nep-ban New Economics Papers
on Banking
Issue of 2016‒08‒21
fourteen papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Unsecured and Secured Funding By Ranaldo, Angelo; Wrampelmeyer, Jan
  2. How does P2P lending fit into the consumer credit market? By de Roure, Calebe; Pelizzon, Loriana; Tasca, Paolo
  3. Capturing information contagion in a stress-testing framework By Anand, Kartik; Gauthier, Céline; Gai, Prasanna S.; Souissi, Moez
  4. Lending Conditions and Loan Default: What Can We Learn From UK Buy-to-Let Loans? By Kelly, Robert; O'Toole, Conor
  5. Bank enforcement actions and the terms of lending By Deli, Yota; Delis, Manthos D.; Hasan, Iftekhar; Liu, Liuling
  6. Do banks extract informational rents through collateral? By Bing Xu; