nep-ban New Economics Papers
on Banking
Issue of 2015‒12‒08
33 papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Financial Intermediation, Capital Accumulation, and Recovery By Gersbach, Hans; Rochet, Jean-Charles; Scheffel, Martin
  2. Foreign competition and banking industry dynamics: an application to Mexico By Corbae, Dean; D'Erasmo, Pablo
  3. Firmer foundations for a stronger European Banking Union By Dirk Schoenmaker
  4. Securitization and Credit Quality By Alper Kara; David Marques-Ibanez; Steven Ongena
  5. Monetary and Macroprudential Policies under Fixed and Variable Interest Rates By Margarita Rubio
  6. The effects of global bank competition and presence on local business cycles: The Goldilocks principle does not apply to global banking By Uluc Aysun
  7. A Theory of Payments Crises By Saki Bigio
  8. Banking panics and protracted recessions By Sanches, Daniel R.
  9. Does the CAMEL bank ratings system follow a procyclical pattern? By Papanikolaou, Nikolaos I.; Wolff, Christian C
  10. The end of the waterfall: default resources of central counterparties By Rama Cont
  11. Can credit cards with access to complimentary credit score information benefit consumers and lenders? By Mikhed, Vyacheslav
  12. On Zombie Banks and Recessions after Systemic Banking Crises By Homar, Timotej; van Wijnbergen, Sweder
  13. Monitoring the Unsecured Interbank Funds Market By Miguel Sarmiento; Jorge Cely; Carlos León
  14. The Persistence of a Banking Crisis By Kilian Huber
  15. Quantity versus Price Bank Competition and Macroeconomic Performance given Bank Concentration By Erotokritos Varelas
  16. Identifying Central Bank Liquidity Super-Spreaders in Interbank Funds Networks By Leon Rincon, C.E.; Machado, C.; Sarmiento Paipilla, N.M.
  17. Monitoring the Unsecured Interbank Funds Market By Miguel Sarmiento; Jorge Cely; Carlos León
  18. Collateral after the Brazilian Creditor Rights Reform By Bernardus Ferdinandus Nazar Van Doornik; Lucio Rodrigues Capelletto
  19. Selectivity and Transparency in Social Banking: Evidence from Europe By Simon Cornée; Panu Kalmi; Ariane Szafarz
  20. The Effect of Bank Shocks on Firm-Level and Aggregate Investment By João Amador; Arne J. Nagengast
  21. Psychometrics as a tool to improve screening and access to credit By Arráiz,Irani; Bruhn,Miriam; Stucchi,Rodolfo Mario
  22. Cocos, Contagion and Systemic Risk By Chan, Stephanie; van Wijnbergen, Sweder
  23. Monetary Policy in a Developing Country: Loan Applications and Real Effects By Charles Abuka; Ronnie K. Alinda; Camelia Moniou; Jose-Luis Peydro; Andrea Filippo Presbitero
  24. Loan as a Durable Good and Bank Indirect-Tax Incidence By Soldatos, Gerasimos T.
  25. Macroprudential Policy: What Does It Really Mean By Lopez, Claude; Markwardt, Donald; Savard, Keith
  26. Banking Union as a Shock Absorber By Ansgar Belke; Daniel Gros
  27. The economics of debt collection: enforcement of consumer credit contracts By Fedaseyeu, Viktar; Hunt, Robert M.
  28. Regional Bank Efficiency and its Effect on Regional Growth in “Normal” and “Bad” Times By Ansgar Belke; Ulrich Haskamp; Ralph Setzer
  29. Emergency Liquidity Facilities, Signalling and Funding Costs By Céline Gauthier; Alfred Lehar; Héctor Pérez Saiz; Moez Souissi
  30. Intergenerational Linkages in Household Credit By Ghent, Andra C.; Kudlyak, Marianna
  31. Access to finance for innovative SMEs since the financial crisis By Neil Lee; Hiba Sameen; Marc Cowling
  32. Macroprudential Policy in a DSGE Model: anchoring the countercyclical capital buffer By Leonardo Nogueira Ferreira; Márcio Issao Nakane
  33. Macroprudential supervision: from theory to policy By Dirk Schoenmaker; Peter Wierts

  1. By: Gersbach, Hans; Rochet, Jean-Charles; Scheffel, Martin
    Abstract: This paper integrates a simple model of banks into a two-sector neoclassical growth model. The integration yields an analytically tractable framework with two coupled accumulation rules for household capital and bank equity. We analyze steady state properties, transition and recovery patterns, as well as policies to accelerate recoveries. After establishing existence, uniqueness and global stability of the steady state, we identify in particular five key results and predictions, and we provide a quantitative assessment. First, larger financial frictions in financial intermediation may increase banker wealth although total capital is depressed. Second, negative shocks to bank equity cause considerably larger downturns than comparable shocks to household wealth, but their persistence is similar. Third, temporary worsening of shocks to financial frictions (called "trust shocks") induces divergent reactions of household wealth and bank equity, causes a boom in the banking sector, and possibly in the economy – after an initial bust. Fourth, the model replicates typical patterns of financing over the business cycle: procyclical bank leverage, procyclical bank lending, and counter-cyclical bond financing. Finally, a combination of bailouts and dividend-payout-restrictions ensures a rapid build-up of bank equity after a slump in the banking sector and increases total production.
