nep-ban New Economics Papers
on Banking
Issue of 2016‒02‒29
twenty-one papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Bank Cross-Selling And The Production Of Soft Information By Stefania Cosci; Valentina Meliciani; Valentina Sabato
  2. Is macroprudential policy instrument blunt? By Katsurako Sonoda; Nao Sudo
  3. The Banking Regulatory Bubble and How to Get out of It By Giovanni Ferri; Doris Neuberger
  4. Systemic risk and the optimal seniority structure of banking liabilities By Spiros Bougheas; Alan Kirman
  5. Weathering the storm: Ownership structure and performance of microfinance institutions in the wake of the global financial crisis By Mahinda Wijesiri
  6. Selectivity and Transparency in Social Banking: Evidence from Europe By Simon Cornée; Panu Kalmi; Ariane Szafarz
  7. A note on banking and housing crises and the strength of recoveries By Boysen-Hogrefe, Jens; Jannsen, Nils; Meier, Carsten-Patrick
  8. The dynamics of business investment following banking crises and normal recessions By Jannsen, Nils
  9. Trends and preferences in consumer payments: updates from the visa payment panel study By Herbst-Murphy, Susan
  10. Borrowers’ Participation in Group Borrowing By Tutlani, Ankur
  11. On the roles of different foreign currencies in European bank lending By Krogstrup, Signe; Tille, Cédric
  12. The Price of Deposit Liquidity: Banks versus Microfinance Institutions By Carolina Laureti; Ariane Szafarz
  13. Wholesale Banking and Bank Runs in Macroeconomic Modeling of Financial Crises By Gertler, Mark; Kiyotaki, Nobuhiro; Prestipino, Andrea
  14. Financial Stability Paper 30: Dear Prudence, won’t you come out to play? Approaches to the analysis of CCP default fund adequacy By Murphy, David; Nahai-Williamson, Paul
  15. Formal credit access for Vietnamese SMEs: What determines credit obtainment? By Nguyet Thi Khanh Cao
  16. Does Lack of Financial Stability Impair the Transmission of Monetary Policy? By Acharya, Viral V.; Imbierowicz, Björn; Steffen, Sascha; Teichmann, Daniel
  17. The Corporate Saving Glut in the Aftermath of the Global Financial Crisis By Gruber, Joseph W.; Kamin, Steven B.
  18. Targeted business incentives and the debt behavior of households By Di, Wenhua; Millimet, Daniel
  19. Persistent Demand Shortage Due to Household Debt By KOBAYASHI Keiichiro
  20. JPMorgan Chase London Whale H: Cross-Border Regulation By Arwin G. Zeissler; Andrew Metrick
  21. A Stochastic Dominance Approach to the Basel III Dilemma: Expected Shortfall or VaR? By Chang, C-L.; Jiménez-Martín, J.A.; McAleer, M.J.; Pérez-Amaral, T.

  1. By: Stefania Cosci (LUMSA University); Valentina Meliciani (University of Teramo); Valentina Sabato (LUMSA University)
    Abstract: We model the effect of cross-selling on the quality of banks’ loans and interest rates under alternative lending technologies when banks produce both hard and soft information. The main theoretical findings are: i) when banks adopt transaction lending technologies, where loan officers have only the task of screening loan applicants, cross-selling lowers banks incentives of producing soft information and loans’ quality, ii) when banks adopt relationship lending technologies, where loan officers have the task of both screening and cross-selling services, cross-selling may improve banks’ incentives of producing soft information and loans quality, iii) under relatively competitive market conditions, cross-selling reduces lending interest rates for both transaction- and relationship-lending banks. The econometric analysis, carried on a sample of European banks over the period 2001-2006, support these findings. The results suggest regulators should address cross-selling strategies to control for bank risk in different ways depending on the lending technology adopted by banks.
