nep-ban New Economics Papers
on Banking
Issue of 2016‒02‒12
24 papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Banking Competition and Stability: The Role of Leverage By Xavier Freixas; Kebin Ma
  2. Pricing in the Norwegian interbank market – the effects of liquidity and implicit government support By Q. Farooq Akram; Casper Christophersen
  3. Optimal Leverage and Strategic Disclosure By Trigilia, Giulio
  4. Should the ‘outs’ join the European banking union? By Pia Hüttl; Dirk Schoenmaker
  5. Interbank market and central bank policy By Ahn, Jung-Hyun; Bignon, Vincent; Breton, Régis; Martin, Antoine
  6. Banking Crisis, Moral Hazard and Fiscal Policy Responses. By Jin Cheng; Meixing Dai; Frédéric Dufourt
  7. The dynamics of subprime adjustable-rate mortgage default: a structural estimation By Fang, Hanming; Kim, You Suk; Li, Wenli
  8. Performance of the banking sector of a developing country: A non-structural model using the disequilibrium approach By Matousek, Roman; Nguyen, Thao Ngoc; Chris, Stewart
  9. What we learn from China's rising shadow banking: exploring the nexus of monetary tightening and banks' role in entrusted lending By Chen, Kaiji; Ren, Jue; Zha, Tao
  10. Money in the Equilibrium of Banking By Jin Cao; Gerhard Illing
  11. Coco Design, Risk Shifting and Financial Fragility By Stephanie Chan; Sweder van Wijnbergen
  12. The information in systemic risk rankings By Nucera, Federico; Schwaab, Bernd; Koopman, Siem Jan; Lucas, André
  13. Discovering SIFIs in interbank communities By Nicolò Pecora; Alessandro Spelta
  14. Debt renegotiation and the design of financial contracts By Christophe J. GODLEWSKI
  15. Estimating Group Support for German Landesbanken By Benjamin Käfer
  16. International Housing Markets, Unconventional Monetary Policy and the Zero Lower Bound By Florian Huber; Maria Teresa Punzi
  17. An encompassing model & test of the Evans-Jovanovic credit constraints hypothesis By Jean Bonnet; Robert Cressy
  18. How Does Long-Term Finance Affect Economic Volatility? By Demirgüç-Kunt, A.; Horváth, Bálint; Huizinga, Harry
  19. Credit risk stress testing for EU15 banks: a model combination approach By George Papadopoulos; Savas Papadopoulos; Thomas Sager
  20. Personal Insolvency Dynamics in Germany and the UK – A SUR-TAR Approach By Eva Arnold; Nadja König
  21. Unconventional Monetary Policy and Bank Lending By Nobuhiko Mitani
  22. A simple model of subprime borrowers and credit growth By Justiniano, Alejandro; Primiceri, Giorgio E.; Tambalotti, Andrea
  23. Are small scale VARs useful for business cycle analysis? Revisiting Non-Fundamentalness By Canova, Fabio; Hamidi Sahneh, Mehdi
  24. A Critique of Modern Money Theory and the Disequilibrium Dynamics of Banking and Government Finance By Tianhao Zhi

  1. By: Xavier Freixas; Kebin Ma
    Abstract: This paper re-examines the classical issue of the possible trade-offs between banking competition and financial stability by highlighting different types of risk and the role of leverage. We show that competition can affect portfolio risk, insolvency risk, liquidity risk, and systemic risk differently. The effect depends crucially on a bank’s type of funding (retail deposits vs. wholesale debts) and whether leverage is exogenous or endogenous. In particular, we argue that while competition might increase financial stability in a classical originate-to-hold banking industry, the opposite can be true for an originate-to-distribute banking industry with a large fraction of market short-term funding.
