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on Banking |
| By: | Matthias EFING (University of Geneva and Swiss Finance Institute); Harald HAU (University of Geneva and Swiss Finance Institute); Patrick KAMPKÖTTER (University of Cologne); Johannes STEINBRECHER (Ifo Institute Branch Dresden) |
| Abstract: | We use payroll data in the Austrian, German, and Swiss banking sector to identify incentive pay in the critical banking segments of treasury/capital market management and investment banking for 67 banks. We document an economically signifi?cant correlation of incentive pay with both the level and volatility of bank trading income?--particularly for the pre-crisis period 2003?-7, in which incentive pay was strongest. This result is robust if we instrument the bonus share in the capital markets divisions with the strength of incentive pay in unrelated bank divisions like retail banking. Moreover, pre-crisis incentive pay appears too strong for an optimal trade-off between trading income and risk, which maximizes the net present value of trading income. Further analyses indicate that the bonus moderation during the crisis has removed excessive pre-crisis incentive pay. |
| Keywords: | Trading Income, Bank Risk, Incentive Pay, Bonus Payments |
| JEL: | G20 G21 D22 |
| URL: | http://d.repec.org/n?u=RePEc:chf:rpseri:rp1455&r=ban |
| By: | Eickmeier, Sandra; Metiu, Norbert; Prieto, Esteban |
| Abstract: | We document that expansionary monetary policy shocks are less effective at stimulating output and investment in periods of high volatility compared to periods of low volatility, using a regime-switching vector autoregression. Exogenous policy changes are identified by adapting an external instruments approach to the non-linear model. The lower effectiveness of monetary policy can be linked to weaker responses of credit costs, suggesting a financial accelerator mechanism that is weaker in high volatility periods. To rationalize our robust empirical results, we use a macroeconomic model in which financial intermediaries endogenously choose their capital structure. In the model, the leverage choice of banks depends on the volatility of aggregate shocks. In low volatility periods, financial intermediaries lever up, which makes their balance sheets more sensitive to aggregate shocks and the financial accelerator more effective. On the contrary, in high volatility periods, banks decrease leverage, which renders the financial accelerator less effective; this in turn decreases the ability of monetary policy to improve funding conditions and credit supply, and thereby to stimulate the economy. Hence, we provide a novel explanation for the non-linear effects of monetary stimuli observed in the data, linking the effectiveness of monetary policy to the procyclicality of leverage. |
| Keywords: | monetary policy,credit spread,non-linearity,intermediary leverage,financial accelerator |
| JEL: | C32 E44 E52 |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:iwhdps:iwh-19-16&r=ban |
| By: | Chunshuo LI (Zhong Qin Wan Xin Certified Public Accountants); Steven ONGENA (University of Zurich, Swiss Finance Institute and CEPR) |
| Abstract: | The impact of U.S. bank loan announcements on the stock prices of the corporate borrowers has been decreasing during the two last decades with estimated two-day cumulative abnormal returns slipping from almost 200 basis points in the beginning of the 1980s to close to zero by the turn of the Century. We estimate excess returns before and after the onset of the most recent financial crisis. We find that while prior to August 2007 returns were indeed close to zero, afterwards returns jump back up to around 200 basis points. We surmise that in a booming credit market the certification of corporate borrowers by banks started to play a lesser role, while during the crisis the banks’ role was revitalized. Consistent with this interpretation we find that after August 2007 excess returns increase especially for loans with a longer maturity, and for smaller, levered, less profitable or lowly rated firms. |
| Keywords: | syndicated loans, borrower’s equity value, asymmetric information, event study, crisis, U.S. |
| JEL: | G21 G32 H11 D80 |
| URL: | http://d.repec.org/n?u=RePEc:chf:rpseri:rp1426&r=ban |
| By: | Matthias EFFING (University of Geneva and Swiss Finance Institute) |