    Keywords: Cross-selling; Hard and soft information; Relationship lending; Loans’ quality; Interest margin
    JEL: G21 D82 C23 L15
    Date: 2014–06
  2. By: Katsurako Sonoda; Nao Sudo
    Abstract: Since the global financial crisis of 2008, macroprudential instruments have attracted an increasing amount of attention as potentially the best tools for stabilizing boom-and-bust cycles. This is because, in contrast to short-term interest rates, macroprudential instruments are regarded as particularly precise tools that act only on the area of concern. In this paper, we conduct an empirical examination to determine if this is the case by studying relevant areas of the Japanese economy from the 1970s to 1990s. We focus on a policy instrument called Quantitative Restriction (QR) implemented by the government. QR explicitly required banks to curb their lending to the real estate industry and related activities, and was used in the wake of the credit boom. We construct shocks to QR using narrative records of the government, and estimate their impact on the macroeconomy. We find that QR affected the aggregate economy as well as the real estate sector and land prices. In order to see why QR was a "blunt" instrument, we conduct a cross-sectional analysis using individual bank data and disaggregated industry group data. We find evidence that shocks to QR affected the aggregate economy by damaging the balance sheets of banks and non-financial firms.
    Keywords: Short-term interest rates, macroprudential instrument, boom-and-bust cycle
    Date: 2016–01
  3. By: Giovanni Ferri (LUMSA University); Doris Neuberger (University of Rostock)
    Abstract: We claim that we currently live in a banking regulatory bubble. We review how: i) banking intermediation theory hinges on dealing with borrower-lender asymmetry of information; ii) instead, the presence of complete information is the keystone of the finance theory. Next, we document how finance theory prevailed over banking intermediation theory in shaping banking regulation: This appalling contradiction is the true culprit behind lower credit standards, mounting systemic risk in banking, and macroeconomic debt overhang. Consequently, we discuss actions that, by restoring the consistency of banking regulation with the theory of banking intermediation, would make banking sounder.
    Keywords: Asymmetric Information; Relationship Lending vs. Transactional Lending; Efficient Markets Hypothesis; Banking Regulation Inconsistencies; Basel II.
    JEL: G01 G14 G21 G28
    Date: 2014–05
  4. By: Spiros Bougheas (School of Economics, University of Nottingham); Alan Kirman (Faculte de Droit et de Sciences Politiques, Aix-Marseille Université)
    Abstract: The paper argues that systemic risk must be taken into account when designing optimal bankruptcy procedures in general, and priority rules in particular. Allowing for endogenous formation of links in the interbank market we show that the optimal policy depends on the distribution of shocks and the severity of fire sales.
    Keywords: Banks; Priority rules; Systemic Risk
    JEL: G21 G28
    Date: 2016–01
  5. By: Mahinda Wijesiri (Indira Gandhi Institute of Development Research; Institute of Economic Growth)
    Abstract: This study investigates the effects of the 2008 global financial crisis on the performance of different microfinance ownership types. The analysis in this study relies on a novel methodological framework that provides consistent productivity measures in the presence of undesirable outputs, while taking into account the technological heterogeneity among different ownership types. The results show that banks and non-bank financial institutions (NBFIs) that performed better immediately before the crisis, suffered more during the crisis and early post-crisis periods. Cooperatives and non-governmental organizations (NGOs), on the other hand, were less affected by the crisis. Moreover, results indicate that the pattern of productivity growth of all ownership forms three years after the eruption of the crisis was remarkably similar to their productivity growth pattern in the very early phase of the pre-crisis period.
    Keywords: Microfinance; Ownership; Metafrontier; Malmquist-Luenberger; Productivity change; Global Financial Crisis
    JEL: C61 D24 G01 G21
    Date: 2016–01
  6. By: Simon Cornée (Université de Rennes 1, CREM CNRS, and CERMi, France); Panu Kalmi (University of Vaasa); Ariane Szafarz (Université Libre de Bruxelles, SBS-EM, CEB, and CERMi)
    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: 2016–02
  7. By: Boysen-Hogrefe, Jens; Jannsen, Nils; Meier, Carsten-Patrick
    Abstract: We investigate whether recoveries following normal recessions differ from recoveries following recessions that are associated with either banking crises or housing crises. Using a parametric panel framework that allows for a bounce-back in the level of output during the recovery, we find that normal recessions are followed by strong recoveries in advanced economies. This bounce-back is absent following recessions associated with banking crises and housing crises. Consequently, the permanent output losses of recessions associated with banking crises and housing crises are considerably larger than those of normal recessions.
