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on Banking |
| By: | Kinda Cheryl Hachem; Zheng Michael Song |
| Abstract: | China increased bank liquidity standards in the late 2000s. The interbank market became tighter and more volatile and credit soared, contrary to expectations. To explain this, we argue that shadow banking developed among Chinaʼs small and medium-sized banks to evade the higher liquidity standards. The shadow banks, which were not subject to interest rate ceilings on traditional bank deposits, then poached deposits from big commercial banks. In response, big banks used their substantial interbank market power to restrict credit to the shadow banks and increased their lending to non-financials. A calibration of our unified framework generates a quantitatively important credit boom and higher and more volatile interbank interest rates as unintended consequences of higher liquidity standards. |
| JEL: | E44 G28 |
| Date: | 2016–01 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:21880&r=ban |
| By: | Grodecka, Anna (Financial Stability Department, Central Bank of Sweden) |
| Abstract: | A growing literature (i.e. Jaffee, Lynch, Richardson, and Van Nieuwerburgh, 2009, Acharya and Schnabl, 2009) argues that securitization improves financial stability if the securitized assets are held by capital market participants, rather than financial intermediaries. I construct a quantitative macroeconomic model with a novel specification for mortgage-backed securities (MBS) to evaluate this claim for subprime securitization during the Great Recession. I find that output in the U.S. would have dropped by only about a third and house prices by only a half of what we actually observed, if subprime MBS had been purchased by non-financial agents, rather than held by banks. This is because banks are subject to capital requirements and if MBS remain within the banking system, the fall in their value puts a strain on banks’ balance sheets. The subsequent deleveraging amplifies business cycles. My findings suggest that the existence of the securitization market stabilizes the economy under the condition that financial intermediaries do not engage in the acquisition of securitized assets. |
| Keywords: | Subprime Borrowers; Securitization; Financial Intermediation; Great Recession |
| JEL: | E32 E44 G01 G13 G21 R21 |
| Date: | 2016–03–01 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:rbnkwp:0317&r=ban |
| By: | Emilia Bonaccorsi di Patti (Banca d'Italia); Roberto Felici (Banca d'Italia); Federico Maria Signoretti (Banca d'Italia) |
| Abstract: | Based on publicly available data we propose a simple taxonomy of the banks under the direct supervision of the ECB, taking into account their core business, size, and degree of internationalization. We compare the structures of the balance sheet and income statement of the eight different types of bank, and analyse their profitability between 2006 and 2013. The majority of banks are lending-oriented, exposed to their domestic market, with high credit risk exposure to nonfinancial firms and retail clients. The ratio of risk-weighted assets to total assets differs significantly across bank types, even controlling for the composition of credit risk exposures; this heterogeneity mostly reflects country-specific riskiness and the extent to which banks in each category use their internal models to determine capital requirements. Since 2010, the profitability of lending-oriented banks has declined more sharply than that of the other banks, reflecting both poorer macroeconomic conditions in countries where many of these banks are located, and a higher sensitivity of ROA to GDP growth. |
| Keywords: | euro area banks, significant banks, business model, bank profitability |
| JEL: | G21 |
| Date: | 2016–01 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:opques:qef_306_15&r=ban |
| By: | Corbisiero, Giuseppe (Central Bank of Ireland) |
| Abstract: | This paper provides a theory to investigate the transmission of non-standard monetary policy to corporate lending in a monetary union where financial frictions limit firms’ access to external finance. The model incorporates a banking-sovereign nexus by assuming that sovereign default would generate a liquidity shock severely hitting domestic banks’ balance sheet. I find that this feature crucially impairs the transmission of monetary policy, generating asymmetric lending responses and the risk of contagion across economies. In particular I show that, in some circumstances, the liquidity injected into the risky country’s banks results in financing the sovereign rather than boosting lending, and sovereign risk in one country generates negative spillover effects on lending throughout the monetary union via the collateral channel. The model sheds light on the troubled transmission of the ECB’s policy measures to the economy of stressed countries during the euro sovereign debt crisis. |
| Keywords: | Bank Lending, Sovereign Risk, Monetary Policy, Crisis, Euro Area |
| JEL: | E44 E52 F36 G01 G33 |
| Date: | 2016–03 |
| URL: | http://d.repec.org/n?u=RePEc:cbi:wpaper:02/rt/16&r=ban |
| By: | Dominique Guegan (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique); Bertrand Hassani (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique) |
| 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 |
| Date: | 2016–02 |
| URL: | http://d.repec.org/n?u=RePEc:hal:cesptp:halshs-01281940&r=ban |
