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on Banking |
| By: | Hasan, Iftekhar; Kim, Suk-Joong; Wu, Eliza |
| Abstract: | We investigate the effects of credit ratings-contingent financial regulation on foreign bank lending behavior. We examine the sensitivity of international bank flows to debtor countries’ sovereign credit rating changes before and after the implementation of the Basel 2 risk-based capital regulatory rules. We study the quarterly bilateral flows from G-10 creditor banking systems to 77 recipient countries over the period Q4:1999 to Q2:2013. We find direct evidence that sovereign credit re-ratings that lead to changes in risk-weights for capital adequacy requirements have become more significant since the implementation of Basel 2 rules for assessing banks’ credit risk under the standardized approach. This evidence is consistent with global banks acting via their international lending decisions to minimize required capital charges associated with the use of ratings-contingent regulation. We find evidence that banking regulation induced foreign lending has also heightened the perceived sovereign risk levels of recipient countries, especially those with investment grade status. Keywords: cross-border banking, sovereign credit ratings, Basel 2, rating-contingent financial regulation |
| JEL: | E44 F34 G21 H63 |
| Date: | 2014–11–17 |
| URL: | http://d.repec.org/n?u=RePEc:bof:bofrdp:2014_025&r=ban |
| By: | Michael Woodford |
| Abstract: | The massive expansion of central-bank balance sheets in response to recent crises raises important questions about the effects of such "quantitative easing" policies, both their effects on financial conditions and on aggregate demand (the intended effects of the policies), and their possible collateral effects on financial stability. The present paper compares three alternative dimensions of central bank policy — conventional interest-rate policy, increases in the central bank's supply of safe (monetary) liabilities, and macroprudential policy (possibly implemented through discretionary changes in reserve requirements) — showing in the context of a simple intertemporal general-equilibrium model why they are logically independent dimensions of variation in policy, and how they jointly determine financial conditions, aggregate demand, and the severity of the risks associated with a funding crisis in the banking sector. In the proposed model, each of the three dimensions of policy can be used independently to influence aggregate demand, and in each case a more stimulative policy also increases financial stability risk. However, the policies are not equivalent, and in particular the relative magnitudes of the two kinds of effects are not the same. Quantitative easing policies increase financial stability risk (in the absence of an offsetting tightening of macroprudential policy), but they actually increase such risk less than either of the other two policies, relative to the magnitude of aggregate demand stimulus; and a combination of expansion of the central bank's balance sheet with a suitable tightening of macroprudential policy can have a net expansionary effect on aggregate demand with no increased risk to financial stability. This suggests that quantitative easing policies may be useful as an approach to aggregate demand management not only when the zero lower bound precludes further use of conventional interest-rate policy, but also when it is not desirable to further reduce interest rates because of financial stability concerns. |
| JEL: | E44 E52 |
| Date: | 2016–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:22285&r=ban |
| 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. |
| Keywords: | money and banking, economic policy uncertainty, business cycle |
| JEL: | E40 E50 G21 |
| Date: | 2016–02 |
| URL: | http://d.repec.org/n?u=RePEc:hoo:wpaper:16110&r=ban |
| By: | Hasan, Iftekhar; Liuling, Liu; Zhang, Gaiyan |
| Abstract: | Using a sample of 161 global banks in 23 countries, we examine the applicability of structural models and bank fundamentals to price global bank credit risk. First, we find that variables predicted by structural models (leverage, volatility, and risk-free rate) are significantly associated with bank CDS spreads. Second, some CAMELS indicators, including asset quality, cost efficiency, and sensitivity to market risk, contain incremental information for bank CDS prices. Moreover, leverage and asset quality have had a stronger impact on bank CDS since the onset of the recent financial crisis. Banks in countries with lower stock market volatility and/or more financial conglomerates restrictions tend to have lower CDS spreads. Deposit insurance appears to have an adverse effect on CDS spreads, indicating a moral hazard problem. Keywords: bank credit default swaps, structural models, CAMELS, global banks |
