over time. Older households on the other hand suffered from negative home equity, forcing them to take up higher mortgage loans. |
| Keywords: | house prices; mortgage credit; credit conditions |
| JEL: | G21 E51 C32 |
| Date: | 2015–11 |
| URL: | http://d.repec.org/n?u=RePEc:dnb:dnbwpp:486&r=ban |
| By: | Kyriakos C. Neanidis; L. Pereira da Silva |
| Abstract: | This paper studies the extent to which alternative loan loss provisioning regimes affect the procyclicality of the financial system and financial stability. It uses a DSGE model with financial frictions (namely, balance sheet and collateral effects, as well as economies of scope in banking) and a generic formulation of provisioning regimes. Numerical experiments with a parameterized version of the model show that cyclically adjusted (or, more commonly called, dynamic) provisioning can be highly effective in terms of mitigating procyclicality and financial instability, measured in terms of the volatility of the credit-output ratio and real house prices, in response to financial shocks. The optimal combination of simple cyclically adjusted provisioning and countercyclical reserve requirements rules is also studied. The simultaneous use of these instruments does not improve the ability of either one of them to mitigate financial instability, making them partial substitutes rather than complements. |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:man:cgbcrp:216&r=ban |
| By: | Bonin, John P. (BOFIT); Louie , Dana (BOFIT) |
| Abstract: | Our objective is to examine empirically the behavior of foreign banks regarding real loan growth during a financial crisis for a set of countries in which these banks dominate the banking sectors due primarily to having taken over large existing former state-owned banks. The eight countries are among the most developed in Emerging Europe, their banking sectors having been modernized by the beginning of the time period.We consider a data period that includes an initial credit boom (2004 – 2007) followed by the global financial crisis (2008 & 2009) and the onset of the Eurozone crisis (2010). Our main innovations with respect to the existing literature on banking during the financial crisis are to include explicit consideration of exchange rate dynamics and to separate foreign banks into two categories, namely, subsidiaries of the Big 6 European MNBs and all other foreign-controlled banks. Our results show that bank lending was impacted adversely by the crisis but that the two types of foreign banks behaved differently. The Big 6 banks remained committed to the region in that their lending behavior was not different from that of domestic banks corroborating the notion that these countries are a “second home market” for these banks. Contrariwise, the other foreign banks were primarily responsible for fueling the credit boom prior to the crisis but then “cut and ran” by decreasing their lending appreciably during the crisis. Our results also indicate different bank behavior in countries with flexible exchange rate regimes from those in the Eurozone. Hence, we conclude that both innovations matter in empirical work on bank behavior during a crisis in the region and may, by extension, be relevant to other small countries in which banking sectors are dominated by foreign financial institutions. |
| Keywords: | foreign bank lending; financial crisis; multinational banks; Emerging Europe |
| JEL: | G01 G15 P34 |
| Date: | 2015–11–04 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:bofitp:2015_031&r=ban |
| By: | Nadja Dwenger (Universitat Hohenheim, CESifo); Frank M Fossen (Freie Universitat Berlin, DIW and IZA); Martin Simmler (Oxford University Centre for Business Taxation and DIW Berlin) |
| Abstract: | What began as a financial crisis in the United States in 2007¨C2008 quickly evolved into a massive crisis of the global real economy. We investigate the importance of the bank lending and firm borrowing channel in the international transmission of bank distress to the real economy ¡ªin particular, to real investment and labour employment by nonfinancial firms. We analyse whether and to what extent firms are able to compensate for the shortage in loan supply by switching banks and by using other types of financing. The analysis is based on a unique matched data set for Germany that contains firm-level financial statements for the 2004¨C2010 period together with the financial statements of each firm¡¯s relationship bank(s). We use instrumental variable estimations in first differences to eliminate firm and bank-specific effects. The first stage results show that banks that suffered losses due to proprietary trading activities at the onset of the financial crisis reduced their lending more strongly than non-affected banks. In the second stage, we find that firms whose relationship banks reduce credit supply downsize their real investment and labour employment significantly. This effect is larger for firms that are unable to provide much collateral. We document that firms partially offset reduced credit supply by establishing new bank relationships, using internal funds, and issuing new equity. |