| By: | Wahyoe Soedarmono (Universitas Siswa Bangsa Internasional, Faculty of Business / Sampoerna School of Business); Amine Tarazi (LAPE - Laboratoire d'Analyse et de Prospective Economique - UNILIM - Université de Limoges - IR SHS UNILIM - Institut Sciences de l'Homme et de la Société); Agusman Agusman (bank indonesia - bank indonesia); Gary S. Monroe (University of New South Wales - Australia - University of New South Wales [Sydney]); Dominic Gasbarro (Murdoch University, Australia) |
| Abstract: | In this paper, we examine the role of information sharing and borrower legal rights in affecting the procyclical effect of bank loan loss provisions. Based on a sample of Asian banks, our empirical results highlight that higher non-discretionary provisions reduce loan growth and hence, non-discretionary provisions are procyclical. A closer investigation suggests that better information sharing through public credit registries managed by central banks, but not private credit bureaus managed by the private sector, might substitute the role of a dynamic provisioning system in mitigating the procyclicality of non-discretionary provisions. We also document that higher discretionary provisions in countries with stronger legal rights of borrowers may temper the procyclical effect of non-discretionary provisions. However, these findings only hold for small banks. This suggests that the implementation of a dynamic provisioning system to mitigate the procyclicality of non-discretionary provisions is more crucial for large banks, because such procyclicality cannot be offset by strengthening credit market environments through better information sharing and legal rights of borrowers. |
| Keywords: | Loan loss provisions,loan growth,information sharing,borrower legal rights |
| Date: | 2016–03–08 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:hal-01284978&r=ban |
| By: | Gaetano Gaballo; Ramon Marimon |
| 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. |
| JEL: | D53 D83 D84 E44 E61 G01 G20 J64 |
| Date: | 2016–02 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:22006&r=ban |
| By: | Doblas-Madrid, Antonio (Michigan State University); Lansing, Kevin J. (Federal Reserve Bank of San Francisco) |
| Abstract: | In the context of recent housing busts in the United States and other countries, many observers have highlighted the role of credit and speculation in fueling unsustainable booms that lead to crises. Motivated by these observations, we develop a model of credit-fuelled bubbles in which lenders accept risky assets as collateral. Booming prices allow lenders to extend more credit, in turn allowing investors to bid prices even higher. Eager to profit from the boom for as long as possible, asymmetrically informed investors fuel and ride bubbles, buying overvalued assets in hopes of reselling at a profit to a greater fool. Lucky investors sell the bubbly asset at peak prices to unlucky ones, who buy in hopes that the bubble will grow at least a bit longer. In the end, unlucky investors suffer losses, default on their loans, and lose their collateral to lenders. In our model, tighter monetary and credit policies can reduce or even eliminate bubbles. These findings are in line with conventional wisdom on macro prudential regulation, and stand in contrast with those obtained by Galí (2014) in an overlapping generations context. |
| JEL: | G01 G12 |
| Date: | 2016–03–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedfwp:2016-02&r=ban |
| By: | Arito Ono (Chuo University); Kosuke Aoki (University of Tokyo); Shinichi Nishioka (Bank of Japan); Kohei Shintani (Bank of Japan); Yosuke Yasui (Bank of Japan) |
| Abstract: | This paper examines the effects of long-term interest rates on bank loan supply. Using a simple mean-variance model of bank portfolio selection subject to the value-at-risk (VaR) constraint, we make theoretical predictions on two transmission channels through which lower long-term interest rates increase loan supply: (i) the portfolio balance channel and (ii) the bank balance sheet channel. We construct a unique and massive firm-bank loan-level panel dataset for Japan spanning the period 2002-2014 and test our theoretical predictions to find the following. First, an unanticipated reduction in long-term interest rates increased bank loan supply, which lends support to the existence of the portfolio balance channel. Second, banks that enjoyed larger capital gains on their bond holdings due to a decline in interest rates significantly increased their loan supply, which lends support to the existence of the bank balance sheet channel. Further, the bank balance sheet channel was stronger in the case of loans to smaller, more leveraged, and less creditworthy firms, which suggests that a stronger balance sheet leads banks to increase their loan supply to credit-constrained and riskier firms. |
| Keywords: | portfolio balance channel, bank balance sheet channel, value-at-risk constraint |
| JEL: | E44 E52 G11 G21 |
| Date: | 2016–03–02 |
| URL: | http://d.repec.org/n?u=RePEc:boj:bojwps:wp16e02&r=ban |
| By: | Alejandro Justiniano; Giorgio E. Primiceri; Andrea Tambalotti |
| 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 with 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. Due to their low income, 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. |
| JEL: | E21 E44 G21 |
| Date: | 2016–01 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:21942&r=ban |
| By: | Ono, Arito; Uchida, Hirofumi; Udell, Gregory F.; Uesugi, Iichiro |