    Keywords: banking crises; business cycles; bust-boom cycles; capital accumulation; financial intermediation; macroeconomic shocks; recovery policies
    JEL: E21 E32 F44 G21 G28
    Date: 2015–11
  2. By: Corbae, Dean (University of Wisconsin‒Madison); D'Erasmo, Pablo (Federal Reserve Bank of Philadelphia)
    Abstract: The authors develop a simple general equilibrium framework to study the effects of global competition on banking industry dynamics and welfare. They apply the framework to the Mexican banking industry, which underwent a major structural change in the 1990s as a consequence of both government policy and external shocks. Given the high concentration in the Mexican banking industry, domestic and foreign banks act strategically in the authors’ framework. After calibrating the model to Mexican data, the authors examine the welfare consequences of government policies that promote global competition. They find relatively high economy-wide welfare gains from allowing foreign bank entry.
    Keywords: Global banks; Foreign bank competition; Bank industry dynamics
    JEL: E60 F30 F41 G01 G21
    Date: 2015–09–18
  3. By: Dirk Schoenmaker
    Abstract: Highlights The move to European Banking Union involving the supervision and resolution of banks at euro-area level was stimulated by the sovereign debt crisis in the euro area in 2012. However, the long-term objective of Banking Union is dealing with intensified cross-border banking. The share of the assets of national banking systems that come from other EU countries was rising before the financial and economic crisis of 2007, but went into decline thereafter in the context of a general retrenchment of international banking. Most recent data, however, suggests the decline has been halted. About 14 percent of the assets of banks in Banking Union come from other EU countries, while about a quarter of the assets of the top 25 banks in the Banking Union are held in other EU countries. While a crisis-prevention framework for the euro area has largely been completed, the crisis-management framework remains incomplete, potentially creating instability. There is no governance mechanism to resolve disputes between different levels of crisis-management agencies, and incentives to promote optimum oversight are lacking. Most importantly, risk-sharing mechanisms do not adequately address the sovereign-bank loop, with a lack of clarity about the divide between bail-in and bail-out. To complete Banking Union, the lender-of-last-resort and deposit insurance functions should move to the euro-area level, breaking the sovereign-bank loop. A fully-fledged single deposit insurance (and resolution) fund should be favoured over a reinsurance scheme for reasons of cost and simplicity.
    Date: 2015–11
  4. By: Alper Kara (Loughborough University); David Marques-Ibanez (Board of Governors of the Federal Reserve System; Bangor University); Steven Ongena (University of Zrich)
    Abstract: Banks are usually better informed on the loans they originate than other financial intermediaries. As a result, securitized loans might be of lower credit quality than otherwise similar non- securitized loans. We assess the effect of securitization activity on credit quality employing a uniquely detailed dataset from the euro-denominated syndicated loan market. We find that, at issuance, banks do not select and securitize loans of lower credit quality. Following securitization, however, the credit quality of borrowers whose loans are securitized deteriorates by more than those in the control group. We find tentative evidence suggesting that poorer performance by securitized loans might be linked to banks reduced monitoring incentives.
    Keywords: Securitization; syndicated loans; credit risk
    JEL: G21 G28
    Date: 2015–11
  5. By: Margarita Rubio
    Abstract: In this paper, I analyze the ability of monetary policy to stabilize both the macroeconomy and nancial markets under two different scenarios: fixed and variable-rate mortgages. I develop and solve a New Keynesian dynamic stochastic general equilibrium model that features a housing market and a group of constrained individuals who need housing collateral to obtain loans. A given share of constrained households borrows at a variable rate, while the rest borrows at a fixed rate. I consider two alternative ways of introducing a macroprudential approach to enhance nancial stability: one in which monetary policy, using the interest rate as an instrument, responds to credit growth; and a second one in which the macroprudential instrument is instead the loan-to-value ratio (LTV). Results show that when rates are variable, a countercyclical LTV rule performs better to stabilize financial markets than monetary policy. However, when they are fixed, even though monetary policy is less effective to stabilize the macroeconomy, it does a good job to promote financial stability.
