nep-ban New Economics Papers
on Banking
Issue of 2016‒05‒08
fifteen papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Cross-border regulatory spillovers: How much? How important? What sectors? Lessons from the United Kingdom By Hills, Robert; Reinhardt, Dennis; Sowerbutts, Rhiannon; Wieladek, Tomasz
  2. Tracking Variation in Systemic Risk at US Banks During 1974-2013 By Armen Hovakimian; Edward Kane,; Luc Laeven
  3. The banking sector and the Swiss financial account during the financial and European debt crises By Raphael Anton Auer; Cédric Tille
  4. Competition and Bank Liquidity Creation By Liangliang Jiang; Ross Levine; Chen Lin
  5. Evaluating Systemic Risk using Bank Default Probabilities in Financial Networks By Sergio Rubens Stancato de Souza; Thiago Christiano Silva; Benjamin Miranda Tabak; Solange Maria Guerra
  6. Capital Requirements, Risk Shifting and the Mortgage Market By Uluc, Arzu; Wieladek, Tomasz
  7. A macroprudential stable funding requirement and monetary policy in a small open economy By Punnoose Jacob; Anella Munro
  8. How excessive is banks’ maturity transformation? By Anatoli Segura; Javier Suarez
  9. Lost in translation? ECB's monetary impulses and financial intermediaries' responses By Beck, Günter Wilfried; Kotz, Hans-Helmut; Zabelina, Natalia
  10. Breaking the spell with credit-easing : self-confirming credit crises in competitive search economies By Gaballo, Gaetano; Marimon, Ramon
  11. Crisis, contagion and international policy spillovers under foreign ownership of banks By Michal Brzoza-Brzezina; Marcin Kolasa; Krzysztof Makarski
  12. A comparative analysis of tools to limit the procyclicality of initial margin requirements By Murphy, David; Vasios, Michalis; Vause, Nicholas
  13. Peer-to-peer lending and financial innovation in the United Kingdom - Ulrich Atz and David Bholat By Atz, Ulrich; Bholat, David
  14. How Does the Sensitivity of Consumption to Income Vary Over Time? International Evidence By Ergys Islamaj; Ayhan Kose
  15. Measuring Financial Cycles in a Model-Based Analysis: Empirical Evidence for the United States and the Euro Area By Gabriele Galati; Irma Hindrayanto; Siem Jan Koopman; Marente Vlekke

  1. By: Hills, Robert (Bank of England); Reinhardt, Dennis (Bank of England); Sowerbutts, Rhiannon (Bank of England); Wieladek, Tomasz (Barclays Capital)
    Abstract: This paper forms the United Kingdom’s contribution to the International Banking Research Network’s project examining the cross-border spillovers of prudential policy actions, where each participant in the network uses proprietary bank-level data available to central banks. We examine whether UK-owned banks’ domestic lending is affected by prudential actions in other countries where they have exposures. We also examine the impact of a change in prudential policy in a foreign-owned UK-resident bank’s home jurisdiction on its lending to the United Kingdom. Our results suggest that prudential actions taken abroad do not have significant spillover effects on bank lending in the UK economy as a whole. But there are more granular effects: for instance, when a foreign authority tightens loan-to-value standards, UK affiliates of banks owned from that country expand their lending to UK households and corporates.
    Keywords: Macroprudential policies; bank lending; spillovers; capital flows
    JEL: F32 F34 G21
    Date: 2016–04–22
  2. By: Armen Hovakimian (Baruch College); Edward Kane, (Boston College); Luc Laeven (European Central Bank)
    Abstract: This paper proposes a theoretically based and easy-to-implement way to measure the systemic risk of financial institutions using publicly available accounting and stock market data. The measure models the credit enhancement taxpayers provide to individual banks in the Merton tradition (1974) as a combination put option for the deep tail of bank losses and a knock-in stop-loss call on bank assets. This model expresses the value of taxpayer loss exposure from a string of defaults as the value of this combination option written on the portfolio of industry assets. The exercise price of the call is the face value of the debt of the entire sector. We conceive of an individual bank’s systemic risk as its contribution to the value of this sectorwide option on the financial safety net. To the extent that authorities are slow to see bank losses or reluctant to exercise the call, the government itself becomes a secondary source of systemic risk. We apply our model to quarterly data over the period 1974-2013. The model indicates that systemic risk reached unprecedented highs during the financial crisis years 2008- 2009, and that bank size, leverage, and asset risk are key drivers of systemic risk.
