nep-ban New Economics Papers
on Banking
Issue of 2016‒07‒02
twelve papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Asset encumbrance, bank funding and financial fragility By Ahnert, Toni; Anand, Kartik; Gai, Prasanna; Chapman, James
  3. TARP and Market Discipline: Evidence on the Moral Hazard Effects of Bank Recapitalizations By Forssbaeck, Jens; Nielsen, Caren Yinxia
  4. Risk Management of Demand Deposits in a Low Interest Rate Environment By Hana Dzmuranova
  5. Risk management of the Vietnamese banking system: A market research survey By Matousek, Roman; Nguyen, Thao Ngoc; Stewart, Chris
  6. The collateral channel of open market operations By Cassola, Nuno; Koulischer, François
  7. Default, Mortgage Standards and Housing Liquidity By Allen Head; Hongfei Sun; Chenggang Zhou
  8. Timing of banks' loan loss provisioning during the crisis By Leo de Haan; Maarten van Oordt
  9. The real effects of universal banking on firms’ investment: Micro-evidence from 2004-2009 By F. Vinas
  10. What drives banks’ willingness to lend to SMEs? An ARDL approach By Lokman, Azarahiah; Masih, Mansur
  11. Sovereign risk and bank risk-taking By Ari, Anil
  12. Do Credit Card Companies Screen for Behavioral Biases? By Hong Ru; Antoinette Schoar

  1. By: Ahnert, Toni; Anand, Kartik; Gai, Prasanna; Chapman, James
    Abstract: How does asset encumbrance affect the fragility of intermediaries subject to rollover risk? We offer a model in which a bank issues covered bonds backed by a pool of assets that is bankruptcy remote and replenished following losses. Encumbering assets allows a bank to raise cheap secured debt and expand profitable investment, but it also concentrates risk on unsecured debt and thus exacerbates fragility and raises unsecured funding costs. Deposit insurance or wholesale funding guarantees induce excessive encumbrance and fragility. To mitigate such risk shifting, we study prudential regulatory tools, including limits on encumbrance, minimum capital requirements and surcharges for encumbrance.
    Keywords: asset encumbrance,covered bonds,financial fragility,guarantees,rollover risk,wholesale funding
    JEL: D82 G01 G21 G28
    Date: 2016
  2. By: Maria Gerhardt; Rudi Vander Vennet (-)
    Abstract: During the financial crisis, European governments implemented emergency rescue packages to support struggling banks. No less than 114 European banks benefited from goverment support in the period 2007 to 2013. We investigate the financial condition of banks before and after receiving state support by running logit regressions. Our results indicate that the equity ratio is the decisive indicator to predict distress. Bank-specific variables, such as loan provision, nonperforming loans and bank size also perform well in detecting bank bailouts. Surprisingly, the aided banks hardly improve their performance indicators after they have been rescued but maintain similar risk profiles/business models.
    Keywords: Bank bailout, state aid, financial crisis, logit analysis
    JEL: G21 G28
    Date: 2016–05
  3. By: Forssbaeck, Jens (School of Economics and Management, Lund University); Nielsen, Caren Yinxia (Department of Economics, Lund University)
    Abstract: We examine the moral hazard effects of bank recapitalizations by assessing the impact of the U.S. TARP program on market discipline exerted by subordinated debt-holders using a sample of 123 bank holding companies over the period 2004-2013. Predicted distress risk has a consistently positive and significant effect on sub-debt spreads, suggesting the presence of market discipline. A higher bailout probability significantly reduces the risk-sensitivity of spreads for the full sample, indicating a moral hazard effect of recapitalizations. This appears to be a too-big-to-fail effect, as it is absent when the largest banks are dropped from the sample. Results indicate that it is transitory. We also find a large effect of the crisis, appearing both as a uniform rise in, and a heightened risk sensitivity of, sub-debt spreads during the crisis.
