nep-ban New Economics Papers
on Banking
Issue of 2016‒06‒18
nineteen papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Interbank intermediation By Bluhm, Marcel; Georg, Co-Pierre; Krahnen, Jan-Pieter
  2. Risk-based capital requirements and optimal liquidation in a stress scenario By Yann Braouezec; Lakshithe Wagalath
  3. Systemic risk: Time-lags and persistence By Kubitza, Christian; Gründl, Helmut
  4. Bank leverage and monetary policy's risk-taking channel: evidence from the United States By Dell’Ariccia, Giovanni; Laeven, Luc; Suarez, Gustavo A.
  5. Incentivizing Resilience in Financial Networks By Matt V. Leduc; Stefan Thurner
  6. Shadow banking, financial regulation and animal spirits: An ACE approach By Krug, Sebastian; Wohltmann, Hans-Werner
  7. Banking Competition and Economic Stability By Ronald Fischer; Nicolás Inostroza; Felipe J. Ramírez
  8. Timing of Banks’ Loan Loss Provisioning During the Crisis By Leo de Haan; Maarten van Oordt
  9. Does one bank size fit all? The role of diversification and monitoring By Avramidis, Panagiotis; Cabolis, Christos; Serfes, Konstantinos
  10. How Low Can House Prices Go? Estimating a Conservative Lower Bound By Alexander N. Bogin; Stephen D. Bruestle; William M. Doerner
  11. The heterogeneous response of domestic sales and exports to bank credit shocks By Ines Buono; Sara Formai
  12. Microcredit Contracts, Risk Diversification and Loan Take-Up By Attanasio, O.; Augsburg, B.; de Haas, Ralph
  13. Financial Contagion in the Laboratory: Does Network Structure Matter? By John Duffy; Aikaterini Karadimitropoulou; Melanie Parravano
  14. Purchases of sovereign debt securities by Italian banks during the crisis: the role of balance-sheet conditions By Massimiliano Affinito; Giorgio Albareto; Raffaele Santioni
  15. A Quantitative Model of "Too Big to Fail,"' House Prices, and the Financial Crisis By Acikgoz, Omer; Kahn, James
  16. Banks, regions and development after the crisis and under the new regulatory system By Pietro Alessandrini; Michele Fratianni; Luca Papi; Alberto Zazzaro
  17. Does one size fit all at all times? The role of country specificities and state dependencies in predicting banking crises By Stijn Ferrari; Mara Pirovano
  18. The Impact of Merger Legislation on Bank Mergers By Siedlarek, Jan-Peter; Carletti, Elena; Ongena, Steven; Spagnolo, Giancarlo
  19. The funding of small and medium companies by shadow-banks in China By Löchel, Horst; Packham, Natalie; Hölzl, Eugen

  1. By: Bluhm, Marcel; Georg, Co-Pierre; Krahnen, Jan-Pieter
    Abstract: This paper explores the economics of interbank lending and borrowing using bank-balance sheet data for Germany, the largest European economy. Our 2002 - 2014 panel data set allows us to analyze the cross section and the dynamics of the observed interbank exposures. Our findings suggest a genuine intermediation process within the banking system, with implications for allocative efficiency and financial stability. A typical bank in our sample holds a significant amount of term and overnight interbank positions on both sides of the balance sheet simultaneously, and at any point in time. The average contract length in the German interbank market is well above one year, which stands in contrast to the widely held view that interbank exposures are largely overnight. Based on panel regressions, we find the build-up of the interbank book to be driven by innovations in the client book (i.e. non-bank deposit taking and lending). The resulting interbank book affects the bank's duration gap, the maturity disparity between bank assets and bank liabilities. A bank's duration gap is often seen as its major macroeconomic risk factor. Overall our findings lend support to a theory of banking that involves leverage stacks, i.e intermediation among banks.
