nep-ban New Economics Papers
on Banking
Issue of 2016‒08‒14
eight papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Australian prudential regulation before and after the global financial crisis By Peter Docherty; Ron Bird; Timo Henckel; Gordon Menzies
  2. Regulatory Reforms and the Dollar Funding of Global Banks: Evidence from the Impact of Monetary Policy Divergence By Tomoyuki Iida; Takeshi Kimura; Nao Sudo
  3. Modeling Rating Transition Matrices for Wholesale Loan Portfolios By Kit Baum; Soner Tunay; Alper Corlu
  4. Fire-Sale Externalities By Eduardo Dávila; Anton Korinek
  5. Income Rounding and Loan Performance in the Peer-to-Peer Market By Eid, Nourhan; Maltby, Josephine; Talavera, Oleksandr
  6. The role of contracts in improving access to credit in the smallholder livestock sector of Swaziland By Xolile Mamba, Tangetile
  7. Is Optimal Capital-Control Policy Countercyclical In Open-Economy Models With Collateral Constraints? By Stephanie Schmitt-Grohé; Martín Uribe
  8. Finance and Synchronization By Ambrogio Cesa-Bianchi; Jean Imbs; Jumana Saleheen

  1. By: Peter Docherty; Ron Bird; Timo Henckel; Gordon Menzies
    Abstract: This paper reviews the nature of Australian bank prudential regulation before and after the Global Financial Crisis (GFC). It provides a detailed conceptual framework for understanding the functions of banks and deposit-takers, the theory of what can go wrong with the operation of these institutions, and the logic of prudential regulation. It traces developments in Australian prudential regulation from the introduction of the formal capital-based framework in the 1980s to the implementation of the Basel III regime after the GFC. The paper concludes that i) the introduction of the Financial Claims Scheme was a clear and welcome change compared with pre-GFC arrangements; ii) the introduction of the Basel III liquidity regime constituted a more fundamental modification, best characterised as a significant refinement to the riskbased calculation of capital than as a fundamental change to regulatory philosophy; iii) the Australian Prudential Regulation Authority (APRA) had been practising macroprudential regulation well before the GFC even though Australia’s adoption of Basel III’s macroprudential apparatus appears on the surface to constitute a genuine innovation in prudential regulation; and iv) the importance of financial stability as a policy objective and the nature of macroprudential regulation raise questions about the wisdom of having split monetary policy and prudential regulation functions in 1998, and a revisit of this question and a reassessment of institutional structures are called for.
    Keywords: banking, financial crises, prudential regulation, macroprudential supervision
    JEL: G21 G28
    Date: 2016–08
  2. By: Tomoyuki Iida (Bank of Japan); Takeshi Kimura (Bank of Japan); Nao Sudo (Bank of Japan)
    Abstract: Deviations from the covered interest rate parity (CIP), the premium paid to the U.S. dollar (USD) supplier in the foreign exchange swap market, have long attracted the attention of policy makers, since they often accompany a banking crisis. In this paper, we document the emergence of the new drivers of CIP deviations taking the place of banks f creditworthiness and assess their roles. We first provide theoretical evidence to show that monetary policy divergence between the Federal Reserve and other central banks widens CIP deviations, and that regulatory reforms such as stricter leverage ratios raise the sensitivity of CIP deviations to monetary policy divergence by increasing the marginal cost of global banks f USD funding. We then empirically examine whether the data accords with our theory, and find that monetary policy divergence has recently emerged as an important driver that boosts CIP deviation. We also show that regulatory reforms have brought about dual impacts on the global financial system. By increasing the sensitivity of CIP deviations to various shocks, the stricter financial regulations have limited banks f excessive gsearch for yield h activities resulting from monetary policy divergence, and have thereby contributed to financial stability. However, the impact of severely adverse shocks in the asset management sector is amplified by the stricter financial regulations and is transmitted to the FX swap market and beyond, inducing non-U.S. banks to further cut back on their USD-denominated lending.
