nep-ban New Economics Papers
on Banking
Issue of 2016‒05‒28
fourteen papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Anticipating the financial crisis: Evidence from insider trading in banks By Ozlem Akin; José M. Marín; José-Luis Peydró
  2. On the roles of different foreign currencies in European bank lending By Signe Krogstrup; Cédric Tille
  3. Deposit Insurance: Theories and Facts By Charles W. Calomiris; Matthew Jaremski
  4. Non-performing loans: regulatory and accounting treatments of assets By Bholat, David; Lastra, Rosa; Markose, Sheri; Miglionico, Andrea; Sen, Kallol
  5. Too-Big-to-Fail before the Fed By Gorton, Gary; Tallman, Ellis W.
  6. The Real Effects of Capital Requirements and Monetary Policy: Evidence from the United Kingdom By De Marco, Filippo; Wieladek, Tomasz
  7. Analyzing and Comparing Basel's III Sensitivity Based Approach for the interest rate risk in the trading book By Mabelle Sayah
  8. Small Firms and Domestic Bank Dependence in Europe’s Great Recession By Mathias Hoffmann; Bent E. Sorensen
  9. Monetary Policy, Bank Bailouts and the Sovereign-Bank Risk Nexus in the Euro Area By Marcel Fratzscher, DIW Berlin, Humboldt-University Berlin and CEPR; Malte Rieth, DIW Berlin
  10. Credit, Securitization and Monetary Policy; Watch Out for Unintended Consequences By Andrea Pescatori; Juan Sole
  11. Waves of international banking integration: A tale of regional differences By Vincent Bouvatier; Anne Laure Delatte
  12. Firms’ Strategic Choice of Loan Delinquencies By Morales-Acevedo, Paola
  13. A robust confidence interval of historical Value-at-Risk for small sample By Dominique Guegan; Bertrand Hassani; Kehan Li
  14. Regulating innovation in microfinance By Katherine Hunt

  1. By: Ozlem Akin; José M. Marín; José-Luis Peydró
    Abstract: Banking crises are recurrent phenomena, often induced by ex-ante excessive bank risk-taking, which may be due to behavioral reasons (overoptimistic banks neglecting risks) and to agency problems between bank shareholders with debt-holders and taxpayers (banks understand high risktaking). We test whether US banks' stock returns in the 2007-08 crisis are related to bank insiders' sale of their own bank shares in the period prior to 2006:Q2 (the peak and reversal in real estate prices). We find that top-five executives' ex-ante sales of shares predicts the cross-section of banks returns during the crisis; interestingly, effects are insignificant for independent directors' and other officers' sale of shares. Moreover, the top-five executives' significant impact is stronger for banks with higher ex-ante exposure to the real estate bubble, where an increase of one standard deviation of insider sales is associated with a 13.33 percentage point drop in stock returns during the crisis period. The informational content of bank insider trading before the crisis suggests that insiders understood the risk-taking in their banks, which has important implications for theory, public policy and the understanding of crises.
    Keywords: Financial crises, insider trading, banking, risk-taking, agency problems in firms.
    JEL: G01 G02 G21 G28
    Date: 2016–05
  2. By: Signe Krogstrup; Cédric Tille
    Abstract: We draw on a new data set on the use of Swiss francs and other currencies by European banks to assess the patterns of foreign currency bank lending. We show that the patterns differ sharply across foreign currencies. The Swiss franc is used predominantly for lending to residents, especially households. It is sensitive to the interest rate differential, exchange rate developments, funding availability, and to some extent international trade. Domestic lending in other currencies is used, to a greater extent, in cross-border lending, and for lending to resident nonfinancial firms, and is much less sensitive to the drivers identified for Swiss franc lending. Policy measures aimed at foreign currency lending have a clear impact on lending to residents. The results underline that not all foreign currencies are alike when it comes to foreign currency bank lending and the associated financial stability risks.
    Keywords: Swiss franc lending, foreign currency lending, cross-border transmission of shocks, European bank balance sheets
    JEL: F32 F34 F36
    Date: 2016
  3. By: Charles W. Calomiris; Matthew Jaremski
    Abstract: Economic theories posit that bank liability insurance is designed as serving the public interest by mitigating systemic risk in the banking system through liquidity risk reduction. Political theories see liability insurance as serving the private interests of banks, bank borrowers, and depositors, potentially at the expense of the public interest. Empirical evidence – both historical and contemporary – supports the private-interest approach as liability insurance generally has been associated with increases, rather than decreases, in systemic risk. Exceptions to this rule are rare, and reflect design features that prevent moral hazard and adverse selection. Prudential regulation of insured banks has generally not been a very effective tool in limiting the systemic risk increases associated with liability insurance. This likely reflects purposeful failures in regulation; if liability insurance is motivated by private interests, then there would be little point to removing the subsidies it creates through strict regulation. That same logic explains why more effective policies for addressing systemic risk are not employed in place of liability insurance. The politics of liability insurance also should not be construed narrowly to encompass only the vested interests of bankers. Indeed, in many countries, it has been installed as a pass-through subsidy targeted to particular classes of bank borrowers.