| Abstract: | This paper uses data about bond holdings of banks domiciled in Germany to analyze adverse selection in the structured debt market. Within a group of asset-backed securities (ABS) with the same Basel II risk weight, banks tend to buy the ABS with the highest yield spreads, the most inflated credit ratings, and the worst collateral. The effect is more pronounced for banks operating with capital adequacy ratios close to the regulatory minimum requirement. The evidence suggests that regulatory arbitrage considerations influence the selection of ABS and that ratings inflation reinforces regulatory arbitrage as Basel II risk weights depend mechanically on credit ratings. |
| Keywords: | Regulatory arbitrage, asset-backed securities, risk-taking, ratings inflation |
| JEL: | G01 G21 G24 G28 |
| URL: | http://d.repec.org/n?u=RePEc:chf:rpseri:rp1465&r=ban |
| By: | Blaseg, Daniel; Koetter, Michael |
| Abstract: | Does bank instability push borrowers to use crowdfunding as a source of external finance? We identify stressed banks and link them to a unique, manually constructed sample of 157 new ventures seeking equity crowdfunding. The sample comprises projects from all German equity crowdfunding platforms since 2011, which we compare with 200 ventures that do not use crowdfunding. Crowdfunding is significantly more likely for new ventures that interact with stressed banks. Innovative funding is thus particularly relevant when conventional financiers are facing crises. But crowdfunded ventures are generally also more opaque and risky than new ventures that do not use crowdfunding. |
| Keywords: | equity crowdfunding,credit crunch,bank stress |
| JEL: | G01 G21 G30 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:iwhdps:iwh-8-15&r=ban |
| By: | Moritz Schularick (University of Bonn); Alan Taylor (Department of Economics & Graduate School of Management); Oscar Jorda (Federal Reserve Bank of San Francisco an) |
| Abstract: | This paper unveils a new resource for macroeconomic research: a long-run dataset covering disaggregated bank credit for 17 advanced economies since 1870. The new data show that the share of mortgages on banks’ balance sheets doubled in the course of the 20th century, driven by a sharp rise of mortgage lending to households. Household debt to asset ratios have risen substantially in many countries. Financial stability risks have been increasingly linked to real estate lending booms which are typically followed by deeper recessions and slower recoveries. Housing finance has come to play a central role in the modern macroeconomy. |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed016:185&r=ban |
| By: | Mario Ravioli (Universitat Rovira i Virgili) |
| Abstract: | In 2012, Argentina passed a regulation imposing a minimum level of commercial lending on large banks. The regulation was meant to boost lending to SMEs in less favored regions via improved credit availability and capped interest rates, with the ultimate goal of spurring private investment. This paper studies two outcomes of the aforementioned regulation. First, using a difference-in- difference setup, it studies the degree to which this regulation fostered credit supplied by those banks affected by the new rules, and the speed of loan creation.Second, it investigates the performance of loans created as a result of the regulation. Overall, the paper highlights the potential bright and dark sides of imposing supply of banking services and products on private banks. |
| Keywords: | Interest rate caps, Priority lending schemes, Directed credit, SMEs |
| JEL: | G28 G21 E58 |
| URL: | http://d.repec.org/n?u=RePEc:sek:iacpro:4006626&r=ban |
| By: | Kun-Li Lin (Feng Chia University) |
| Abstract: | This paper examines the relationship between income diversification and bank efficiency in across 83 countries over the period 2003–2012. We also evaluate how ownership structure varies the impact of bank diversification on cost efficiency. Using stochastic frontier approach to estimate bank’s cost efficiency, we find the evidence that increased diversification tend to improve bank efficiency, and government-controlled banks with fewer volatile income sources are likely to have lower efficiency of income diversification. Our results also reveal that more diversified foreign-controlled banks tend to be less efficient in developed countries, while increased foreign ownership of banks appears to improve the diversification benefits in developing countries after the financial crisis. Our findings highlight the implications of bank income diversification and ownership for efficiency and are relevant to bank regulators who are considering additional regulations on bank efficiency. |
| Keywords: | Income diversification, ownership structure, efficiency, banking |
| URL: | http://d.repec.org/n?u=RePEc:sek:iacpro:4006061&r=ban |