    Keywords: banking competition, financial stability, leverage
    JEL: G21 G28
    Date: 2015–10
  2. By: Q. Farooq Akram (Norges Bank (Central Bank of Norway)); Casper Christophersen (European Insurance and Occupational Pensions Authority (EIOPA) and Norges Bank (Central Bank of Norway))
    Abstract: We investigate the effects of central bank liquidity and possible implicit government guarantees against default on Norwegian overnight interbank interest rates. We conduct an econometric study of these interest rates over the period 2006-2009, which includes the sharp fall in interbank trading during the financial crisis. Our findings suggest relatively lower funding costs for banks of systemic importance, particularly for banks with many and valuable linkages to other banks. Moreover, interest rates are found to depend not only on overall liquidity in the interbank market, but on its distribution among banks as well. There is also evidence of stronger effects on interest rates of systemic importance, creditworthiness and liquidity demand and supply factors during the financial crisis.
    Keywords: Interbank money market, Interest rates, Systemic importance
    JEL: G21 E43 E58
    Date: 2015–02–01
  3. By: Trigilia, Giulio (University of Warwick)
    Abstract: Firms seeking external financing jointly choose what securities to issue, and the extent of their disclosure commitments. The literature shows that enhanced disclosure reduces the cost of financing. This paper analyses how disclosure affects the optimal composition of financing means. It considers a market where firms compete for external financing under costly-state-verification, but,in contrast to the standard model : (i) the degree of asymmetric information between firms and outside investors is variable, and (ii) firms can affect it through a disclosure policy, modeled as a verifiable signal with a cost decreasing in its noise component. Two central predictions emerge. On the positive side, optimal disclosure and leverage are negatively correlated. Efficient equity financing requires that firms are sufficiently transparent, whereas debt does not; it solely relies on the threat of bankruptcy and liquidation. Therefore, more transparent firms issue cheaper equity and face a higher opportunity cost of leveraged external financing. The prediction is shown to be consistent with the behavior of US corporations since the 1980s. On the normative side, disclosure externalities and time inconsistencies lead to under-disclosure and excessive leverage relative to the constrained best. If mandatory disclosures are feasible { that is, they cannot be easily dodged { they increase welfare. Otherwise, endogenously higher transparency can be triggered if regulators set capital requirements. Capital regulation proves especially useful when (i) firm performances are highly correlated, and (ii) disclosure requirements can be easily dodged { conditions that seem to apply to large financial firms. The view of capital standards as a means to improve the information environment is novel in the literature; its policy implications and challenges are discussed.
    Keywords: leverage ; costly-state-verification ; disclosure ; asymmetric information ; capital requirements ; financial regulation ; optimal contracting JEL classification numbers: D82 ; G21 ; G32 ; G38
    Date: 2016
  4. By: Pia Hüttl; Dirk Schoenmaker
    Abstract: Highlights For political reasons, European Union member states’ opinions on joining banking union range from outright refusal to active consideration. The main stance is to wait and see how the banking union develops. The wait-and-see positions are often motivated by the consideration that joining banking union might imply joining the euro. However, in the long term, banking union’s ultimate rationale is linked to cross-border banking in the single market, which goes beyond the single currency. This Policy Contribution documents the banking linkages between the nine ‘outs’ and 19 ‘ins’ of the banking union. We find that some of the major banks based in Sweden and Denmark have substantial banking claims across the Nordic and Baltic regions. We also find large banking claims from banks based in the banking union on central and eastern Europe. The United Kingdom has a special position, with London as both a global and European financial centre. We find that the out countries could profit from joining banking union, because it would provide a stable arrangement for managing financial stability. Banking union allows for an integrated approach towards supervision (avoiding ring fencing of activities and therefore a higher cost of funding) and resolution (avoiding coordination failure). On the other hand, countries can preserve sovereignty over their banking systems outside the banking union. 