nep-ban New Economics Papers
on Banking
Issue of 2016‒03‒06
twenty-one papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. The effect of monetary policy on bank wholesale funding By Choi, Dong Boem; Choi, Hyun-Soo
  2. How Excessive Is Banks' Maturity Transformation? By Segura, Anatoli; Suarez, Javier
  3. Debt collection agencies and the supply of consumer credit By Fedaseyeu, Viktar
  4. Determinants of mortgage default and consumer credit use: the effects of foreclosure laws and foreclosure delays By Chan, Sewin; Haughwout, Andrew F.; Hayashi, Andrew; Van der Klaauw, Wilbert
  5. Uncertainty in historical Value-at-Risk: an alternative quantile-based risk measure By Dominique Guegan; Bertrand K. Hassani; Kehan Li
  6. Risky Mortgages, Bank Leverage and Credit Policy By Ferrante, Francesco
  7. Securitization and Credit Quality By Kara, Alper; Marques-Ibanez, David; Ongena, Steven
  8. More Accurate Measurement for Enhanced Controls: VaR vs ES? By Dominique Guegan; Bertrand K. Hassani
  9. Financial Stability Paper 31: Understanding the fair value of banks’ loans By Knott, Samuel; Richardson, Peter; Rismanchi, Katie; Sen, Kallol
  10. Information Asymmetry and Financial Development Dynamics in Africa By Simplice Asongu; Jacinta C. Nwachukwu; Vanessa S. Tchamyou
  11. CoCo Design, Risk Shifting and Financial Fragility By Chan, Stephanie; van Wijnbergen, Sweder
  12. Insecure debt By Rafael Matta; Enrico Perotti
  13. To Separate or not to Separate Investment from Commercial Banking? An Empirical Analysis of Attention Distortion under Multiple Tasks By Reint E. Gropp; K. Park
  14. The Role of Trust-Control Mechanisms in Operations Processes: Mitigating Mission Drift in a Microfinance Institution in Gujarat, India By Viresh Amin
  15. Interconnectedness in the Interbank Market By Brunetti, Celso; Harris, Jeffrey H.; Mankad, Shawn; Michailidis, George
  16. Explaining the Cyclical Volatility of Consumer Debt Risk By Carlos Madeira
  17. Why does the FDIC sue? By Koch, Christoffer; Okamura, Ken
  18. Aid Volatility and Social Performance in Microfinance By Bert D'Espallier; Marek Hudon; Ariane Szafarz
  19. Explicit diversification benefit for dependent risks By Michel Dacorogna; Laila Elbahtouri; Marie Kratz
  20. Financial Stability Paper No 29: An investigation into the procyclicality of risk-based initial margin models By Murphy, David; Vasios, Michalis; Vause, Nick
  21. Financial Stability Paper 34: The resilience of financial market liquidity By Anderson, Nicola; Webber, Lewis; Noss, Joseph; Beale, Daniel; Crowley-Reidy, Liam

  1. By: Choi, Dong Boem (Federal Reserve Bank of New York); Choi, Hyun-Soo (Singapore Management University)
    Abstract: We study how monetary policy affects the funding composition of the banking sector. When monetary tightening reduces the retail deposit supply owing to, for example, a decrease in bank reserves or in money demand, banks try to substitute the deposit outflows with more wholesale funding in order to mitigate the policy impact on their lending. Banks have varying degrees of accessibility to wholesale funding sources because of financial frictions, and those banks that are large or that have a greater reliance on wholesale funding increase their wholesale funding more. As a result, monetary tightening increases both the reliance on and the concentration of wholesale funding within the banking sector, indicating that monetary tightening could increase systemic risk. Our findings also suggest that introducing liquidity requirements can bolster monetary policy transmission through the bank lending channel by limiting the funding substitution of large banks.
    Keywords: bank funding; monetary policy transmission; systemic stability; liquidity regulation; bank lending channel
    JEL: E52 E58 G21 G28
    Date: 2016–01–01
  2. By: Segura, Anatoli; Suarez, Javier
    Abstract: We quantify the gains from regulating banks' maturity transformation in an infinite horizon model of banks which finance long-term assets with non-tradable debt. Banks choose the amount and maturity of their debt trading off investors' preference for short maturities with the risk of systemic crises. As in Stein (2012), pecuniary externalities make unregulated debt maturities inefficiently short. The assessment is based on the calibration of the model to Eurozone banking data for 2006. Lengthening the average maturity of wholesale debt from its 2.8 months to 3.3 months would produce welfare gains with a present value of euro 105 billion.