    Keywords: Bank bailouts; moral hazard; distress risk; capital injections; TARP; CPP; market discipline; financial crisis
    JEL: E50 G01 G21 G28 H12
    Date: 2016–06–13
  4. By: Hana Dzmuranova (Institute of Economic Studies, Faculty of Social Sciences, Charles University in Prague, Smetanovo nabrezi 6, 111 01 Prague 1, Czech Republic)
    Abstract: In this paper, we focus on the liquidity characteristics (stability and maturity) of retail deposits in the Czech Republic and changes in the structure of retail deposit products that occurred because of low interest-rate environment. Retail deposits are a primary source of funding for banks in the Czech Republic. In simplicity, we divide retail deposits into two main groups: (i) demand deposits are products with non-maturing features as maturity (timing of cash flows) is not known by a bank as a client can withdraw a deposit on notice while in reality deposits remain in a bank for a longer period; (ii) term deposits are products with maturing characteristics, i.e. a timing of cash flows is known. Bankers deem retail deposits as a largely stable and cheap funding source. Our research shows that demand deposits are a stable funding source with much higher maturity than term deposits. Moreover, we conclude that the transfer of term deposits to demand deposits that accelerated in recent years resulted from a low interest rate environment. This transfer implies increasing liquidity risk of the Czech banking sector. However, we argue that banks should be able to hedge this risk properly.
    Keywords: asset and liability management, demand deposits, term deposits, liquidity risk, interest rate sensitivity
    JEL: G21 C22 C53
    Date: 2016–05
  5. By: Matousek, Roman (University of Kent); Nguyen, Thao Ngoc (Nottingham Trent University); Stewart, Chris (Kingston University London)
    Abstract: The purpose of this paper is to examine risk management of the Vietnamese banking system. This is the first such study of the Vietnamese banking system. To be able to carry out a comparative analysis and provide policy recommendations for risk management, we carry out an original survey of Vietnamese commercial banks using a questionnaire. 42% of the interviewees are General/Deputy General Directors and 58% are Heads/Deputies of a risk management department. The Kruskal-Wallis, Pearson chi-square and other tests are employed to examine the relationship between risk management and bank efficiency. The survey results indicate that there is a difference between banks in terms of risk area identification, risk intensification methods prioritised, risk monitoring methods, efficiency improvement suggestions, awareness of other banks’ risk management systems and credit risk analysis.
    Keywords: Banking; Risk Management; Efficiency; Vietnam
    JEL: C12 C14 G21 L25
    Date: 2016–06–20
  6. By: Cassola, Nuno; Koulischer, François
    Abstract: We build a model of collateral choice by banks that allows to recover the opportunity cost of collateral use and the access of banks to the interbank market. We estimate the model using country-level data on assets pledged to the European Central Bank from 2009 to 2011. The model can be used to quantify how changes in haircuts affect the collateral used by banks and can provide proxies for the funding cost of banks. 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. JEL Classification: E52, E58, G01, F36
    Keywords: central bank, collateral, haircut, money market
    Date: 2016–05
  7. By: Allen Head (Queen's University); Hongfei Sun (Queen's University); Chenggang Zhou (University of Waterloo)
    Abstract: The effects of households' indebtedness on their house-selling decisions are studied in a dynamic equilibrium model with search in the housing market and defaultable long-term mortgages. In equilibrium, both sellers' asking prices and time-to-sell increase with the relative size of their outstanding mortgages. In turn, the liquidity of the housing market associated with time-to-sell determines the mortgage standards of competitive lenders, measured by the maximum loan-to-value (LTV) ratio offered at origination. Calibrated to the U.S. economy, the model generates, as observed, positive correlations over time between house prices and LTV's at origination and across sellers among asking prices, time-to-sell, and LTV's outstanding.
