nep-ban New Economics Papers
on Banking
Issue of 2016‒08‒07
eleven papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. International Banking and Cross-Border Effects of Regulation: Lessons from Canada By H. Evren Damar; Adi Mordel
  2. Liquidity Management in Banking: What is the Role of Leverage? By Quynh Anh VO
  3. Bank Lending Channel of Transmission of Monetary Policy: Does the Financial Structure of Banks Matter? By Jose E. Gomez-Gonzalez; Ali M. Kutan; Jair N. Ojeda-Joya; María Camila Ortiz
  4. Relationships in the Interbank Market By Jonathan Chiu; Cyril Monnet
  5. Bank Lending Technologies and the Great Trade Collapse: Evidence from EU Micro-data By Giovanni Ferri; Pierluigi Murro
  6. The Determinants of Structural Liquidity in Brazil: what to expect for the NSFR? By Yure Lage Nuic; Cleysson Ribeiro Vieira; Marcos Soares da Silva
  7. Credit Risk and Collateral Demand in a Retail Payment System By Héctor Pérez Saiz; Gabriel Xerri
  8. Banking development, economic structure and income inequality By Alexandra D'Onofrio; Raoul Minetti; Pierluigi Murro
  9. How Central Banks End Crises By Guillermo Ordonez; Gary Gorton
  10. Mortgage Design in an Equilibrium Model of the Housing Market By Timothy McQuade; Arvind Krishnamurthy; Adam Guren
  11. Liquidity Traps and Monetary Policy: Managing a Credit Crunch By Juan Pablo Nicolini

  1. By: H. Evren Damar; Adi Mordel
    Abstract: We study how changes in prudential requirements affect cross-border lending of Canadian banks by utilizing an index that aggregates adjustments in key regulatory instruments across jurisdictions. We show that when a destination country tightens local prudential measures, Canadian banks lend more to that jurisdiction, and the effect is particularly significant when capital requirements are tightened and weaker if banks lend mainly via affiliates. Our evidence also suggests that Canadian banks adjust foreign lending in response to domestic regulatory changes. The results confirm the presence of heterogeneous spillover effects of foreign prudential requirements.
    Keywords: Financial Institutions, Financial stability, Financial system regulation and policies
    JEL: G01 F34 G21
    Date: 2016
  2. By: Quynh Anh VO (University of Zurich)
    Abstract: This paper examines potential impacts of banks' leverage on their incentives to manage their liquidity. We analyse a model where banks control their liquidity risk by managing their liquid asset positions. In the basic framework, a model with a single bank, where the possibility of selling long-term assets when in need of liquidity is not taken into account, we find that the bank chooses to prudently manage its liquidity risk only when its leverage is low. In a model with multiple banks and a secondary market for long-term assets, we find that a banking system where banks are highly leveraged can be prone to liquidity crises. Our model predicts a typical pattern of liquidity crises that is consistent with what was observed during the 2007-2009 crisis.
    Keywords: Leverage, Liquidity Risk, Moral Harzard, Cash-In-The-Market Pricing
    JEL: G21 D82
  3. By: Jose E. Gomez-Gonzalez (Banco de la República de Colombia); Ali M. Kutan; Jair N. Ojeda-Joya (Banco de la República de Colombia); María Camila Ortiz
    Abstract: This paper tests the importance of the financial structure of banks in the bank lending channel of monetary policy transmission in Colombia, using an unbalanced panel of 51 banks for the period of 1996:4-2014:8. We find that an increase in the interbank rate (proxy of the intervention rate) has a response of a drop in the growth of the total loan portfolio of banks. When we breakdown by type of policy, the bank lending channel works better in times of monetary contraction, exhibiting significant reactions from banks with low levels of solvency rather than those with high solvency. In contrast, when the policy is expansionary, the high solvency banks are the only segment exhibiting the presence of the bank lending channel. We discuss the policy implications of findings. Classification JEL: E5, E52, E59, G21
    Keywords: Monetary Policy Transmission, Bank Lending Channel, Bank Financial Structure, Solvency, Heterogeneous Effects, Colombia
    Date: 2016–08
  4. By: Jonathan Chiu; Cyril Monnet
    Abstract: The market for central bank reserves is mainly over-the-counter and exhibits a core-periphery network structure. This paper develops a model of relationship lending in the unsecured interbank market. In equilibrium, a tiered lending network arises endogenously as banks choose to build relationships to insure against liquidity shocks and to economize on the cost to trade in the interbank market. Relationships matter for banks’ bidding strategies at the central bank auction and introduce a relationship premium that can significantly distort the observed overnight rate. For example, it can explain some anomalies in the level of interest rates—namely, that banks sometimes trade above (below) the central bank’s lending (deposit) rate. The model also helps to explain how monetary policy affects the network structure of the interbank market and its functioning, and how the market responds dynamically to an exit from the floor system. We also use the model to discuss the potential effects of bilateral exposure limits on relationship lending.
    Keywords: Interest rates, Monetary policy implementation, Transmission of monetary policy
    JEL: E4 E5
    Date: 2016
  5. By: Giovanni Ferri (LUMSA University); Pierluigi Murro (LUMSA University)
    Abstract: The first wave of the global financial crisis – emanating from the US subprime debacle and the bankruptcy of Lehman – hit Europe in the last part of 2008 and through 2009. Coupled with it was the Great Trade Collapse (GTC), whereby trade crumpled intensely. With banks in a tailspin, credit rationing intensified – as measured in various different ways – particularly for the small and medium sized enterprises (SMEs). The extent of such retrenchment in the supply of credit could reflect not only the worsened general condition of the European banks but also vary at the micro level depending on the lending technologies being used in the firm-main bank rapport. Using the EFIGE database, we try to assess the extent to which differences in the lending technologies affect export and foreign activities in seven EU countries (Austria, France, Germany, Hungary, Italy, Spain and the UK).
