nep-ban New Economics Papers
on Banking
Issue of 2016‒03‒29
33 papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Economic Policy Uncertainty and the Credit Channel: Aggregate and Bank Level U.S. Evidence over Several Decades By Michael D. Bordo; John V. Duca; Christoffer Koch
  2. Insurance activities and systemic risk By Berdin, Elia; Sottocornola, Matteo
  3. The risk-taking channel of monetary policy in Norway By Artashes Karapetyan
  4. How does bank capital affect the supply of mortgages? Evidence from a randomized experiment By Valentina Michelangeli; Enrico Sette
  5. Credit-Market Sentiment and the Business Cycle By David López-Salido; Jeremy C. Stein; Egon Zakrajšek
  6. Crisis transmission through the global banking network By Hale, Galina; Kapan, Tumer; Minoiu, Camelia
  7. Earnings quality and performance in the banking industry: A profit frontier approach By Emili Tortosa-Ausina; Diego Prior Jiménez
  8. The quantity of corporate credit rationing with matched bank-firm data By Lorenzo Burlon; Davide Fantino; Andrea Nobili; Gabriele Sene
  9. Interbank funding as insurance mechanism for (persistent) liquidity shocks By Bluhm, Marcel
  10. Switching costs and financial stability By Stenbacka, Rune; Takalo, Tuomas
  11. Does Government Intervention Affect Banking Globalization? By Anya Kleymenova; Andrew K. Rose; Tomasz Wieladek
  12. How Did Pre-Fed Banking Panics End? By Gary Gorton; Ellis W. Tallman
  13. Interacting Default Intensity with Hidden Markov Process By Feng-Hui Yu; Wai-Ki Ching; Jia-Wen Gu; Tak-Kuen Siu
  14. The Absorption Ratio as an Indicator for Macro-prudential Monitoring in Jamaica By Gordon, Leo-Rey
  15. Blockchains, Real-Time Accounting and the Future of Credit Risk Modeling By Byström, Hans
  16. Did foreign banks "cut and run" or stay committed to Emerging Europe during the crises? By Bonin, John P.; Louie, Dana
  17. The real effects of credit crunch in the Great Recession: evidence from Italian provinces By Guglielmo Barone; Guido de Blasio; Sauro Mocetti
  18. Asymmetric information in frictional markets for liquidity: on the non-equivalence of credit and sale By Florian Madison
  19. Systemic risk-taking at banks: Evidence from the pricing of syndicated loans By Gong, Di; Wagner, Wolf
  20. Are too-big-to-fail banks history in Europe? Evidence from overnight interbank loans By Tölö, Eero; Jokivuolle, Esa; Virén, Matti
  21. Lender of last resort versus buyer of last resort: The impact of the European Central Bank actions on the bank-sovereign nexus By Acharya, Viral; Pierret, Diane; Steffen, Sascha
  22. Do shadow banks create money? 'Financialisation' and the monetary circuit By Jo Michell
  23. Public Development Banks and Credit Market Imperfections By Eslava, Marcela; Freixas, Xavier
  24. Prudential policy at times of stagnation: a view from the trenches By Piergiorgio Alessandri; Fabio Panetta
  25. How Collateral Laws Shape Lending and Sectoral Activity By Charles W. Calomiris; Mauricio Larrain; José M. Liberti; Jason D. Sturgess
  26. Credit Funding and Banking Fragility: An Empirical Analysis for Emerging Economies By Alexander Guarín-López; Ignacio Lozano-Espitia
  27. Bank Quality, Judicial Efficiency and Borrower Runs: Loan Repayment Delays in Italy By Fabio Schiantarelli; Massimiliano Stacchini; Philip E. Strahan
  28. Non-performing loans, systemic risk and resilience in financial networks By Giulio Bottazzi; Alessandro De Sanctis; Fabio Vanni
  29. Deepening Contractions and Collateral Constraints By Jensen, Henrik; Ravn, Søren Hove; Santoro, Emiliano
  30. Securitisation Bubbles: Structured finance with disagreement about default correlations By Broer, Tobias
  31. Network Contagion and Interbank Amplification during the Great Depression By Mitchener, Kris James; Richardson, Gary
  32. Deadly Embrace: Sovereign and Financial Balance Sheets Doom Loops By Emmanuel Farhi; Jean Tirole
  33. Challenges for the Japanese Local Banks in face of Large-Scale Natural Disasters By Shingo Umino; Yoichi Toshiki Jinushi

  1. By: Michael D. Bordo; John V. Duca; Christoffer Koch