| JEL: | G21 G13 G15 |
| Date: | 2015–01–05 |
| URL: | http://d.repec.org/n?u=RePEc:bof:bofrdp:2014_033&r=ban |
| 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: | banking, financial crises, credit, macroeconomics and credit markets, monetary policy, international finance, public policy |
| JEL: | G01 G02 G21 G28 |
| Date: | 2016–05 |
| URL: | http://d.repec.org/n?u=RePEc:bge:wpaper:906&r=ban |
| By: | Xu, Bing; Wang, Honglin; Rixtel, Adrian van |
| Abstract: | This paper investigates if relationship lending and bank market concentration permit informational rent extraction through collateral. We use equity IPOs as informational shocks that erode rent seeking opportunities. Using unique loan data from China, we find collateral incidence increases with relationship intensity and bank market concentration for pre-IPO loans, while these effects are moderated post-IPO. We further discover after an IPO, rent extraction is moderated for safe firms but intensified for risky firms. These results are not driven by differences or changes in financial risks. Ours is the first investigation on collateral determinants for China with loan-level data. |
| Keywords: | informational rents, collateral, relationship lending, market structure, IPOs, China |
| JEL: | G21 L11 |
| Date: | 2016–03–17 |
| URL: | http://d.repec.org/n?u=RePEc:bof:bofitp:2016_005&r=ban |
| By: | Beck, Günter Wilfried; Kotz, Hans-Helmut |
| Abstract: | Very low policy rates as well as the substantial redesign of rules and supervisory institutions have changed background conditions for the Euro Area's financial intermediary sector substantially. Both policy initiatives have been targeted at improving societal welfare. And their potential side effects (or costs) have been discussed intensively, in academic as well as policy circles. Very low policy rates (and correspondingly low market rates) are likely to whet investors' risk taking incentives. Concurrently, the tightened regulatory framework, in particular for banks, increases the comparative attractiveness of the less regulated, so-called shadow banking sector. Employing flow-of-funds data for the Euro Area's non-bank banking sector we take stock of recent developments in this part of the financial sector. In addition, we examine to which extent low interest rates have had an impact on investment behavior. Our results reveal a declining role of banks (and, simultaneously, an increase in non-bank banking). Overall intermediation activity, hence, has remained roughly at the same level. Moreover, our findings also suggest that non-bank banks have tended to take positions in riskier assets (particularly in equities). In line with this observation, balance-sheet based risk measures indicate a rise in sector-specific risks in the non-bank banking sector (when narrowly defined). |
| Keywords: | non-bank financial intermediation,shadow banking,financial stability,systemic risk,financial regulation,low interest rate environment |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:safewh:37&r=ban |
| By: | Lallour, Antoine (Bank of England); Mio, Hitoshi (Bank of Japan) |
| Abstract: | We use data from the recent global financial crisis to study the importance of several structural funding metrics in characterising banks’ resilience. We find that structural funding ratios, including the Basel Committee’s Net Stable Funding Ratio (NSFR) which will soon become a new requirement, would have helped detect, back in 2006, which banks were to subsequently fail, even controlling for the banks’ solvency ratios. Their predictive power seems to come from the liability side and in particular from the fact that they count retail deposits as a highly stable funding source. Indeed, a deposits-to-assets ratio would outperform the other structural metrics we investigated as failure predictors for this crisis. Our findings suggest that this crisis was a crisis of banks’ funding structures. |
| Keywords: | Banking; bank regulation; deposits; funding; |
| JEL: | G01 G18 G21 |
| Date: | 2016–05–20 |
| URL: | http://d.repec.org/n?u=RePEc:boe:boeewp:0602&r=ban |
| By: | Anastasia Cozarenco; Ariane Szafarz |
