nep-ban New Economics Papers
on Banking
Issue of 2016‒03‒10
eighteen papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. The universal banking feedback effet : U.S. and Canada evidence By Christian Calmès; Raymond Théoret
  2. Bank Quality, Judicial Efficiency and Borrower Runs: Loan Repayment Delays in Italy By Fabio Schiantarelli; Massimiliano Stacchini; Philip E. Strahan
  3. On the differential impact of securitization on bank lending during the financial crisis By Clemens Bonner; Daniel Streitz; Michael Wedow
  4. Bank Lending Technologies and SME Credit Rationing in Europe in the 2009 Crisis By Giovanni Ferri; Pierluigi Murro; Zeno Rotondi
  5. Does Greater Capital Hamper the Cost Efficiency of Banks? By Jitka Lesanovska; Laurent Weill
  6. The political economy of bank lending : evidence from an emerging market By Agarwal,Sumit; Morais,Bernardo; Ruiz Ortega,Claudia; Zhang,Jian
  7. The Lender of Last Resort Function after the Global Financial Crisis By Marc Dobler; Simon Gray; Diarmuid Murphy; Bozena Radzewicz-Bak
  8. Lenders on the storm of wholesale funding shocks: Saved by the central bank? By de Haan, Leo; Vermeulen, Philip; van den End, Jan Willem
  9. Management Board Composition of Banking Institutions and Bank Risk-Taking: The Case of the Czech Republic By Diana Zigraiova
  10. Lending-of-last-resort is as lending-of-last-resort does: central bank liquidity provision and interbank market functioning in the euro area By Garcia-de-Andoain, Carlos; Heider, Florian; Hoerova, Marie; Manganelli, Simone
  12. A Microfounded Design of Interconnectedness-Based Macroprudential Policy By Jose Fique
  13. Estimating Cost Efficiency of Turkish Commercial Banks under Unobserved Heterogeneity with Stochastic Frontier Models By Hakan Güneş; Dilem Yıldırım
  14. Effects of Monetary and Macroprudential Policies on Financial Conditions; Evidence from the United States By Aleksandra Zdzienicka; Sally Chen; Federico Diaz Kalan; Stefan Laseen; Katsiaryna Svirydzenka
  15. Breaking the Spell with Credit-Easing: Self-Confirming Credit Crises in Competitive Search Economies By Gaballo, Gaetano; Marimon, Ramon
  16. Bank Lending Margins in the Euro Area: The Effects of Financial Fragmentation and ECB Policies By Helen Louri; Petros M. Migiakis
  17. Currency Diversification of Banks: A Spontaneous Buffer Against Financial Losses By Justine Pedrono
  18. Booms and banking crises By Frederic Boissay; Fabrice Collard; Frank Smets

  1. By: Christian Calmès (Chaire d'information financière et organisationnelle ESG-UQAM, Laboratory for Research in Statistics and Probability, Université du Québec (Outaouais)); Raymond Théoret (Chaire d'information financière et organisationnelle ESG-UQAM, Université du Québec (Montréal), Université du Québec (Outaouais))
    Abstract: Bank non-traditional business lines have significant feedback effects on both economic activity and the stock market. These effects appear in the non-interest income series after 1997 strucutral break. Based on U.S. and Canadian data, we find that the banking cycle tends to lead the business cycle in both countries over the whole sample period (frist quarter of 1984 to last quarter of 2013), and particularly in the last decades. Despite these results, the impact of monetary policy on net interest income remains surprisingly stable after the emergence of universal banking.
    Keywords: Universal banking; Banking cycle; VAR; feedback effects.
    JEL: C32 G20 G21
    Date: 2016–01–23
  2. By: Fabio Schiantarelli (Boston College; IZA); Massimiliano Stacchini (Bank of Italy); Philip E. Strahan (Boston College; NBER)
    Abstract: Exposure to liquidity risk makes banks vulnerable to runs from both depositors and from wholesale, short-term investors. This paper shows empirically that banks are also vulnerable to run-like behavior from borrowers who delay their loan repayments (default). Firms in Italy defaulted more against banks with high levels of past losses. We control for borrower fundamentals with firm-quarter fixed effects; thus, identification comes from a firm’s choice to default against one bank versus another, depending upon their health. This ‘selective’ default increases where legal enforcement is weak. Poor enforcement thus can create a systematic loan risk by encouraging borrowers to default en masse once the continuation value of their bank relationships comes into doubt.