    Abstract: Economic policy uncertainty affects decisions of households, businesses, policy makers and Financial intermediaries. We first examine the impact of economic policy uncertainty on aggregate bank credit growth. Then we analyze commercial bank entity level data to gauge the effects of policy uncertainty on Financial intermediaries' lending. We exploit the cross-sectional heterogeneity to back out indirect evidence of its effects on businesses and households. We ask (i) whether, conditional on standard macroeconomic controls, economic policy uncertainty affected bank level credit growth, and (ii) whether there is variation in the impact related to banks' balance sheet conditions; that is, whether the effects are attributable to loan demand or, if impact varies with bank level financial constraints, loan supply. We find that policy uncertainty has a significant negative effect on bank credit growth. Since this impact varies meaningfully with some bank characteristics – particularly the overall capital-to-assets ratio and bank asset liquidity–loan supply factors at least partially (and significantly) help determine the influence of policy uncertainty. Because other studies have found important macroeconomic effects of bank lending growth on the macroeconomy, our findings are consistent with the possibility that high economic policy uncertainty may have slowed the U.S. economic recovery from the Great Recession by restraining overall credit growth through the bank lending channel.
    JEL: E40 E50 G21
    Date: 2016–02
  2. By: Berdin, Elia; Sottocornola, Matteo
    Abstract: This paper investigates systemic risk in the insurance industry. We first analyze the systemic contribution of the insurance industry vis-à-vis other industries by applying 3 measures, namely the linear Granger causality test, conditional value at risk and marginal expected shortfall, on 3 groups, namely banks, insurers and non-financial companies listed in Europe over the last 14 years. We then analyze the determinants of the systemic risk contribution within the insurance industry by using balance sheet level data in a broader sample. Our evidence suggests that i) the insurance industry shows a persistent systemic relevance over time and plays a subordinate role in causing systemic risk compared to banks, and that ii) within the industry, those insurers which engage more in non-insurance-related activities tend to pose more systemic risk. In addition, we are among the first to provide empirical evidence on the role of diversification as potential determinant of systemic risk in the insurance industry. Finally, we confirm that size is also a significant driver of systemic risk, whereas price-to-book ratio and leverage display counterintuitive results.
    Keywords: systemic risk,insurance activities,systemically important financial institutions
    JEL: G01 G22 G28 G32
    Date: 2015
  3. By: Artashes Karapetyan (Norges Bank (Central Bank of Norway))
    Abstract: We identify the effects of monetary policy on credit risk-taking using a unique dataset covering the population of corporate borrowers in Norway. We find that a lower benchmark interest rate (interbank rates or overnight rates) induces the average bank to grant more loans to risky firms. We also find that the strength of the bank's balance-sheet is important: less capitalized banks are more likely to increase loan volumes to ex-ante risky firms compared to more capitalized ones (Jimenez et al., 2014). The data allow us to distinguish the changes in the supply of credit from the changes in credit demand. In all our specifications we control for both observed and unobserved firm and bank heterogeneity by using financial statement information and firm, bank and time fixed effects.
    Keywords: Risk-taking channel, monetary policy, nancial stability, credit risk
    JEL: E44 E5 G01 G21 G28 L14
    Date: 2016–02–15
  4. By: Valentina Michelangeli (Bank of Italy); Enrico Sette (Bank of Italy)
    Abstract: We study the effect of bank capital on the supply of mortgages. We fully control for endogenous matching between borrowers, loan contracts, and banks by submitting randomized mortgage applications to the major online mortgage broker in Italy. We find that: higher bank capital is associated with a higher likelihood of application acceptance and lower offered interest rates; banks with lower capital reject applications by riskier borrowers and offer lower rates to safer ones. Finally, nonparametric estimates of the probability of acceptance and of the offered rate show that the effect of bank capital is stronger when capital is low.