| By: | Giuliana Birindelli (Department of Management and Business Administration, University of Chieti-Pescara, Italy); Paola Ferretti (Department of Economics and Management, University of Pisa, Italy); Marco Savioli (Department of Economics, University of Bologna, Italy; The Rimini Centre for Economic Analysis, Italy) |
| Abstract: | Based on a sample of eurozone banks classified into six business models over the period 2001–2014, this paper aims to investigate whether and how strongly the Basel 3 requirements affect differently the stability of banks working under different business models. Our findings show that, irrespective of the business model, the most positive driver of banks' stability is the leverage ratio, followed by the net stable funding ratio. The interactions with banks' business models allow us to highlight significant differences in the coefficients of the Basel 3 variables. In particular, savings banks are predicted to gain the greatest advantage from our set of identified reform measures in banking prudential regulation; on the contrary, commercial and investment banks are the least advantaged. Thus, our findings stress the need to revise the current “one-size-fits-all” prudential framework. |
| Keywords: | Basel 3, banks' business model, financial stability |
| JEL: | G21 G28 |
| Date: | 2016–07 |
| URL: | http://d.repec.org/n?u=RePEc:rim:rimwps:16-20&r=ban |
| By: | Cycon, Lisa; Koetter, Michael |
| Abstract: | With a unique loan portfolio maintained by a top-20 universal bank in Germany, this study tests whether unconventional monetary policy by the European Central Bank (ECB) reduced corporate borrowing costs. We decompose corporate lending rates into refinancing costs, as determined by money markets, and markups that the bank is able to charge its customers in regional markets. This decomposition reveals how banks transmit monetary policy within their organizations. To identify policy effects on loan rate components, we exploit the co-existence of eurozone-wide security purchase programs and regional fiscal policies at the district level. ECB purchase programs reduced refinancing costs significantly, even in an economy not specifically targeted for sovereign debt stress relief, but not loan rates themselves. However, asset purchases mitigated those loan price hikes due to additional credit demand stimulated by regional tax policy and enabled the bank to realize larger economic margins. |
| Keywords: | unconventional monetary policy,asset purchase programs,ECB,interest rate channel,internal capital markets |
| JEL: | G01 G21 E42 E43 E52 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:iwhdps:iwh-9-15&r=ban |
| By: | Colonnello, Stefano; Efing, Matthias; Zucchi, Francesca |
| Abstract: | Credit derivatives give creditors the possibility to transfer debt cash flow rights to other market participants while retaining control rights. We use the market for credit default swaps (CDSs) as a laboratory to show that the real effects of such debt unbundling crucially hinge on shareholder bargaining power. We find that creditors buy more CDS protection when facing strong shareholders to secure themselves a valuable outside option in distressed renegotiations. After the start of CDS trading, the distance-to-default, investment, and market value of firms with powerful shareholders drop by 7.9%, 7%, and 8.8% compared to other firms. |
| Keywords: | debt decoupling,empty creditors,credit default swaps,shareholder bargaining power,real effects |
| JEL: | G32 G33 G34 |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:iwhdps:iwh-10-16&r=ban |
| By: | Gropp, Reint E.; Park, Kyounghoon |
| Abstract: | In the wake of the 2008/2009 financial crisis, a number of policy reports (Vickers, Liikanen, Volcker) proposed to separate investment banking from commercial banking to increase financial stability. This paper empirically examines one theoretical justification for these proposals, namely attention distortion under multiple tasks as in Holmstrom and Milgrom (1991). Universal banks can be viewed as combining two different tasks (investment banking and commercial banking) in the same organization. We estimate pay-performance sensitivities for different segments within universal banks and for pure investment and commercial banks. We show that the pay-performance sensitivity is higher in investment banking than in commercial banking, no matter whether it is organized as part of a universal bank or in a separate institution. Next, the paper shows that relative pay-performance sensitivities of investment and commercial banking are negatively related to the quality of the loan portfolio in universal banks. Depending on the specification, we obtain a reduction in problem loans when investment banking is removed from commercial banks of up to 12 percent. We interpret the evidence to imply that the higher pay-performance sensitivity in investment banking directs the attention of managers away from commercial banking within universal banks, consistent with Holmstrom and Milgrom (1991). Separation of investment banking and commercial banking may indeed be associated with a reduction in risk in commercial banking. |