    Keywords: interbank markets,liquidity,financial stability
    JEL: G2
    Date: 2016
  2. By: Yann Braouezec (IESEG School of Management (LEM 9221-CNRS)); Lakshithe Wagalath (IESEG School of Management (LEM 9221-CNRS))
    Abstract: We develop a simple yet realistic framework to analyze the impact of an exogenous shock on a bank's balance-sheet and its optimal response when it is constrained to maintain its risk-based capital ratio above a regulatory threshold. We show that in a stress scenario, capital requirements may force the bank to shrink the size of its assets and we exhibit the bank's optimal strategy as a function of regulatory risk-weights, asset market liquidity and shock size. When financial markets are perfectly competitive, we show that the bank is always able to restore its capital ratio above the required one. However, for banks constrained to sell their loans at a discount and/or with a positive price impact when selling their marketable assets (large banks) we exhibit situations in which the deleveraging process generates a death spiral. We then show how to calibrate our model using annual reports of banks and study in detail the case of the French bank BNP Paribas. Finally, we suggest how our simple framework can be used to design a systemic capital surcharge
    Keywords: Risk-weighted assets (RWA), stress-tests, fire sales, market impact, optimal liquidation, systemic capital surcharge
    Date: 2016–05
  3. By: Kubitza, Christian; Gründl, Helmut
    Abstract: Common systemic risk measures focus on the instantaneous occurrence of triggering and systemic events. However, systemic events may also occur with a time-lag to the triggering event. To study this contagion period and the resulting persistence of institutions' systemic risk we develop and employ the Conditional Shortfall Probability (CoSP), which is the likelihood that a systemic market event occurs with a specific time-lag to the triggering event. Based on CoSP we propose two aggregate systemic risk measures, namely the Aggregate Excess CoSP and the CoSP-weighted time-lag, that reflect the systemic risk aggregated over time and average time-lag of an institution's triggering event, respectively. Our empirical results show that 15% of the financial companies in our sample are significantly systemically important with respect to the financial sector, while 27% of the financial companies are significantly systemically important with respect to the American non-financial sector. Still, the aggregate systemic risk of systemically important institutions is larger with respect to the financial market than with respect to non-financial markets. Moreover, the aggregate systemic risk of insurance companies is similar to the systemic risk of banks, while insurers are also exposed to the largest aggregate systemic risk among the financial sector.
    Keywords: Contagion Period,Spillover Effects,Systemic Risk,Financial Crisis,Financial Markets
    JEL: G01 G14 G15 G20
    Date: 2016
  4. By: Dell’Ariccia, Giovanni; Laeven, Luc; Suarez, Gustavo A.
    Abstract: We present evidence of a risk-taking channel of monetary policy for the U.S. banking system. We use confidential data on banks’ internal ratings on loans to businesses over the period 1997 to 2011 from the Federal Reserve’s survey of terms of business lending. We find that ex-ante risk taking by banks (measured by the risk rating of new loans) is negatively associated with increases in short-term interest rates. This relationship is more pronounced in regions that are less in sync with the nationwide business cycle, and less pronounced for banks with relatively low capital or during periods of financial distress. JEL Classification: E43, E52, G21
    Keywords: banks, interest rates, leverage, monetary policy, risk
    Date: 2016–05
  5. By: Matt V. Leduc; Stefan Thurner
    Abstract: When banks extend loans to each other, they generate a negative externality in the form of systemic risk. They create a network of interbank exposures by which they expose other banks to potential insolvency cascades. In this paper, we show how a regulator can use information about the financial network to devise a transaction-specific tax based on a network centrality measure that captures systemic importance. Since different transactions have different impact on creating systemic risk, they are taxed differently. We call this tax a Systemic Risk Tax (SRT). We show that this SRT induces a unique equilibrium matching of lenders and borrowers that is systemic-risk efficient, i.e. it minimizes systemic risk given a certain transaction volume. On the other hand, we show that without this SRT multiple equilibrium matchings can exist and are generally inefficient. This allows the regulator to effectively `rewire' the equilibrium interbank network so as to make it more resilient to insolvency cascades, without sacrificing transaction volume. Moreover, we show that a standard financial transaction tax (e.g. a Tobin-like tax) has no impact on reshaping the equilibrium financial network because it taxes all transactions indiscriminately. A Tobin-like tax is indeed shown to have a limited effect on reducing systemic risk while it decreases transaction volume.