    Keywords: Fixed/Variable-rate mortgages, monetary policy, macroprudential policy, LTV, housing market, collateral constraint
    Date: 2015
  6. By: Uluc Aysun (University of Central Florida, Orlando, FL)
    Abstract: I solve a two-country real business cycle model that includes Cournot competitive global and local banks to investigate the impact of banking competition and global bank presence on local business cycles. Simulations reveal an inverted U-shaped relationship between the two factors and the volatility of output when global banks face portfolio adjustment costs. This relationship is determined by the asymmetric degree of diminishing returns to lending that global banks face in each economy. Specifcally, when global banks have a larger presence or are less competitive in one of the economies than the other, the cross-country mobility of loanable funds and the local responses to domestic shocks are smaller compared those obtained when the two economies are more symmetric.
    Keywords: Global banks, Cournot competition, real business cycles, bank size
    JEL: E32 E44 F33 F44
    Date: 2015–08
  7. By: Saki Bigio (Columbia GSB)
    Abstract: We provide a descriptive account of aggregate and bank-level nancial ows that occurred during the nancial crisis of 2007-2009 and its aftermath. We collect the following facts: [1] the commercial banking system increased their assets by as much as the shadow banking industry was reduced. [2] Traditional banks suered $656B equity losses. [3] There has been a persistent and substantial discrepancy between book and market equity values for many banks during the period. [4] Low market- to-book banks predicted low earnings and dividend payments. [5] Despite [4], there are no substantial dierences in lending and borrowing in the cross-section: book assets seem to be sticky. We draw on these observations to raise further empirical questions and suggest guidelines for improving banking and macroeconomic models.
    Date: 2015
  8. By: Sanches, Daniel R. (Federal Reserve Bank of Philadelphia)
    Abstract: This paper develops a dynamic model of bank liquidity provision to characterize the ex post efficient policy response to a banking panic and study its implications for the behavior of output in the aftermath of a panic. It is shown that the trajectory of real output following a panic episode crucially depends on the cost of converting long-term assets into liquid funds. For small values of this liquidation cost, the recession associated with a banking panic is protracted. For intermediate values, the recession is more severe but short lived. For relatively large values, the contemporaneous decline in real output in the event of a panic is substantial but followed by a vigorous rebound in real activity above the long-run level. The author argues that these theoretical predictions are consistent with the observed disparity in crisis-related output losses.
    Keywords: Banking panic; Deposit contract; Suspension of convertibility; Time-consistent policy
    JEL: E32 E42 G21
    Date: 2015–10–21
  9. By: Papanikolaou, Nikolaos I.; Wolff, Christian C
    Abstract: The financial crisis which erupted in 2007-8 has illustrated the disruptive effects of procyclicality. The phenomenon of procyclicality refers to the mutually reinforcing interactions between the financial system and the real economy that tend to amplify business cycle fluctuations. These fluctuations can cause or exacerbate turbulences in the financial system and this explains why supervisory and regulatory authorities are so much concerned in mitigating the degree of procyclicality. In this study, we focus on the ratings system of the U.S. banking institutions and test how these are linked to the phenomenon of procyclicality. More concretely, we empirically investigate the sensitivity of CAMEL ratings system, which is used by the U.S. authorities to monitor the conditions in the banking market, to the fluctuations of economic cycle. Our results reveal that the overall state of the U.S. economy and CAMEL ratings are positively correlated. We find that CAMEL ratings largely depend on the course of the business cycle as they are lower during economic upturns and higher during economic downturns. This is to say that the performance and risk-taking behaviour of banks is rated higher when the conditions in the economy are favourable and lower when the economic environment is weak. This very important and rather unknown source of procyclicality should be taken into serious consideration by authorities.