1. Introduction Banking union, which consists of the Single Supervisory Mechanism (SSM) and the Single Resolution Mechanism (SRM), was a reply to one of the root-causes of the European debt crisis - the sovereign-banking loop. The vicious circle linking the solvency of euro-area countries to the solvency of their banks contributed to the crisis. The sovereign-bank loop works two ways. First, banks hold on their balance sheets large amounts of the bonds of their own governments (Merler and Pisani-Ferry, 2012; Battistini et al, 2014). Consequently, a deterioration of a government’s credit rating would automatically undermine the solvency of that country’s banks. Second, a weakening of a country’s banking system could have implications for the government’s budget because of the potential for a government-financed bank bailout, and because of lower tax revenues resulting from the subsequent economic downturn (Angeloni and Wolff, 2012)1. The euro area fell victim to the sovereign-bank loop because national central banks have given up control over the currency in which their debts are issued, putting the European Central Bank (ECB) in charge. To break the loop, a June 2012 summit of euro-area heads of state and government2 decided to move the responsibility for banking supervision to the euro-area level as a pre-condition for direct bank recapitalisation by the European Stability Mechanism (ESM)3. Moreover, the ECB was substantially exposed to banks because it was forced to provide them with liquidity without having supervisory control. If ex-post rescues are organised at European level, ex-ante supervision should also be moved to European level to minimise the need for such rescues (Goodhart and Schoenmaker, 2009). The essence of banking union is therefore supervision and resolution of banks at supranational level. While euro-area members have been included in all elements of the banking union by default, the SSM also allows non-euro area EU members to participate. For these countries, an important strategic question is if and when they should join part or all of banking union. On this question, opinions differ (Figure 1). Sweden declared in 2014 that it will not join banking union in the foreseeable future, and has not since changed its view substantially4, remaining the United Kingdom's main ally on this issue. By contrast, Denmark's government said in April 2015 that it wants to become part of the banking union, because it views it as being in the interests of its financial sector (Østergaard and Larsen, 2015)5. In central and eastern Europe, the Czech Republic remains sceptical about eventual participation in the banking union, and Hungary and Poland have also adopted wait-and-see approaches6. Bulgaria and Romania are more positive about joining banking union. In July 2014, Bulgaria said it would seek to join banking union after poor supervision led to the collapse of its fourth biggest lender7. Romania too has embraced the idea of joining banking union from early on (Isarescu, 2013). [infogram id="new_map___all_of_europe" prefix="SEh" format="interactive" title="new map - All of Europe"] These wait-and-see positions are often motivated by the consideration that joining banking union might imply joining the euro. However, we argue that in the long-term, banking union’s ultimate rationale is more linked to cross-border banking in the single market, which goes beyond the single currency. Therefore, the debate about whether to opt in to banking union is not necessarily a debate about joining the full package, eg joining both the euro and banking union.
    Date: 2016–02
  5. By: Ahn, Jung-Hyun (NEOMA Business School); Bignon, Vincent (Banque de France); Breton, Régis (Banque de France); Martin, Antoine (Federal Reserve Bank of New York)
    Abstract: We develop a model in which financial intermediaries hold liquidity to protect themselves from shocks. Depending on parameter values, banks may choose to hold too much or too little liquidity on aggregate compared with the socially optimal amount. The model endogenously generates a situation of cash hoarding, leading to the associated market freezes or underinsurance against liquidity choice. The model therefore provides a unified framework for thinking, on the one hand, about policy measures that can reduce hoarding of cash by banks and, on the other hand, about liquidity requirements of the type imposed by the new Basel III regulation. In our model, banks hold tradable and nontradable assets. Nontradable assets are subject to a liquidity shock, and an injection of cash is required for the asset to mature if it is hit by the shock. Banks have access to an interbank market on which they obtain cash against their tradable securities. The quantity of cash obtained on this market is determined endogenously by the market value of the tradable assets and is subject to cash-in-the-market pricing. Banks holding an asset that turns out to be bad may be constrained on the interbank market and therefore may have to interrupt their nontradable project.
