nep-ban New Economics Papers
on Banking
Issue of 2016‒04‒16
fourteen papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Predicting bank failures: The leverage versus the risk-weighted capital ratio By Xi Yang
  2. Excess capital and bank behavior : evidence from Indonesia By Hamada, Miki
  3. Bank regulation under fire sale externalities By Kara, Gazi; Ozsoy, S. Mehmet
  4. Female leaders and financial inclusion: Evidence from microfinance institutions By R. Oystein Strøm; Bert D'Espallier; Roy Mersland
  5. Key Determinants of Demand, Credit Underwriting, and Performance on Government-Insured Mortgage Loans in Russia By Lozinskaia Agata; Ozhegov Evgeniy
  6. Lobbying on Regulatory Enforcement Actions: Evidence from Banking By Thomas Lambert
  7. Organizational complexity and balance sheet management in global banks By Cetorelli, Nicola; Goldberg, Linda S.
  9. Are Banking Shocks Contagious? Evidence from the Eurozone By Thomas Flavin; Dolores Lagoa-Varela
  10. Why bank capital matters for monetary policy By Leonardo Gambacorta; Hyun Song Shin
  11. The Deposits Channel of Monetary Policy By Itamar Drechsler; Alexi Savov; Philipp Schnabl
  12. Discussion of "Financial Intermediation in a Global Environment" (Victoria Nuguer). By Kollmann, Robert
  13. Have Large Scale Asset Purchases Increased Bank Profits? By Juan A. Montecino; Gerald Epstein
  14. Asset composition of the Philippines' universal and commercial banks : monetary policy or self-discipline? By Kashiwabara, Chie

  1. By: Xi Yang
    Abstract: This paper investigates the efficiency of leverage ratios and risk-weighted capital ratios as bank failure predictors during the global financial crisis. Analyzing 417 bank failures between 2008 and 2012, we find that the predictive power of different capital ratios is not homogeneous across banks. The simple leverage ratio outperforms the risk-weighted ratio in predicting failures of large banks, while both capital ratios are important in predicting the failure of smaller banks. The better performance of the leverage ratio in the case of large banks is especially important during the crisis period of 2008-2010. The findings support the regulatory reforms proposed by Basel Committee on Banking Supervision on the adoption of a supplementary minimum leverage ratio in order to strengthen the resilience of the bank sector.
    Keywords: leverage ratio, risk-weighted capital ratio, bank failure, CAMELS, Logit model
    JEL: G21 G28 G33
    Date: 2016
  2. By: Hamada, Miki
    Abstract: The Indonesian banking sector has been restructured since Asian financial crisis and restored to soundness. The capital adequacy ratio (CAR) returned to a sound level; however, the average excess capital has become too high, while credit disbursement has remained low. This paper investigates the determinants of excess capital among Indonesian banks and its effects on credit growth during the 2000s. The results indicate that the determinants of excess capital vary widely depending on bank type. Return on equity (ROE) affects excess capital negatively among domestic banks, and the effect of non-performing loans is mixed, differing for various bank types. Excess capital affects credit growth positively, except among foreign banks.
    Keywords: Banks, Finance, Bank capital, Bank lending, Bank behavior
    JEL: G21 G30 N25
    Date: 2016–03
  3. By: Kara, Gazi; Ozsoy, S. Mehmet
    Abstract: This paper examines the optimal design of and interaction between capital and liquidity regulations in a model characterized by fire sale externalities. In the model, banks can insure against potential liquidity shocks by hoarding sufficient precautionary liquid assets. However, it is never optimal to fully insure, so realized liquidity shocks trigger an asset fire sale. Banks, not internalizing the fire sale externality, overinvest in the risky asset and underinvest in the liquid asset in the unregulated competitive equilibrium. Capital requirements can lead to less severe fire sales by addressing the inefficiency and reducing risky assets -- however, we show that banks respond to stricter capital requirements by decreasing their liquidity ratios. Anticipating this response, the regulator preemptively sets capital ratios at high levels. Ultimately, this interplay between banks and the regulator leads to inefficiently low levels of risky assets and liquidity. Macroprudential liquidity requirements that complement capital regulations, as in Basel III, restore constrained efficiency, improve financial stability and allow for a higher level of investment in risky assets.
    Keywords: Bank capital regulation ; liquidity regulation ; fire sale externality ; Basel III
    JEL: G20 G21 G28
    Date: 2016–03
  4. By: R. Oystein Strøm; Bert D'Espallier; Roy Mersland
    Abstract: This research advances the hypothesis that female leaders – chief executive officers (CEOs), chairs, and directors – of a microfinance institution (MFI) give more priority to the poorest families in loan provision than male leaders do. We differentiate between a depth and a width dimension of financial inclusion. The data set is a unique global panel of MFIs collected from MFI raters’ reports. Our sample is also unique in the sense that about one-third of all MFIs have a female CEO. The problem of endogeneity for the female leader is resolved by running Heckman’s two-step endogenous dummy variable estimation with an instrument for the female leader. We find evidence of greater depth financial inclusion (smaller average loans, more gender bias) with a female leader but not for width financial inclusion (credit client growth). Female leaders exhibit greater altruism and greater competition avoidance but not greater risk aversion than male peers.