    Keywords: CAMELS ratings; financial crisis; financial stability; procyclicality
    JEL: C13 C20 C50 D02 G21 G28
    Date: 2015–11
  10. By: Rama Cont (Imperial College London)
    Abstract: Central counterparties (CCPs) have become pillars of the new global financial architecture following the financial crisis of 2008. The key role of CCPs in mitigating counterparty risk and contagion has in turn cast them as systemically important financial institutions whose eventual failure may lead to potentially serious consequences for financial stability, and prompted discussions on CCP risk management standards and safeguards for recovery and resolutions of CCPs in case of failure. We contribute to the debate on CCP default resources by focusing on the incentives generated by the CCP loss allocation rules for the CCP and its members and discussing how the design of loss allocation rules may be used to align these incentives in favor of outcomes which benefit financial stability. After reviewing the ingredients of the CCP loss waterfall and various proposals for loss recovery provisions for CCPs, we examine the risk management incentives created by different ingredients in the loss waterfall and discuss possible approaches for validating the design of the waterfall. We emphasize the importance of CCP stress tests and argue that such stress tests need to account for the interconnectedness of CCPs through common members and cross-margin agreements. A key proposal is that capital charges on assets held against CCP Default Funds should depend on the quality of the risk management of the CCP, as assessed through independent stress tests.
    Keywords: CCP, central clearing, central counterparty, systemic risk, default risk, counterparty risk, default fund, OTC derivatives, mechanism design, regulation, EMIR.
    Date: 2015–11–27
  11. By: Mikhed, Vyacheslav (Federal Reserve Bank of Philadelphia)
    Abstract: Barclaycard U.S. is one of a growing number of banks offering cardholders free access to their FICO® Credit Scores with credit card products. On November 19, 2014, Paul Wilmore of Barclaycard U.S. presented Barclays’ rationale for offering this feature and provided his perspective on its development. He also discussed how consumers responded to this feature in terms of their spending, repayment behavior, and lifespan and intensity of their relationship with the bank. According to Wilmore, program participation is correlated with increased card spending, decreased credit utilization and delinquency, increased digital engagement, and lower cardholder attrition.
    Keywords: Credit Reports; Risk Scores; Credit Cards; Consumer Lending; Information; Credit Performance
    JEL: D12 D14 G21
    Date: 2015–09–30
  12. By: Homar, Timotej; van Wijnbergen, Sweder
    Abstract: What costs do zombie banks impose on society? We analyze the effects of government and central bank interventions in 68 systemic banking crises since 1980, of which 28 are part of the recent global financial crisis. Our estimation approach controls for the correlation between intervention measures and the time-invariant component of unobservable crisis severity. We find that timely bank recapitalizations substantially reduce the duration of recessions, underscoring the distortions caused by zombie banks and the costs of regulatory forbearance.
    Keywords: bank recapitalization; economic recovery; financial crises; intervention; regulatory forbearance; zombie banks
    JEL: E44 E58 G21 G28
    Date: 2015–11
  13. By: Miguel Sarmiento; Jorge Cely; Carlos León
    Abstract: A core goal of regulators and financial authorities is to understand how market prices convey information on the financial health of its participants. From this viewpoint we build an Early-Warning Indicators System (EWIS) that allows for identifying those financial institutions perceived as risky counterparts by the participants of the interbank market. We use micro-level data from bilateral overnight unsecured loans performed in the interbank market between January 2011 and December 2014. The EWIS identifies those participants that systematically pay high prices for liquidity in this market. We employ coverage tests to estimate EWIS’ robustness and consistency. We find that financial institutions with an elevated frequency of signals tend to exhibit a net borrower liquidity position in the interbank market, hence suggesting they are facing recurrent liquidity needs. Those institutions also exhibit higher probability of insolvency measured by the Z-score indicator. Thus, our results support the existence of market discipline based on peer-monitoring. Overall, the EWIS may assist financial authorities in focusing their attention and resources on those financial institutions perceived by the market as those closer to distress.
    Keywords: Early warning indicators, interbank markets, market discipline, bank risk.
    JEL: E40 G14 G21
    Date: 2015–11–30
  14. By: Kilian Huber (Centre for Economic Performance, London School of Economics; Centre for Macroeconomics (CFM))
    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 macro economic growth.
    Date: 2015–11
  15. By: Erotokritos Varelas (Department of Economics, University of Macedonia)
    Abstract: This paper elaborates upon the following three theses: First, given bank sector concentration, the other aspect of this sector that matters for the overall economy is that of price vs. quantity competition by itself. Second, the macroeconomic performance of price competition is superior, enhancing the tax base and bank profit, capitalizing additionally the banks upon public debt induced instability, which the policymaker can minimize through Taylor rule. And, third, the ultimate link between banking competition and macroeconomic performance is the bank regulation shaping bank operation in accordance with the financial needs of fiscal policy.
    Keywords: Bank competition, Bank concentration, Public debt, Macroeconomic stability, Monetary policy.