| Keywords: | multiple tasks,universal bank,bank holding company,incentive pay,loan performance |
| JEL: | G21 G24 G29 |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:iwhdps:iwh-2-16&r=ban |
| By: | Adrian, Tobias; Liang, Nellie |
| Abstract: | We review a growing literature that incorporates endogenous risk premiums and risk taking in the conduct of monetary policy. Accommodative policy can create an inter-temporal tradeoff between improving current financial conditions at a cost of increasing future financial vulnerabilities. In the U.S., structural and cyclical macroprudential tools to reduce vulnerabilities at banks are being implemented, but may not be sufficient because activities can migrate and there are limited tools for nonbank intermediaries or for borrowers. While monetary policy itself can influence vulnerabilities, its efficacy as a tool will depend on the costs of tighter policy on activity and inflation. We highlight how adding a risk-taking channel to traditional transmission channels could significantly alter a cost-benefit calculation for using monetary policy, and that considering risks to financial stability—as downside risks to employment--is consistent with the dual mandate. |
| Keywords: | financial conditions; financial stability; leaning against the wind; macroprudential policy; monetary policy rules; monetary policy transmission; risk taking channel of monetary policy |
| Date: | 2016–07 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:11394&r=ban |
| By: | Buch, Claudia M.; Koetter, Michael; Ohls, Jana |
| Abstract: | We identify the determinants of all German banks' sovereign debt exposures between 2005 and 2013 and test for the implications of these exposures for bank risk. Larger, more capital market affine, and less capitalised banks hold more sovereign bonds. Around 15% of all German banks never hold sovereign bonds during the sample period. The sensitivity of sovereign bond holdings by banks to eurozone membership and inflation increased significantly since the collapse of Lehman Brothers. Since the outbreak of the sovereign debt crisis, banks prefer sovereigns with lower debt ratios and lower bond yields. Finally, we find that riskiness of government bond holdings affects bank risk only since 2010.This confirms the existence of a nexus between government debt and bank risk. |
| Keywords: | sovereign debt,bank-level heterogeneity,bank risk |
| JEL: | G01 G11 G21 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:iwhdps:iwh-12-15&r=ban |
| By: | Dobridge, Christine L. |
| Abstract: | I provide empirical evidence that the effect of high-cost credit access on household material well-being depends on if a household is experiencing temporary financial distress. Using detailed data on household consumption and location, as well as geographic variation in access to high cost payday loans over time, I find that payday credit access improves wellbeing for households in distress by helping them smooth consumption. In periods of temporary financial distress—after extreme weather events like hurricanes and blizzards—I find that payday loan access mitigates declines in spending on food, mortgage payments, and home repairs. In an average period, however, I find that access to payday credit reduces well-being. Loan access reduces spending on nondurable goods overall and reduces housing- and food-related spending particularly. These results highlight the state dependent nature of the effects of high-cost credit as well as the consumption-smoothing role that it plays for households with limited access to other forms of credit. |
| Keywords: | Household finance ; Consumption ; Consumer credit ; Payday loans |
| JEL: | D14 E21 G23 |
| Date: | 2016–07 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2016-56&r=ban |
| By: | Fabio Schiantarelli (Boston College and IZA); Massimiliano Stacchini (Bank of Italy); Philip Strahan (Boston College and NBER) |