    JEL: E44 G21 G28
    Date: 2016–05
  4. By: Bholat, David (Bank of England); Lastra, Rosa (Queen Mary University); Markose, Sheri (University of Essex); Miglionico, Andrea (University of Reading); Sen, Kallol (Bank of England)
    Abstract: Asset quality is an essential part of sound banking. However, asset quality is difficult for banking regulators and investors to assess in the absence of a common, cross-border scheme to classify assets. Currently no standard is applied universally to classify loans, the most sizable asset on many banks’ balance sheets. As a corollary, no common definition of non-performing loans (NPLs) exists. This paper documents divergences in the definition of NPLs across countries, accounting regimes, firms and data sources. The paper’s originality is in attending to the legal, accounting, statistical, economic and strategic aspects of loan loss provisioning (LLP) and NPLs, topics that are multidisciplinary by nature but have not been dealt with in the literature in an integrated fashion before. Since the 2007 Great Financial Crisis (GFC), accounting bodies and prudential regulators are increasingly focused on early recognition of credit losses and enhanced disclosure. A common approach to NPL recognition might complement these initiatives.
    Keywords: Non-performing loans; impairment; loan loss provisions; bank capital; data standards; credit risk.
    JEL: G01 G21 M41
    Date: 2016–04–22
  5. By: Gorton, Gary (Yale School of Management); Tallman, Ellis W. (Federal Reserve Bank of Cleveland)
    Abstract: “Too-big-to-fail” is consistent with policies followed by private bank clearing houses during financial crises in the U.S. National Banking Era prior to the existence of the Federal Reserve System. Private bank clearing houses provided emergency lending to member banks during financial crises. This behavior strongly suggests that “too-big-to-fail” is not the problem causing modern crises. Rather, it is a reasonable response to the threat posed to large banks by the vulnerability of short-term debt to runs.
    Keywords: Financial crisis; bank runs; banking panic; clearing house; bank-specific information; currency premium;
    JEL: E02 E32 E42 E52 E58
    Date: 2016–05–06
  6. By: De Marco, Filippo; Wieladek, Tomasz
    Abstract: We study the effects of bank-specific capital requirements on Small and Medium Enterprises (SMEs) in the UK from 1998 to 2006. Following a 1% increase in capital requirements, SMEs' asset growth contracts by 6.9% in the first year of a new bank-firm relationship, but the effect declines over time. We also compare the effects of capital requirements to those of monetary policy. Monetary policy only affects firms with higher credit risk and those borrowing from small banks, whereas capital requirements affect both. Capital requirement changes, instead, do not affect firms with alternative sources of finance, but monetary policy shocks do.
    Keywords: Capital requirements; Firm-level real effects; prudential and monetary policy.; relationship lending; SMEs
    JEL: E51 G21 G28
    Date: 2016–05
  7. By: Mabelle Sayah (SAF - Laboratoire de Sciences Actuarielle et Financière - UCBL - Université Claude Bernard Lyon 1, ISFA - Institut des Science Financière et d'Assurances - PRES Université de Lyon, Faculte des Sciences - Universite Saint Joseph - USJ - Université Saint-Joseph de Beyrouth)
    Abstract: A bank's capital charge computation is a widely discussed topic with new approaches emerging continuously. Each bank is computing this figure using internal methodologies in order to reflect its capital adequacy; however, a more homogeneous model is recommended by the Basel committee to enable judging the situation of these financial institutions and comparing different banks among each other. In this paper, we compare different numerical and econometric models to the sensitivity based approach (SBA) implemented by BCBS under Basel III in its February 2015 publication in order to compute the capital charge, we study the influence of having several currencies and maturities within the portfolio and try to define the time horizon and confidence level implied by Basel s III approach through an application on bonds portfolios. By implementing several approaches, we are able to find equivalent VaRs to the one computed by the SBA on a pre-defined confidence level (97.5 %). However, the time horizon differs according to the chosen methodology and ranges from 1 month up to 1 year.
    Keywords: interest rate risk,ICA,Dynamic Nelson Siegel,bonds portfolio,PCA,Basel III,GARCH,Capital charge,Sensitivity Based approach,trading book
    Date: 2016–02–01
  8. By: Mathias Hoffmann; Bent E. Sorensen
    Abstract: The paper studies the role of small businesses (SME) in the transmission of the Eurozone crisis to member countries and whether regions or countries with many SMEs were less able to share risk. Our analysis draws attention to domestic bank dependence—defined as the share of domestic private credit originated by domestic banks—as a key variable modulated the impact of shocks on bankdependent SMEs and thus on the real economy. We argue that Eurozone banking integration in the years after the creation of the single currency was lopsided in the sense that, until 2008, cross-border lending between banks increased markedly while foreign banks’ lending to the real sector stayed relatively flat. Hence, SMEs remained very dependent on domestic banks for credit, in spite of high levels of banking sector integration between Eurozone countries. Our results suggest that domestic bank dependence made countries, regions, and sectors with many SMEs more vulnerable to global banking sector shocks and, at the same time, provided little risk sharing.