    JEL: G21 L11 E32 E44 E63
    Date: 2015–12
  16. By: Leon Rincon, C.E. (Tilburg University, Center For Economic Research); Machado, C.; Sarmiento Paipilla, N.M. (Tilburg University, Center For Economic Research)
    Abstract: We model the allocation of central bank liquidity among the participants of the interbank market by using network analysis’ metrics. Our analytical framework considers that a super-spreader simultaneously excels at receiving (borrowing) and distributing (lending) central bank’s liquidity for the whole network, as measured by financial institutions’ hub centrality and authority centrality, respectively. Evidence suggests that the Colombian interbank funds market exhibits an inhomogeneous and hierarchical network structure, akin to a core-periphery organization, in which a few financial institutions fulfill the role of central bank’s liquidity super-spreaders. Our results concur with evidence from other interbank markets and other financial networks regarding the flaws of traditional direct financial contagion models based on homogeneous and non-hierarchical networks. Also, concurrent with literature on lending relationships in interbank markets, we confirm that the probability of being a super-spreader is mainly determined by financial institutions’ size. We provide additional elements for the implementation of monetary policy and for safeguarding financial stability.
    Keywords: interbank; liquidity; monetary policy; financial stability; networks; super-spreader; central bank
    JEL: E5 G2 L14
    Date: 2015
  17. By: Miguel Sarmiento (Banco de la República de Colombia); Jorge Cely (Banco de la República de Colombia); Carlos León (Banco de la República de Colombia)
    Abstract: A core goal of regulators and financial authorities is to understand how market prices convey information on the financial health of its participants. From this viewpoint we build an Early-Warning Indicators System (EWIS) that allows for identifying those financial institutions perceived as risky counterparts by the participants of the interbank market. We use micro-level data from bilateral overnight unsecured loans performed in the interbank market between January 2011 and December 2014. The EWIS identifies those participants that systematically pay high prices for liquidity in this market. We employ coverage tests to estimate EWIS’ robustness and consistency. We find that financial institutions with an elevated frequency of signals tend to exhibit a net borrower liquidity position in the interbank market, hence suggesting they are facing recurrent liquidity needs. Those institutions also exhibit higher probability of insolvency measured by the Z-score indicator. Thus, our results support the existence of market discipline based on peer-monitoring. Overall, the EWIS may assist financial authorities in focusing their attention and resources on those financial institutions perceived by the market as those closer to distress. Classification JEL: E40; G14; G21
    Keywords: Early warning indicators, interbank markets, market discipline, bank risk.
    Date: 2015–11
  18. By: Bernardus Ferdinandus Nazar Van Doornik; Lucio Rodrigues Capelletto
    Abstract: This study investigates how the strengthening of creditor rights affected corporate debt structure, collateral liquidity, and collateralization rate following the 2005 bankruptcy law in Brazil. Using a large dataset from the Brazilian credit registry, it was found that secured debt usage increased 13 percentage points after the reform, together with a reinforcement in the use of more liquid collateral agreements. It proved that the law had a varying effect across groups of borrowers with different amounts of collateral pledged before the reform. Firms previously pledging amounts of collateral in excess of the value of the loan could access credit with a much lower collateralization rate after the introduction of the law. However, the collateralization rate significantly increased for firms with lower-pledge levels, imposing an extra cost on them. The study showed that a multiple banking set-up may give such borrowers an option out of overcollateralization, as foreign-owned banks demanded substantially less collateral compared with domestic-owned banks after the reform. The results are robust after applying a wide variety of control tests
    Date: 2015–11
  19. By: Simon Cornée; Panu Kalmi; Ariane Szafarz
    Abstract: How do social banks signal their social commitment to motivated funders? This paper hypothesizes that two main channels are used, namely selectivity and transparency. We test these predictions using a rich dataset comprising balance-sheet information on 5,000 European banks over the 1998-2013 period. The results suggest that social screening leads social banks to higher project selectivity compared with mainstream banks. Social banks also tend to be more transparent than other banks. However, combining selectivity and transparency can result in excess liquidity. Overall, the empirical findings not only confirm our theoretical hypotheses, but also raise challenging issues on the management of social banks.
    Keywords: Social banks, Social enterprises, Social mission, European banks.
    JEL: G21 L33 M14 L31 D63 D82
    Date: 2015–12–01
  20. By: João Amador; Arne J. Nagengast
    Abstract: We show that credit supply shocks have a strong impact on firm-level as well as aggregate investment by applying the methodology developed by Amiti and Weinstein (2013) to a rich dataset of matched bank-firm loans in the Portuguese economy for the period 2005 to 2013. We argue that their decomposition framework can also be used in the presence of small firms with only one banking relationship as long as they account for a small share of the total loan volume of their banks. The growth rate of individual loans in our dataset is decomposed into bank, firm, industry and common shocks. Adverse bank shocks are found to strongly impair firm-level investment, particularly in small firms and in those with no access to alternative financing sources. For the economy as a whole, granular shocks in the banking system account for around 20-40% of aggregate investment dynamics.