    Keywords: liquidity risk; maturity regulation; pecuniary externalities; systemic crises
    JEL: G01 G21 G28
    Date: 2016–02
  3. By: Fedaseyeu, Viktar (Bocconi University)
    Abstract: Supersedes Working Paper 13-38/R. The activities of third-party debt collectors affect millions of borrowers. However, relatively little is known about their impact on consumer credit. To study this issue, I investigate whether state debt collection laws affect the ability of third-party debt collectors to recover delinquent debts and if this, in turn, affects the amount of credit being provided. This paper constructs, from state statutes and session laws, a state-level index of debt collection restrictions and uses changes in this index over time to estimate the impact of debt collection laws on revolving credit. Stricter debt collection regulations appear to reduce the number of third-party debt collectors and to lower recovery rates on delinquent credit card loans. This, in turn, leads to fewer openings of credit cards.
    Keywords: Household finance; Consumer credit; Creditor rights; Contract enforcement; Debt collection; Law and finance
    JEL: D12 D18 G18 G20 K35
    Date: 2015–06–19
  4. By: Chan, Sewin (New York University); Haughwout, Andrew F. (Federal Reserve Bank of New York); Hayashi, Andrew (University of Virginia); Van der Klaauw, Wilbert (Federal Reserve Bank of New York)
    Abstract: The mortgage default decision is part of a complex household credit management problem. We examine how factors affecting mortgage default spill over to other credit markets. As home equity turns negative, homeowners default on mortgages and HELOCs at higher rates, whereas they prioritize repaying credit cards and auto loans. Larger unused credit card limits intensify the preservation of credit cards over housing debt. Although mortgage non-recourse statutes increase default on all types of housing debt, they reduce credit card defaults. Foreclosure delays increase default rates for both housing and non-housing debts. Our analysis highlights the interconnectedness of debt repayment decisions.
    Keywords: mortgage default; state foreclosure laws; consumer finance
    JEL: D12 D14 G1 K10
    Date: 2015–06–01
  5. By: Dominique Guegan (Centre d'Economie de la Sorbonne); Bertrand K. Hassani (Grupo Santander et Centre d'Economie de la Sorbonne); Kehan Li (Centre d'Economie de la Sorbonne)
    Abstract: The financial industry has extensively used quantile-based risk measures relying on the Value-at-Risk (VaR). They need to be estimated from relevant historical data set. Consequently, they contain uncertainty. We propose an alternative quantile-based risk measure (the Spectral Stress VaR) to capture the uncertainty in the historical VaR approach. This one provides flexibility to the risk manager to implement prudential regulatory framework. It can be a VaR based stressed risk measure. In the end we propose a stress testing application for it
    Keywords: Historical method; Uncertainty; Value-at-Risk; Stress risk measure; Tail risk measure; Prudential financial regulation; Stress testing
    JEL: G28 G32 C14
    Date: 2016–01
  6. By: Ferrante, Francesco (Board of Governors of the Federal Reserve System (U.S.))
    Abstract: Two key channels that allowed the 2007-2009 mortgage crisis to severely impact the real economy were: a housing net worth channel, as defined by Mian and Sufi (2014), which affected the wealth of leveraged households; and a bank net worth channel, which reduced the ability of financial intermediaries to provide credit. To capture these features of the Great Recession, I develop a DSGE model with balance-sheet constrained banks financing both risky mortgages and productive capital. Mortgages are provided to agents facing idiosyncratic housing depreciation risk, implying an endogenous default decision and a link between their borrowing capacity and house prices. The interaction among the housing net worth channel, the bank net worth channel and endogenous foreclosures generates novel amplification mechanisms. I analyze the quantitative implications of these new channels by considering two different shocks linked to the supply of mortgage credit: an increase in the variance of housing risk and a deterioration in the collateral value of mortgages for bank funding. Both shocks are able to produce co-movements in house prices, business investment, consumption and output. Finally, I study two types of policy interventions that are able to reduce the severity of a mortgage crisis: debt relief for borrowing households and central bank credit intermediation.