| Abstract: | Subsidized microfinance institutions (MFIs) provide affordable credit to small entrepreneurs. Many industrialized countries regulate MFIs. But in a market with accessible small business financing, regulatory loan ceilings can jeopardize the supply of microcredit to the most disadvantaged people. This is because small entrepreneurs in need of above-ceiling credit have the option to combine a ceiling-high microcredit with a supplementary loan from a regular bank. By reducing information asymmetry, this type of co-financing may prompt MFIs to divert credit away from entrepreneurs seeking below-ceiling loans. This study uses hand-collected data from a French MFI to test, and partly confirm, this theory. |
| Keywords: | Microcredit; microfinance; regulation; loan ceiling; self-employment; entrepreneurs |
| JEL: | G21 L51 G28 O52 L31 I38 C25 M13 |
| Date: | 2016–04–29 |
| URL: | http://d.repec.org/n?u=RePEc:sol:wpaper:2013/229550&r=ban |
| By: | Beck, Thorsten; Degryse, Hans; De Haas, Ralph; van Horen, Neeltje |
| Abstract: | Using a novel way to identify relationship and transaction banks, we study how banks’ lending techniques affect funding to SMEs over the business cycle. For 21 countries we link the lending techniques that banks use in the direct vicinity of firms to these firms’ credit constraints at two contrasting points of the business cycle. We show that relationship lending alleviates credit constraints during a cyclical downturn but not during a boom period. The positive impact of relationship lending in an economic downturn is strongest for smaller and more opaque firms and in regions where the downturn is more severe. |
| JEL: | F36 G21 L26 O12 O16 |
| Date: | 2014–07–07 |
| URL: | http://d.repec.org/n?u=RePEc:bof:bofitp:2014_014&r=ban |
| 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 |
| URL: | http://d.repec.org/n?u=RePEc:bof:bofrdp:2016_002&r=ban |
| By: | Kiema, Ilkka; Jokivuolle, Esa |
| Abstract: | Concern that government may not guarantee bank deposits in a future crisis can cause a bank run. The government may break its guarantee during a severe crisis because of time-inconsistent preferences regarding the use of public resources. However, as deposits are with-drawn during the bank run, the size of the government’s liability to guarantee the remaining deposits is gradually reduced, which increases the government’s incentive to provide the promised guarantee. This in turn reduces depositors’ incentive to withdraw, which may explain why bank runs sometimes remain partial. Our model yields an endogenously determined probability and size of a partial bank run. These depend on a common signal as to the future state of the economy, the cost of liquidity provision to banks, and the government’s reputational cost of breaking the deposit guarantee. We apply the model to a multi-country deposit insurance scheme, an idea that has been aired in the context of the European Banking Union. |
| Keywords: | bank crises, information induced bank runs, deposit guarantee, bank regulation |
| JEL: | G21 G28 |
| Date: | 2015–04–09 |
| URL: | http://d.repec.org/n?u=RePEc:bof:bofrdp:2015_010&r=ban |
| By: | Haselmann, Rainer; Schoenherr, David; Vig, Vikrant |
| Abstract: | We employ a unique dataset on members of an elite service club in Germany to investigate how elite networks affect the allocation of resources. Specifically, we investigate credit allocation decisions of banks to firms inside the network. Using a quasi-experimental research design, we document misallocation of bank credit inside the network, with state-owned banks engaging most actively in crony lending. The aggregate cost of credit misallocation amounts to 0.13 percent of annual GDP. Our findings, thus, resonate with existing theories of elite networks as rent extractive coalitions that stie economic prosperity. |
| JEL: | F34 F37 G21 G28 G33 K39 |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:safewp:132&r=ban |
| By: | Juselius, Mikael; Drehmann, Mathias |
| Abstract: | In addition to leverage, the debt service burden of households and firms is an important link between financial and real developments at the aggregate level. Using US data from 1985 to 2013, we find that the debt service burden has sizeable negative effects on expenditure. Its interplay with leverage also explains several data puzzles, such as the lack of above-trend output growth during credit booms and the depth and length of ensuing recessions, without appealing to large shocks or non-linearities. Using data up to 2005, our model predicts paths for credit and expenditure that closely match actual developments before and during the Great Recession. |
| Keywords: | business cycle, credit boom, leverage, debt service burden, financial-real interactions, financial stability |
