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on Banking |
| By: | Manuel Buchholz |
| Abstract: | This paper investigates the effect of a macroprudential policy instrument, caps on banks’ leverage, on domestic credit to the private sector since the Global Financial Crisis. Applying a difference-in-differences approach to a panel of 69 advanced and emerging economies over 2002–2014, we show that real credit grew after the crisis at considerably higher rates in countries which had implemented the leverage cap prior to the crisis. This stabilising effect is more pronounced for countries in which banks had a higher pre-crisis capital ratio, which suggests that after the crisis, banks were able to draw on buffers built up prior to the crisis due to the regulation. The results are robust to different choices of subsamples as well as to competing explanations such as standard adjustment to the pre-crisis credit boom |
| Keywords: | macroprudential policies, domestic credit, financial crisis |
| JEL: | E51 E58 G21 G28 |
| Date: | 2015–12–30 |
| URL: | http://d.repec.org/n?u=RePEc:eea:boewps:wp2015-7&r=ban |
| By: | Davide Avino (School of Management, Swansea University); Thomas Conlon (Smurfit Graduate Business School, University College Dublin); John Cotter (Smurfit Graduate Business School and Geary Institute for Public Policy, University College Dublin) |
| Abstract: | We examine the ability of CDS contracts written on individual banks to provide market discipline. Changes in CDS spreads are found to represent a robust signal of bank failure, thus providing indirect market discipline. Furthermore, changes in CDS spreads provide information about the condition of banks which supplements that available from equity markets and contained in accounting metrics. Consistent results are detailed for both senior and subordinated CDS spreads. Our results hold for various cohorts, for excess and idiosyncratic changes in CDS and are robust to the use of alternative measures of bank distress, including rating downgrades and accounting risk. |
| Keywords: | height, Bank Failure, Market Discipline, Credit Default Swap, CDS |
| Date: | 2016–01–07 |
| URL: | http://d.repec.org/n?u=RePEc:ucd:wpaper:201601&r=ban |
| By: | Isabel Argimón (Banco de España); Ángel Estrada (Banco de España); Michel Dietsch (ACPR-Banque de France) |
| Abstract: | European banks hold 10% of their total assets in portfolios that give rise to unrealised gains and losses which under Basel III will no longer be allowed to be removed from banks’ regulatory capital. Using a sample of European banks, and taking advantage of the different treatment afforded, under Basel II, to such gains and losses among jurisdictions and instruments and over time, we find evidence that: a) the inclusion of unrealised gains and losses in capital ratios increases their volatility; b) the partial inclusion of unrealised gains and total inclusion of losses on fixed-income securities in regulatory capital, compared with the complete exclusion of both (neutralisation), reduces the volume of securities categorised as Available For Sale (AFS), thus potentially affecting liquidity management and demand for bonds (most of which are currently government bonds); and c) the higher the partial inclusion of gains from debt instruments, the lower the holdings of such instruments in the AFS category and the higher the regulatory Tier 1 capital ratio, thus affecting banks’ capital buffer strategy. We do not find evidence that the removal of neutralisation would impact capital ratios. |
| Keywords: | prudential regulation, regulatory capital, fair value accounting, prudential filters |
| JEL: | G21 M41 |
| Date: | 2015–12 |
| URL: | http://d.repec.org/n?u=RePEc:bde:wpaper:1538&r=ban |
| By: | Kelly, Robert (Central Bank of Ireland); McCann, Fergal (Central Bank of Ireland); O'Toole, Conor (Central Bank of Ireland) |
| Abstract: | We provide a micro-empirical link between the large literature on credit and house prices and the burgeoning literature on macroprudential policy. Using loan-level data on Irish mortgages originated between 2003 and 2010, we construct a measure of credit availability which varies at the borrower level as a function of income, wealth, age, interest rates and prevailing market conditions around Loan to Value ratios (LTV), Loan to Income ratios (LTI) and monthly Debt Service Ratios (DSR). We deploy a property-level house price model which shows that a ten per cent increase in credit available leads to an 1.5 per cent increase in the value of property purchased. Coeffcients from this model are then used to fit values under scenarios of macroprudential restrictions on LTV, LTI and DSR on credit availability and house prices in Ireland for 2003 and 2006. Our results suggest that macroprudential limits would have had substantial impacts on house prices, and that both the level at which they are set and the timing of their introduction is a crucial determinant of their impact on housing values. |