    Keywords: liquidity risk, bank runs, bank loans
    Date: 2016–02–15
  3. By: Clemens Bonner; Daniel Streitz; Michael Wedow
    Abstract: This paper analyzes the effect of securitization on bank loan supply over the 2001 to 2013 period using a large sample of Eurozone banks. We document that an increase in banks' ABS issuances positively correlates with bank loan supply before the 2007-08 financial crisis but not afterwards. The underlying collateral of the securitization is correlated with changes of loan supply of the respective type. The main motivation for banks to issue ABS and covered bonds is their use as a funding tool. Since the required skills are similar, ABS issuers were better able to switch to covered bonds, allowing them to gain from the higher liquidity of covered bonds during and right after the financial crisis. We do not find evidence of ABS issuances increasing bank risk.
    Keywords: Securitization; Credit Supply; Financial Crisis
    JEL: G21
    Date: 2016–02
  4. By: Giovanni Ferri (LUMSA University); Pierluigi Murro (LUMSA University); Zeno Rotondi (UniCredit Bank)
    Abstract: The first wave of the global financial crisis hit Europe in the last part of 2008 and through 2009. With banks in a tailspin, credit rationing intensified – as measured in various different ways – particularly for the small and medium sized enterprises (SMEs). The extent of such retrenchment in the supply of credit could reflect not only the worsened general condition of the European banks but also vary at the micro level depending on the lending technologies being used in the SME-main bank rapport. Using the EFIGE database, we examine SME credit rationing in seven EU countries (Austria, France, Germany, Hungary, Italy, Spain and the UK) and try to assess the extent to which differences in the lending technologies and in the status of the firm-main bank relationship contributed to the phenomenon. We find that a firm matching with a bank using the transactional lending technology was more likely to end up rationed for credit during the first part of the financial crisis.
    Keywords: Bank-Firm Relationships, Asymmetric Information, Credit Rationing.
    JEL: G21 D82 G30
    Date: 2016–02
  5. By: Jitka Lesanovska; Laurent Weill
    Abstract: The aim of our research is to analyze the relation between capital and bank efficiency by considering both directions of the Granger causality for the Czech banking industry. We use an exhaustive dataset of Czech banks from 2002 to 2013. We measure the cost efficiency of banks using stochastic frontier analysis. We perform Granger-causality tests to check the sign and significance of the causal relation between capital and efficiency. We embed Granger-causality estimations in the GMM dynamic panel estimator. We find no relation between capital and efficiency, as neither the effect of capital on efficiency, nor the effect of efficiency on capital is significant. The financial crisis does not influence the relation between capital and efficiency. Our findings suggest that tighter capital requirements like those under Basel III do not affect financial stability through the efficiency channel. Policies favoring capital levels and efficiency of the banking industry can therefore be designed separately.
    Keywords: Bank capital, Basel III, efficiency
    JEL: G21 G28
    Date: 2015–12
  6. By: Agarwal,Sumit; Morais,Bernardo; Ruiz Ortega,Claudia; Zhang,Jian
    Abstract: This study investigates the existence of political rents in bank lending, using a comprehensive loan-level data set of the universe of commercial loans in Mexico from 2003 to 2012. Identification relies on changes in the state of origin of a senate committee chairman as a source of exogenous variation in firms'political relationship. The study finds that banks offer favorable loan terms to politically connected firms with larger loan quantities, lower loan spreads, longer maturities, and lower collateral requirements. Furthermore, political loans exhibit higher default rates. To isolate the bank supply channel, a rich set of fixed-effects is included with various specifications. The favorable lending increases with the strength of a firm's political connection, varies gradually along the political cycle, and is mainly offered by large and domestic banks. Consistent with the quid pro quo hypothesis, the study finds that banks that extend political loans receive significantly more government borrowings with better credit quality. The study also shows that the greater credit supply due to political connection leads to a large and significant increase in firm-level employment and assets. The study provides estimates of the total social cost of political lending and net revenue for banks that are engaged in rent provision activity. Finally, a series of robustness tests are performed to rule out alternative mechanisms and explanations.