    Keywords: Bank runs; deposit insurance; large depositors
    JEL: E32 E44 E58 G21
    Date: 2015–12–18
  7. By: Kara, Alper (Loughborough University); Marques-Ibanez, David (Board of Governors of the Federal Reserve System (U.S.)); Ongena, Steven (University of Zürich)
    Abstract: Banks are usually better informed on the loans they originate than outside investors. 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;
    Date: 2015–11–03
  8. By: Dominique Guegan (Centre d'Economie de la Sorbonne); Bertrand K. Hassani (Grupo Santander et Centre d'Economie de la Sorbonne)
    Abstract: This paper analyses how risks are measured in financial institutions, for instance Market, Credit, Operational, etc with respect to the choice of the risk measures, the choice of the distributions used to model them and the level of confidence selected. We discuss and illustrate the characteristics, the paradoxes and the issues observed comparing the Value-at-Risk and the Expected Shortfall in practice. This paper is built as a differential diagnosis and aims at discussing the reliability of the risk measures as long as making some recommendations
    Keywords: Risk measures; Marginal distributions; Level of confidence; Capital requirement
    JEL: G28 G32 C14
    Date: 2016–02
  9. By: Knott, Samuel (Bank of England); Richardson, Peter (Bank of England); Rismanchi, Katie (Bank of England); Sen, Kallol (Bank of England)
    Abstract: ​Loans are typically the largest asset class on banks’ balance sheets. So understanding the value of loans is vital to any assessment of the resilience of the banking system. This is not straightforward. The market value of loans is seldom observable. And the nature and diversity of banks’ loans has changed markedly over time: the maturity of loans has increased, on average; banks’ mortgage lending has ballooned; and banks use more hard information in their lending decisions. So it is unlikely that any one valuation technique will capture all relevant aspects of valuation across all types of loans. Recognising this, banks are required by accounting standards to disclose the fair value of their loans in the notes to their accounts. At the end of 2013, the fair value of the major UK banks’ loans was £55 billion less than the amortised cost value. This paper explains loan fair value techniques and compares these to other valuation approaches. Fair value approaches include elements of valuation that are not captured by amortised cost approaches, such as lifetime expected credit losses and embedded interest rate gains and losses. As such, fair value disclosures might provide additional insight into the value of some assets, such as longer-term, fixed-rate loans, like mortgages. But loan fair values, like all loan valuation approaches, come with a number of health warnings. For example, they may capture factors that do not necessarily have a bearing on banks’ resilience. As a result, a loan fair value number on its own is often insufficient, which suggests that there may be benefits to improved supplementary disclosures about the drivers of the fair value of banks’ loans to complement balance sheet values.
    Keywords: bank regulation; fair value
    JEL: G28
    Date: 2014–11–28
  10. By: Simplice Asongu (Yaoundé/Cameroun); Jacinta C. Nwachukwu (Huddersfield, HD1 3DH, UK); Vanessa S. Tchamyou (Yaoundé/Cameroon)
    Abstract: We examine policy thresholds of information sharing for financial development in 53 African countries for the period 2004-2011. Public credit registries (PCR) and private credit bureaus (PCB) are used as proxies for reducing information asymmetry whereas financial development includes all financial dimensions identified by the Financial Development and Structure Database (FDSD) of the World Bank, namely: depth, efficiency, activity and size. The empirical evidence is based on interactive Generalised Methods of Moments with forward orthogonal deviations. The following findings are established. First, PCR and PCB have negative effects on financial depth, with the magnitude of the former higher. Second, contrary to PCR which have insignificant effects, PCB has a negative impact on banking system efficiency. Third, PCR and PCB have negative impacts on financial activity, with the magnitude of the latter higher. Moreover, their marginal effects are negative. Fourth, PCR and PCB have positive effects on financial size, with the effect of the former higher. While marginal effects are positive, corresponding thresholds are not within range. Policy implications are discussed.
    Keywords: Information Asymmetry; Financial Development
    JEL: G20 G29 O16 O55
    Date: 2015–06
  11. By: Chan, Stephanie; van Wijnbergen, Sweder
    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: capital requirements; contingent convertible capital; risk shifting incentives; systemic risk
    JEL: G01 G13 G21 G28 G32
    Date: 2016–02
  12. By: Rafael Matta; Enrico Perotti
    Abstract: We analyse bank runs under fundamental and asset liquidity risk, adopting a realistic description of bank default. We obtain an unique run equilibrium, even as fundamental risk becomes arbitrarily small. When safe returns are securitized and pledged to repo debt, funding costs are reduced but risk becomes concentrated on unsecured debt. We show the private choice of repo debt leads to more frequent unsecured debt runs. Thus satisfying safety demand via secured debt creates risk directly. Collateral fire sales upon default may reduce its liquidity and lead to higher haircuts, which further increase the frequency of runs.