    Date: 2016–06
  6. By: Krug, Sebastian; Wohltmann, Hans-Werner
    Abstract: Over the past decades, the framework for financing has experienced a fundamental shift from traditional bank lending towards a broader market-based financing of financial assets. As a consequence, regulated banks increasingly focus on coping with regulatory requirements meaning that the resulting funding gap for the real economy is left to the unregulated part of the financial system, i.e. to shadow banks highly relying on securitization and repos. Unfortunately, economic history has shown that unregulated financial intermediation exposes the economy to destabilizing externalities in terms of excessive systemic risk. The arising question is now whether and how it is possible to internalize these externalities via financial regulation. We aim to shed light on this issue by using an agent-based computational macro-model as experimental lab. The model is augmented with a shadow banking sector representing an alternative investment opportunity for the real sector which shows animal spirit-like, i.e. highly pro-cyclical and myopic, behavior in its investment decision. We find that an unilateral inclusion of shadow banks into the regulatory framework, i.e. without access to central bank liquidity, has negative effects on monetary policy goals, significantly increases the volatility in growth rates and that its disrupting character materializes in increasing default rates and a higher volatility in the credit-to-GDP gap. However, experiments with a full inclusion, i.e. with access to a lender of last resort, lead to superior outcomes relative to the benchmark without shadow banking activity. Moreover, our results highlight the central role of the access to contagion-free, alternative sources of liquidity within the shadow banking sector.
    Keywords: Shadow Banking,Financial Stability,Monetary Economics,Macroprudential Policy,Financial Regulation,Agent-based Macroeconomics
    JEL: E44 E50 G01 G28 C63
    Date: 2016
  7. By: Ronald Fischer; Nicolás Inostroza; Felipe J. Ramírez
    Abstract: We study banking competition and stability in a 2-period economy. Firms need loans to operate, and in case of a real shock, a fraction of firms default. Banks bound by capital adequacy constraints lend less and amplify the initial shock. The magnification depends on the intensity of bank competition. The model admits prudent and imprudent equilibria, where banks collapse after shocks. We find existence conditions for a prudent equilibrium. Competition increases efficiency but leads to higher second period variance and makes imprudent equilibria more attractive. We examine the moderating effect of regulation and forbearance. JEL classiffications: E44, G18, L16. Key words: Keywords: Bank competition, stability, efficiency, forbearance.
    Date: 2015
  8. By: Leo de Haan; Maarten van Oordt
    Abstract: We estimate a panel error correction model for loan loss provisions, using unique supervisory data on flow of funds into and out of the allowance for loan losses of 25 Dutch banks in the post-2008 crisis period. We find that these banks aim for an allowance of 49% of impaired loans. In the short run, however, the adjustment of the allowance is only 29% of the change in impaired loans. The deviation from the target is made up by (a) larger additions to allowances in subsequent quarters and (b) smaller reversals of allowances when loan losses do not materialize. After one quarter, the adjustment toward the target level is 34% and after four quarters is 81%. For individual banks, there are substantial differences in timing of provisioning for bad loan losses. We present two model-based metrics that inform supervisors on the extent to which banks’ short-term provisioning behaviour is out of sync with their target levels.
    Keywords: Financial Institutions, Financial stability
    JEL: G01 G21 G32
    Date: 2016
  9. By: Avramidis, Panagiotis (ALBA Graduate Business School at The American College of Greece); Cabolis, Christos (IMD and ALBA Graduate Business School at The American College of Greece); Serfes, Konstantinos (School of Economics Drexel University)
    Abstract: Using a sample of US bank holding companies from 2001 to 2012, we provide evidence that the relationship between size and bank charter value is an inverse U-shape, which implies the existence of an optimal size. More importantly, motivated by Diamond’s (1984) theoretical model of financial intermediation as delegated monitors, we provide evidence that the inverse U-shape relationship, and consequently the optimal size, is determined by the tradeoff between the diversification benefits and monitoring costs, that is, the direct monitoring cost of bank assets and the delegation costs for debtholders and shareholders.
    Keywords: Bank Size; Charter Value; Diversification; Monitoring
    JEL: G21 G32 L25
    Date: 2016–05–30
  10. By: Alexander N. Bogin (Federal Housing Finance Agency); Stephen D. Bruestle (Penn State Erie); William M. Doerner (Federal Housing Finance Agency)
    Abstract: We develop a theoretically-based statistical technique to identify a conservative lower bound for house prices. Leveraging a model based upon consumer and investor incentives, we are able to explain the depth of housing market downturns at both the national and state level over a variety of market environments. This approach performs well in several historical back tests and has strong out-of-sample predictive ability. When back-tested, our estimation approach does not understate house price declines in any state over the 1987 to 2001 housing cycle and only understates declines in three states during the most recent financial crisis. This latter result is particularly noteworthy given that the post-2001 estimates are performed out-of-sample. Our measure of a conservative lower bound is attractive because it (1) provides a leading indicator of the severity of future downturns and (2) allows trough estimates to dynamically adjust as markets conditions change. This estimation technique could prove particularly helpful in measuring the credit risk associated with portfolios of mortgage assets as part of evaluating static stress tests or designing dynamic stress tests.