    Keywords: Debt Markets,Banks&Banking Reform,Access to Finance,Microfinance,Bankruptcy and Resolution of Financial Distress
    Date: 2016–02–24
  7. By: Marc Dobler; Simon Gray; Diarmuid Murphy; Bozena Radzewicz-Bak
    Abstract: The global financial crisis (GFC) has renewed interest in emergency liquidity support (sometimes referred to as “Lender of Last Resort†) provided by central banks to financial institutions and challenged the traditional way of conducting these operations. Despite a vast literature on the topic, central bank approaches and practices vary considerably. In this paper we focus on, for the most part, the provision of idiosyncratic support, approaching it from an operational perspective; highlighting different approaches adopted by central banks; and also identifying some of the issues that arose during the GFC.
    Keywords: Lender of last resort;Central banks and their policies;collateral, risk control measures, market, lender, liquidity, central bank, Government Policy and Regulation, All Countries,
    Date: 2016–01–22
  8. By: de Haan, Leo; Vermeulen, Philip; van den End, Jan Willem
    Abstract: We provide empirical evidence on banks’ responses to shocks in wholesale funding, using data of 181 euro area banks over the period August 2007 to June 2013. Banks’ adjustments of loan volumes and lending rates in response to funding liquidity shocks are analysed in a panel VAR framework. The results show that shocks in the securities and interbank markets have significant effects on loan rates and credit supply, particularly of banks in stressed countries. The results also suggest that central bank liquidity has mitigated this effect most clearly on lending volumes. Lending to non-financial corporations is more sensitive to wholesale funding shocks than lending to households. Moreover, bank characteristics matter for monetary transmission: loan growth of large banks that are typically more dependent on wholesale funding and of banks with large exposure to government bonds shows relatively stronger responses to wholesale funding shocks. JEL Classification: G21, G32
    Keywords: banking/financial intermediation, financial crisis
    Date: 2016–02
  9. By: Diana Zigraiova
    Abstract: The paper investigates how the management board composition of banking institutions affects their risk-taking behavior in the Czech Republic. More specifically, we examine the effect of average director age, the proportion of female directors, the proportion of non-national directors, and director education level on four different bank risk proxies. We build a unique data set comprising selected biographical information on the management board members of Czech financial institutions holding a banking license over the 2001-2012 period. Our most robust finding is that higher proportions of non-national directors increase bank risk as measured by profit volatility and reduce bank stability as captured by the Z-score for the Czech banking sector overall and for the segments of general commercial banks, small and mid-sized banks and adequately capitalized banks. Moreover, we also detect risk-increasing implications of board size for the segments of building societies and small and mid-sized banks. As for average board tenure, its effect on risk-taking varies depending on bank characteristics. We find mixed evidence on the effect of female directors and do not find any strong effect of directors' age on risk in the Czech banking sector. All in all, the results of our analysis are subject to the proxy of bank risk used. The reader should keep in mind that higher absolute level of bank risk is not necessarily unfavorable as it does not capture if risk-taking behavior is excessive for a given return.
    Keywords: Banks, management board composition, panel data, risk-taking
    JEL: C33 G21 G34 J16
    Date: 2015–12
  10. By: Garcia-de-Andoain, Carlos; Heider, Florian; Hoerova, Marie; Manganelli, Simone
    Abstract: This paper investigates the impact of ample liquidity provision by the European Central Bank on the functioning of the overnight unsecured interbank market from 2008 to 2014. We use novel data on interbank transactions derived from TARGET2, the main euro area payment system. To identify exogenous shocks to central bank liquidity, we exploit the timing of ECB liquidity operations and use a simple structural vector auto-regression framework. We argue that the ECB acted as a de-facto lender-of-last-resort to the euro area banking system and identify two main effects of central bank liquidity provision on interbank markets. First, central bank liquidity replaces the demand for liquidity in the interbank market, especially during the financial crisis (2008-2010). Second, it increases the supply of liquidity in the interbank market in stressed countries (Greece, Italy and Spain) during the sovereign debt crisis (2011-2013). JEL Classification: E58, F36, G01, G21
    Keywords: central bank policy, financial crisis, interbank markets, lender-of-last-resort, sovereign debt crisis
    Date: 2016–02
  11. By: Chia-Chien Chang (Department of finance); Yung -Jen Chung (Department of finance)
    Abstract: In December 2010, the BCBS (2010a) strengthened its liquidity framework by proposing two quantitative indicators for liquidity risk in Basel III: the liquidity coverage ratio (LCR) and the net stable funding ratio (NSFR). Whether the new liquidity risk indicators are effective to measure the liquidity risk of bank thereby reducing bank failures is an issue of concern. Thus, this study uses a quarterly data of Taiwan banks from 2006 to 2013 and uses the panel multiple regression model to investigate the effectiveness of LCR and NSFR in Taiwan banks. We also study the effectiveness of spread and several liquidity risk indictors used in Taiwan based on Principles for Sound Liquidity Risk Management and Supervision (PSLRMS). Moreover, we test the liquidity risk majored from systematic or non-systematic risk, and consider the size effect and time effect to compare the result. The result shows that all liquidity risk indicators can explain empirical default point (EDD) significantly, for big banks, LCR is more important than NSFR, but for small banks, NSFR is more important. In crisis period, spread and LCR are significant in big banks, but no indicators are significant in small banks. After crisis, both big and small banks are affected by spread, and NSFR and LCR is significant in small bank and in big bank, respectively.