    JEL: E32 E44 G21 G32
    Date: 2015
  21. By: Arráiz,Irani; Bruhn,Miriam; Stucchi,Rodolfo Mario
    Abstract: This paper studies the use of psychometric tests, which were designed by the Entrepreneurial Finance Lab as a tool to screen out high credit risk and potentially increase access to credit for small business owners in Peru. The analysis uses administrative data covering the period from June 2011 to April 2014 to compare debt accrual and repayment behavior patterns across entrepreneurs who were offered a loan based on the traditional credit-scoring method versus the Entrepreneurial Finance Lab tool. The paper finds that the psychometric test can lower the risk of the loan portfolio when used as a secondary screening mechanism for already banked entrepreneurs?that is, those with a credit history. For unbanked entrepreneurs?those without a credit history?using the Entrepreneurial Finance Lab tool can increase access to credit without increasing portfolio risk.
    Keywords: Access to Finance,Bankruptcy and Resolution of Financial Distress,Debt Markets,Banks&Banking Reform,Microfinance
    Date: 2015–12–03
  22. By: Chan, Stephanie; van Wijnbergen, Sweder
    Abstract: Abstract Cocos (contingent convertible capital) are designed to convert from debt to equity when banks need it most. Using a Diamond-Dybvig model cast in a global games framework, we show that while the coco conversion of the issuing bank may bring the bank back into compliance with capital requirements, it will nevertheless raise the probability of the bank being run, because conversion is a negative signal to depositors about asset quality. Moreover, conversion imposes a negative externality on other banks in the system in the likely case of correlated asset returns, so bank runs elsewhere in the banking system become more probable too and systemic risk will actually go up after conversion. Cocos thus lead to a direct conflict between micro- and macroprudential objectives. We also highlight that ex ante incentives to raise capital to stave off conversion depend critically on coco design. In many currently popular coco designs, wealth transfers after conversion actually flow from debt holders to equity holders, destroying the latter's incentives to provide additional capital in times of stress. Finally the link between coco conversion and systemic risk highlights the tradeoffs that a regulator faces in deciding to convert cocos, providing a possible explanation of regulatory forbearance.
    Keywords: Bank Runs; Contagion; Contingent Convertible Capital; Global games; Systemic Risk
    JEL: G01 G21 G32
    Date: 2015–11
  23. By: Charles Abuka (Bank of Uganda); Ronnie K. Alinda (Bank of Uganda); Camelia Moniou (International Monetary Fund (IMF)); Jose-Luis Peydro (ICREA-Universitat Pompeu Fabra,CREI, Barcelona GSE and CEPR.); Andrea Filippo Presbitero (International Monetary Fund, Universit… Politecnica delle Marche - MoFiR)
    Abstract: We examine the bank lending channel in Uganda, a developing country where monetary policy transmission may be impaired by weaknesses in the contracting environment, shallow financial markets, and a concentrated banking system. Our analysis employs a supervisory loan-level dataset and focuses on a short period during which the policy rate rose by 1,000 basis points and then came down by 1,100 basis points. We find that an increase in interest rates reduces the supply of bank credit both on the extensive and intensive margins, and there is significant pass-through to retail lending rates. We document a strong bank balance sheet channel, as the lending behavior of banks with high capital and liquidity is different from that of banks with low capital and liquidity. Finally, we show the impact of monetary policy on real activity across districts depends on banking sector conditions. Overall, our results indicate significant real effects of the bank lending channel in developing countries.
    Keywords: Bank balance sheet channel, Bank lending channel, Developing countries, Monetary policy transmission
    JEL: E42 E44 E52 E58
    Date: 2015–12
  24. By: Soldatos, Gerasimos T.
    Abstract: This paper maintains that the durable-goods character of loans enables the forward shift of bank indirect taxes à la Coase (1972), increasing thereby the money multiplier and reducing the equity-lending ratio regardless bank industry structure. Consequently, policymakers may use such taxes countercyclically if, of course, the need for depositor insurance is not exaggerated evoking upon the problems of asymmetric information accompanying lending. Also, the “standard” proposition that the ability to shift indirect taxation forward depends negatively on the size of the elasticity of loan demand, is confirmed here, too. The low elasticity of loan demand is related with relationship banking, contemplating thereby that the mix “bank indirect tax-relationship banking” may prove to be critical for capital accumulation and growth depending on the dissemination of such banking. A zero-bank-profit policy is proposed as a stabilization policy beyond the countercyclical manipulation of the tax.