    Keywords: business cycle,recovery,banking crisis,housing crisis
    JEL: E32 C33
    Date: 2015
  8. By: Jannsen, Nils
    Abstract: I empirically analyze the dynamics of business investment following normal recessions (declines in business investment that are not associated with banking crises) and banking crises. Using a panel of 16 advanced economies, I find evidence for significant non-linear trend reversion or bounce-back effects on the level of business investment following normal recessions, i.e., the deeper the previous recession was, the higher the growth rate of business investment will be. The trend reversion effect is absent when a decline in business investment is associated with a banking crisis. As a consequence, normal recessions do not have significant permanent effects on the level of business investment, whereas banking crises have large and significant permanent effects. The results are in line with important theories and other empirical results on business cycle dynamics.
    Keywords: business investment,business cycle,recovery,banking crises,asymmetries
    JEL: E32 C33
    Date: 2015
  9. By: Herbst-Murphy, Susan (Federal Reserve Bank of Philadelphia)
    Abstract: Michael Marx, senior director, Visa Research Insights, conducted a workshop in 2009 at the Payment Cards Center (PCC) as the economy was emerging from a recession. At that time, it appeared that the recession had affected consumer payment preferences, especially those related to cash and credit cards. To get an update on consumers’ use of the various payment methods, the PCC invited Marx to facilitate another workshop in 2014. More recent findings from the Visa Payment Panel Study reveal declines in cash use ― a return to the long-term trend ― and increases in credit card use, perhaps signaling some return of confidence among consumers. Check use continued its unbroken long-term decline, and debit card growth has slowed. Private label cards have also registered a steady decline in their share of spending volume for a number of years. Their revolving credit utility, however, remains consequential in financing consumer purchases.
    Keywords: Consumer payments; Electronic payments; Private label credit
    JEL: D1
    Date: 2015–07–03
  10. By: Tutlani, Ankur
    Abstract: Borrowers’ participation in MFI group lending credit market is not insured because of the alternative sources of credit available. The question arises what is the ideal MFI interest rate to ensure borrowers’ participation which at the same time being financially viable for MFI. The paper attempts to answer this question and analyzes the borrowers’ trade-off of borrowing from MFI or from moneylender (ML). Results show that borrowers may find comparative advantage in borrowing individually from ML as compared to borrowing in a group from MFI if the transaction cost burden is high and their credit requirement is low
    Keywords: Microfinance, Group lending, Informal finance, Transaction cost, Effective cost
    JEL: G21 O17
    Date: 2016–02–12
  11. By: Krogstrup, Signe; Tille, Cédric
    Abstract: We draw on a new data set on the use of Swiss francs and other currencies by European banks to assess the patterns of foreign currency bank lending. We show that the patterns differ sharply across foreign currencies. The Swiss franc is used predominantly for lending to residents, especially households. It is sensitive to the interest rate differential, exchange rate developments, funding availability, and to some extent international trade. Lending in other currencies is more used in lending to resident nonfinancial firms, and mostly in cross-border lending, where it is sensitive to funding costs and trade. Policy measures aimed at foreign currency lending have a clear impact on lending to residents. Our analysis shows that not all foreign currencies are alike, and that any policy aimed at the use of foreign currencies needs to take this heterogeneity into account.
    Keywords: Swiss franc lending,foreign currency lending,cross-border transmission of shocks,European bank balance sheets
    JEL: F32 F35 F36
    Date: 2015
  12. By: Carolina Laureti; Ariane Szafarz
    Abstract: Using data from Bangladesh, this paper finds that the liquidity premium—the difference between the interest paid on illiquid and liquid savings accounts—is higher in commercial banks than in microfinance institutions. One possible interpretation lies in the higher prevalence of time-inconsistency among the poor. The observed difference in liquidity premia could be due to poor time-inconsistent agents willing to forgo interest on illiquid savings accounts in order to discipline their future selves.
    Keywords: liquidity premium; present-bias; banks; microfinance; Bangladesh
    JEL: G21 D14 O16
    Date: 2016–02–04
  13. By: Gertler, Mark (NYU); Kiyotaki, Nobuhiro (Princeton University); Prestipino, Andrea (Board of Governors of the Federal Reserve System (U.S.))
    Abstract: There has been considerable progress in developing macroeconomic models of banking crises. However, most of this literature focuses on the retail sector where banks obtain deposits from households. In fact, the recent financial crisis that triggered the Great Recession featured a disruption of wholesale funding markets, where banks lend to one another. Accordingly, to understand the financial crisis as well as to draw policy implications, it is essential to capture the role of wholesale banking. The objective of this paper is to characterize a model that can be seen as a natural extension of the existing literature, but in which the analysis is focused on wholesale funding markets. The model accounts for both the buildup and collapse of wholesale banking, and also sketches out the transmission of the crises to the real sector. We also draw out the implications of possible instability in the wholesale banking sector for lender-of-last resort policy as well as for macroprudential policy.