    JEL: F30 F36 F40 F45
    Date: 2015–09
  9. By: Marcel Fratzscher, DIW Berlin, Humboldt-University Berlin and CEPR; Malte Rieth, DIW Berlin
    Abstract: The paper analyses the empirical relationship between bank risk and sovereign credit risk in the euro area. Using structural VAR with daily financial markets data for 2003-13, the analysis confirms twoway causality between shocks to sovereign risk and bank risk, with the former being overall more important in explaining bank risk, than vice versa. The paper focuses specifically on the impact of non-standard monetary policy measures by the European Central Bank and on the effects of bank bailout policies by national governments. Testing specific hypotheses formulated in the literature, we find that bank bailout policies have reduced credit risk in the banking sector, but partly at the expense of raising the credit risk of sovereigns. By contrast, monetary policy was in most, but not all cases effective in lowering credit risk among both sovereigns and banks. Finally, we find spillover effects in particular from sovereigns in the euro area periphery to the core countries.
    JEL: E52 G10 E60
    Date: 2015–09
  10. By: Andrea Pescatori; Juan Sole
    Abstract: We show evidence that interest rate hikes slowdown loan growth but lead intermediation to migrate from banks’ balance sheets to non-banks via increased securitization activity. As such, higher interest rates have the potential for unintended consequences; raising systemic risk rather than lowering it by pushing more intermediation activity to more weakly regulated sectors. In the past, this increased securitization activity was driven primarily byb private-label securitization. On the other hand, the government sponsored entities like Freddie Mac and Fannie Mae appear to react to higher policy rates by cutting back on their securitization activity but expanding loans to the Federal Home Loan Bank system.
    Keywords: Monetary policy;United States;Interest rate increases;Credit expansion;Nonbank financial sector;Securities;Mortgages;Financial intermediaries;Monetary policy; monetary policy shocks; VAR; proxy VAR; financial intermediation; shadow banking; securitization; GSE; private-label ABS issuers.
    Date: 2016–03–23
  11. By: Vincent Bouvatier (Université Paris 10, Paris Ouest Nanterre La Défense (UP10)); Anne Laure Delatte (Pôle Finance Responsable - Rouen Business School)
    Abstract: We propose an original measure of international banking integration based on gravity equations and a spline function on a panel of 14 countries and their 186 partners between 1999 and 2012. Contrary to the conventional wisdom, we uncover that: (1) the international banking integration outside the euro area has been tenaciously increasing since \1999 and has even strengthened after the crisis. (2) In contrast, the international banking integration of the euro area has been cyclical since 1999 with a peak in 2006 and a complete reversal since then. (3) This decline is not a correction of previous overshooting but a marked disintegration. (4) Outside the euro area, the level of income does not affect the shape of banking integration.
    Keywords: International banking; Gravity model; Banking integration
    JEL: F34 F36
    Date: 2015–11
  12. By: Morales-Acevedo, Paola (Monetary Policy Department, Central Bank of Sweden)
    Abstract: I analyze the repayment decisions of firms with multiple loans that, for liquidity constraints or strategic reasons, stop making payments in some but not all their loans. Using a sample of commercial loans from Colombia over the period 2002:03 – 2012:06, I find that firms are less likely to stop making payments on loans granted by banks with which they have long relationships and by banks with which they have a clean repayment history. These results suggest that firms are concerned with losing the benefits gained through the relationship. I also find that firms are more likely to stop making payments on loans from foreign banks when compared to domestic banks, and equally on loans from state owned banks when compared to private banks. This suggests that the ability and willingness of the bank to punish the firm for misbehaving play an important role in a firm’s decision. Overall, the results suggest that firms assess their delinquency choices based on their perceived ability to obtain new loans in the future.
    Keywords: Payment delinquencies; strategic choice; lending relationship; foreign ownership; state banks
    JEL: G21 G32 G33
    Date: 2016–04–01
  13. 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); Kehan Li (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique)
    Abstract: Finiteness of sample, as one major sources of uncertainty, has been ignored by the regulators and risk managers domains such as portfolio management, credit risk modelling and finance (or insurance) regulatory capital calculations. To capture this uncertainty, we provide a robust confidence interval (CI) of historical Value-at-Risk (hVaR) for different length of sample. We compute this CI from a saddlepoint approximation of the distribution of hVaR using a bisection search approach. We also suggest a Spectral Stress Value-at-Risk measure based on the CI, as an alternative risk measure for both financial and insurance industries. Finally we perform a stress testing application for the SSVaR.
    Keywords: Uncertainty,Small sample,Value-at-Risk,Asymptotic normality approximation,Saddlepoint approximation,Bisection search approach,Spectral Stress VaR,Stress testing
    Date: 2016–04
  14. By: Katherine Hunt
    Keywords: Innovation, Policy, Microfinance, Microfinance Innovation, Microfinance Policy
    JEL: G21
    Date: 2016–04

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