    Keywords: mortgages, banks, household finance, randomized experiment
    JEL: G21 D14
    Date: 2016–02
  5. By: David López-Salido; Jeremy C. Stein; Egon Zakrajšek
    Abstract: Using U.S. data from 1929 to 2013, we show that elevated credit-market sentiment in year t – 2 is associated with a decline in economic activity in years t and t + 1. Underlying this result is the existence of predictable mean reversion in credit-market conditions. That is, when our sentiment proxies indicate that credit risk is aggressively priced, this tends to be followed by a subsequent widening of credit spreads, and the timing of this widening is, in turn, closely tied to the onset of a contraction in economic activity. Exploring the mechanism, we find that buoyant credit-market sentiment in year t – 2 also forecasts a change in the composition of external finance: net debt issuance falls in year t, while net equity issuance increases, patterns consistent with the reversal in credit-market conditions leading to an inward shift in credit supply. Unlike much of the current literature on the role of financial frictions in macroeconomics, this paper suggests that time-variation in expected returns to credit market investors can be an important driver of economic fluctuations.
    JEL: E32 E44 G12
    Date: 2016–01
  6. By: Hale, Galina (Federal Reserve Bank of San Francisco); Kapan, Tumer (; Minoiu, Camelia (International Monetary Fund)
    Abstract: We study the transmission of financial sector shocks across borders through international bank connections. For this purpose, we use data on long-term interbank loans among more than 6,000 banks during 1997-2012 to construct a yearly global network of interbank exposures. We estimate the effect of direct (first-degree) and indirect (second-degree) exposures to countries experiencing systemic banking crises on bank profitability and loan supply. We find that direct exposures to crisis countries squeeze banks’ profit margins, thereby reducing their returns. Indirect exposures to crisis countries enhance this effect, while indirect exposures to non-crisis countries mitigate it. Furthermore, crisis exposures have real effects in that they reduce banks’ supply of domestic and cross-border loans. Our results, based on a large global sample, support the notion that interconnected financial systems facilitate shock transmission.
    JEL: F34 F36
    Date: 2016–02–04
  7. By: Emili Tortosa-Ausina (Universitat Jaume I and Ivie); Diego Prior Jiménez (Business Department, Universitat Autònoma de Barcelona)
    Abstract: The analysis of efficiency and productivity in banking has received a great deal of attention for almost three decades now. However, most of the literature to date has not explicitly accounted for risk when measuring efficiency. We propose an analysis of profit efficiency taking into account how the inclusion of a variety of bank risk measures might bias efficiency scores. Our measures of risk are partly inspired by the literature on earnings managemen t and earnings quality, keeping in mind that loan loss provisions, as a generally accepted proxy for risk, can be adjusted to manage earn-ings and regulatory capital. We also consider some variants of traditional models of profit efficiency where different regimes are stipulated so that financial institutions can be evaluated in different dimensions—i.e., prices, quantities, or prices and quantities simultaneously. We perform this analysis on the Spanish banking industry, whose institutions have been deeply affected by the current international financial crisis, and where re-regulation is taking place. Our results can be explored in multiple dimensions but, in general, they indicate that the impact of earnings management on profit efficiency is of less magnitude than what might a prioribe expected, and that on the hole, savings banks have performed less well than commercial banks. However, savings banks are adapting to the new regulatory scenario and rapidly catching up with commercial banks, especially in some dimensions of performance.
    Keywords: bank, efficiency, loan loss provision, profit, risk
    JEL: C14 C61 G21 L50
    Date: 2014–11
  8. By: Lorenzo Burlon (Bank of Italy); Davide Fantino (Bank of Italy); Andrea Nobili (Bank of Italy); Gabriele Sene (Bank of Italy)
    Abstract: This paper provides measures of credit rationing in the market of term loans to Italian non-financial firms. We identify non-price allocations of credit by exploiting a unique bank-firm dataset of more than 5 million observations, which matches the quantity and the cost of credit available from the Credit Register with a number of bank- and firm-specific characteristics from different sources of microdata. We propose an approach that endogenously identifies all the bank-firm transactions subject to credit rationing, thus circumventing aggregation biases stemming from the use of less detailed information. The estimates suggest that in the Italian case, rationing mostly reflected an increase in non-performing loans in banks' portfolios and a decline in available collateral. Borrowers' characteristics played a minor role, although banks did switch their supply of funds in favour of firms with greater creditworthiness after the outbreak of the sovereign debt crisis.