    Keywords: Loan life, Bank indirect-tax incidence, Bank market power, Quantity competition, Capital accumulation
    JEL: E44 G21 H22 H32
    Date: 2015
  25. By: Lopez, Claude; Markwardt, Donald; Savard, Keith
    Abstract: As many central banks contemplate the normalization of monetary policy, their focus is turning to the promise of macroprudential policy as a tool to manage possible future systemic risk in financial markets. Janet Yellen and Mario Draghi, among others, are pinning much of their hopes for managing financial stability in the context of Basel III on macroprudentialism. Despite central banks’ clear intention that this policy will play a significant role in developed economies, few policymakers or financial players know what macroprudential policy is, much less how to assess its efficacy or necessity. The paper is a shorter version of a report on the same subject. It aims to clarify the concept of macroprudential policy for a broader audience, cultivating a better understanding of these tools and their implications for broader monetary policy going forward.
    Keywords: Macroprudential, Systemic Risk
    JEL: E6 F3
    Date: 2015–10
  26. By: Ansgar Belke; Daniel Gros
    Abstract: This study investigates the shock-absorbing properties of a banking union by providing a detailed comparison between the way regional financial shocks have been absorbed at the federal level in the US, but have led to severe regional (national) financial dislocation and tensions in Europe and particularly in the euro area. The institutions of the banking union, which is now emerging in the euro area, should increase its capacity to deal with future regional boom and bust cycles. Cross-border capital flows in the form of equity appear to be much more stable than those taking the form of credit, especially inter-bank credit. It therefore follows that cross-border banks would be useful to deal with regional shocks. But large banks pose the ‘too big to fail’ problem and they would also propagate regional shocks, especially if they originate in large countries, to the entire area. The extent to which the (incomplete) banking union now put in place for the euro area provides some shock absorption is also discussed.
    Keywords: banking union, currency union, default, shock absorber, two-tier reinsurance system.
    JEL: E42 E50 F3 G21
    Date: 2015–02
  27. By: Fedaseyeu, Viktar (Federal Reserve Bank of Philadelphia); Hunt, Robert M. (Federal Reserve Bank of Philadelphia)
    Abstract: Supersedes Working Paper 14-7.{{p}} In the U.S., creditors often outsource the task of obtaining repayment from defaulting borrowers to third-party debt collection agencies. This paper argues that an important incentive for this is creditors' concerns about their reputations. Using a model along the lines of the common agency framework, we show that, under certain conditions, debt collection agencies use harsher debt collection practices than original creditors would use on their own. This appears to be consistent with empirical evidence. The model also fits several other empirical facts about the structure of the debt collection industry and its evolution over time. We show that the existence of third-party debt collectors may improve consumer welfare if credit markets contain a sufficiently large share of opportunistic borrowers who would not repay their debts unless faced with \harsh" debt collection practices. In other cases, the presence of third-party debt collectors can result in lower consumer welfare. The model provides insight into which policy interventions may improve the functioning of the collections market.
    Keywords: Debt collection; Contract enforcement; Consumer credit markets; Regulation of credit markets; Credit cards; Fair Debt
    JEL: D18 G28 L24
    Date: 2015–11–01
  28. By: Ansgar Belke; Ulrich Haskamp; Ralph Setzer
    Abstract: The financial crisis affected regions in Europe in a different magnitude. This is why we examine whether regions which incorporate banks with a higher intermediation quality grow faster in “normal” times and are more resilient in “bad” ones. For this purpose, we measure the intermediation quality of a bank by estimating its profit and cost efficiency while taking the changing banking environment after the financial crisis into account. Next, we aggregate the efficiencies of all banks within a NUTS 2 region to obtain a regional proxy for financial quality in twelve European countries. Our results show that relatively more profit efficient banks foster growth in their region. The link between financial quality and growth is valid in “normal” and in “bad” times. These results provide evidence to the importance of swiftly restoring bank pro_tability in euro area crisis countries through addressing high nonperforming loans ratios and decisive actions on bank recapitalization.