    Keywords: Bank-Firm Relationships, Lending Technologies, Trade.
    JEL: G21 D82 F10
    Date: 2016–07
  6. By: Yure Lage Nuic; Cleysson Ribeiro Vieira; Marcos Soares da Silva
    Abstract: This paper empirically investigates the main determinant factors of the new prudential liquidity requirement, the Net Stable Funding Ratio (NSFR), and assesses the possible impacts of its implementation on the Brazilian banking system. To this end, a dynamic panel of 131 financial institutions was estimated for the period between 2008 and 2014. The results indicate that the cost of adjusting the structural liquidity of Brazilian banks is relatively moderate, requiring about eight quarters for a complete absorption of an exogenous shock. Additionally, the results do not indicate that the NSFR has a negative impact on banks’ profitability, as measured by the adjusted return on average assets (ROAA). This suggests a compatibility between lower structural liquidity risk and higher profitability in the long run. Finally, the NSFR presented itself countercyclical, showing its ability to mitigate excessive growth of banking operations during the phase of economic expansion, contributing to the stability of the financial system
    Date: 2016–06
  7. By: Héctor Pérez Saiz; Gabriel Xerri
    Abstract: The recent financial crisis has led to the development of new regulations to control risk in designated payment systems, and the implementation of new credit risk management standards is one of the key issues. In this paper, we study various credit risk management schemes for the Canadian retail payment system (ACSS) that are designed to cover the exposure of a defaulting member. We consider schemes that use a collateral pool calculated using a rolling time window. Our simulations show that the size of the window has a very significant effect on the average level of collateral and its variability day to day, creating an interesting trade-off. Collateral levels and variability may be important for ACSS participants because they could affect the opportunity costs of pledging collateral, and also the costs of managing it over time. Our results contribute to understanding the practical implementation of risk management schemes in the current and future generations of payment systems in Canada.
    Keywords: Econometric and statistical methods, Financial stability, Payment clearing and settlement systems
    JEL: G21 G23 C58
    Date: 2016
  8. By: Alexandra D'Onofrio (ASSONIME); Raoul Minetti (Michigan State University); Pierluigi Murro (LUMSA University)
    Abstract: Using rich data from the Italian local credit markets (provinces), this paper investigates the impact of local banking development on income inequality and the role of the socioeconomic structure in this link. Exploiting the Italian historical banking regulationtoin strument for the local presence of bank branches, we find that local banking development mitigates income inequality and poverty. However, the finance-inequality nexus manifests itself only in relatively advanced areas, suggesting important non-linearities. When we study the structural channels of influence, we obtain evidence that banking development can reduce inequality by affecting geographical mobility and urbanization, while it has modest effects through the development of material infrastructures and human capital.
    Keywords: Income inequality; Financial development; Socio economic structure
    JEL: G21 G38 O15
    Date: 2016–07
  9. By: Guillermo Ordonez (University of Pennsylvania); Gary Gorton (Yale School of Management)
    Abstract: To end a financial crisis, the central bank is to lend freely, against good collateral, at a high rate, according to Bagehot’s Rule. We argue that in theory and in practice there is a missing ingredient to Bagehot’s Rule: secrecy. Re-creating confidence requires that the central bank lend in secret, hiding the identities of the borrowers, to prevent information about individual collateral from being produced and to create an information externality by raising the perceived value of average collateral. Ironically, the participation of “bad†borrowers, with low quality collateral, in the central bank’s lending program is a desirable part of re-creating confidence because it creates stigma. Stigma is critical to sustain secrecy because no borrower wants to reveal his participation in the lending program, and it is limited by the central bank charging a high rate for its loans.
    Date: 2016
  10. By: Timothy McQuade (Stanford University); Arvind Krishnamurthy (Stanford University); Adam Guren (Boston University)
    Abstract: How can mortgages be redesigned or modified in a crisis to reduce housing market volatility, consumption volatility, and default? We answer these questions using a quantitative general equilibrium life cycle model with aggregate shocks in which households have realistic long-term mortgages and a rich set of choices as to whether to prepay, refinance, move, or default, and household and lender decisions aggregate up to determine house prices. The calibrated model is used to quantitatively assess how different mortgage contracts affect housing market volatility, particularly in busts like the Great Recession. In this preliminary draft, we focus on comparing fixed-rate mortgages (FRMs) and adjustable-rate mortgages (ARMs). Although FRMs allow homeowners to increase consumption by locking in a low rate, this effect is swamped by the insurance benefits of ARMs in a crisis. ARMs reduce default and improves consumption smoothing, particularly for young and high LTV homeowners. Quantitatively, in a crisis episode defaults are 50 percent lower with ARMs, and over five years the cumulative consumption-equivalent welfare loss under ARMs is 20 percent of annual consumption. These findings suggest that welfare could be improved dramatically by introducing the insurance features of ARMs into mortgage designs.
    Date: 2016
  11. By: Juan Pablo Nicolini (Minneapolis Fed)
    Abstract: We study a model with heterogeneous producers that face collateral and cash in advance constraints. A tightening of the collateral constraint results in a credit-crunch generated recession that reproduces several features of the financial crisis that unraveled in 2007. The model can suitable be used to study the effects on the main macroeconomic variables and of alternative policies following the credit crunch. The policy implications are in sharp contrast with the prevalent view in most Central Banks, based on the New Keynesian explanation of the liquidity trap.
    Date: 2016

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