| Abstract: | Using a unique micro dataset compiled from the real estate registry in Japan, we examine more than 400,000 loan-to-value (LTV) ratios for business loans to draw implications for the efficacy of caps on LTV ratios as a macro-prudential policy measure. We find that the LTV ratio exhibits counter-cyclicality through the business cycle. We also find that borrowers obtaining high-LTV loans performed no worse ex-post than those with lower LTV loans. Our findings imply that a fixed cap on LTV ratios might not only be ineffective in curbing loan volume in boom periods but also inhibit well-performing firms from borrowing. |
| Keywords: | loan-to-value (LTV) ratios, pro-cyclicality, macro-prudential policy, bubble |
| JEL: | G28 R33 G21 G32 |
| Date: | 2016–02 |
| URL: | http://d.repec.org/n?u=RePEc:hit:remfce:41&r=ban |
| By: | Mark Gertler; Nobuhiro Kiyotaki; Andrea Prestipino |
| 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 that provides a step toward accomplishing this objective. 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 instaibility in the wholesale banking sector for lender-of-last resort policy as well as for macroprudential policy. |
| JEL: | E44 |
| Date: | 2016–01 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:21892&r=ban |
| By: | Ono, Arito; Saito, Yukiko; Sakai, Koji; Uesugi, Iichiro |
| Abstract: | Using a unique and massive firm-bank matched panel dataset, this paper examines the causal link between the geographical distance between a firm and its main bank and the probably that a firm will switch its main bank. Utilizing the exogenous change in firm-main bank distances brought about by bank mergers and bank branch consolidations in Japan during 2000–2010, the analysis – the first of its kind – finds the following. First, an increase in lending distance positively affected switching of firm-main bank relationships. Second, the average lending distance for firms that switched to new main banks significantly decreased afterwards. Third, the lending distance of new firm-main bank relationships after the switch did not have a significant impact on firms' probability of ex-post default, suggesting that larger lending distance does not necessarily result in a deterioration in the quality of soft information. |
| Keywords: | lending distance, firm-bank relationships, bank mergers, main bank |
| JEL: | G21 R12 |
| Date: | 2016–02 |
| URL: | http://d.repec.org/n?u=RePEc:hit:remfce:40&r=ban |
| By: | Fetzer , Thiemo (Department of Economics, University of Warwick) |
| Abstract: | Numerous authors point to a decline in joint liability microcredit, and rise in individual liability lending. But empirical evidence is lacking, and there have been no rigorous analyses of possible causes. We first show using the well-known MIX Market dataset that there is evidence for a decline. Second, we show theoretically that commercialization–an increase in competition and a shift from non-profit to for-profit lending (both of which are present in the data)–drives lenders to reduce their use of joint liability loan contracts. Third, we test the model’s key predictions, and find support for them in the data. |
| Keywords: | microfinance, joint liability, commercialization, market structure |
| JEL: | G21 O12 O16 |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:wrk:warwec:1119&r=ban |
| By: | Zeineb Affes (Centre d'Economie de la Sorbonne); Rania Hentati-Kaffel (Centre d'Economie de la Sorbonne) |
| Abstract: | Using a large panel of US banks over the period 2008-2013, this paper proposes an early-warning framework to identify bank leading to bankruptcy. We conduct a comparative analysis based on both Canonical Discriminant Analysis and Logit models to examine and to determine the most accurate of these models. Moreover, we analyze and improve suitability of models by comparing different optimal cut-off score (ROC curve vs theoretical value). The main conclusions are: i) Results vary with cut-off value of score, ii) the logistic regression using 0.5 as critical cut-off value outperforms DA model with an average of correct classification equal to 96.22%. However, it produces the highest error type 1 rate 42.67%, iii) ROC curve validation improves the quality of the model by minimizing the error of misclassification of bankrupt banks: only 4.42% in average and exhibiting 0% in both 2012 and 2013. Also, it emphasizes better prediction of failure of banks because it delivers in mean the highest error type II 8.43% |
| Keywords: | Bankruptcy prediction; Canonical Discriminant Analysis; Logistic regression; CAMELS; ROC curve; Early-warning system |
| JEL: | G21 G33 C25 C38 C53 |
| Date: | 2016–02 |
| URL: | http://d.repec.org/n?u=RePEc:mse:cesdoc:16016&r=ban |
| By: | Charles Goodhart; Dirk Schoenmaker |
| Abstract: | Highlights For the full references and the annex, please see the PDF version of this publication. In the aftermath of the global financial crisis, the market share of US investment banks is increasing, while that of their European counterparts is declining. We present evidence that US investment banks are on the verge of taking over pole position in European investment banking. Meanwhile, since 2015, Chinese investment banks have overtaken American and European investment banks in the Asia-Pacific market. Credit rating agencies and investment banks are the gatekeepers of the capital markets. The European supervisory institutions can effectively supervise the European operations of these US-managed players. On the political side, we suggest that the European Commission should continue to view its, albeit declining, banking industry as a strategic sector. The Commission, the European Central Bank and the Bank of England should jointly develop a strategic agenda for the EU-US Regulatory Dialogue. Finally, corporates rely on investment banks to issue new securities. We recommend that the big European corporates should cherish the (few) remaining European investment banks, by giving them at least one place in otherwise US- dominated banking syndicates. That could help to avoid complete dependence on US investment banks. 