    Keywords: bank efficiency, financial development, regional growth, Europe
    JEL: G21 O47 O52
    Date: 2015–07
  29. By: Céline Gauthier; Alfred Lehar; Héctor Pérez Saiz; Moez Souissi
    Abstract: In the months preceding the failure of Lehman Brothers in September 2008, banks were willing to pay a premium over the Federal Reserve’s discount window (DW) rate to participate in the much less flexible Term Auction Facility (TAF). We empirically test the predictions of a new signalling model that offers a rationale for offering two different liquidity facilities. In our model, illiquid yet solvent banks need to pay a high cost to access the TAF as a way to signal their quality, in exchange for more favourable funding in the future. Less solvent banks access the less costly and more flexible DW in case they experience an unexpected run, paying a higher future funding cost. The existence of two facilities with different characteristics allowed banks to signal their level of solvency, which helped to decrease asymmetric information during the crisis. Using recently disclosed data on access to these facilities, we provide evidence consistent with these results. Banks that accessed TAF in 2008 paid approximately 31 basis points less in the interbank lending market in 2010 and were perceived as less risky than banks that accessed the DW. Our results can contribute to a better design of liquidity facilities during a financial crisis.
    Keywords: Financial Institutions, Financial stability, Lender of last resort
    JEL: G G0 G01 G2 G21 G28
    Date: 2015
  30. By: Ghent, Andra C. (University of Wisconsin, Madison); Kudlyak, Marianna (Federal Reserve Bank of Richmond)
    Abstract: We document economically important correlations between children’s future credit outcomes and their parents’ credit risk scores, default, and the extent of credit constraints – intergenerational linkages in household credit. Using observations on siblings, we find that the linkages are due to unobserved household heterogeneity rather than parental credit conditions directly affecting children’s credit outcomes. In particular, in the sample of siblings, there is no correlation between parental and child credit attributes after controlling for household fixed effects. The linkages are stronger in cities with lower intergenerational income mobility, implying that common factors drive both. Finally, existing measures of state-level educational policy interventions appear to have limited effects on the strength of intergenerational linkages.
    Keywords: Household Finance; Intergenerational Mobility; Credit Constraints; Income Inequality
    JEL: D14 E21 G10
    Date: 2015–11–05
  31. By: Neil Lee; Hiba Sameen; Marc Cowling
    Abstract: In the wake of the 2008 financial crisis, there has been increased focus on access to finance for small and medium sized firms. Some evidence from before the crisis suggested that it was harder for innovative firms to access finance. Yet no research has considered the differential effect of the crisis on innovative firms. This paper addresses this gap using a dataset of over 10,000 UK SME employers. We find that innovative firms are more likely to be turned down for finance than other firms, and this worsened significantly in the crisis. However, regressions controlling for a host of firm characteristics show that the worsening in general credit conditions has been more pronounced for non-innovative firms with the exception of absolute credit rationing which still remains more severe for innovative firms. The results suggest that there are two issues in the financial system. First, we find evidence of a structural problem which restricts access to finance for innovative firms. Second, we show a cyclical problem has been caused by the financial crisis and impacted relatively more severely on non-innovative firms.
    Keywords: Finance; SME; Entrepreneurship; Recession; Innovation
    JEL: G21 G32 L2 O31
    Date: 2015–03
  32. By: Leonardo Nogueira Ferreira; Márcio Issao Nakane
    Abstract: The 2007-8 world financial crisis highlighted the deficiency of the regulatory framework in place at the time. Thenceforth many papers have been assessing the introduction of macroprudential policy in a DSGE model. However, they do not focus on the choice of the variable to which the macroprudential instrument must respond - the anchor variable. In order to fulfil this gap, we input different macroprudential rules into the DSGE with a banking sector proposed by Gerali et al. (2010), and estimate its key parameters using Bayesian techniques applied to Brazilian data. We then rank the results using the unconditional expectation of lifetime utility as of time zero as the measure of welfare: the larger the welfare, the better the anchor variable. We find that credit growth is the variable that performs best
    Date: 2015–11
  33. By: Dirk Schoenmaker; Peter Wierts
    Abstract: HIGHLIGHTS Financial supervision focuses on the aggregate (macroprudential) in addition to the individual (microprudential). But an agreed framework for measuring and addressing financial imbalances is lacking. We propose a holistic approach for the financial system as a whole, beyond banking. Building on our model of financial amplification, the financial cycle is the key variable for measuring financial imbalances. The cycle can be curbed by leverage restrictions that might vary across countries and sectors. Macroprudential supervision has been discussed since the onset of the great financial crisis, but policymakers are still slow on the ground. While the current monetary policy stance of quantitative easing may be needed to stimulate subdued growth, the risk of financial booms is increasing. We make concrete policy proposals for the design of macroprudential instruments to simplify the current framework and make it more consistent.
    Date: 2015–11

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