| JEL: | E20 E32 E44 G01 |
| Date: | 2016–04–01 |
| URL: | http://d.repec.org/n?u=RePEc:bof:bofrdp:2016_003&r=ban |
| By: | Elias, Aptus; Gersbach, Hans; Volker, Britz |
| Abstract: | We examine the impact of so-called "Crisis Contracts" on bank managers' risk-taking incentives and on the probability of banking crises. Under a Crisis Contract, managers are required to contribute a pre-specified share of their past earnings to finance public rescue funds when a crisis occurs. This can be viewed as a retroactive tax that is levied only when a crisis occurs and that leads to a form of collective liability for bank managers. We develop a game-theoretic model of a banking sector whose shareholders have limited liability, so that society at large will suffer losses if a crisis occurs. Without Crisis Contracts, the managers' and shareholders' interests are aligned, and managers take more than the socially optimal level of risk. We investigate how the introduction of Crisis Contracts changes the equilibrium level of risk-taking and the remuneration of bank managers. We establish conditions under which the introduction of Crisis Contracts will reduce the probability of a banking crisis and improve social welfare. We explore how Crisis Contracts and capital requirements can supplement each other and we show that the efficacy of Crisis Contracts is not undermined by attempts to hedge. |
| JEL: | C79 G21 G28 |
| Date: | 2016–05 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:11267&r=ban |
| By: | Huotari, Jarkko |
| Abstract: | I propose a financial stress index (FSI) for the Finnish financial system that aims to reflect the functionality of the financial system and provide an aggregate measure of financial stress in the money, bond, equity and foreign exchange markets and the banking sector. The FSI is a composite index that combines information from these markets and provides a measure of stress in the financial system as a whole. The FSI has obvious benefits for all participants in the financial markets who need a tool for monitoring the functioning of the financial markets, as it provides information on systemic stress events which are not as easily captured with the stress measures of individual markets or sectors. The ESRB recommendation (ESRB, 2014a) also states that national or international FSIs could be used when making a decision about the release of the counter-cyclical capital buffer. Hence, the index can also be used to support the macro-prudential policy decision making in Finland. |
| Keywords: | financial stress index, counter-cyclical capital buffer, macro-prudential policy |
| JEL: | G01 G28 C43 |
| Date: | 2015–03–11 |
| URL: | http://d.repec.org/n?u=RePEc:bof:bofrdp:2015_007&r=ban |
| By: | N. Cassola; F. Koulischer |
| Abstract: | We build a model of collateral choice by banks to quantify how changes in the haircut policy of the central bank affect the collateral used by banks and the funding cost of banks. We estimate the model using data on assets pledged to the European Central Bank from 2009 to 2011. Our results suggest for example that a 5% higher haircut on low rated collateral would have reduced the use of this collateral by 10% but would have increased the average funding cost spread between high yield and low yield countries by 5% over our sample period. |
| Keywords: | Collateral, Haircut, Central Bank, Money market. |
| JEL: | E52 E58 G01 F36 |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:bfr:banfra:593&r=ban |
| By: | Hibiki Ichiue; Frederic Lambert |
| Abstract: | Foreign bank lending has stopped growing since the global financial crisis. Changes in banks’ business models, balance-sheet adjustments, as well as the tightening of banking regulations are potential drivers of this prolonged slowdown. The existing literature however suggests an opposite effect related to regulation, with tighter regulations encouraging foreign lending through regulatory arbitrage. We investigate this question using new survey data on regulations specific to banks’ international operations. Our results show that regulatory tightening can explain about half of the decline in the foreign lending-to-GDP ratio between 2007 and 2013. Regulatory changes in home countries have had a larger effect than those in host countries. |
| Keywords: | International banking;Bank regulations;Cross-border banking;Foreign banks;Loans;Globalization;international banking, regulation |
| Date: | 2016–04–08 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:16/88&r=ban |