    Keywords: Housing, Mortgages, Foreclosures, Directed Search, Liquidity, Block Recursive Equilibrium
    JEL: E30 G21 R10 R31
    Date: 2016–06
  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: Loan loss provisioning; Impairments; Financial institutions; Supervision; Crisis
    JEL: G01 G21 G32
    Date: 2016–05
  9. By: F. Vinas
    Abstract: Most studies analyzing the transmission of financial shocks to the real economy fail to uncover real effects at firm level. Taking into account banks' business models, this article attempts to fix that issue. Two banking models are considered: traditional and universal banks, the latter providing sophisticated financial services (market-making on derivatives, management of large commitments). Relying on a unique database on credits, banks and firms covering more than 5,000 firms over 2004-2009, the paper shows that in period of high liquidity, both models have a similar credit supply, but in liquidity crisis, universal banks had a significantly lower credit supply, contrary to traditional banks, leading to real effects on firm’s investment.
    Keywords: Crisis, Retail Bank, Universal Bank, Firm, Credit, Credit Line, Maturity, Long-Term Credit, Short-Term Credit, Liquidity, Investment.
    JEL: E22 E51 G01 G21 G24
    Date: 2016
  10. By: Lokman, Azarahiah; Masih, Mansur
    Abstract: SMEs have been recognized as an important engine for driving economic growth and job creation both in developed and developing countries. However, there is concern that financial constraint is impeding growth in these SMEs. Bank is a major source of SME financing in most countries. In Malaysia, banks provide 90% of total financing to SMEs (SME Annual Report, 2014/15). Focusing on three aspects; the macroeconomic environment, demand for large enterprise loans and property prices, this study aims to find out the effect of these factors on banks’ willingness to lend to SMEs and which of these three is most influential. Using ARDL approach applied to Malaysian quarterly data for the period from 2003Q2 to 2015Q4, the study finds macroeconomic environment significantly influences banks’ willingness to lend to SMEs. Thus, policy makers have a tall order of creating and maintaining a healthy macroeconomic environment in an attempt to improve banks’ willingness to lend to SMEs. The finding that property prices also play a role in influencing banks’ willingness to lend to SMEs appears to suggest banks’ dependency on property as collateral for SME financing. Thus, policy makers should continue to develop and improve SME financing schemes that encourages banks’ participation in financing SMEs with potential but lacks collateral.
    Keywords: SME lending, SME financing, bank lending, ARDL
    JEL: C22 C58 G21
    Date: 2016–06–19
  11. By: Ari, Anil
    Abstract: In European countries recently hit by a sovereign debt crisis, the share of domestic sovereign debt held by the national banking system has sharply increased, raising issues in their economic and financial resilience, as well as in policy design. This paper examines these issues by analyzing the banking equilibrium in a model with optimizing banks and depositors. To the extent that sovereign default causes bank losses also independently of their holding of domestic government bonds, under-capitalized banks have an incentive to gamble on these bonds. The optimal reaction by depositors to insolvency risk imposes discipline, but also leaves the economy susceptible to self-fulfilling shifts in sentiments, where sovereign default also causes a banking crisis. Policy interventions face a trade-off between alleviating funding constraints and strengthening incentives to gamble. Liquidity provision to banks may eliminate the good equilibrium when not targeted. Targeted interventions have the capacity to eliminate adverse equilibria. JEL Classification: E44, E58, F34, G21, H63
    Keywords: bank risk-taking, Eurozone, financial constraints, sovereign debt crises
    Date: 2016–04
  12. By: Hong Ru; Antoinette Schoar
    Abstract: We look at the supply side of the credit card market to analyze the pricing and marketing strategies of credit card offers. First, we show that card issuers target less-educated customers with more steeply back-loaded fees (e.g., lower introductory APRs but higher late and over-limit fees) compared offers made to educated customers. Second, issuers use rewards programs to screen for unobservable borrower types. Conditional on the same borrower type, cards with rewards, such as low introductory APR programs, also have more steeply backloaded fees. In contrast, cards with mileage programs, which are offered mainly to the most-educated consumers, rely much less on back-loaded fees. Finally, using shocks to the credit risk of customers via increases in state-level unemployment insurance, we show that card issuers rely more heavily on back-loaded and hidden fees when customers are less exposed to negative cash flow shocks. These findings are in line with the recent behavioral contract theory literature.
    JEL: G02 G1 G21 G23
    Date: 2016–06

This nep-ban issue is ©2016 by Christian Calmès. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.