    Keywords: house prices, trough, lower bound, trend, financial stress testing
    JEL: G21 C58 R31
    Date: 2015–05
  11. By: Ines Buono (Bank of Italy); Sara Formai (Bank of Italy)
    Abstract: This paper analyzes the role of bank credit in firms' export performance. We use Italian bank-firm matched data and contribute to the existing literature by focusing on the link between bank-credit and exports in ‘normal times’ (1997-2008) and measuring access to credit with hard data on the credit actually extended to firms by the banking system. We also establish the causal link that goes from bank credit to exports, exploiting bank mergers and acquisitions as a source of bank credit supply shocks. We find that short-run shocks to the supply of bank credit induce exporters to decrease their export flows, without affecting their domestic sales. On the other hand, non-exporters react by reducing their domestic sales.
    Keywords: export, bank lending channel, credit shocks, mergers and acquisitions
    JEL: F14 G21 G34
    Date: 2016–06
  12. By: Attanasio, O.; Augsburg, B.; de Haas, Ralph (Tilburg University, Center For Economic Research)
    Abstract: We study theoretically and empirically the demand for microcredit under different liability arrangements and risk environments. A simple theoretical model shows that the demand for joint-liability loans can exceed that for individual-liability loans when risk-averse borrowers value their long-term relationship with the lender. Joint liability then offers a way to diversify risk and to reduce the chance of losing access to future loans. We also show that the demand for loans depends negatively on the riskiness of projects. Using data from a randomized controlled trial in Mongolia we find that these model predictions hold true empirically. In particular, we use innovative data on subjective risk perceptions to show that expected project risk negatively affects the demand for loans. In line with an insurance role of joint-liability contracts, this effect is muted in villages where joint-liability loans are available.
    Keywords: microcredit; joint liability; loan take-up; risk diversification
    JEL: D14 D81 D86 G21 O16
    Date: 2016
  13. By: John Duffy (Department of Economics, University of California-Irvine); Aikaterini Karadimitropoulou (School of Economics, University of East Anglia); Melanie Parravano (Business School, Newcastle University)
    Abstract: We design and report on laboratory experiments exploring the role of interbank network structure for the likelihood of a financial contagion. The laboratory provides us with the control necessary to precisely explore the role of different network configurations for the fragility of the financial system. Specifically, we study the likelihood of financial contagion in complete and incomplete networks of banks who are linked in terms of interbank deposits as in the model of Allen and Gale (2000). Subjects play the role of depositors who must decide whether or not to withdraw their funds from their bank. We find that financial contagions are possible under both network structures. While such contagions always occur under an incomplete interbank network structure, they are significantly less likely to occur under a complete interbank network structure where interbank linkages can effectively provide insurance against shocks to the system, and localize damage from the financial shock.
    Keywords: Contagion; Networks; Experiments; Bank runs,; Interbank seposits; Financial fragility
    JEL: C92 E44 G21
    Date: 2016–06
  14. By: Massimiliano Affinito (Bank of Italy); Giorgio Albareto (Bank of Italy); Raffaele Santioni (Bank of Italy)
    Abstract: This paper analyses the main microeconomic determinants of Italian banks’ purchases of sovereign debt securities from 2007 to 2013, with special reference to their balance-sheet conditions. The analysis distinguishes two phases of the crisis – the period following the Lehman Brothers collapse and the sovereign debt crisis – and different types of banks (large and small). Results show that banks’ specific characteristics and balance-sheet features do matter and that banks use government securities purchases to support their financial and economic conditions. The influence of the balance-sheet conditions differs according to the phase of the crisis and the type of bank.
    Keywords: financial crisis, securities portfolio, banks’ balance sheets, sovereign risk
    JEL: G01 G21 H63
    Date: 2016–06
  15. By: Acikgoz, Omer; Kahn, James
    Abstract: This paper develops a quantitative model that can rationally explain a sizeable part of the dramatic rise and fall of house prices in the 2000-2009 period. The model is driven by the assumption that the government cannot resist bailing out large financial institutions, but can mitigate the consequences by limiting financial institutions' risk-taking. An episode of regulatory forbearance, modeled as a relaxation of loan-to-value limits for conforming mortgages, is welfare-reducing, results in opportunistic behavior and, for plausible parameters inflates house prices and price/rent ratios by roughly twenty percent. This "boom" is followed by a collapse with high default rates.