    Keywords: money market; liquidity regulation; nonconventional monetary policy; cash-in-the-market pricing
    JEL: E58 G21 G28
    Date: 2016–01–01
  6. By: Jin Cheng; Meixing Dai; Frédéric Dufourt
    Abstract: This paper examines the role of fiscal policy as prudential instrument in preventing banking crisis in a framework where the government faces the tradeoff between the supply of public services and the stabilization of the banking system. We advocate that in a monetary union, the national governments without monetary autonomy should redesign their fiscal policy to prevent financial crises due to the moral hazard of banking entrepreneurs whose incentives are distorted by their expectations of ex-post bailout. We show that the government has incentive to bail out banks under both discretion and commitment if the banking sector is relatively influential. To prevent financial fragility, the pre-committed fiscal bailout policy should be time-consistent and incite banks to keep sufficient liquidity reserves and a low leverage ratio. Such policy could be efficiently complemented by public lending with a pre-announced interest rate that reduces banks’ moral hazard incentives but not their normal risk-taking.
    Keywords: Banking crisis, capital ratio, over risk-taking, too big to fail, fiscal bailout, fiscal policy, government put, moral hazard, crisis resolution, public lending.
    JEL: E44 G01 G11 G28 H21 H32
    Date: 2015
  7. By: Fang, Hanming (University of Pennsylvania); Kim, You Suk (Board of Governors of the Federal Reserve System); Li, Wenli (Federal Reserve Bank of Philadelphia)
    Abstract: We present a dynamic structural model of subprime adjustable-rate mortgage (ARM) borrowers making payment decisions, taking into account possible consequences of different degrees of delinquency from their lenders. We empirically implement the model using unique data sets that contain information on borrowers' mortgage payment history, their broad balance sheets, and lender responses. Our investigation of the factors that drive borrowers' decisions reveals that subprime ARMs are not all alike. For loans originated in 2004 and 2005, the interest rate resets associated with ARMs as well as the housing and labor market conditions were not as important in borrowers' delinquency decisions as in their decisions to pay o_ their loans. For loans originated in 2006, interest rate resets, housing price declines, and worsening labor market conditions all contributed importantly to their high delinquency rates. Counterfactual policy simulations reveal that even if the London Interbank Offered Rate (LIBOR) could be lowered to zero by aggressive traditional monetary policies, it would have a limited effect on reducing the delinquency rates. We find that automatic modification mortgages with cushions, under which the monthly payment or principal balance reductions are triggered only when housing price declines exceed a certain percentage, may result in a Pareto improvement, in that borrowers and lenders are both made better o_ than under the baseline, with lower delinquency and foreclosure rates. Our counterfactual analysis also suggests that limited commitment power on the part of the lenders regarding loan modification policies may be an important reason for the relatively low rate of modifications observed during the housing crisis.
    Keywords: Adjustable-rate mortgage; Default; Loan modification; Automatic modification mortgages with cushions
    JEL: D12 D14 G2 G21 G33
    Date: 2016–01–11
  8. By: Matousek, Roman (Kent Business School, University of Kent); Nguyen, Thao Ngoc (Nottingham Business School, Nottingham Trent University); Chris, Stewart (Kingston University London)
    Abstract: Based on the non-structural model – disequilibrium approach (Goddard and Wilson, 2009), this paper presents an empirical assessment of the degree of competition within the Vietnamese banking system from 1999 to 2009. We examine a greater number of environmental covariates and different dependent variables compared to previous applications of this model. Moreover, we use lagged input prices (to avoid endogeneity) and exclude assets (to avoid specification bias) in our models. The results indicate that the Vietnamese banking system operates in a monopolistic environment.
    Keywords: Banking; Performance; Non-structural model; Disequilibrium approach; Vietnam
    JEL: C23 G21 L22
    Date: 2016–02–05
  9. By: Chen, Kaiji (Emory University); Ren, Jue (Emory University); Zha, Tao (Federal Reserve Bank of Atlanta)
    Abstract: We argue that China's rising shadow banking was inextricably linked to potential balance-sheet risks in the banking system. We substantiate this argument with three didactic findings: (1) commercial banks in general were prone to engage in channeling risky entrusted loans; (2) shadow banking through entrusted lending masked small banks' exposure to balance-sheet risks; and (3) two well-intended regulations and institutional asymmetry between large and small banks combined to give small banks an incentive to exploit regulatory arbitrage by bringing off-balance-sheet risks into the balance sheet. We reveal these findings by constructing a comprehensive transaction-based loan dataset, providing robust empirical evidence, and developing a theoretical framework to explain the linkages between monetary policy, shadow banking, and traditional banking (the banking system) in China.