    Keywords: Repo credit; bank runs; asset liquidity risk
    JEL: G21 G28
    Date: 2015–07
  13. By: Reint E. Gropp; K. Park
    Abstract: In the wake of the 2008/2009 financial crisis, a number of policy reports (Vickers, Liikanen, Volcker) proposed to separate investment banking from commercial banking to increase financial stability. This paper empirically examines one theoretical justification for these proposals, namely attention distortion under multiple tasks as in Holmstrom and Milgrom (1991). Universal banks can be viewed as combining two different tasks (investment banking and commercial banking) in the same organization. We estimate pay-performance sensitivities for different segments within universal banks and for pure investment and commercial banks. We show that the pay-performance sensitivity is higher in investment banking than in commercial banking, no matter whether it is organized as part of a universal bank or in a separate institution. Next, the paper shows that relative pay-performance sensitivities of investment and commercial banking are negatively related to the quality of the loan portfolio in universal banks. Depending on the specification, we obtain a reduction in problem loans when investment banking is removed from commercial banks of up to 12 percent. We interpret the evidence to imply that the higher pay-performance sensitivity in investment banking directs the attention of managers away from commercial banking within universal banks, consistent with Holmstrom and Milgrom (1991). Separation of investment banking and commercial banking may indeed be associated with a reduction in risk in commercial banking.
    Keywords: multiple tasks, universal bank, bank holding company, incentive pay, loan performance
    JEL: G21 G24 G29
    Date: 2016–02
  14. By: Viresh Amin (Department of Management, Birkbeck College University of London)
    Abstract: This study explores how managers of microfinance institutions (MFIs) use trust-control mechanisms in the operation processes to mitigate the problem of mission drift arising out of the need to meet the dual goals of social development and financial self-sustainability. Using a case study methodology, purposive sampling, and replication logic, data from the operations processes of four geographically different sites of a microfinance institution in Gujarat, India were analyzed. The findings suggest that the managers of microfinance institutions balance integrity-trust, benevolence-trust, competence-trust, and control mechanisms to achieve dual goals of social development and financial self-sustainability. The conditions and contingencies under which trust-control mechanisms are most effective for mitigating mission drift are identified. The findings also indicate that managers of the microfinance institution use calculative and relational forms of trust to achieve the empowerment of women borrowers along with the fulfilment of the aims of financial self-sustainability. Finally, the study places mission drift mitigation within its ethical context by examining client vulnerability and the MFI’s operational responses.
    Date: 2014–06
  15. By: Brunetti, Celso (Board of Governors of the Federal Reserve System (U.S.)); Harris, Jeffrey H. (American University); Mankad, Shawn (University of Maryland); Michailidis, George (University of Michigan)
    Abstract: We study the behavior of the interbank market before, during and after the 2008 financial crisis. Leveraging recent advances in network analysis, we study two network structures, a correlation network based on publicly traded bank returns, and a physical network based on interbank lending transactions. While the two networks behave similarly pre-crisis, during the crisis the correlation network shows an increase in interconnectedness while the physical network highlights a marked decrease in interconnectedness. Moreover, these networks respond differently to monetary and macroeconomic shocks. Physical networks forecast liquidity problems while correlation networks forecast financial crises.
    Keywords: Interconnectedness; correlation network; financial crisis; interbank market; physical network
    Date: 2015–09–30
  16. By: Carlos Madeira
    Abstract: Previous studies of consumer debt risk estimate low sensitivities to negative economic shocks, contradicting the historical data. This work proposes a heterogeneous agents' model of household finances and credit risk. Families suffer labor income shocks and choose from a menu of new loans contracts, defaulting on debt commitments when unable to finance minimum consumption standards. Using survey data I simulate household credit default for Chile over the last 20 years, replicating successfully the highs and lows of consumer delinquency. Households, especially those of low income, are shown to be highly vulnerable to changes in interest rates, credit maturities and liquidity.
    Date: 2016–01
  17. By: Koch, Christoffer (Federal Reserve Bank of Dallas); Okamura, Ken (University of Oxford)
    Abstract: Cases the Federal Deposit Insurance Corporation (FDIC) pursues against the directors and officers of failed commercial banks for (gross) negligence are important for the corporate governance of U.S. commercial banks. These cases shape the kernel of bank corporate governance, as they guide expectations of bankers and regulators in defining the limits of acceptable behavior under financial distress. We examine the differences in behavior of all 408 U.S. commercial banks that were taken into receivership between 2007–2012. Sued banks had different balance sheet dynamics in the three years prior to failure. These banks were generally larger, faster growing, obtained riskier funding and were more “optimistic”. We find evidence that the behavior of bank boards adjusts in an out-of-sample set of banks. Our results suggest the FDIC does not only pursue “deep pockets”, but sets corporate governance standards for all banks by suing negligent directors and officers.