    Keywords: financial crises; wholesale banking; interbank markets; rollover risk
    JEL: E44
    Date: 2016–01–29
  14. By: Murphy, David (Bank of England); Nahai-Williamson, Paul (Bank of England)
    Abstract: Central counterparties (CCPs) are a key feature of the post-crisis financial system, and it is vital that they are robust. Indeed, as Paul Tucker said, ‘it is an understatement that it would be a disaster if a clearing house failed’ (Tucker (2011)). Therefore the question of how safe CCPs are is an important one. A key regulatory standard for CCPs is ‘cover 2’: this states that systemically important clearing houses must have sufficient financial resources to ‘cover’, or be robust under the failure of, their two largest members in extreme but plausible circumstances. This is an unusual standard, in that it is independent of the number of members a CCP has. Therefore it is natural to ask how prudent the cover 2 standard is for different sizes of CCP. This is the question investigated in this paper. We first use a simple model to quantify the likelihood of CCP failure. This model is used to produce stylised results showing how the probability of failure of a CCP that meets the cover 2 standard can be estimated. Second, we present a simple approach to explore how the distribution of risk among clearing members affects the prudence of the cover 2 standard. Our results give some reassurance in that we find that CCPs meeting the cover 2 standard are not highly risky provided that tail risks are not distributed too uniformly amongst CCP members. They do however suggest that CCPs and their supervisors should monitor this distribution as central clearing evolves.
    Keywords: financial regulation; central counter parties
    JEL: G28
    Date: 2014–10–24
  15. By: Nguyet Thi Khanh Cao (Graduate School of Economics, Kobe University)
    Date: 2016–02
  16. By: Acharya, Viral V.; Imbierowicz, Björn; Steffen, Sascha; Teichmann, Daniel
    Abstract: We investigate the transmission of central bank liquidity to bank deposit and loan spreads of European firms over the January 2006 to June 2010 period. When the European Central Bank (ECB) allocated liquidity to banks in a competitive tender at the beginning of the crisis, higher “aggregate” central bank liquidity (i.e. the total liquidity in the banking system that is held at the ECB) reduces bank deposit rates of low risk banks but has no effect on deposit rates of high risk banks or on corporate loan spreads of high or low risk banks. After the ECB started to fully allot all liquidity requested by banks via its refinancing operations on October 8, 2008, an increase in liquidity decreases deposit rates of both high and low risk banks. While loan spreads of low risk banks decrease, those of high risk banks remain unchanged also under full allotment of liquidity. We find that borrowers of high risk banks refinance term loans drawing down loan commitments. They have lower payouts, lower capital expenditures and lower asset growth compared with borrowers of low risk banks. Our results suggest a differential transmission of central bank liquidity of low versus high risk banks, and an impaired transmission to corporate borrowers of high risk banks.
    Keywords: Central Bank Liquidity, Corporate Deposits, ECB, Financial Crisis, Loans
    JEL: E43 E58 G01 G21
    Date: 2015–06
  17. By: Gruber, Joseph W. (Board of Governors of the Federal Reserve System (U.S.)); Kamin, Steven B. (Board of Governors of the Federal Reserve System (U.S.))
    Abstract: We examine the increase in the net lending (saving minus investment) of nonfinancial corporations in the years preceding and especially following the Global Financial Crisis (GFC). We consider whether this increase in net lending is an endogenous reflection of the current weak pace of growth or an outcome of other factors, such as firms' desire to cut investment and hoard assets, and thus an exogenous drag on growth. Looking at G7 economies, we find that the fall in corporate investment during the GFC was in line with historical norms, given the path of GDP growth, interest rates, profits, and other relevant determinants. However, we find that investment declined from a surprisingly weak starting point, as corporate investment in many of the G7 economies started falling below our models' predictions in the years before the GFC. Moreover, corporate payouts to investors in the form of dividends and equity buybacks have trended up over the past 1-1/2 decades, inconsistent with the view that cautious firms were cutting back on investment spending to strengthen their balance sheets. Identifying the causes of the rise in corporate net lending and declines in investment rates starting in the years before the GFC should be an important focus of future research.
