nep-ban New Economics Papers
on Banking
Issue of 2016‒05‒14
ten papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Macroprudential regulation, credit spreads and the role of monetary policy By Tayler, William; Zilberman , Roy
  2. Governance, efficiency and risk taking in Chinese banking By Dong, Yizhe; Girardone, Claudia; Kuo, Jing-Ming
  3. Entangling credit and funding shocks in interbank markets By Giulio Cimini; Matteo Serri
  4. Could competition always raise the risk of bank failure? By Rodolphe Dos Santos Ferreira; Teresa Lloyd-Braga; Leonor Modesto
  5. Organizational Complexity and Balance Sheet Management in Global Banks By Nicola Cetorelli; Linda S. Goldberg
  6. Indicators for Setting the Countercyclical Capital Buffer By Creedon, Conn; O'Brien, Eoin
  7. A macroprudential stable funding requirement and monetary policy in a small open economy By Punnoose Jacob; Anella Munro
  8. Does the Policy Lending of a Government Financial Institution to Mitigate the Credit Crunch Improve Firm Performance? Evidence from loan level data in Japan By SEKINO Masahiro; WATANABE Wako
  9. Financial Fragility and Over-the-Counter Markets By Sultanum, Bruno
  10. Latent Risk Estimation in Commercial Bank Delinquency Rates By Hubbs, Todd; Kuethe, Todd

  1. By: Tayler, William (Lancaster University); Zilberman , Roy (Lancaster University)
    Abstract: We study the macroprudential roles of bank capital regulation and monetary policy in a borrowing cost channel model with endogenous financial frictions, driven by credit risk, bank losses and bank capital costs. These frictions induce financial accelerator mechanisms and motivate the examination of a macroprudential toolkit. Following credit shocks, countercyclical regulation is more effective than monetary policy in promoting price, financial and macroeconomic stability. For supply shocks, combining macroprudential regulation with a stronger anti-inflationary policy stance is optimal. The findings emphasize the importance of the Basel III accords in alleviating the output-inflation trade-off faced by central banks, and cast doubt on the desirability of conventional (and unconventional) Taylor rules during periods of financial distress.
    Keywords: Basel III — macroprudential policy; bank capital; monetary policy; borrowing cost channel; welfare
    JEL: E32 E44 E52 E58 G28
    Date: 2016–04–29
  2. By: Dong, Yizhe; Girardone, Claudia; Kuo, Jing-Ming
    Abstract: We employ a hand-collected unique dataset on banks operating in China between 2003 and 2011 to investigate the impact of board governance features (size, composition and functioning) on bank efficiency and risk taking. Our evidence suggests that board characteristics tend to have a greater influence on banks’ profit and cost efficiency than on loan quality. We find that the proportion of female directors on the board appears not only to be linked to higher profit and cost efficiency but also to lower traditional banking risk. Similarly, board independence is associated with higher profit efficiency of banks; while the opposite is found for executive directors and in the presence of dual leadership of the CEO/chairperson. Among the control variables, we found that liquidity negatively affects profit and cost efficiency, while positively affecting risk. Interestingly, we find some evidence of an incremental effect of specific board characteristics on efficiency for banks with more concentrated ownership structures and state-owned institutions; while for banks with CEO performance-related pay schemes the effect on efficiency when significant is usually negative. Our results offer useful insights to policy makers in China charged with the task of improving the governance mechanisms in banking institutions.
    Keywords: Board governance; Bank efficiency; Asset quality; Bank ownership; Performance-related compensation; Chinese banking sector
    Date: 2016–05
  3. By: Giulio Cimini; Matteo Serri
    Abstract: Credit and liquidity risks represent main channels of financial contagion for interbank lending markets. On one hand, banks face potential losses whenever their counterparties are under distress and thus unable to fulfill their obligations. On the other hand, solvency constraints may force banks to recover lost fundings by selling their illiquid assets, resulting in effective losses in the presence of fire sales - that is, when funding shortcomings are widespread over the market. Because of the complex structure of the network of interbank exposures, these losses reverberate among banks and eventually get amplified, with potentially catastrophic consequences for the whole financial system. Building on Debt Rank [Battiston et al., 2012], in this work we define a systemic risk metric that estimates the potential amplification of losses in interbank markets accounting for both credit and liquidity contagion channels: the Debt-Solvency Rank. We implement this framework on a dataset of 183 European banks that were publicly traded between 2004 and 2013, showing indeed that liquidity spillovers substantially increase systemic risk, and thus cannot be neglected in stress-test scenarios. We also provide additional evidence that the interbank market was extremely fragile up to the 2008 financial crisis, becoming slightly more robust only afterwards.