    Keywords: Financial stability; corporate governance; bank failures; financial ratios
    JEL: G21 G28 G33 G34
    Date: 2016–01–25
  18. By: Bert D'Espallier; Marek Hudon; Ariane Szafarz
    Abstract: Uncertainty makes objectives harder to reach. This paper examines whether uncertainty in subsidies leads to mission drift in microfinance institutions (MFIs). Using a worldwide sample of 1,151 MFIs active in 104 countries, we find that interest rates increase with aid volatility while average loan size is inversely related to aid volatility. These results suggest that MFIs consider average loan size as a signaling device for commitment to their social mission, but use interest rates as an adjustment variable to cope with uncertainty. The policy prescription to donor agencies wishing to curtail the rise in interest rates is to deliver subsidies predictably and transparently.
    Keywords: Microfinance; subsidies; mission drift; average loan size; interest rate
    JEL: F35 G21 G28 O54 O57
    Date: 2016–02–18
  19. By: Michel Dacorogna (SCOR SE - SCOR SE); Laila Elbahtouri (SCOR SE - SCOR SE); Marie Kratz (SID - Information Systems, Decision Sciences and Statistics Department - Essec Business School)
    Abstract: We propose a new approach to analyse the effect of diversification on a portfolio of risks. By means of mixing techniques, we provide an explicit formula for the probability density function of the portfolio. These techniques allow to compute analytically risk measures as VaR or TVaR, and consequently the associated diversification benefit. The explicit formulas constitute ideal tools to analyse the properties of risk measures and diversification benefit. We use standard models, which are popular in the reinsurance industry, Archimedean survival copulas and heavy tailed marginals. We explore numerically their behavior and compare them to the aggregation of independent random variables, as well as of linearly dependent ones. Moreover, the numerical convergence of Monte Carlo simulations of various quantities is tested against the analytical result. The speed of convergence appears to depend on the fatness of the tail; the higher the tail index, the faster the convergence.
    Keywords: Weibull,Aggregation of risks, Archimedean copula, Clayton, Diversification (benefit), Gaussian, Gumbel, Heavy tail, Mixing technique, Pareto, Risk measure, TVaR, VaR
    Date: 2015–12
  20. By: Murphy, David (Bank of England); Vasios, Michalis (Bank of England); Vause, Nick (Bank of England)
    Abstract: The initial margin requirements for a portfolio of derivatives are typically calculated using a risk model. Common risk models are procyclical: margin requirements for the same portfolio are higher in times of market stress and lower in calm markets. This procyclicality can cause liquidity stress whereby parties posting margin have to find additional liquid assets, often at just the times when it is most difficult for them to do so. Hence regulation has recognised that, subject to being adequately risk sensitive, margin models should not be ‘overly’ procyclical. There is, however, no standard definition of procyclicality. This paper proposes two types of quantitative measure of procyclicality: one that examines margin variation across the cycle and one that focuses on short-term margin increases. It then studies, using historical and simulated data, various margin models with regard to both their risk sensitivity and the proposed procyclicality measures. It finds that models which pass common risk sensitivity tests can have very different levels of procyclicality. The paper recommends that CCPs and major dealers should disclose the procyclicality properties of their margin models, perhaps by reporting the proposed procyclicality measures. This would help derivatives users to anticipate potential margin calls and ensure they have adequate holdings of or access to liquid assets.
    Keywords: derivatives; financial regulation
    JEL: G15 G28
    Date: 2014–05–16
  21. By: Anderson, Nicola (Bank of England); Webber, Lewis (Bank of England); Noss, Joseph (Bank of England); Beale, Daniel (Bank of England); Crowley-Reidy, Liam (Bank of England)
    Abstract: Financial markets have been affected by a number of structural changes over the past few years. Innovation has generated a broad trend towards fast, electronic trading. And necessary regulation implemented in response to the global financial crisis to ensure the safety and soundness of core intermediaries has discouraged them from market making as principal – though this may also reflect greater risk aversion on their part. These developments, alongside occasional bursts of volatility associated with short-term illiquidity, have led to concerns that market liquidity may have become more fragile. Although episodes of heightened volatility and short-term illiquidity are not necessarily in themselves threats to financial stability, they could become so if they were to persist, amplify or spill over. This paper draws out common lessons from such episodes. Overall, the ‘normal’ level of liquidity in markets that are less reliant on core intermediaries appears to have increased – but in some cases to the detriment of resilience. In contrast, the ‘normal’ level of liquidity in markets that are more reliant on core intermediaries appears to have fallen – but with a likely increase in the resilience of those markets via the resilience of the core intermediaries themselves. This is consistent with recent episodes of volatility and illiquidity having centred on fast, electronic markets, including exchange-traded venues.
    Keywords: financial regulation; liquidity; financial markets
    JEL: G14 G15 G28
    Date: 2015–10–30

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