    Keywords: credit rationing, bank-firm relationships, ML estimation
    JEL: E44 G01 G21
    Date: 2016–02
  9. By: Bluhm, Marcel
    Abstract: The interbank market is important for the efficient functioning of the financial system, transmission of monetary policy and therefore ultimately the real economy. In particular, it facilitates banks' liquidity management. This paper aims at extending the literature which views interbank markets as mutual liquidity insurance mechanism by taking into account persistence of liquidity shocks. Following a theory of long-term interbank funding a financial system which is modeled as a micro-founded agent based complex network interacting with a real economic sector is developed. The model features interbank funding as an over-the-counter phenomenon and realistically replicates financial system phenomena of network formation, monetary policy transmission and endogenous money creation. The framework is used to carry out an optimal policy analysis in which the policymaker maximizes real activity via choosing the optimal interest rate in a trade-off between loan supply and financial fragility. It is shown that the interbank market renders the financial system more efficient relative to a setting without mutual insurance against persistent liquidity shocks and therefore plays a crucial role for welfare.
    Keywords: financial fragility,interbank market,liquidity,maturity,network model
    JEL: E44 E51 G01 G21 G28
    Date: 2015
  10. By: Stenbacka, Rune; Takalo, Tuomas
    Abstract: ?We establish that the effect of intensified deposit market competition, measured by reduced switching costs, on the probability of bank failures depends critically on whether we focus on competition with established customer relationships or competition for the formation of such relationships. With inherited customer relationships, intensified competition (i.e., lower switching costs) destabilizes the banking market, whereas it stabilizes the banking market if we shift our focus to competition for the formation of customer relationships. These findings imply that the proportion between new and locked-in depositors is decisively important when determining whether intensified competition destabilizes the banking market or not.
    Keywords: deposit market competition, financial stability, bank failures, switching cost, competition versus stability tradeoff
    JEL: G21 D43
    Date: 2016–03–01
  11. By: Anya Kleymenova; Andrew K. Rose; Tomasz Wieladek
    Abstract: Using data from British and American banks, we provide empirical evidence that government intervention affects banking globalization along three dimensions: depth, breadth and persistence. We examine depth by studying whether a bank’s preference for domestic, as opposed to external, lending (funding) changes when it is subjected to a large public intervention, such as bank nationalization. Our results suggest that, following nationalization, non-British banks allocate their lending away from the UK and increase their external funding. Second, we find that nationalized banks from the same country tend to have portfolios of foreign assets that are spread across countries in a way that is far more similar than either private banks from the same country or nationalized banks from different countries, consistent with an impact on the breadth of globalization. Third, we study the Troubled Asset Relief Program (TARP) to examine the persistence of the effect of large government interventions. We find weak evidence that upon entry into the TARP, foreign lending declines but domestic does not. This effect is observable at the aggregate level, and seems to disappear upon TARP exit. Collectively, this evidence suggests that large government interventions affect the depth and breadth of banking globalization, but may not persist after public interventions are unwound.
    JEL: F36 G28
    Date: 2016–02
  12. By: Gary Gorton; Ellis W. Tallman
    Abstract: How did pre-Fed banking crises end? How did depositors’ beliefs change? During the National Banking Era, 1863-1914, banks responded to the severe panics by suspending convertibility, that is, they refused to exchange cash for their liabilities (checking accounts). At the start of the suspension period, the private clearing houses cut off bank-specific information. Member banks were legally united into a single entity by the issuance of emergency loan certificates, a joint liability. A new market for certified checks opened, pricing the risk of clearing house failure. Certified checks traded at a discount to cash (a currency premium) in a market that opened during the suspension period. Confidence was restored when the currency premium reached zero.
    JEL: E32 E42 E44 E58
    Date: 2016–02
  13. By: Feng-Hui Yu; Wai-Ki Ching; Jia-Wen Gu; Tak-Kuen Siu
    Abstract: In this paper we consider a reduced-form intensity-based credit risk model with a hidden Markov state process. A filtering method is proposed for extracting the underlying state given the observation processes. The method may be applied to a wide range of problems. Based on this model, we derive the joint distribution of multiple default times without imposing stringent assumptions on the form of default intensities. Closed-form formulas for the distribution of default times are obtained which are then applied to solve a number of practical problems such as hedging and pricing credit derivatives. The method and numerical algorithms presented may be applicable to various forms of default intensities.