| Abstract: | Exposure to liquidity risk makes banks vulnerable to runs from both depositors and from wholesale, short-term investors. This paper shows empirically that banks are also vulnerable to run-like behaviour from borrowers who delay their loan repayments (default). Firms in Italy defaulted more against banks with high levels of past losses. We control for borrower fundamentals with firm-quarter fixed effects; thus, identification comes from a firm’s choice to default against one bank versus another, depending on their health. This ‘selective’ default increases where legal enforcement is weak. Poor enforcement can therefore create a systematic loan risk by encouraging borrowers to default en masse once the continuation value of their bank relationships comes into doubt. |
| Keywords: | bank lending, financial distress |
| JEL: | G2 |
| Date: | 2016–07 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:wptemi:td_1072_16&r=ban |
| By: | Kale, Deeksha |
| Abstract: | This paper studies the impact of a policy package aimed at increasing access to bank credit of small firms at the national level in India. In 2006, the Government of India expanded the pool of small firms eligible for directed credit under a nation-wide credit program, by changing the criterion that determined the small business status of firms across all industries. Exploiting the expansion in the pool of small firms eligible for directed lending, I analyze the crowding out of previously eligible firms by recently eligible firms. I also study the growth in credit experienced by small firms from sources other than bank credit. I find that recently eligible firms not only disproportionately increased their bank credit stock relative to previously eligible firms, but also increased borrowings from other sources of credit. In other words, I find no evidence of substitution of other forms of credit with bank loans for recently eligible firms. |
| Keywords: | Banking; Government Policy; Credit Access |
| JEL: | G1 G18 G2 |
| Date: | 2016–07–12 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:72510&r=ban |
| By: | Martin Hellwig (Max Planck Institute for Research on Collective Goods) |
| Abstract: | The paper discusses the role of risk weighting in the determination of minimum requirements for eligible bail-in-able liabilities of banks (MREL), i.e. liabilities that are not exempt from the bail-in tool in bank resolution and that can be written down or converted into equity if losses on assets exceed the available equity and such bailing-in is required to re-establish bank solvency so as to provide a basis for maintaining systemically important operations in resolution. The paper begins with a general discussion of the reasons for introducing bank resolution as a special procedure outside of insolvency law, of the reasons for having the bail-in tool and of the frictions that may stand in the way of successful and frictionless resolution. This discussion emphasizes the importance of having sufficient bail-in-able liabilities available; in contrast, for large institutions that have access to bond markets, the social costs of such requirements are small (unlike the private costs to the banks themselves). However, neither risk weighted nor total assets provide proper guidance for determining MREL. Risk-weighting suffers from a lack of a proper statistical basis and a certain manipulability. Moreover, the risk weighting that is used for capital regulation is not well suited for determining MREL; whereas capital regulation focuses on the probability of bad results, MREL is concerned with the extent of losses conditional on results being bad. “Total assets” suffer from not truly representing total assets because various rules, e.g. for netting, allow banks to keep certain assets and liabilities off their balance sheets. |
| Date: | 2016–07 |
| URL: | http://d.repec.org/n?u=RePEc:mpg:wpaper:2016_12&r=ban |
| By: | Kogler, Michael |
| Abstract: | Several European countries have recently introduced levies on bank liabilities to internalise the fiscal costs of banking crises. This paper studies the tax incidence: Building on the Monti-Klein model, we predict that banks shift the burden to borrowers by raising lending rates and that deposit rates may increase as deposits are partly exempt. Bank-level evidence for 23 EU countries in the period 2007-2013 implies a moderate increase in lending and deposit rates and net interest margins. Market characteristics and capital structure influence the magnitude: The lending rate strongly increases in concentrated markets, whereas the pass-through is weak for well-capitalised banks. |