    Keywords: Subprime mortgage crisis, Basel III, The Liquidity Coverage Ratio, The Net Stable Funding Ratio, Size effect
  12. By: Jose Fique
    Abstract: To address the challenges posed by global systemically important banks (G-SIBs), the Basel Committee on Banking Supervision recommended an “additional loss absorbency requirement” for these institutions. Along these lines, I develop a microfounded design of capital surcharges that target the interconnectedness component of systemic risk. These surcharges increase the costs of establishing interbank connections, which leads to a non-monotonic welfare effect. While reduced interconnectedness decreases welfare by restricting the ability of banks to insure against liquidity shocks, it also increases it by reducing contagion when an interconnected bank fails. Thus, the regulator faces a trade-off between efficiency and financial stability. Furthermore, I show that capital requirements are more effective than default fund contributions when tail-risk exposure is the private information of banks. I conclude by analyzing how resolution regimes and stable funding requirements interact with these surcharges.
    Keywords: Financial Institutions, Financial system regulation and policies
    JEL: D82 D85 G21 G28
    Date: 2016
  13. By: Hakan Güneş (Department of Economics, METU); Dilem Yıldırım (Department of Economics, METU)
    Abstract: This study aims to investigate the cost efficiency of Turkish commercial banks over the restructuring period of the Turkish banking system, which coincides with the 2008 financial global crisis and the 2010 European sovereign debt crisis. To this end, within the stochastic frontier framework, we employ a modified version of the true fixed effect model of Greene (2005), where the unobserved bank heterogeneity is integrated in the inefficiency distribution at a mean level. To select the cost function with the most appropriate inefficiency correlates, we first adopt a search algorithm and then utilize the model averaging approach of Huang and Lai (2012) to verify that our results are not exposed to model selection bias. Overall, our empirical results reveal that cost efficiencies of Turkish banks have improved over time, with the effects of the 2008 and 2010 crises remaining rather limited. Furthermore, not only the cost efficiency scores but also impacts of the crises on those scores appear to vary with regard to bank size and ownership structure, in accordance with much of the existing literature.
    Keywords: Stochastic Frontier, Cost Efficiency, Turkish commercial banks, Panel Data
    JEL: C23 C24 D21 G21 G28
    Date: 2016–03
  14. By: Aleksandra Zdzienicka; Sally Chen; Federico Diaz Kalan; Stefan Laseen; Katsiaryna Svirydzenka
    Abstract: The Global Financial Crisis has reopened discussions on the role of the monetary policy in preserving financial stability. Determining whether monetary policy affects financial variables domestically—especially compared to the effects of macroprudential policies— and across borders, is crucial in this context. This paper looks into these issues using U.S. exogenous monetary policy shocks and macroprudential policy measures. Estimates indicate that monetary policy shocks have significant and persistent effects on financial conditions and can attenuate long-term financial instability. In contrast, the impact of macroprudential policy measures is generally more immediate but shorter-lasting. Also, while an exogenous increase in U.S. monetary policy rates tends to reduce credit and house prices in other countries—with the effects varying with country-specific characteristics—an increase driven by improved U.S. economic conditions tends to have the opposite effect. Finally, we do not find evidence of cross-border spillover effects associated with U.S. macroprudential policies.