    Date: 2016–03
  14. By: Gordon, Leo-Rey
    Abstract: The systemic monitoring of the financial system often utilizes indices created from the aggregation of various financial and economic variables. This paper uses the principles components technique as an alternative to variable aggregation when creating a stability indicator for the Jamaica banking system. Based on this principal components approach, the paper: i) measures changes in the extent of common risk exposure over time ii) identifies periods in which this common exposure became a systemic concern iii) identifies systemically important institutions and sectors. The results demonstrate that Jamaica’s financial system has demonstrated varying periods in which common exposure was a systemic concern. During these periods there was varying contributions to common exposure by institutions but the foreign exchange and equity markets were identified as key market drivers.
    Keywords: Systemic Risk; Principal Components Analysis; Absorption Ratio
    JEL: G1 G21
    Date: 2015
  15. By: Byström, Hans (Department of Economics, Lund University)
    Abstract: In this paper (letter) I discuss how blockchains potentially could affect the way credit risk is modeled, and how the improved trust and timing associated with blockchain-enabled real-time accounting could improve default prediction. To demonstrate the (quite substantial) effect the change would have on well-known credit risk measures, a simple case-study compares Z-scores and Merton distances to default computed using typical accounting data of today to the same risk measures computed under a hypothetical future blockchain regime.
    Keywords: blockchain; credit risk modeling; real-time accounting
    JEL: G33 G39 M41 M42
    Date: 2016–03–02
  16. By: Bonin, John P.; Louie, Dana
    Abstract: Our objective is to examine empirically the behavior of foreign banks regarding real loan growth during a financial crisis for a set of countries in which these banks dominate the banking sectors due primarily to having taken over large existing former state-owned banks. The eight countries are among the most developed in Emerging Europe, their banking sectors having been modernized by the beginning of the time period.We consider a data period that includes an initial credit boom (2004 - 2007) followed by the global financial crisis (2008 & 2009) and the onset of the Eurozone crisis (2010). Our main innovations with respect to the existing literature on banking during the financial crisis are to include explicit consideration of exchange rate dynamics and to separate foreign banks into two categories, namely, subsidiaries of the Big 6 European MNBs and all other foreign-controlled banks. Our results show that bank lending was impacted adversely by the crisis but that the two types of foreign banks behaved differently. The Big 6 banks remained committed to the region in that their lending behavior was not different from that of domestic banks corroborating the notion that these countries are a "€œsecond home market" for these banks. Contrariwise, the other foreign banks were primarily responsible for fueling the credit boom prior to the crisis but then "€œcut and ran"€ by decreasing their lending appreciably during the crisis. Our results also indicate different bank behavior in countries with flexible exchange rate regimes from those in the Eurozone. Hence, we conclude that both innovations matter in empirical work on bank behavior during a crisis in the region and may, by extension, be relevant to other small countries in which banking sectors are dominated by foreign financial institutions.
    Keywords: foreign bank lending, financial crisis, multinational banks, Emerging Europe
    JEL: P34 G01 G15
    Date: 2015–11–04
  17. By: Guglielmo Barone (Bank of Italy); Guido de Blasio (Bank of Italy); Sauro Mocetti (Bank of Italy)
    Abstract: The paper estimates the effects on the real economy of the sharp reduction in the supply of credit following the 2008 financial crisis. We develop a measure of local credit supply that is based on the market shares of the banks that serve a local economy and the national change in each bank’s lending that is attributable to supply factors (i.e. purged of local demand factors). The decrease in our credit supply indicator, which is strongly correlated to the growth of outstanding loans, accounts for 13 per cent of the contraction in real value added with respect to the pre-crisis period. The negative effects also concern employment, although to a lesser extent. The real effects of the credit crunch are concentrated on small firms and in the areas that are more dependent upon external finance. Finally, credit supply shocks affected lending but not real outcomes in the pre-crisis period.