    Date: 2016–04
  4. By: Rodolphe Dos Santos Ferreira; Teresa Lloyd-Braga; Leonor Modesto
    Abstract: The debate between the 'competition-fragility' and 'competition-stability' views has been centered upon the risk of banks' loan portfolios. In this paper, we shift the focus of the debate from the riskiness of loan portfolios to the riskiness of operational costs net of the income of non-traditional banking activities, banks' default resulting from negative aggregate profits. We consider a simple model in which, due to purely idiosyncratic risks, portfolio diversification would eliminate the risk of banks' default if those net operational costs were negligible or were known with certainty. We show that more competition always raises the risk of bank default, non-monotonicity being excluded as an equilibrium outcome under free oligopolistic competition between profit maximizing banks. However, the same result obtains in fact under systemic risk, even under non-stochastic net operation costs, a situation which we explore in a slightly different model. We show further that, under liquidity shortness, a higher intensity of competition in the loan market can result in an increase of deposit rates, rather than a decrease of loan rates.
    Keywords: Bank failure, oligopolistic competition in the loan market.
    JEL: G21 D43 L13
    Date: 2016
  5. By: Nicola Cetorelli; Linda S. Goldberg
    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.
    JEL: F3 G15 G21
    Date: 2016–04
  6. By: Creedon, Conn (Central Bank of Ireland); O'Brien, Eoin (Central Bank of Ireland)
    Abstract: Since January 1 2016, the Countercyclical Capital Buffer (CCB), a new macro-prudential policy instrument, has been operational in Ireland. The CCB, which is a time-varying countercyclical capital requirement, aims to limit the potential systemic risks associated with excessive credit growth. This Letter provides an overview of the CCB and summarises European Systemic Risk Board (ESRB) recommendations on appropriate economic and financial indicator variables to guide the setting of the CCB. A number of indicators are applied to historical Irish data for illustrative purposes. The analysis also highlights challenges that arise in the estimation and interpretation of indicators and, therefore, the importance that policymaker judgement will play in setting the CCB rate.
    Date: 2016–04
  7. By: Punnoose Jacob; Anella Munro (Reserve Bank of New Zealand)
    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. This paper introduces a stable funding requirement (SFR) into a small open economy DSGE model featuring a banking sector with richly-specified liabilities. We estimate the model for New Zealand, where a similar requirement was adopted in 2010, and evaluate the implications of an SFR for monetary policy trade-offs. Altering the steady-state 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 amplifes 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.
    JEL: E31 E32 E44 F41
    Date: 2016–04
  8. By: SEKINO Masahiro; WATANABE Wako
    Abstract: Using the data of individual loan contracts extended by the government-owned Japan Finance Corporation for Small and Medium Enterprise (JASME), we examine how the JASME's lending from December 1997 through March 1999 that aimed at mitigating the adverse effects of the credit crunch affected firm performance. We find that the return on assets (ROA) and earnings before income, tax, depreciation and amortization (EBITDA) to total assets ratio are negative a few years after the loans are made, but that this negative effect dissipates afterward.
    Date: 2016–03
  9. By: Sultanum, Bruno (Federal Reserve Bank of Richmond)
    Abstract: This paper studies the interaction between financial fragility and over-the-counter markets. In the model, the financial sector is composed of a large number of investors divided into different groups, which are interpreted as financial institutions, and a large number of dealers. Financial institutions and dealers trade assets in an over-the-counter market à la Duffie et al. (2005) and Lagos and Rocheteau (2009). Investors are subject to privately observed preference shocks, and financial institutions use the balanced team mechanism, proposed by Athey and Segal (2013), to implement an efficient risk-sharing arrangement among its investors. I show that when the market is more liquid, in the sense that the searchfriction is mild, the economy is more likely to have a unique equilibrium and, therefore, is not fragile. However, when the search friction is severe, I provide examples with run equilibria—where investors announce low valuation of assets because they believe everyone else in their financial institution is doing the same. In terms of welfare, I find that, conditional on bank runs existing, the welfare impact of the search friction is ambiguous. The reason is that, during runs, trade is inefficient and, as a result, a friction that reduces trade during runs has the potential to improve welfare. This result is in sharp contrast with the existing literature which suggests that search friction has a negative impact on welfare.
    JEL: D82 E58 G01 G21
    Date: 2016–04–13
  10. By: Hubbs, Todd; Kuethe, Todd
    Keywords: Agricultural and Food Policy,
    Date: 2016–03

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