    Keywords: Female leadership; financial access; microfinance institutions; cross-country panel data
    JEL: G34 M12 M14
    Date: 2016–03–21
  5. By: Lozinskaia Agata; Ozhegov Evgeniy
    Abstract: This research analyses the process of lending from Russian state-owned mortgage provider. Two-level lending and insurance of mortgage system lead to substantially higher default rates for insured loans. This means that underwriting incentives for regional operators of government mortgage loans perform poorly. We use loan-level data of issued mortgage by one regional government mortgage provided in order to understand the interdependence between underwriting, choice of contract terms including loan insurance by borrower and loan performance. We found an evidence of a difference in credit risk measures for insured and uninsured loans and interest income.
    JEL: C36 D12 R20
    Date: 2016–03–24
  6. By: Thomas Lambert
    Abstract: This paper analyzes the relationship between bank lobbying and supervisory decisions of regulators, and documents its moral hazard implications. Exploiting bank-level information on the universe of commercial and savings banks in the United States, I find that regulators are less likely to initiate enforcement actions against lobbying banks. In addition, I show that lobbying banks are riskier and reliably underperform their non-lobbying peers. Overall, these results appear rather inconsistent with an information-based explanation of bank lobbying, but consistent with the theory of regulatory capture.
    Keywords: Banking supervision; enforcement actions; lobbying; moral hazard; risk taking
    JEL: D72 G21 G28
    Date: 2016–03–15
  7. By: Cetorelli, Nicola (Federal Reserve Bank of New York); Goldberg, Linda S. (Federal Reserve Bank of New York)
    Abstract: Banks have progressively evolved from being standalone institutions to being subsidiaries of increasingly complex financial conglomerates. We conjecture and provide evidence that the organizational complexity of the family of a bank is a fundamental driver of the business model of the bank itself, as reflected in the management of the bank’s own balance sheet. Using micro-data on global banks with branch operations in the United States, we show that branches of conglomerates in more complex families have a markedly lower lending sensitivity to funding shocks. The balance sheet management strategies of banks are very much determined by the structure of the organizations the banks belong to. The complexity of the conglomerate can change the scale of the lending channel for a large global bank by more than 30 percent.
    Keywords: global bank; liquidity; transmission; internal capital market; organization; complexity
    JEL: E44 F36 G32
    Date: 2016–03–01
  8. By: Olivier Bruno (GREDEG - Groupe de Recherche en Droit, Economie et Gestion - UNS - Université Nice Sophia Antipolis - CNRS - Centre National de la Recherche Scientifique); Alexandra Girod (GREDEG - Groupe de Recherche en Droit, Economie et Gestion - UNS - Université Nice Sophia Antipolis - CNRS - Centre National de la Recherche Scientifique)
    Abstract: We investigate the impact the risk sensitive regulatory ratio may have on banks' risk taking behaviours during the business cycle. We show that the risk sensitivity of capital requirements introduce by Basel II adds either an "equity surplus" or an "equity deficit" on a bank that owns a fixed capital endowment and a constant leverage ratio. Depending on the magnitude of cyclical variations into requirements, the "surplus" may be exploited by the bank to increase its value toward the selection of a riskier asset or the "deficit" may restrict the bank to opt for a less risky asset. Whether the optimal asset risk level swings among classes of risk through the cycle, the risk level of bank's portfolio may increase during economic upturns, or decrease in downturns, leading to a rise in financial fragility or a "fly to quality" phenomenon.
    Keywords: Bank capital,Basel capital accord,risk incentive
    Date: 2016–03–31
  9. By: Thomas Flavin (Department of Economics, Finance and Accounting, Maynooth University.); Dolores Lagoa-Varela (Universidad La Coruña, Spain.)
    Abstract: We test for contagion between banking stocks – global and domestic – and the domestic nonfinancial sector for eleven Eurozone countries. Using a Markov-switching Factor augmented VAR (MS-FAVAR) model, we assess changes to the transmission mechanism of shocks as we move from ‘normal’ market conditions to a high-volatility, ‘crisis’ regime. Results confirm the role of contagion in propagating shocks between the global and domestic banking sectors but show that the non-financial sector suffered little contagion. In general, the nonfinancial sectors appear to ‘de-couple’ from the global and domestic banking sectors.
    Keywords: Contagion; Shock transmission; Financial market crises.
    JEL: G01 G21 C32
    Date: 2016
  10. By: Leonardo Gambacorta; Hyun Song Shin
    Abstract: One aim of post-crisis monetary policy has been to ease credit conditions for borrowers by unlocking bank lending. We find that bank equity is an important determinant of both the bank's funding cost and its lending growth. In a cross-country bank-level study, we find that a 1 percentage point increase in the equity-to-total assets ratio is associated with a 4 basis point reduction in debt financing and with a 0.6 percentage point increase in annual loan growth.