| Keywords: | Mortgages, credit availability, macroprudential policy, house prices. |
| Date: | 2015–12 |
| URL: | http://d.repec.org/n?u=RePEc:cbi:wpaper:06/rt/15&r=ban |
| By: | Matt V. Leduc; Sebastian Poledna; Stefan Thurner |
| Abstract: | We study insolvency cascades in an interbank system when banks are allowed to insure their loans with credit default swaps (CDS) sold by other banks. We show that, by properly shifting financial exposures from one institution to another, a CDS market can be designed to rewire the network of interbank exposures in a way that makes it more resilient to insolvency cascades. A regulator can use information about the topology of the interbank network to devise a systemic insurance surcharge that is added to the CDS spread. CDS contracts are thus effectively penalized according to how much they contribute to increasing systemic risk. CDS contracts that decrease systemic risk remain untaxed. We simulate this regulated CDS market using an agent-based model (CRISIS macro-financial model) and we demonstrate that it leads to an interbank system that is more resilient to insolvency cascades. |
| Date: | 2016–01 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1601.02156&r=ban |
| By: | Kelly, Robert (Central Bank of Ireland); McCann, Fergal (Central Bank of Ireland) |
| Abstract: | The 2007-2008 financial crisis yielded a significant number of delinquent mortgage loans, which ordinarily would have faced foreclosure and repossession. However, given the negative externalities of repossession, policy response has shifted towards forbearance and mortgage modification, which has led to longer spells in default for delinquent mortgage holders. It is therefore imperative to move beyond binary models of default towards an understanding of the factors that drive the depth of default spells. Exploiting a highly detailed dataset on financially distressed households in Ireland in 2012 and 2013, we are able to identify the impact of a range of current household-level information, generally not available in loan-level studies of mortgage default, on the probability of entering early and deep states of mortgage default. Our results suggest that high loan-to-value ratios, consumer credit growth, shocks to mortgage affordability and unemployment should all trigger serious concerns among policy makers regarding subsequent stability in the mortgage market, with these measures all shown to have differentially large impacts on entry to deep, relative to early-stage arrears. |
| Keywords: | Mortgages, default, days past due, affordability. |
| Date: | 2015–11 |
| URL: | http://d.repec.org/n?u=RePEc:cbi:wpaper:05/rt/15&r=ban |
| By: | Stefan Behrendt (School of Economics and Business Administration, Friedrich Schiller University Jena) |
| Abstract: | Empirical research on the monetary transmission mechanism considering credit developments is almost exclusively limited to the amount of outstanding credit in an economy. Two issues arise out of this. First, stock-flow inconsistencies might occur. Second, the change of the outstanding amount of credit on banks' balance sheets does not consist only of new lending activity, but also incorporates other factors. As central banks should predominantly be focused on the amount of newly created credits in an economy while analysing the impact of monetary policy towards lending activity, using the change in the stock of lending can lead to distorted results, because of the incorporation of data on maturing loans, revaluations, securitization, and write-offs into this variable. The majority of existing credit channel literature does not really account for these issues. This paper makes a case to better caption new lending activity in monetary policy research. What is shown in this paper is that empirical investigations might lead to differing results when accounting for the other factors in the stock data. Central bank policy might therefore be biased. |
| Keywords: | credit channel, monetary transmission, bank lending |
| JEL: | C18 C82 E51 E52 |
| Date: | 2016–01–06 |
| URL: | http://d.repec.org/n?u=RePEc:jrp:jrpwrp:2016-002&r=ban |
| By: | Tomáš Heryán (Department of Finance and Accounting, School of Business Administration, Silesian University); Panayiotis G. Tzeremes (Department of Economics, University of Thessaly); Roman Matousek (University of Kent, Kent Business School) |