    Keywords: Too-Big-to-Fail, Financial Crisis, House Prices
    JEL: E02 E21 E3 G21 R31
    Date: 2016–06–06
  16. By: Pietro Alessandrini (Universit… Politecnica delle Marche, MoFiR); Michele Fratianni (Indiana University, Kelly School of Business, Bloomington US, Univ. Plitecn ica Marche and MoFiR); Luca Papi (Universit… Politecnica delle Marche, Dipartimento di Scienze economiche e Sociali, MoFiR); Alberto Zazzaro (Universit… Politecnica delle Marche, Dipartimento di Scienze economiche e Sociali, MoFiR - Ancona, Italy, CSEF, Naples, Italy^M)
    Abstract: One of the most evident consequences of the Great Financial Crisis has been a rapid expansion of banking regulation. We argue that the burden of the new regulatory system is asymmetric, driving small banks to the "too-small-to-survive" zone, while reinforcing the "too-big-to-fail" protection for big banks. The asymmetric effect on banking structure produces related asymmetries on firms and regional economies, in light of the fact that small firms and peripheral regions are highly dependent on bank credit and need strategic proximity of banking structures. Finally, our review of the literature on different countries and on different periods of time, including the financial crisis years, suggests the importance of a differentiated banking model when firms and regions are heterogeneous. There is no obvious optimal size of bank.
    Keywords: financial crisis, regulation, small banks, large banks, asymmetries, heterogeneity
    JEL: G01 G18 G21
    Date: 2016–06
  17. By: Stijn Ferrari; Mara Pirovano (Prudential Policy and Financial Stability, National Bank of Belgium)
    Abstract: Given the indisputable cost of policy inaction in the run-up to banking crises as well as the negative side effects of unwarranted policy activation, policymakers would strongly benefit from earlywarning thresholds that more accurately predict crises and produce fewer false alarms. This paper presents a novel yet intuitive methodology to compute country-specific and state-dependent thresholds for early-warning indicators of banking crises. Our results for a selection of early-warning indicators for banking crises in 14 EU countries show that the benefits of applying the conditional moments approach can be substantial. The methodology provides more robust signals and improves the early-warning performance at the country-specific level, by accounting for country idiosyncrasies and state dependencies, which play an important role in national supervisory authorities’ macroprudential surveillance.
    Keywords: Banking crises, Early warning systems, Country-specific thresholds, State-dependent thresholds
    JEL: C40 E44 E47 E61 G21
    Date: 2016–05
  18. By: Siedlarek, Jan-Peter (Federal Reserve Bank of Cleveland); Carletti, Elena (Bocconi University, IGIER, and CEPR); Ongena, Steven (University of Zurich, the Swiss Finance Institute, and CEPR); Spagnolo, Giancarlo (Site-Stockholm School of Economics, the University of Rome Tor Vergata, EIEF, and CEPR)
    Abstract: We find that stricter merger control legislation increases abnormal announcement returns of targets in bank mergers by 7 percentage points. Analyzing potential explanations for this result, we document an increase in the pre-merger profitability of targets, a decrease in the size of acquirers, and a decreasing share of transactions in which banks are acquired by other banks. Other merger properties, including the size and risk profile of targets, the geographic overlap of merging banks, and the stock market response of rivals appear unaffected. The evidence suggests that the strengthening of merger control leads to more efficient and more competitive transactions.
    Keywords: banks; mergers and acquisitions; merger control; antitrust;
    JEL: G21 G34 K21 L40
    Date: 2016–06–01
  19. By: Löchel, Horst; Packham, Natalie; Hölzl, Eugen
    Abstract: This paper looks at the current shadow-banking practices of Chinese SME's and the question if these practices have a positive impact on the development of those SME's. For this pur-pose, new primary data is examined: Four case studies and two supplementary sets of data. Although the data volume imposes limitations on the results, the two main findings are: First, shadow-banking does have such a positive effect. Second, interpersonal lending is by far the most important financing channel for this effect among all the shadow-banking types ob-served.
    Keywords: Shadow-banking,SME-funding,China's financial system
    JEL: D82 K42 O17
    Date: 2016

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