1. Introduction Europe’s banks are in retreat from playing a global investment banking role. This should not be a surprise. It is an, often intended, consequence of the regulatory impositions of recent years, notably of the ring-fencing requirements of the Vickers Report (2011) and the ban on proprietary trading by Liikanen (2012), but also including the enhanced capital requirements on trading books and other measures. The main concern is that a medium-sized European country, such as the United Kingdom or Switzerland, or even a larger country like Germany, let alone a tiny country like Iceland or Ireland, would find a global investment bank to be too large and too dangerous to support, should it get into trouble1. So, one of the intentions of the new set of regulations was to rein back the scale of European investment banking to a more supportable level. The European Union, of course, has a much larger scale than its individual member countries. If the key issue is the relative scale of the global (investment) bank and state that might have to support it, could a Europe-based global investment bank be possible2? We doubt it, primarily because the EU is not a state. It does not have sufficient fiscal competence. Even with the European banking union and European Stability Mechanism, the limits to the mutualisation of losses, eg via deposit insurance, mean that the bulk of the losses would still fall on the home country (Pisani-Ferry and Wolff, 2012). Moreover, there would be intense rivalry over which country should be its home country, and concerns about state aid and the establishment of a monopolistic institution. While the further unification of the euro area might, in due course, allow a Europe-based global investment bank to emerge endogenously, we do not expect it over the next half-decade or so. So the withdrawal of European banks from a global investment banking role is likely to continue. That will leave the five US ‘bulge-bracket’ banks, (Goldman Sachs, Morgan Stanley, JP Morgan, Citigroup and Bank of America Merrill Lynch) as the sole global investment banks left standing. The most likely result is a four-tier investment banking system. The first tier will consist of these five US global giants. The second tier will consist of strong regional players, such as Deutsche Bank, Barclays and Rothschild in Europe and CITIC in the Asia-Pacific region. HSBC is in between, with both European and Asia-Pacific roots. The third tier consists of the national banks’ investment banking arms. They will service (most of) the investment banking needs of their own corporates and public sector bodies, except in the case of the very biggest and most international institutions (which will want global support from the US banks) or in cases of complex, specialist advice. Examples of this third tier are Australian and Canadian banks, which support their own corporates and public sector bodies without extending into global investment banking. The fourth tier consists of small, specialist, advisory and wealth management boutiques. Why should it matter if in all the European countries, the local banks’ investment banking activities should retrench to this more limited local role? After all, there are few claims that Australia and Canada have somehow lost out by not participating in global investment banking. We review the arguments in section 4. Before doing so, we take a closer look at the investment banking market in Europe. Section 2 investigates the development of the relative market shares of US and European investment banks over time. It appears that the US investment banks are about to surpass their European counterparts in the European investment banking market. |
| Date: | 2016–03 |
| URL: | http://d.repec.org/n?u=RePEc:bre:polcon:13132&r=ban |
| By: | Zeineb Affes (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique); Rania Hentati-Kaffel (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique) |
| Abstract: | Using a large panel of US banks over the period 2008-2013, this paper proposes an early-warning framework to identify bank leading to bankruptcy. We conduct a comparative analysis based on both Canonical Discriminant Analysis and Logit models to examine and to determine the most accurate of these models. Moreover, we analyze and improve suitability of models by comparing different optimal cut-off score (ROC curve vs theoretical value). The main conclusions are: i) Results vary with cut-off value of score, ii) the logistic regression using 0.5 as critical cut-off value outperforms DA model with an average of correct classification equal to 96.22%. However, it produces the highest error type 1 rate 42.67%, iii) ROC curve validation improves the quality of the model by minimizing the error of misclassification of bankrupt banks: only 4.42% in average and exhibiting 0% in both 2012 and 2013. Also, it emphasizes better prediction of failure of banks because it delivers in mean the highest error type II 8.43%. |
| Keywords: | Bankruptcy prediction,Canonical Discriminant Analysis,Logistic regression,CAMELS,ROC curve,Early-warning system |
| Date: | 2016–02 |
| URL: | http://d.repec.org/n?u=RePEc:hal:cesptp:halshs-01281948&r=ban |