| Keywords: | financial crisis; contagion; credit rationing; relationship lending; investment |
| JEL: | D22 D92 E44 G01 G20 G31 H25 H32 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:btx:wpaper:1516&r=ban |
| By: | Chia-Lin Chang (Department of Applied Economics Department of Finance National Chung Hsing University Taichung, Taiwan.); Juan-Ángel Jiménez-Martín (Departamento de Fundamentos del Análisis Económico II (Economía Cuantitativa). Universidad Complutense de Madrid.); Esfandiar Maasoumi (Department of EconomicsEmory University, USA); Michael McAleer (Department of Quantitative Finance National Tsing Hua University, Taiwan); Teodosio Pérez-Amaral (Departamento de Fundamentos del Análisis Económico II (Economía Cuantitativa). Universidad Complutense de Madrid.) |
| Abstract: | The Basel Committee on Banking Supervision (BCBS) (2013) recently proposed shifting the quantitative risk metrics system from Value-at-Risk (VaR) to Expected Shortfall (ES). The BCBS (2013) noted that “a number of weaknesses have been identified with using VaR for determining regulatory capital requirements, including its inability to capture tail risk” (p. 3). For this reason, the Basel Committee is considering the use of ES, which is a coherent risk measure and has already become common in the insurance industry, though not yet in the banking industry. While ES is mathematically superior to VaR in that it does not show “tail risk” and is a coherent risk measure in being subadditive, its practical implementation and large calculation requirements may pose operational challenges to financial firms. Moreover, previous empirical findings based only on means and standard deviations suggested that VaR and ES were very similar in most practical cases, while ES could be less precise because of its larger variance. In this paper we find that ES is computationally feasible using personal computers and, contrary to previous research, it is shown that there is a stochastic difference between the 97.5% ES and 99% VaR. In the Gaussian case, they are similar but not equal, while in other cases they can differ substantially: in fat-tailed conditional distributions, on the one hand, 97.5%-ES would imply higher risk forecasts, while on the other, it provides a smaller down-side risk than using the 99%-VaR. It is found that the empirical results in the paper generally support the proposals of the Basel Committee. |
| Keywords: | Stochastic dominance, Value-at-Risk, Expected Shortfall, Optimizing strategy, Basel III Accord. |
| JEL: | G32 G11 G17 C53 C22 |
| Date: | 2015–11 |
| URL: | http://d.repec.org/n?u=RePEc:ucm:doicae:1516&r=ban |
| By: | Ippolito, Filippo; Peydró, José Luis; Polo, Andrea; Sette, Enrico |
| Abstract: | By providing liquidity to depositors and credit line borrowers, banks are exposed to double-runs on assets and liabilities. For identification, we exploit the 2007 freeze of the European interbank market and the Italian Credit Register. After the shock, there are sizeable, aggregate double-runs. In the cross-section, pre-shock interbank exposure is (unconditionally) unrelated to post-shock credit line drawdowns. However, conditioning on firm observable and unobservable characteristics, higher pre-shock interbank exposure implies more post-shock drawdowns. We show that is the result of active pre-shock liquidity risk management by more exposed banks granting credit lines to firms that run less in a crisis. |
| Keywords: | credit lines; financial crisis; liquidity risk; risk management; runs |
| JEL: | G01 G21 G28 |
| Date: | 2015–11 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:10948&r=ban |
| By: | Butt, Nick (Bank of England); Churm, Rohan (Bank of England); McMahon, Michael (University of Warwick, CEPR, CAGE (Warwick), CfM (LSE), and CAMA (ANU)); Morotz, Arpad (Bank of England); Schanz, Jochen (Bank for International Settlements) |
| Abstract: | We test whether quantitative easing (QE), in addition to boosting aggregate demand and inflation via portfolio rebalancing channels, operated through a bank lending channel (BLC) in the UK. Using Bank of England data together with an instrumental variables approach, we find no evidence of a traditional BLC associated with QE. We show, in a simple framework, that the traditional BLC is diminished if the bank receives `flighty' deposits (deposits that are likely to quickly leave the bank). We show that QE gave rise to such flighty deposits which may explain why we find no evidence of a BLC. |
| Keywords: | Monetary policy; Bank lending channel; Quantitative Easing JEL Classification: E51, E52, G20 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:cge:wacage:244&r=ban |
| By: | Phelan, Christopher (Federal Reserve Bank of Minneapolis) |