    JEL: G01 G28
    Date: 2015–08
  3. By: Raphael Anton Auer; Cédric Tille
    Abstract: The US financial crisis and the later eurozone crisis have substantially impacted capital flows into and out of financial centers like Switzerland. We focus on the pattern of capital flows involving the Swiss banking industry. We first rely on balance-of-payment statistics and show that net banking inflows rose during the acute phases of the crises, albeit with a contrasting pattern. In the wake of the collapse of Lehman Brothers, net inflows were driven by a substantial retrenchment into the domestic market by Swiss banks. By contrast, net inflows from mid-2011 to mid-2012 were driven by large flows into Switzerland by foreign banks. We then use more detailed data from Swiss banking statistics which allow us to differentiate the situation across different banks and currencies. We show that, during the US financial crisis, the bank flows cycle was driven strongly by exposures in US dollars, and to a large extent by Swiss-owned banks. During the eurozone crisis, by contrast, the flight to the Swiss franc and move away from the euro was also driven by banks that are located in Switzerland, yet are foreign-owned. In addition, while the demand for the Swiss franc was driven by both foreign and domestic customers from mid-2011 to early 2013, domestic demand took a prominent role thereafter.
    Keywords: capital flows, safe haven, Switzerland, financial globalization, international banking.
    JEL: E51 G15 G21 F21 F32 F36 F65
    Date: 2016
  4. By: Liangliang Jiang; Ross Levine; Chen Lin
    Abstract: Does an intensification of competition among banks increase or decrease liquidity creation? By integrating the dynamic process of interstate bank deregulation that lowered barriers to competition across U.S. states over the 1980s and 1990s with the gravity model of the geographic expansion of banks, we construct time-varying measures of the competitive pressures facing each individual bank. We find that regulatory-induced competition reduced liquidity creation. Consistent with some theories, we also find that the liquidity-destroying effects of competition are mitigated among more profitable banks and heightened among smaller banks.
    JEL: G21 G28 G32 G38
    Date: 2016–04
  5. By: Sergio Rubens Stancato de Souza; Thiago Christiano Silva; Benjamin Miranda Tabak; Solange Maria Guerra
    Abstract: In this paper, we propose a novel methodology to measure systemic risk in networks composed of financial institutions. Our procedure combines the impact effects obtained from stress measures that rely on feedback centrality properties with default probabilities of institutions. We also present new heuristics for designing feasible and relevant stress-testing scenarios that can subside regulators in financial system surveillance tasks. We develop a methodology to extract banking communities and show that these communities are mostly composed of non-large banks and have a relevant effect on systemic risk. This finding renders these communities objects of interest for supervisory activities besides SIFIs and large banks. Finally, our results provide insights and guidelines that can be useful for policymaking
    Date: 2016–04
  6. By: Uluc, Arzu; Wieladek, Tomasz
    Abstract: We study the effect of changes to bank-specific capital requirements on mortgage loan supply with a new loan-level dataset containing all mortgages issued in the UK between 2005Q2 and 2007Q2. We find that a rise of a 100 basis points in capital requirements leads to a 5.4% decline in individual loan size by bank. Loans issued by competing banks rise by roughly the same amount, which is indicative of credit substitution. Borrowers with an impaired credit history (verified income) are not (most) affected. This is consistent with origination of riskier loans to grow capital by raising retained earnings. No evidence for credit substitution of non-bank finance companies is found.
    Keywords: Capital requirements; credit substitution.; loan-level data; mortgage market
    JEL: G21 G28
    Date: 2016–04
  7. By: Punnoose Jacob; Anella Munro
    Abstract: The Basel III net stable funding requirement, scheduled for adoption in 2018, requires banks to use a minimum share of long-term wholesale funding and deposits to fund their assets. A similar regulation has been in place in New Zealand since 2010. This paper introduces the stable funding requirement (SFR) into a DSGE model featuring a banking sector with richly-specified liabilities, and estimates the model for New Zealand. We then evaluate the implications of an SFR for monetary policy trade-offs. Altering the steadystate SFR does not materially affect the transmission of most structural shocks to the real economy and hence has little effect on the optimised monetary policy rules. However, a higher steady-state SFR level amplifies the effects of bank funding shocks, adding to macroeconomic volatility and worsening monetary policy trade-offs conditional on these shocks. We find that this volatility can be moderated if optimal monetary or prudential policy responds to credit growth.