    Keywords: Financial stability;Monetary policy;Central banks and their policies;Financial crises;United States;Western Hemisphere;spillovers, international monetary fund, exchange rate, transmission mechanism, Monetary Policy (Targets, Instruments, and Effects), spillovers.,
    Date: 2015–12–31
  15. By: Gaballo, Gaetano; Marimon, Ramon
    Abstract: We show that credit crises can be Self-Confirming Equilibria (SCE), which provides a new rationale for policy interventions like, for example, the FRB's TALF credit-easing program in 2009. We introduce SCE in competitive credit markets with directed search. These markets are efficient when lenders have correct beliefs about borrowers' reactions to their offers. Nevertheless, credit crises - where high interest rates self-confirm high credit risk - can arise when lenders have correct beliefs only locally around equilibrium outcomes. Policy is needed because competition deters the socially optimal degree of information acquisition via individual experiments at low interest rates. A policy maker with the same beliefs as lenders will find it optimal to implement a targeted subsidy to induce low interest rates and, as a by-product, generate new information for the market. We provide evidence that the 2009 TALF was an example of such Credit Easing policy. We collect new micro-data on the ABS auto loans in the US before and after the policy intervention, and we test, successfully, our theory in this case.
    Keywords: credit crisis; directed search; learning; self-confirming equilibrium; social experimentation; unconventional policies
    JEL: D53 D83 D84 D92 E44 E61 G01 G20 J64
    Date: 2016–02
  16. By: Helen Louri; Petros M. Migiakis
    Abstract: In the present paper we study the determinants of the margins paid by euro-area non-financial corporations (NFCs) for their bank loans on top of the rates they earn for their deposits (bank lending margins). We use panel VAR techniques, in order to test for causality relationships and produce impulse response functions for eleven euro-area countries from 2003:1 to 2014:12. The countries are separated into two groups (distressed and non-distressed), in order to examine for heterogeneities in the relationships between lending margins; the period is also separated with reference to the peak of the global financial crisis (before and after the collapse of Lehman in September 2008). We find that significant heterogeneities existed even before the global financial crisis and remained in its aftermath, although the magnitude and the direction of the effects exercised by the explanatory variables have changed. Furthermore, apart from finding that market concentration and the prudence of banks’ management increase the lending margins NFCs pay for their loans, there is evidence of substitution effects between financing obtained from banks and corporate bond markets. The provision of ample liquidity from the ECB, in the aftermath of the global financial crisis was found to be effective only for the core countries, suggesting that further policy actions are needed in order to reduce the fragmentation of bank lending and promote financial integration to the benefit of the euro-area real economy.
    Keywords: bank lending margins, financial fragmentation, global financial crisis, ECB, euro area
    JEL: E44 E51 E58 F36 F42
    Date: 2016–02
  17. By: Justine Pedrono (AMSE - Aix-Marseille School of Economics - EHESS - École des hautes études en sciences sociales - Centre national de la recherche scientifique (CNRS) - Ecole Centrale Marseille (ECM) - AMU - Aix-Marseille Université)
    Abstract: The Basel Committee on Banking Supervision has introduced in December 2010 a Basel III framework for more resilient banks and banking system. We posit in this paper that, in addition to the current regulatory instruments currently under the review of authorities, the currency diversification of banks’ balance sheets can be a source of banking stability considering both assets and liabilities simultaneously. Our conclusions are based on a simplified definition of a globalized bank’s balance sheet. As banks’ balance sheets are expressed in domestic currency, our model implies an exchange rate conversion of each foreign component. Risks are introduced with stochastic processes in assets, liabilities and exchange rate. In accordance with the Basel III framework and the Basel III Leverage ratio, the bank’s leverage ratio is limited. Our model provides detailed information in each risk faced by global banks including foreign exchange risk. Although our conclusions depend on the variance covariance matrix of assets, liabilities and foreign exchange rate, our main results confirm the positive impact of currency diversification on banking stability considering the current banking system.
    Keywords: Basel III,bank,financial integration,financial stability,currency diversification,financial volatility
    Date: 2016–01
  18. By: Frederic Boissay; Fabrice Collard; Frank Smets
    Abstract: Banking crises are rare events that break out in the midst of credit intensive booms and bring about particularly deep and long-lasting recessions. This paper attempts to explain these phenomena within a textbook DSGE model that features a non-trivial banking sector. In the model, banks are heterogeneous with respect to their intermediation skills, which gives rise to an interbank market. Moral hazard and asymmetric information in this market may lead to sudden interbank market freezes, banking crises, credit crunches and severe recessions. Those "financial" recessions follow credit booms and are not triggered by large exogenous adverse shocks.
    Keywords: moral hazard, asymmetric information, saving glut, lending boom, credit crunch, banking crisis
    Date: 2016–02

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