    Keywords: Regulatory arbitrage; asset pricing; institutional asymmetry; entrusted loans; risk taking; shadow loans; bank loans; nonloan investment; nonbank trustees; small banks; large banks; balance sheet; optimal decisions
    JEL: E02 E5 G11 G12 G28
    Date: 2016–01–01
  10. By: Jin Cao; Gerhard Illing
    Abstract: In most banking models, money is merely modeled as medium for transaction, but in reality, money is also the most liquid asset for banks. Central banks do not only passively supply money to meet demand for transaction, as often assumed in these models, instead they also actively inject liquidity into market, taking banksEilliquid assets as collateral. We examine both roles of money in an integrated framework, in which banks are subject to aggregate illiquidity risk. With fixed nominal deposit contracts, the monetary economy with active central bank can replicate constrained efficient allocation. This allocation, however, cannot be implemented in market equilibrium without additional regulation: Due to moral hazard problems, banks invest excessively in illiquid assets, forcing the central bank to provide liquidity at low interest rates. We show that interest rate policy to reduce systemic liquidity risk on its own is dynamically inconsistent. Instead, the constrained efficient solution can be achieved by imposing ex ante liquidity coverage requirement.
    Keywords: Central banking; liquidity facility; systemic liquidity risk JEL classification: G21; G28
    Date: 2015–12
  11. By: Stephanie Chan (University of Amsterdam, the Netherlands); Sweder van Wijnbergen (University of Amsterdam, the Netherlands)
    Abstract: We highlight the ex ante risk-shifting incentives faced by a bank's shareholders/managers when CoCos (contingent convertible capital) are part of the capital structure. The risk shifting incentive arises from the wealth transfers that the shareholders will receive upon the CoCo's conversion under CoCo designs widely used in practice. Specifically we show that for principal writedown and nondilutive equity-converting CoCos, shareholders/managers have an incentive to take on more risk to make conversion more likely because of those wealth transfers. As a consequence, wide spread use of CoCos will increase systemic fragility. We show that such improperly designed CoCos should not be allowed to fill in loss absorption capacity requirements unless accompanied by higher required equity ratios to mitigate the increased risk taking incentives they lead to. Sufficiently dilutive CoCos do not lead to undesired risk taking behavior.
    Keywords: Contingent Convertible Capital, Systemic Risk, Risk Shifting Incentives, Capital Requirements
    JEL: G01 G13 G21 G28 G32
    Date: 2016–02–01
  12. By: Nucera, Federico; Schwaab, Bernd; Koopman, Siem Jan; Lucas, André
    Abstract: We propose to pool alternative systemic risk rankings for financial institutions using the method of principal components. The resulting overall ranking is less affected by estimation uncertainty and model risk. We apply our methodology to disentangle the common signal and the idiosyncratic components from a selection of key systemic risk rankings that have been proposed recently. We use a sample of 113 listed financial sector firms in the European Union over the period 2002-2013. The implied ranking from the principal components is less volatile than most individual risk rankings and leads to less turnover among the top ranked institutions. We also find that price-based rankings and fundamentals-based rankings deviated substantially and for a prolonged time in the period leading up to the financial crisis. We test the adequacy of our newly pooled systemic risk ranking by relating it to credit default swap premia. JEL Classification: E
    Keywords: banking supervision, financial regulation, forecast combination, risk rankings, systemic risk contribution
    Date: 2016–01
  13. By: Nicolò Pecora; Alessandro Spelta (Università Cattolica del Sacro Cuore; Dipartimento di Economia e Finanza, Università Cattolica del Sacro Cuore)
    Abstract: This paper proposes a new methodology based on non-negative matrix factor- ization to detect communities and to identify Systemically Important Financial In- stitutions in the interbank network as well as within communities. The method is speci…cally designed for directed weighted networks and it is able to take into account exposures on both sides of banksbalance sheets, distinguishing between Systemically Important Borrowers and Lenders. Using interbank transactions data from the e-Mid platform, we show that the systemic importance associated with Italian banks decreased during the 2007-2009 …nancial crisis while the opposite happened for foreign institutions. We also show that, as the transactions volume grew, the number of communities rose as well. The contrary happened during the crisis phase. Moreover results indicate that, during …nancial crisis, banks strongly operate into non overlapping communities with few institutions playing the role of SIFIs. On the contrary during business as usual times banks act in several and overlapping modules.