    Keywords: credit crunch, economic crisis, local growth
    JEL: E51 G21 R11
    Date: 2016–02
  18. By: Florian Madison
    Abstract: In the aftermath of the global financial crisis, the market for unsecured credit literally dried out and collateral secured debt became the most widely used concept to coinsure against liquidity shocks. However, since financial assets are usually unproductive, the question comes up why institutions in the need of cash do not just simply sell these assets rather than using them as collateral. The aim of this paper is to develop a non-equivalence between secured credit and outright sale in the presence of asymmetric information and to show through a signaling game, why the willingness to deposit assets as collateral is a best response.
    Keywords: Liquidity, asymmetric information, collateral, undefeated equilibrium
    JEL: D82 E44 G12 G21
    Date: 2016–02
  19. By: Gong, Di; Wagner, Wolf
    Abstract: Public guarantees extended during systemic crises can affect the relative pricing of risks in the financial system. Studying the market for syndicated loans, we find that banks require lower compensation for aggregate risk than for idiosyncratic risk, consistent with systemic risk-taking due to guarantees. The underpricing of aggregate risk is concentrated among banks that benefit more from exposure to public guarantees and disappears for non-bank lenders not protected by these guarantees. Estimates from loan spread regressions imply a sizeable guarantee that is passed onto borrowers, but also distortions in the economy's capital allocation.
    Keywords: loan pricing; public guarantees; systemic risk-taking; too-many-to-fail
    JEL: G21 G32
    Date: 2016–03
  20. By: Tölö, Eero; Jokivuolle, Esa; Virén, Matti
    Abstract: We investigate how European banks’ overnight borrowing costs depend on bank size. We use the Eurosystem’s proprietary interbank daily loan data on euro-denominated transactions from 2008-2014. We find that large banks have had a clear borrowing cost advantage over small banks and that this premium increases progressively with the size of the bank. This result is robust with respect to subsamples, subperiods, time aggregation, and control variables such as Tier 1 capital ratio and rating. During episodes of financial stress, the size advantage becomes several times larger. However, we also find evidence that the new recovery and resolution framework for banks may have slightly reduced the borrowing cost advantage of larger banks in Europe.
    Keywords: overnight rates, too-big-to-fail, implicit government guarantee, borrowing costs
    JEL: G21 G22 G24 G28
    Date: 2015–12–14
  21. By: Acharya, Viral; Pierret, Diane; Steffen, Sascha
    Abstract: In summer 2011, elevated sovereign risk in Eurozone peripheral countries increased the solvency risk of Eurozone banks, precipitating a run on their short-term debt. We assess the effectiveness of different European Central Bank (ECB) interventions that followed - lender of last resort vs. buyer of last resort - in stabilizing the European financial sector. We find that (i) by being lender of last resort to banks via the long-term refinancing operations (LTRO), ECB temporarily reduced funding pressure for banks, but did not help to contain sovereign risk. In fact, banks of the peripheral countries used the public funds to increase their exposure to risky domestic debt, so that when solvency risk in the Eurozone worsened the run of private short-term investors from Eurozone banks intensified. (ii) In contrast, ECB's announcement of being a potential buyer of last resort via the Outright Monetary Transaction program (OMT) significantly reduced the bank-sovereign nexus. The OMT increased the market prices of sovereign bonds, leading to a permanent reversal of private funding flows to Eurozone banks holding these bonds.
    Keywords: money market funds,repos,bank risk,sovereign debt,ECB
    JEL: G01 G21 G28
    Date: 2016
  22. By: Jo Michell (University of the West of England)
    Abstract: The rise of the shadow banking system is viewed throught the lens of Graziani's Monetary Theory of Production. Graziani's categories of 'initial finance' and 'final finance' are used to analyse the new forms of credit created in the shadow banking sector. It is argued that the accumulation of leverage in the shadow banking system and the creation of credit money by the traditional banking sector are symbiotic processes. While Graziani's triangular debtor-bank-creditor relationship remains central, the circuit operates in a perverse form in which household debt is stored on the balance sheets of shadow banks, allowing the banking system to break the historical connection between money creation and productive activity.