| Keywords: | Taxation of banks, Tax Incidence, Pigovian taxes |
| JEL: | G21 G28 H22 |
| Date: | 2016–04 |
| URL: | http://d.repec.org/n?u=RePEc:usg:econwp:2016:06&r=ban |
| By: | Ioannis G. Samantas (University of Athens) |
| Abstract: | This study examines whether the effect of market structure on financial stability is persistent, subject to current regulation and supervision policies. Extreme Bounds Analysis (EBA) is employed over a sample of 2450 banks operating within the EU-27 during the period 2003-2010. The results show an inverse U-shaped association between market power and soundness and a stabilizing tendency in markets of less concentration, where policies lean towards limited restrictions on non-interest income, official intervention in bank management and book transparency. Regulation significantly contributes as a stability channel through which bank competition policy is optimally designed. |
| Keywords: | Market power; financial stability; regulation; extreme bound analysis |
| JEL: | D21 D4 L11 L51 |
| Date: | 2016–07 |
| URL: | http://d.repec.org/n?u=RePEc:bog:wpaper:209&r=ban |
| By: | Fabio BRAGGION (Tilburg University); Mintra DWARKASING (Tilburg University); Steven ONGENA (University of Zurich, Swiss Finance Institute and CEPR) |
| Abstract: | We empirically test hypotheses emanating from recent theory predicting that household wealth inequality may determine entrepreneurial dynamism and corporate financing. We construct two measures of wealth inequality at the US MSA/county level: One based on the distribution of financial rents in 2004 and another one related to the distribution of land holdings in the late Nineteenth century. Our results suggest that in more unequal areas business creation, especially of high-tech ventures, is lower and more likely to be financed via bank and family financing. Wealth inequality seemingly also affects local institutions such as banks, schools, and courts. OR from paper: We empirically test hypotheses emanating from recent theory showing how household wealth inequality may determine corporate financing and entrepreneurial dynamism. We employ a historic measure of wealth inequality, i.e., the distribution of land holdings at the US county level in 1890, and saturate specifications with comprehensive sets of fixed effects and characteristics. The estimated coefficients suggest that county-level wealth inequality robustly increases sole-ownership and the proportion of equity, family and bank financing, yet decreases angel and venture capital financing. Inequality further reduces the likelihood local firms are high-tech and depresses various other measures of entrepreneurial dynamism. |
| Keywords: | inequality, corporate financing, entrepreneurship |
| JEL: | D31 G3 L26 |
| URL: | http://d.repec.org/n?u=RePEc:chf:rpseri:rp1427&r=ban |
| By: | Krause, Thomas; Sondershaus, Talina; Tonzer, Lena |
| Abstract: | We construct a novel dataset to measure banks' complexity and relate it to banks' riskiness. The sample covers stock listed Euro area banks from 2007 to 2014. Bank stability is significantly affected by complexity, whereas the direction of the effect differs across complexity measures. This heterogeneity advises against the use of a single complexity measure when evaluating the implications of bank complexity. |
| Keywords: | bank risk,complexity,globalization |
| JEL: | G01 G20 G33 |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:iwhdps:iwh-17-16&r=ban |
| By: | Gropp, Reint E.; Saadi, Vahid |
| Abstract: | In this note we document political lending cycles for German savings banks. We find that savings banks on average increase supply of commercial loans by €7.6 million in the year of a local election in their respective county or municipality (Kommunalwahl). For all savings banks combined this amounts to €3.4 billion (0.4% of total credit supply in Germany in a complete electoral cycle) more credit in election years. Credit growth at savings banks increases by 0.7 percentage points, which corresponds to a 40% increase relative to non-election years. Consistent with this result, we also find that the performance of the savings banks follows the same electoral cycle. The loans that the savings banks generate during election years perform worse in the first three years of maturity and loan losses tend to be realized in the middle of the election cycle. |
| Keywords: | German savings banks,municipality |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:iwhonl:112015&r=ban |
| By: | Eichler, Stefan; Lähner, Tom; Noth, Felix |