    Keywords: DSGE models, prudential policy, monetary policy, small open economy, sticky interest rates, banks, wholesale funding
    JEL: E31 E32 E44 F41
    Date: 2016–05
  8. By: Anatoli Segura (Banca d’Italia); Javier Suarez (Cemfi)
    Abstract: We quantify the gains from regulating banks’ maturity transformation in an infinite horizon model of banks which finance long-term assets with non-tradable debt. Banks choose the amount and maturity of their debt trading off investors’ preference for short maturities with the risk of systemic crises. As in Stein (2012), pecuniary externalities make unregulated debt maturities inefficiently short. The assessment is based on the calibration of the model to Eurozone banking data for 2006. Lengthening the average maturity of wholesale debt from its 2.8 months to 3.3 months would produce welfare gains with a present value of euro 105 billion.
    Keywords: liquidity risk, maturity regulation, pecuniary externalities, systemic crises
    JEL: G01 G21 G28
    Date: 2016–04
  9. By: Beck, Günter Wilfried; Kotz, Hans-Helmut; Zabelina, Natalia
    Abstract: Non-bank (-balance sheet) based financial intermediation has become considerably more important over the last couple of decades. For the U.S., this trend has been discussed ever since the mid-1990s. As a consequence, traditional monetary transmission mechanisms, mainly operating through bank balance sheets, have apparently become less relevant. This in particular applies to the bank lending channel. Concurrently, recent theoretical and empirical work uncovered a "risk-taking channel" of monetary policy. This mechanism is not confined to traditional banks but has been found to operate also across the spectrum of financial intermediaries and intermediation devices, including securitization and collateralized lending/borrowing. In addition, recent empirical evidence suggests that the increasing importance of shadow-banking activities might have given rise to a so-called "waterbed effect". This is a mediating mechanisms, dampening or counteracting typically to be expected reactions to monetary policy impulses. Employing flow-of-funds data, we can document also for the Euro Area that a trend towards non-bank (not necessarily more 'market'-based) intermediation has occurred. This is, however, a fairly recent development, substantially weaker than in the U.S. Nonetheless, analyzing the response of Euro Area bank and nonbank financial intermediaries to monetary policy impulses, we find some notable behavioral differences between mainly deposit-funded and more 'market'-based financial intermediaries. We also detect, inter alia, the existence of a (still) fairly weak, but potentially policyrelevant, "waterbed" effect.
    Keywords: non-bank financial intermediation,interest-rate channel,credit channel,risk-taking channel of monetary policy,market-based financial intermediation,monetary transmission mechanism,waterbed effect
    Date: 2016
  10. 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: unconventional policies, learning, credit crisis, social experimentation, self-confirming, equilibrium, directed search
    JEL: D53 D83 D84 D92 E44 E61 G01 G20 J64
    Date: 2016
  11. By: Michal Brzoza-Brzezina; Marcin Kolasa; Krzysztof Makarski
    Abstract: This paper checks how international spillovers of shocks and policies are modified when banks are foreign owned. To this end we build a two-country macroeconomic model with banking sectors that are owned by residents of one (big and foreign) country. Consistently with empirical findings, in our model foreign ownership of banks amplifies spillovers from foreign shocks. It also strenghtens the international transmission of monetary and macroprudential policies. We next use the model to replicate the financial crisis in the euro area and show how, by preventing bank capital out ow in 2009, the Polish regulatory authorities managed to reduce its contagion to Poland. We also find that under foreign bank ownership such policy is strongly prefered to a recapitalization of domestic banks.