    Keywords: monetary circuit, endogenous money, shadow banking, financialization, Graziani
    JEL: E12 E40 G21
    Date: 2016–03
  23. By: Eslava, Marcela; Freixas, Xavier
    Abstract: This paper is devoted to understanding the role of public development banks in alleviating financial market imperfections. We explore two issues: 1) which types of firms should be optimally targeted by public financial support; and 2) what type of mechanism should be implemented in order to efficiently support the targeted firms' access to credit. We model firms that face moral hazard and banks that have a costly screening technology, which results in a limited access to credit for some firms. We show that a public development bank may alleviate the inefficiencies by lending to commercial banks at subsidized rates, targeting the firms that generate high added value. This may be implemented through subsidized ear-marked lending to the banks or through credit guarantees which we show to be equivalent in "normal times". Still, when banks are facing a liquidity shortage, lending is preferred, while when banks are undercapitalized, a credit guarantees program is best suited. This will imply that 1) there is no "one size fits all" intervention program and 2) that any intervention program should be fine-tuned to accommodate the characteristics of competition, collateral, liquidity and banks capitalization of each industry.
    Keywords: Costly screening; Credit rationing; Governmental loans and guarantees; Public development banks
    JEL: G20 G21 G23 H81
    Date: 2016–03
  24. By: Piergiorgio Alessandri (Banca d'Italia); Fabio Panetta (Banca d'Italia)
    Abstract: In the euro area, macroprudential policy can be a powerful complement to monetary policy. However, its coordination with microprudential policy is a particularly delicate task. The coexistence of two supervisory regimes that rely on similar tools to pursue different objectives may at times give rise to conflicting decisions, or create uncertainty on the logic of the prudential framework. These risks are structurally greater in bank-based economies with highly concentrated banking sectors, and may be heightened in the contractionary phase of the cycle, when policymakers face a short-run trade-off between the resilience of the financial sector and the speed of economic recovery. This makes the micro/macro coordination problem a top priority for European supervisors today. In order to address it, supervisors must agree to rank their policy objectives and examine their interventions from a general equilibrium perspective. We remain agnostic as to how much capital European banks should ultimately be required to hold. Instead we stress that, irrespective of the target, supervisors should achieve it over the appropriate time span, minimizing any negative spillovers on credit supply and protecting the credibility of the newly-launched countercyclical macroprudential framework with all available means.
    Keywords: banking supervision, coordination, policy uncertainty, euro area
    JEL: G21 G28
    Date: 2015–11
  25. By: Charles W. Calomiris; Mauricio Larrain; José M. Liberti; Jason D. Sturgess
    Abstract: We demonstrate the central importance of creditors’ ability to use “movable” assets as collateral (as distinct from “immovable” real estate) when borrowing from banks. Using a unique cross-country micro-level loan dataset containing loan-to-value ratios for different assets, we find that loan-to-values of loans collateralized with movable assets are lower in countries with weak collateral laws, relative to immovable assets, and that lending is biased towards the use of immovable assets. Using sector-level data, we find that weak movable collateral laws create distortions in the allocation of resources that favor immovable-based production. An analysis of Slovakia’s collateral law reform confirms our findings.
    JEL: G18 G21
    Date: 2016–01
  26. By: Alexander Guarín-López (Banco de la República de Colombia); Ignacio Lozano-Espitia (Banco de la República de Colombia)
    Abstract: This paper proposes an empirical model to identify and forecast banking fragility episodes using information on the credit funding sources. We predict the probability of occurrence of such episodes 0, 3 and 6 months ahead employing a Bayesian Model Averaging of logistic regressions. The exercises use monthly balance sheet data since the middle of the nineties for the banking system of nine merging economies: Brazil, Colombia, Croatia, Czech Republic, Mexico, Peru, Poland, Taiwan and Turkey. Our findings suggest that the increasing use of wholesale funds to support credit expansion provides warning signals of banking frailness. The in-sample and out-of-sample predictions indicate that the proposed technique is a suitable tool for forecasting short-term financial fragility events. Therefore, monitoring these funds through our tool could become useful in prudential practice. Classification JEL:C11, C52, C53, G01, G21
    Keywords: credit cycle, financial stability, wholesale funds, balance sheet, logistic model regression, Bayesian model averaging.
    Date: 2016–03
  27. By: Fabio Schiantarelli; Massimiliano Stacchini; Philip E. Strahan
    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.