| Abstract: | This study analyzes if regionally affiliated Federal Open Market Committee (FOMC) members take their districts' regional banking sector instability into account when they vote. Considering the period from 1978 to 2010, we find that a deterioration in a district's bank health increases the probability that this district's representative in the FOMC votes to ease interest rates. According to member-specific characteristics, the effect of regional banking sector instability on FOMC voting behavior is most pronounced for Bank presidents (as opposed to governors) and FOMC members who have career backgrounds in the financial industry or who represent a district with a large banking sector. |
| Keywords: | FOMC voting,regional banking sector instability,lobbying |
| JEL: | E43 E52 E58 G21 |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:iwhdps:iwh-15-16&r=ban |
| By: | Eichler, Stefan; Littke, Helge; Tonzer, Lena |
| Abstract: | We analyze the effect of central bank transparency on cross-border bank activities. Based on a panel gravity model for cross-border bank claims for 21 home and 47 destination countries from 1998 to 2010, we find strong empirical evidence that a rise in central bank transparency in the destination country, on average, increases cross-border claims. Using interaction models, we find that the positive effect of central bank transparency on cross-border claims is only significant if the central bank is politically independent. Central bank transparency and credibility are thus considered complements by banks investing abroad. |
| Keywords: | central bank transparency,cross-border banking,gravity model |
| JEL: | E58 F30 G15 |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:iwhdps:iwh-16-16&r=ban |
| By: | Tao Zha (Federal Reserve Bank of Atlanta); Jue Ren (Emory University); Kaiji Chen (Emory University) |
| Abstract: | We argue that China's rising shadow banking was inextricably linked to potential \emph{balance-sheet} risks in the banking system. We substantiate this argument with three didactic findings: (1) commercial banks in general were prone to engage in channeling \emph{risky} entrusted loans; (2) shadow banking through entrusted lending masked small banks' exposure to balance-sheet risks; and (3) two well-intended regulations and institutional asymmetry between large and small banks combined to give small banks an incentive to exploit regulatory arbitrage by bringing off-balance-sheet risks into the balance sheet. We reveal these findings by constructing a comprehensive transaction-based loan dataset, providing robust empirical evidence, and developing a theoretical framework to explain the linkages between monetary policy, shadow banking, and traditional banking (the banking system) in China |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed016:82&r=ban |
| By: | Sebastian C. MOENNINGHOFF (WHU - Otto Beisheim School of Management); Steven ONGENA (University of Zurich); Axel WIEANDT (WHU - Otto Beisheim School of Management) |
| Abstract: | This paper provides evidence on how the new international regulation on Global Systemically Important Banks (G-SIBs) impacts the market value of large banks. We analyze the stock price reactions for the 300 largest banks from 52 countries across 12 relevant regulatory announcement and designation events. We observe that the new regulation negatively affects the value of the newly regulated banks, yet that the official designation of banks as “globally systemically important” itself has a partly offsetting positive impact. A cross-sectional analysis of the valuation effects with respect to, for example, government ownership of banks supports the view that the positive reaction to these designations can be attributed to a Too-Big-to-Fail (TBTF) perception by investors. The fact that these valuation effects emerge from a regulation specifically designed to reduce the costs and risks of Too-Big-to-Fail demonstrates the inherently paradoxical nature of the new regulation. These results further suggest that even though the individual components of the regulation have been effective, revealing the identities of G-SIBs eliminated ambiguity about the presence of government guarantees, and thereby may have run counter to the regulators’ intent to contain the effects of TBTF. |
| Keywords: | TBTF, Too Big to Fail, G-SIB, Global Systemically Important Bank, Bank Regulation, Unintended Consequences |
| JEL: | G20 G21 G24 G28 |
| URL: | http://d.repec.org/n?u=RePEc:chf:rpseri:rp1433&r=ban |
| By: | Mikhed, Vyacheslav (Federal Reserve Bank of Philadelphia); Scholnick, Barry (University of Alberta) |