| Abstract: | This study focuses on the bank lending channels and transmission mechanisms of monetary policy in European Union (EU) countries. In accordance with previous empirical studies, we deploy the generalized method of moments (GMM) with pooled annual data. We examine the period from 1999 to 2012. We extend the current research on the transmission mechanisms of monetary policy in the following way: first, we compare the differences between the ‘old’ Economic Monetary Union (EMU) and ‘new’ EU countries. Second, we examine the interaction terms between bank characteristics and both monetary policy indicators. In particular, we examine the impact of short-term interest rates and monetary aggregate M2 on bank behaviour. Assuming a more obvious transmission mechanism, we argue that, in the group of ‘old’ EMU countries, the lending channel is affected by smaller banks that are less liquid or are strongly capitalized. For ‘new’ EU countries, we find similar results, i.e., the lending channel affects smaller banks. However, in terms of liquidity and capital adequacy and assuming a more obvious transmission mechanism, we find an opposing result. Those countries’ lending channel is affected by smaller banks with higher levels of liquidity and lower bank capital. Third, we describe how transmission mechanisms changed during the crises period. |
| Keywords: | lending channel, transmission mechanism, crisis times, old EMU and new EU countries |
| JEL: | C58 G01 G21 G28 |
| Date: | 2016–01–04 |
| URL: | http://d.repec.org/n?u=RePEc:opa:wpaper:0027&r=ban |
| By: | Erik Kole (Erasmus University Rotterdam, the Netherlands); Thijs Markwat (Robeco Asset Management, the Netherlands); Anne Opschoor (VU University Amsterdam, the Netherlands); Dick van Dijk (Erasmus University Rotterdam, the Netherlands) |
| Abstract: | We examine the impact of temporal and portfolio aggregation on the quality of Value-at-Risk (VaR) forecasts over a horizon of ten trading days for a well-diversified portfolio of stocks, bonds and alternative investments. The VaR forecasts are constructed based on daily, weekly or biweekly returns of all constituent assets separately, gathered into portfolios based on asset class, or into a single portfolio. We compare the impact of aggregation to that of choosing a model for the conditional volatilities and correlations, the distribution for the innovations and the method of forecast construction. We find that the degree of temporal aggregation is most important. Daily returns form the best basis for VaR forecasts. Modelling the portfolio at the asset or asset class level works better than complete portfolio aggregation, but differences are smaller. The differences from the model, distribution and forecast choices are also smaller compared to temporal aggregation. |
| Keywords: | forecast evaluation; aggregation; Value-at-Risk; model comparison |
| JEL: | C22 C32 C52 C53 G17 |
| Date: | 2015–01–04 |
| URL: | http://d.repec.org/n?u=RePEc:tin:wpaper:20150140&r=ban |
| By: | Anaïs Périlleux; Annabel Vanroose; Bert D'Espallier |
| Abstract: | This paper investigates whether financial cooperatives are crowded out by commercial banks in the process of financial sector development. We use a self-constructed database (1990-2011) of financial cooperatives in 55 developing countries. Our empirical results are threefold. First, financial cooperatives tend to reach more members in countries where the commercial banking sector is weak. This validates their role as a market failure solution. Second, in the process of commercial bank expansion, financial cooperatives run the risk of being crowded out. Third, financial cooperatives seem to benefit from some kind of bank presence, especially as far as savings mobilization is concerned. |
| Keywords: | Financial cooperatives; Microfinance; Competition; Crowding out; Financial Sector Development |
| JEL: | G21 L31 O16 P13 |
| Date: | 2016–01–07 |
| URL: | http://d.repec.org/n?u=RePEc:sol:wpaper:2013/223569&r=ban |
| By: | Andrea Bellucci (Institute for Applied Economic Research (IAW), Germany and MoFiR, Italy); Alexander Borisov (University of Cincinnati, USA and MoFiR, Italy); Alberto Zazzaro (University of Naples Federico II, Polytechnic University of Marche, Finance Research Group (MoFiR) and CSEF) |
| Abstract: | Academic research recognizes that the organizational structure of banks could have implications for the financing of small businesses and entrepreneurial firms. In this chapter, we start by reviewing the underlying theoretical motivation and then summarize existing evidence. Overall, it is confirmed that the organization of lending institutions is important for the use and transmission of information, as well as credit availability for small businesses. Moreover, using a unique dataset of bank loans, we empirically document that loan contract characteristics such as interest rates and collateral requirements are sensitive to the hierarchical allocation of decision-making authority within the bank’s organization. JEL Classification: |
| Keywords: | Bank organization structure, Authority allocation, Small business financing |
| Date: | 2016–01–11 |
| URL: | http://d.repec.org/n?u=RePEc:sef:csefwp:424&r=ban |