    Keywords: Financial networks, community detection, systemic risk.
    JEL: D8 L14 C02
  14. By: Christophe J. GODLEWSKI (LaRGE Research Center, Université de Strasbourg)
    Abstract: I study the impact of bank loan renegotiation on the design of financial contracts. Debt renegotiation can be beneficial for borrowers and lenders but its impact on the design of financial contracts is less clear. However, contract design is crucial for borrower’s investment, operating and financing policies. I find that the design of renegotiated credit agreements is not homogenous. Main renegotiation packages contain amendments to loan amount and maturity. I show that secured loans with longer maturities experience broader amendments. Creditors’ friendly environment and the presence of reputable, sound, and profitable lenders have a similar effect.
    Keywords: financial contracts design, bank loans, debt renegotiation.
    JEL: G10 G21 G24
    Date: 2016
  15. By: Benjamin Käfer (University of Kassel)
    Abstract: This paper estimates the funding advantage afforded by the joint liability scheme to German Landesbanken. The advantage is estimated by computing the difference between Moody’s baseline credit assessment (BCA), representing the stand-alone rating, and the adjusted BCA incorporating group support assumptions. This notch advantage is then multiplied by time-varying yield spreads between the respective notches and the rating-dependent liabilities. Our methodology estimates the funding advantage that remains when governmental support for banks formerly considered ‘Too Big to Fail’ (TBTF) is substantially reduced or even abolished. We find a substantial monetary funding advantage due to group support assumptions, amounting on average to a multiple of the Landesbanken’s aggregated annual profits. The aggregated observations mask a distinct heterogeneity, with some of the banks being significantly more exposed to the funding advantage than others.
    Keywords: Too big to fail, implicit guarantee, support rating, systemic risk, Landesbanken, Haftungsverbund, joint liability scheme, institutional protection scheme, deposit insurance
    JEL: G12 G21 G24
    Date: 2015
  16. By: Florian Huber (Department of Economics, Vienna University of Economics and Business); Maria Teresa Punzi (Department of Economics, Vienna University of Economics and Business)
    Abstract: In this paper we propose a time-varying parameter VAR model for the housing market in the United States, the United Kingdom, Japan and the Euro Area. For these four economies, we answer the following research questions: (i) How can we evaluate the stance of monetary policy when the policy rate hits the zero lower bound? (ii) Can developments in the housing market still be explained by policy measures adopted by central banks? (iii) Did central banks succeed in mitigating the detrimental impact of the financial crisis on selected housing variables? We analyze the relationship between unconventional monetary policy and the housing markets by using the shadow interest rate estimated by Krippner (2013b). Our findings suggest that the monetary policy transmission mechanism to the housing market has not changed with the implementation of quantitative easing or forward guidance, and central banks can affect the composition of an investors portfolio through investment in housing. A counterfactual exercise provides some evidence that unconventional monetary policy has been particularly successful in dampening the consequences of the financial crisis on housing markets in the United States, while the effects are more muted in the other countries considered in this study.