    Keywords: foreign-owned banks, monetary and macroprudential policy, international spillovers, DSGE models with banking
    JEL: E32 E44 E58
    Date: 2016–03
  12. By: Murphy, David (Bank of England); Vasios, Michalis (Bank of England); Vause, Nicholas (Bank of England)
    Abstract: The requirement to post initial margin on derivatives transactions is a key feature of the post-crisis reforms of the OTC derivatives markets. Initial margin requirements are usually determined by risk-based models. These models typically require increased margin in stressed conditions: they are procyclical. This procyclicality causes a liquidity burden on market participants which sometimes falls when they are least able to bear it. In this paper we study a variety of tools which have been proposed to mitigate the procyclicality of initial margin requirements. Three of these tools are proposed in European regulation; the other two are new proposals which offer attractive procyclicality mitigation features. The behaviour of all five tools is studied in a simulation framework. We examine the extent to which each tool mitigates procyclicality, and at what cost in demanding unnecessary margin compared to a benchmark unmitigated model. Our findings indicate that all of the tools are useful in mitigating procyclicality to some extent, but that the optimal calibration of each tool in a particular situation depends on the relative weights placed by the modeller on the objectives of minimizing procyclicality on the one hand and minimizing undesirable overmargining in periods of low volatility on the other. This suggests that it may be appropriate to consider moving from tools-based procyclicality regulation to one based on the desired outcomes.
    Keywords: Central counterparty; central clearing; initial margin; margin models; OTC derivatives; procyclicality
    JEL: G17
    Date: 2016–04–22
  13. By: Atz, Ulrich (Bank of England); Bholat, David (Bank of England)
    Abstract: Peer-to-peer (P2P) lending — direct lending between lenders and borrowers online outside traditional financial intermediaries like banks — first emerged in the United Kingdom and the world with the launch of Zopa in 2005. Our paper provides a quantitative analysis of nearly 14 million loan agreements. We lay bare the history of P2P lending from its beginning, showing the regional geography of P2P lending in the United Kingdom. We suggest that the history of P2P lending can shed light on financial innovation in general. We base our conclusions on four semi-structured interviews with the founders of the three most significant UK P2P platforms (Zopa, RateSetter, and Funding Circle).
    Keywords: Peer-to-peer lending; crowdfunding; innovation; fintech; big data
    JEL: G23 L26 O30
    Date: 2016–04–29
  14. By: Ergys Islamaj (Development Prospects Group-The World Bank); Ayhan Kose (Development Prospects Group-The World Bank)
    Abstract: This paper studies how the sensitivity of consumption to income has changed over time as the degree of financial integration has risen. In standard theory, greater financial integration facilitates international borrowing and lending, helping to reduce the sensitivity of consumption growth to fluctuations in income. We examine the empirical validity of this prediction using an array of indicators of financial integration for a large sample of advanced and developing countries over the period 1960-2011. We report two main results. First, the sensitivity of consumption to income has declined over time as the degree of financial integration has risen. The decline has been more pronounced in advanced economies than in developing ones. Second, our regression analysis indicates that a higher degree of financial integration is associated with a lower sensitivity of consumption to income. This finding is robust to the use of a wide range of empirical specifications, country-specific characteristics and other controls, such as interest rates and outcome-based measures of financial integration. We also discuss other potential sources of the temporal changes in the sensitivity of consumption to income.
    Keywords: Consumption Sensitivity, Financial Integration, Risk Sharing, Intertemporal Smoothing.
    JEL: E21 F02 F4
    Date: 2016–04
  15. By: Gabriele Galati (De Nederlandsche Bank DNB, the Netherlands); Irma Hindrayanto (De Nederlandsche Bank DNB, the Netherlands); Siem Jan Koopman (VU University Amsterdam, the Netherlands); Marente Vlekke (Centraal Planbureau CPB, The Hague, the Netherlands)
    Abstract: We adopt an unobserved components time series model to extract financial cycles for the United States and the five largest euro area countries over the period 1970 to 2014. We find that credit, the credit-to-GDP ratio and house prices have medium-term cycles which share a few common statistical properties. We show that financial cycles are longer and more ample than business cycles, and that their length and amplitude vary over time and across countries.
    Keywords: unobserved components time series model; Kalman filter; maximum likelihood estimation; band-pass filter; medium-term cycles
    JEL: C22 C32 E30 E50 E51 G01
    Date: 2016–04–22

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