    Keywords: Investment; Corporate Saving; Corporate Balance Sheets
    Date: 2015–11–05
  18. By: Di, Wenhua (Federal Reserve Bank of Dallas); Millimet, Daniel (Southern Methodist University)
    Abstract: The empirical effects of place-based tax incentive schemes designed to aid low-income communities are unclear. While a growing number of studies find beneficial effects on employment, there is little investigation into other behaviors of households affected by such programs. We analyze the impact of the Texas Enterprise Zone Program on household debt and delinquency. Specifically, we utilize detailed information on all household liabilities, delinquencies, and credit scores from the Federal Reserve Bank of New York Consumer Credit Panel/Equifax, a quarterly longitudinal 5% random sample of all individuals in the US with a social security number and a credit report. We identify the causal effect of the program by using a sharp regression discontinuity approach that exploits the known institutional rules of the program. We find a modest positive impact on the repayment of retail loans, and the evidence of an increase in the delinquency rates of auto loans, as well as in Chapter 13 bankruptcy filings.
    Keywords: Enterprise zones; debt; consumer finance; regression discontinuity
    JEL: C21 G02 H25 H31
    Date: 2016–01–01
  19. By: KOBAYASHI Keiichiro
    Abstract: We construct and analyze a model of household debt with endogenous borrowing constraint, in which a large initial debt has a persistent adverse effect. In this economy, the redistribution shock that makes a percentage of people overly indebted can cause persistent shortages of aggregate demand and inefficiency due to labor-wedge deterioration. Overly accumulated debt may be a primal cause of persistent recessions. Debt forgiveness may be effective to restore aggregate demand and efficiency, and enhance welfare in a crisis-hit economy, where many households suffer from excessive debt burden.
    Date: 2016–02
  20. By: Arwin G. Zeissler; Andrew Metrick
    Abstract: As a global financial service provider, JPMorgan Chase (JPM) is supervised by banking regulatory agencies in different countries.  Bruno Iksil, the derivatives trader primarily responsible for the $6 billion trading loss in 2012, was based in JPM’s London office.  This office was regulated both by the Office of the Comptroller of the Currency (OCC) of the United States and by the Financial Services Authority (FSA), which served as the sole regulator of all financial services in the United Kingdom.  Banking regulators in the US and the UK have entered into agreements with one another to define basic parameters for sharing information gathered during bank examinations and even assisting one another with bank inspections under certain circumstances.  However, even as JPM sought to stifle OCC and FSA supervision, cooperation between the US and UK regulators was minimal.
    Keywords: Systemic Risk, Financial Crises, Financial Regulation
    JEL: G01 G28
    Date: 2014–12
  21. By: Chang, C-L.; Jiménez-Martín, J.A.; McAleer, M.J.; Pérez-Amaral, T.
    Abstract: __Abstract__ The Basel Committee on Banking Supervision (BCBS) (2013) recently proposed shifting the quantitative risk metrics system from Value-at-Risk (VaR) to Expected Shortfall (ES). The BCBS (2013) noted that “a number of weaknesses have been identified with using VaR for determining regulatory capital requirements, including its inability to capture tail risk” (p. 3). For this reason, the Basel Committee is considering the use of ES, which is a coherent risk measure and has already become common in the insurance industry, though not yet in the banking industry. While ES is mathematically superior to VaR in that it does not show “tail risk” and is a coherent risk measure in being subadditive, its practical implementation and large calculation requirements may pose operational challenges to financial firms. Moreover, previous empirical findings based only on means and standard deviations suggested that VaR and ES were very similar in most practical cases, while ES could be less precise because of its larger variance. In this paper we find that ES is computationally feasible using personal computers and, contrary to previous research, it is shown that there is a stochastic difference between the 97.5% ES and 99% VaR. In the Gaussian case, they are similar but not equal, while in other cases they can differ substantially: in fat-tailed conditional distributions, on the one hand, 97.5%-ES would imply higher risk forecasts, while on the other, it provides a smaller down-side risk than using the 99%-VaR. It is found that the empirical results in the paper generally support the proposals of the Basel Committee.
    Keywords: Stochastic dominance, Value-at-Risk, Expected Shortfall, Optimizing strategy, Basel III Accord
    JEL: G32 G11 G17 C53 C22
    Date: 2015–05–01

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