    Keywords: Zero Lower Bound, Shadow interest rate, Housing Market, Time-varying parameter VAR
    JEL: C32 E23 E32
    Date: 2016–01
  17. By: Jean Bonnet (CREM, UMR CNRS 6211, UFR SEGGAT, University of Caen Normandie, France); Robert Cressy (Birmingham Business School, UK)
    Abstract: Using an unbalanced panel of some 36,500 French startup firms and 11,600 closures over the period 1994-2000 we test for a role of bank credit scoring in small business lending using an encompassing version (GEJ) of the seminal Evans-Jovanovic(1989) (EJ) model of credit constraints. In the GEJ model the bank’s estimate of the probabilty of individual company survival (business quality) is allowed to figure in the startup credit decision, alongside collateral. On the French data EJ is rejected in favour of GEJ. Thus we conclude with EJ that there is evidence of startup credit constraints via bank lending rules, but that this imperfection is ameliorated by the bank’s estimate of firm quality: better firms and entrepreneurs are more likely to get loans. Enrepreneurial human capital is also found (consistently with Cressy, 1996) to play a major role in the survival of startup businesses and hence in the chances of getting a loan. Consistent with other empirical work we also establish that startup loan refusal (an upper bound to rationing) affects only a small proportion (9%) of applicants. However, for those whose loan request is rejected, dynamics show that they have a permanently higher hazard of failure (by 50%-90%), relative to their funded counterparts. Credit constraints thus contribute to small business failure.
    Keywords: Entrepreneurship, startups, credit constraints, survival, France, panel data, hazard rate
    JEL: L25 L26 G33
    Date: 2016–01
  18. By: Demirgüç-Kunt, A.; Horváth, Bálint (Tilburg University, Center For Economic Research); Huizinga, Harry (Tilburg University, Center For Economic Research)
    Abstract: In an approach analogous to Rajan and Zingales (1998), we examine how the ability to access long-term debt affects firm-level growth volatility. We find that firms in industries with stronger preference to use long-term finance relative to short-term finance experience lower growth volatility in countries with better-developed financial systems, as these firms may benefit from reduced refinancing risk. Institutions that facilitate the availability of credit information and contract enforcement mitigate refinancing risk and therefore growth volatility associated with short-term financing. Increased availability of long-term finance reduces growth volatility in crisis as well as non-crisis periods.
    Keywords: debt maturity; finanical dependence; firm volatiliy; financial development
    JEL: G20 G32 O16
    Date: 2016
  19. By: George Papadopoulos (Democritus University of Thrace); Savas Papadopoulos (Bank of Greece); Thomas Sager
    Abstract: In bank stress tests, the role of a satellite model is to tie bank-specific risk variables to macroeconomic variables that can generate stress. For valid stress tests it is important to develop a comprehensive satellite model that both preserves the sense of known economic relationships and also exhibits high predictive ability. However, it is often difficult to achieve these desiderata in a single satellite model. Multicollinearity of key macro variables and limited data may militate against inclusion of all important stress variables, thus limiting the range of stress scenarios. In order to address this problem we depart from the custom of using a single model as the "true" satellite. Instead, we generate a full space of candidate models that we then screen for reasonable candidates that remain sufficiently rich to cover a wide range of stress scenarios. We then develop composite models by combining the surviving candidate models through weighting. The result is a composite satellite model that includes all the desired macroeconomic variables, reflects the expected relationships with the dependent variable (NPL growth) and exhibits more than 20% lower RMSE compared to a commonly used benchmark model. An illustrative stress testing application shows that this approach can provide policy makers with prudent estimates of credit risk.