| Abstract: | Banks in the United States have the potential to increase liquidity suddenly and significantly—from $12 trillion to $36 trillion in currency and easily accessed deposits—and could thereby cause sudden inflation. This is possible because the nation’s fractional banking system allows banks to convert excess reserves held at the Federal Reserve into bank loans at about a 10-to-1 ratio. Banks might engage in such conversion if they believe other banks are about to do so, in a manner similar to a bank run that generates a self-fulfilling prophecy. {{p}} Policymakers could guard against this inflationary possibility by the Fed selling financial assets it acquired during quantitative easing or by Congress significantly raising reserve requirements. |
| Date: | 2015–11–03 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedmep:15-8&r=ban |
| By: | Mario Cerrato; John Crosby; Minjoo Kim; Yang Zhao |
| Abstract: | We document asymmetric and time-varying features of dependence between the credit risks of global systemically important banks (G-SIBs) in the UK banking industry using a CDS dataset. We model the dependence of CDS spreads using a dynamic asymmetric cop- ula. Comparing our model with traditional copula models, we find that they usually under- estimate the probability of joint (or conditional) default in the UK G-SIBs. Furthermore, we show that dynamics and asymmetries between CDS spreads are closely associated with the probabilities of joint (or conditional) default through the extensive regression analysis. Especially, our regression analysis provides a policy implication that copula correlation or tail dependence coefficients are able to be leading indicators for the systemic credit event. |
| Keywords: | Calibrated marginal default probability, probability of joint default, probability of conditional default, GAS-based GHST copula. |
| JEL: | C32 G32 |
| Date: | 2015–10 |
| URL: | http://d.repec.org/n?u=RePEc:gla:glaewp:2015_24&r=ban |
| By: | Nieto, Maria J. (Banco de España); Wall, Larry D. (Federal Reserve Bank of Atlanta) |
| Abstract: | In the United States and the European Union (EU), political incentives to oppose cross-border banking have been strong in spite of the measurable benefits to the real economy from breaking down geographic barriers. Even a federal-level supervisor and safety net are not by themselves sufficient to incentivizing cross-border banking although differences in the institutional set-up are reflected in the way the two areas responded to the crisis. The U.S. response was a coordinated response, and the cost of resolving banks was borne at the national level. Moreover, the Federal Deposit Insurance Corporation (FDIC) could market failed banks to other banks irrespective of state boundaries, reducing the cost of the crisis to the U.S. economy and the sovereign finances. In the EU, the crisis resulted in financial market fragmentation and unbearable costs to some sovereigns. Moreover, the FDIC could market failed banks to other banks irrespective of state boundaries, reducing the cost of the crisis to the U.S. economy and the sovereign finances. In the EU, the crisis resulted in financial market fragmentation and unbearable costs to some sovereigns. |
| Keywords: | cross-border banking; financial crisis; bankruptcy; European Union; United States |
| JEL: | G01 G21 G28 K20 L51 |
| Date: | 2015–11–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedawp:2015-11&r=ban |
| By: | Giorgia Piacentino (Olin Business School at Washington University in St Louis); Anjan Thakor (olin school of business); Jason Donaldson (Washington University in St Louis) |
| Abstract: | Since the worst employment slumps follow periods of high household debt and almost all household debt is provided by banks, there is a natural link between bank lending and employment. Building on this, we theoretically investigate whether bank regulation can play a role in stimulating employment. Using a competitive search model, we find that levered households suffer from a debt overhang problem that distorts their preferences, making them demand high wages. In general equilibrium, firms internalize these preferences and post high wages but few vacancies. This vacancy-posting effect implies that high household debt leads to high unemployment. Unemployed households default on their debt. In equilibrium, the level of household debt is inefficiently high due to a household-debt externality--banks fail to internalize the effect that household leverage has on household default probabilities via the vacancy-posting effect. As a result, household debt levels are inefficiently high. Our results suggest that a combina- tion of loan-to-value caps for households and capital requirements for banks can elevate employment and improve efficiency, providing an alternative to monetary policy for labor market intervention. |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed015:1403&r=ban |
| By: | Souphala Chomsisengphet (Comptroller of the Currency); Neale Mahoney (University of Chicago Booth School of Business); Johannes Stroebel (New York University); Sumit Agarwal (NUS) |