    Keywords: Bank capital, book equity, monetary transmission mechanisms, funding, bank lending
    Date: 2016–04
  11. By: Itamar Drechsler; Alexi Savov; Philipp Schnabl
    Abstract: We propose and test a new channel for the transmission of monetary policy. We show that when the Fed funds rate increases, banks widen the interest spreads they charge on deposits, and deposits flow out of the banking system. We present a model in which imperfect competition among banks gives rise to these relationships. An increase in the nominal interest rate increases banks' effective market power, inducing them to increase deposit spreads. Households respond by substituting away from deposits into less liquid but higher-yielding assets. Using branch-level data on all U.S. banks, we show that following an increase in the Fed funds rate, deposit spreads increase by more, and deposit supply falls by more, in areas with less deposit competition. We control for changes in banks' lending opportunities by comparing branches of the same bank. We control for changes in macroeconomic conditions by showing that deposit spreads widen immediately after a rate change, even if it is fully expected. Our results imply that monetary policy has a significant impact on how the financial system is funded, on the quantity of safe and liquid assets it produces, and on its lending to the real economy.
    JEL: E52 E58 G12 G21
    Date: 2016–04
  12. By: Kollmann, Robert
    Abstract: The 2007-09 global financial crisis has led to a rethinking of the role of financial intermediaries for economic fluctuations. Before the financial crisis, the workhorse macro models used by policy institutions and by academic researchers abstracted from banks (e.g., Christiano et al. (2005)). The crisis has stimulated much research that incorporates banks into quantitative dynamic stochastic general equilibrium (DSGE) models. Given the global nature of the banking industry, and of the financial crisis, that research has frequently focused on open economy models; see, e.g., Devereux and Sutherland (2011), Kollmann et al. (2011, 2013), Perri and Quadrini (2011), Ueda (2012), Dedola et al. (2013), Kamber and Thoenissen (2013) and Kollmann (2013). In this new class of DSGE models, bank capital is a key state variable for real activity; negative shocks to bank capital are predicted to increase the spread between banks’ lending and deposit rates, and to trigger a fall in bank credit, investment and output; with a globalized banking system, losses on bank assets in one country can thus lead to a worldwide recession. The paper by Victoria Nuguer makes a very interesting contribution to the new literature on open economy DSGE models with banks. Her paper highlights the role of country asymmetries for the transmission of banking shocks, and for the optimal policy response to those shocks. While most related studies assume symmetric countries, Victoria Nuguer considers a world with two countries of vastly different size. Victoria Nuguer’s paper thereby provides important insights into the role of country asymmetries for the transmission of financial shocks, and for optimal policy. Her paper also suggests fascinating avenues for future research.
    Keywords: Financial intermediation, globalization, transmission of banking shocks, optimal monetary policy, asymmetric economies
    JEL: E3 E6 F3 F4 G15 G2
    Date: 2016
  13. By: Juan A. Montecino (University of Massachusetts, Amherst); Gerald Epstein (University of Massachusetts, Amherst)
    Abstract: This paper empirically examines the effects of the Federal Reserve's Large Scale Asset Purchases (LSAP) on bank profits. We use a new dataset on individual LSAP transactions and bank holding company data from the Fed's FRY-9C regulatory reports to construct a large panel of banks for 2008Q1 to 2009Q4. Our results suggest that banks that sold Mortgage-backed Securities to the Fed (“treatment banks†) experienced economically and statistically significant increases in profitability after controlling for common determinants of bank performance. Banks heavily “exposed†to MBS purchases should also experience increases in profitability through asset appreciation. Our results also provide evidence for this type of spillover effect and suggest that large banks may have been more affected. Although our results suggest that MBS purchases increased bank profits, we find only mixed evidence that these were associated with increased lending. Our findings are thus consistent with the hypothesis that the Federal Reserve undertook these policies, at least in part, to increase the profitability of their main constituency: the large banks.
    JEL: G21 G28 G32
    Date: 2015–02
  14. By: Kashiwabara, Chie
    Abstract: The central bank of the Philippines (Bangko Sentral ng Pilipinas, BSP) has improved its monetary policy measures since the 2000s. After rationalizing the country's banking sector since late-1990s, its monetary policy and the uniiversal/commercial banks' (UCBs) behavior in allocating their assets has changed since mid-2000s. Though further and more detailed studies are nesessary, based on the results of simple correlation analyses conducted in this paper suggest a possible mixture of the country's monetary policy and their own decision-making in asset allocations, instead of a "follow-through" attitude.
    Keywords: Monetary policy, Banks, Monetary policy measure, Universal and commercial banks, The Philippines
    JEL: E42 E52 G38
    Date: 2016–03

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