| Abstract: | We examine how household balance sheets and income statements interact to affect bankruptcy decisions following an exogenous income shock. For identification, we exploit government payments in one but not any other Canadian province that varied exogenously based on family size. Receiving a larger income shock from the payment (relative to household income) reduces the count of bankruptcies, with fewer remaining filers having higher net balance sheet benefits of bankruptcy (unsecured debt discharged minus liquidated assets forgone). Receiving an income shock thus causes households that would receive lower net balance sheet benefits under bankruptcy law to select out of bankruptcy. |
| Keywords: | Household Bankruptcy; Income Shocks; Balance Sheet |
| JEL: | D41 H31 |
| Date: | 2016–07–15 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedpwp:16-19&r=ban |
| By: | Kolm, Julian; Laux, Christian; Lóránth, Gyöngyi |
| Abstract: | We analyze the limits of regulating bank CEO compensation to reduce risk shifting in the presence of an active board that retains the right to approve new investment strategies. Compensation regulation prevents overinvestment in strategies that increase risk, but it is ineffective in preventing underinvestment in strategies that reduce risk. The regulator optimally combines compensation and capital regulations. In contrast, if the board delegates the choice of strategy to the CEO, compensation regulation is sufficient to prevent both types of risk shifting. Compensation regulation increases shareholders' incentives to implement an active board, which reduces the effectiveness of compensation regulation. |
| Keywords: | Bank Regulation; Executive Compensation; Corporate Governance |
| JEL: | G21 G28 |
| Date: | 2016–07 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:11380&r=ban |
| By: | Jochen KRAUSE (University of Zurich); Marc S. PAOLELLA (University of Zurich and Swiss Finance Institute) |
| Abstract: | A fast method is developed for value at risk and expected shortfall prediction for univariate asset return time series exhibiting leptokurtosis, asymmetry, and conditional heteroskedasticity. It is based on a GARCH-type process driven by noncentral t innovations. While the method involves use of several shortcuts for speed, it performs admirably in terms of accuracy, and actually outperforms highly competitive models. |
| Keywords: | GARCH, Mixture-Normal-GARCH, Noncentral t, Table Lookup |
| JEL: | C51 C53 G11 G17 |
| URL: | http://d.repec.org/n?u=RePEc:chf:rpseri:rp1440&r=ban |
| By: | Marc ARNOLD (University of St. Gallen); Dustin SCHUETTE (University of St. Gallen); Alexander WAGNER (University of Zurich and Swiss Finance Institute) |
| Abstract: | This paper analyzes the pricing of issuer credit risk in retail structured products. After the default of Lehman Brothers, investors are compensated for the counterparty risk they bear if the products are not constructed to provide an implicit "credit enhancement", i.e., if they do not feature a sufficiently high correlation of the promised payout and the issuer's financial health. Before the financial crisis, and during the crisis up to the default of Lehman Brothers, investors are not compensated for credit risk. As the default of Lehman Brothers has arguably sharpened investors' attention for counterparty risk, these results suggest that whether issuers compensate investors for a certain risk does not only depend on the level but on investors' awareness for the corresponding risk. Our findings have regulatory and policy implications. |
| Keywords: | Structured products, credit risk, risk awareness |
| JEL: | D8 G34 M52 |
| URL: | http://d.repec.org/n?u=RePEc:chf:rpseri:rp1424&r=ban |
| By: | Aleksander Berentsen (University of Basel) |
| Abstract: | Understanding money demand is important for our comprehension of macroeconomics and monetary policy. Its instability has made this a challenge. Common explications for the instability are financial regulations and financial innovations that shift the money demand function. We provide a complementary view by showing that a model where borrowers have limited commitment can significantly improve the fit between the theoretical money demand function and the data. Limited commitment can also explain why the ratio of credit to M1 is currently so low, despite that nominal interest rates are at their lowest recorded levels. In a low interest rate environment, incentives to default are high and so credit constraints bind tightly, which depresses credit activities. |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed016:104&r=ban |