| Abstract: | A growing literature points to the drop in household borrowing as a proximate cause of the Great Recession, but less is known about the causes of the drop in borrowing. We study the role played by credit supply using a panel dataset with 160 million credit card accounts and hundreds of credit limit regression discontinuities. Using this quasi-exogenous variation in the supply of credit, we find that consumers become increasingly supply-constrained during the Great Recession, with the effect on spending of a $1,000 larger credit limit growing from $82 in 2008 to a maximum of $516 in 2011, and with similar effects on borrowing volumes. We use the panel nature of our data to track the profitability these accounts and find that marginal lending was unprofitable throughout 2008 to 2012, with particularly large losses in the years when consumers had the highest marginal propensity to spend. These results are consistent with the 'no good risks' explanation for limited credit supply and push against the argument that financial frictions prevented banks from exploiting otherwise profitable lending opportunities. |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed015:1489&r=ban |
| By: | Papafilis, Michalis-Panayiotis; Psillaki, Maria; Margaritis, Dimitris |
| Abstract: | This paper examines the changes in the interdependence between sovereign and bank credit risk, that were noticed, after the announcement of the voluntary exchange program of Greek bonds, with the participation of the private sector (Private Sector Involvement - PSI). More precisely, we investigate the progress of the credit default swaps (CDS) of eight eurozone countries and of twenty-one banking institutions, for the period of January 2009 to May 2014. We divide the sample into two sub-periods, based on the announcement of the program. We apply Hsiao's methodology (1981), in order to ascertain the causality which is observed between the CDS series and potential changes in their relationship, due to the implementation of the PSI. We identify limited causality relations between countries and banks of the sample examined, in the second sub-period, while the size of the interaction is reduced in the same period. After developing a Difference-in-Difference model, we confirm the weakening of causal relationships between the CDS series studied, for the period, after the announcement of the PSI. Our results suggest that the implementation of the PSI has contributed to the limitation of the interdependence between the CDS spreads of the sovereigns and banks in the period that follows. |
| Keywords: | CDS spreads, PSI, sovereign credit risk, bank credit risk, debt crisis, contagion, eurozone |
| JEL: | F34 F42 G28 H12 H63 |
| Date: | 2015–11–24 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:68037&r=ban |
| By: | Jonathan Chiu; Tsz-Nga Wong |
| Abstract: | Recent years have witnessed the advances of e-money systems such as Bitcoin, PayPal and various forms of stored-value cards. This paper adopts a mechanism design approach to identify some essential features of different payment systems that implement and improve the constrained optimal resource allocation. We find that, compared to cash, emoney technologies allowing limited participation, limited transferability and non-zerosum transfers can help mitigate fundamental frictions and enhance social welfare, if they satisfy conditions in terms of parameters such as trade frequency and bargaining powers. An optimally designed e-money system exhibits realistic arrangements including nonlinear pricing, cross-subsidization and positive interchange fees even when the technologies incur no costs. Regulations such as a cap on interchange fees (à la the Dodd- Frank Act) can distort the optimal mechanism and reduce welfare. |
| Keywords: | Bank notes, E-Money, Payment clearing and settlement systems |
| JEL: | E E4 E42 E5 E58 L5 L51 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:15-43&r=ban |
| By: | Paolo Barucca; Fabrizio Lillo |
| Abstract: | The properties of the interbank market have been discussed widely in the literature. However a proper model selection between alternative organizations of the network in a small number of blocks, for example bipartite, core-periphery, and modular, has not been performed. In this paper, by inferring a Stochastic Block Model on the e-MID interbank market in the period 2010-2014, we show that in normal conditions the network is organized either as a bipartite structure or as a three community structure, where a group of intermediaries mediates between borrowers and lenders. In exceptional conditions, such as after LTRO, one of the most important unconventional measure by ECB at the beginning of 2012, the most likely structure becomes a random one and only in 2014 the e-MID market went back to a normal bipartite organization. By investigating the strategy of individual banks, we show that the disappearance of many lending banks and the strategy switch of a very small set of banks from borrower to lender is likely at the origin of this structural change. |
| Date: | 2015–11 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1511.08068&r=ban |