    JEL: G02
    Date: 2016–02
  28. By: Giulio Bottazzi; Alessandro De Sanctis; Fabio Vanni
    Abstract: After the outbreak of the financial crisis in 2007-2008 the level of non-performing loans (NPLs) in the economy has generally increased. However, while in some countries this has been a transitory phenomenon, in others it still represents a major threat for economic recovery and financial stability. The present work investigates the relationship between non-performing loans and systemic risk using a network-based approach. In particular, we analyze how an increase in NPLs at firm level propagates to the financial system through the network of credits and debits. To this end we develop a model with two types of agents, banks and firms, linked one another in a two-layers structure by their reciprocal credits and debits. The model is analyzed via numerical simulations and allows a) to define a synthetic measure of systemic risk and b) to quantify the resilience of the financial system to external shocks, making it particularly useful from a policy point of view. For illustrative purposes, in section 3 we present an application of the model to Italy, Germany, and United Kingdom, using empirically observed data for the three countries.
    Keywords: financial crisis, network theory, non-performing loans, resilience, systemic risk
    Date: 2016–01–03
  29. By: Jensen, Henrik; Ravn, Søren Hove; Santoro, Emiliano
    Abstract: The skewness of the US business cycle has become increasingly negative over the last decades. This finding can be explained by the concurrent increases in the loan-to-value ratios of both households and firms. To demonstrate this point, we devise a DSGE model with collateralized borrowing and occasionally non-binding credit constraints. Easier credit access increases the likelihood that constraints become slack in the face of expansionary shocks, while contractionary shocks are further amplified due to tighter constraints. As a result, busts gradually become deeper than booms. Based on the differential impact that occasionally non-binding constraints exert on the shape of expansions and contractions, we are also able to reconcile a more negatively skewed business cycle with a moderation in its volatility. Finally, our model can account for an intrinsic feature of economic downturns preceded by private credit build-ups: Financially driven expansions lead to deeper contractions, as compared to equally-sized non-financial expansions.
    Keywords: Business Cycles; credit constraints; Deleveraging; Skewness
    JEL: E32 E44
    Date: 2016–03
  30. By: Broer, Tobias
    Abstract: The early 2000s have seen an enormous boom and bust in structured financial products, such as residential mortgage-backed securities (RMBSs) or collateralised debt obligations (CDOs). The standard 'Gaussian Copula' model used to quantify their credit risk was highly dependent on the choice of a single default correlation parameter that often required subjective judgement, as underlying assets were not standardised or only had a short history. This paper shows how moderate disagreement about default correlation increases the market value of the structured collateral considerably above that of its total cash-flow, as investors self-select into buying tranches they value more highly than others. The implied 'return to tranching' is sizeable for a typical RMBS, and an order of magnitude larger for CDOs backed by RMBS-tranches, whose cash-flow distribution is not bounded by a minimum recovery value and thus more sensitive to heterogeneous default correlations. In contrast, disagreement about average default probabilities, or recovery values, does not imply a large return to tranching.
    Keywords: CDO; credit risk; default correlation; disagreement; great recession; housing bubble; RMBS
    JEL: D82 D83 E44 G12 G14
    Date: 2016–03
  31. By: Mitchener, Kris James (Santa Clara University); Richardson, Gary (Federal Reserve Bank of Richmond)
    Abstract: Interbank networks amplified the contraction in lending during the Great Depression. Banking panics induced banks in the hinterland to withdraw interbank deposits from Federal Reserve member banks located in reserve and central reserve cities. These correspondent banks responded by curtailing lending to businesses. Between the peak in the summer of 1929 and the banking holiday in the winter of 1933, interbank amplification reduced aggregate lending in the U.S. economy by an estimated 15 percent.
    JEL: E44 G01 G21 L14 N22
    Date: 2016–03–15
  32. By: Emmanuel Farhi; Jean Tirole
    Abstract: The recent unravelling of the Eurozone’s financial integration raised concerns about feedback loops between sovereign and banking insolvency, and provided an impetus for the European banking union. This paper provides a “double-decker bailout” theory of the feedback loop that allows for both domestic bailouts of the banking system by the domestic government and sovereign debt forgiveness by international creditors or solidarity by other countries. Our theory has important implications for the re-nationalization of sovereign debt, macroprudential regulation, and the rationale for banking unions.
    JEL: E0 F34 F36 G28 H63
    Date: 2016–01
  33. By: Shingo Umino; Yoichi Toshiki Jinushi (Graduate School of Economics, Kobe University)
    Date: 2016–03

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