    Keywords: FX swap market; Monetary policy divergence; Regulatory reform; Financial stability
    JEL: F39 G15 G18
    Date: 2016–08–05
  3. By: Kit Baum (Boston College; DIW Berlin); Soner Tunay (Citizens Financial Group); Alper Corlu (Citizens Financial Group)
    Abstract: Risk analysis of a commercial bank's wholesale loan portfolios involves modeling of the asset quality ratings of each borrower's obligations. This customarily involves transition matrices which capture the probability that a loan's AQ rating will migrate to a higher or lower rating, or transition to the default state. We compare and contrast three approaches for transition matrix modeling: the single factor approach commonly used in the financial industry, an approach based on time-series forecasts of default rates, and an approach based on modeling selected elements of the transition matrix which comprise the most likely outcomes. We find that these two unorthodox approaches both have excellent performance over a sample period encompassing the financial crisis.
    Date: 2016–08–10
  4. By: Eduardo Dávila; Anton Korinek
    Abstract: This paper characterizes the efficiency properties of competitive economies with financial constraints and fire sales. We show that two distinct pecuniary externalities occur in such settings: distributive externalities that arise from incomplete insurance markets and can take any sign; and collateral externalities that arise from price-dependent financial constraints and are conducive to over-borrowing. For both types of externalities, we identify three sufficient statistics that determine optimal taxes on financing and investment decisions to implement constrained efficient allocations. We illustrate how to employ our framework in a number of applications. We highlight how small changes in parameters may cause the sufficient statistics that drive distributive externalities to flip sign, leading to either under- or over-borrowing. We also show that financial amplification is neither necessary nor sufficient to generate inefficient fire-sale externalities.
    JEL: D62 E44 G21 G28
    Date: 2016–07
  5. By: Eid, Nourhan; Maltby, Josephine; Talavera, Oleksandr
    Abstract: This paper uses a unique dataset from Lending Club (LC), the largest online lender in the U.S, to analyze the consequences of income rounding in terms of loans performance. We find that rounding of income by a borrower may indicate a bad outcome for a loan. Borrowers with a rounding tendency are more likely to default and less likely to prepay than borrowers with more accurate income reporting. Furthermore, investors are not compensated for the extra risk associated with rounding. Borrowers who misreport income by means of rounding obtain lower interest rates and larger loans with longer maturity than those who do not round. These results are consistent across various specifications and sub-samples.
    Keywords: Peer-to-Peer (P2P) lending, Rounding, Misreporting, Performance
    JEL: D12 G02 G20
    Date: 2016–08
  6. By: Xolile Mamba, Tangetile
    Abstract: Submitted in partial fulfilment of the requirements for the degree of Master of Science in Agriculture (Agricultural Economics) in the Faculty of Natural and Agricultural Sciences, University of Pretoria. Advisors: Professor Charles Machethe and Dr Nadhem Mtimet (ILRI)
    Keywords: Livestock Production/Industries,
    Date: 2016–07
  7. By: Stephanie Schmitt-Grohé; Martín Uribe
    Abstract: This paper contributes to a literature that studies optimal capital control policy in open economy models with pecuniary externalities due to flow collateral constraints. It shows that the optimal policy calls for capital controls to be lowered during booms and to be increased during recessions. Moreover, in the run-up to a financial crisis optimal capital controls rise as the contraction sets in and reach their highest level at the peak of the crisis. These findings are at odds with the conventional view that capital controls should be tightened during expansions to curb capital inflows and relaxed during contractions to discourage capital flight.
    JEL: E44 F41
    Date: 2016–08
  8. By: Ambrogio Cesa-Bianchi (Bank of England; Centre for Macroeconomics (CFM)); Jean Imbs (Paris School of Economics; Centre for Economic Policy Research (CEPR)); Jumana Saleheen (Bank of England)
    Abstract: In the workhorse model of international real business cycles, financial integration exacerbates the cycle asymmetry created by country-specific supply shocks. The prediction is identical in response to purely common shocks in the same model augmented with simple country heterogeneity (e.g., where depreciation rates or factor shares are different across countries). This happens because common shocks have heterogeneous consequences on the marginal products of capital across countries, which triggers international investment. In the data, filtering out common shocks requires therefore allowing for country-specific loadings. We show that finance and synchronization correlate negatively in response to such common shocks, consistent with previous findings. But finance and synchronization correlate non-negatively, almost always positively, in response to purely country-specific shocks.
    Keywords: Financial linkages, Business cycles synchronization, Contagion, Common shocks, Idiosynchratic shocks
    JEL: E32 F15 F36 G21 G28
    Date: 2016–08

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