    Keywords: Financial stability; Macroprudential policy; Non-performing loans; Forecast combination; Predictive modelling
    JEL: C53 E58 G28
    Date: 2016–01
  20. By: Eva Arnold (Universität Hamburg (University of Hamburg)); Nadja König (Universität Hamburg (University of Hamburg))
    Abstract: This paper analyses the dynamics of personal insolvencies in Germany and the UK, focusing on the recent recession. These countries are particularly interesting as they are both member countries of the European Union, yet have completely different approaches to deal with overindebted individuals. In Germany unfortunate households who file on their debt are required to undergo a relatively long restructuring period until they eventually receive debt relief, whereas British debtors can choose proceeding out of many alternatives to manage their debt. Even under the official bankruptcy option, debt gets discharged relatively fast. In line with their different insolvency procedures, the two countries also represent two different financial systems: the German system is rather bank-based and the UK system rather market-based. The underlying financial systems already point to different patterns of lending across countries and hence, also to different structures of debt. Specifically, we are interested in the dynamics of petitions and actual insolvencies during the crisis as well as their reaction to exogeneous macroeconomic and financial conditions. The findings suggest that insolvencies are more persistent in the UK than in Germany, i.e. after an external shock it takes longer for insolvencies to return to their previous level in the UK. In both countries, the recent recession has no effect on petitions to default, but it has an effect on actual insolvencies in the UK suggesting that debtors rather opted for official procedures during the recession.
    Keywords: Private Household Debt, Personal Insolvency Laws, Recessions
    JEL: E44 G01 G21 K49
    Date: 2016–02
  21. By: Nobuhiko Mitani (Osaka School of International Public Policy, Osaka University)
    Abstract: In this paper, I analyze whether liquidity expanded and bank lending was increased by monetary easing in 2000 or not, using pane; data of Japanese bank and shinkin from 2000 to 2014. Analyzing above this, I got the result that lending through shinkin didn't expand and monetary easing didn't take enough effect which increased lending through liquidity expanding.
    Keywords: liquidity rate, nontraditional monetary policy, shinkin
    Date: 2016–01
  22. By: Justiniano, Alejandro (Federal Reserve Bank of Chicago); Primiceri, Giorgio E. (Northwestern University); Tambalotti, Andrea (Federal Reserve Bank of New York)
    Abstract: The surge in credit and house prices that preceded the Great Recession was particularly pronounced in ZIP codes with a higher fraction of subprime borrowers (Mian and Sufi 2009). We present a simple model of prime and subprime borrowers distributed across geographic locations, which can reproduce this stylized fact as a result of an expansion in the supply of credit. Owing to their low incomes, subprime households are constrained in their ability to meet interest payments and hence sustain debt. As a result, when the supply of credit increases and interest rates fall, they take on disproportionately more debt than their prime counterparts, who are not subject to that constraint.
    Keywords: home prices; housing boom; household debt; credit supply; collateral constraints
    JEL: E21 E44 G21
    Date: 2016–02–01
  23. By: Canova, Fabio; Hamidi Sahneh, Mehdi
    Abstract: Non-fundamentalness arises when observables do not contain enough information to recover the vector of structural shocks. Using Granger causality tests, the literature suggested that many small scale VAR models are non-fundamental and thus not useful for business cycle analysis. We show that causality tests are problematic when VAR variables are cross sectionally aggregated or proxy for non-observables. We provide an alternative testing procedure, illustrate its properties with a Monte Carlo exercise, and reexamine the properties of two prototypical VAR models.
    Keywords: aggregation; Granger causality; non-fundamentalness; small scale VARs
    JEL: C32 C5 E5
    Date: 2016–01
  24. By: Tianhao Zhi (Finance Discipline Group, UTS Business School, University of Technology, Sydney)
    Abstract: This paper critically reviews and examines the relationship between the origin of disequilibrium macroeconomic thinking by John Maynard Keynes, and the development of Keynesian disequilibrium macroeconomic models. Given that the two strands of literature are both plentiful, I will focus on discussing the essence of Keynesian disequilibrium thinking, and its implications of relevant models in the context of Keynes-Metzler-Goodwin and Weidlich-Haag-Lux approaches.
    Keywords: disequilibrium macroeconomics; nonlinear economic dynamics; John Maynard Keynes; Hyman Minsky
    JEL: B22 E5 E12 G21
    Date: 2016–02–01

This nep-ban issue is ©2016 by Christian Calmès. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.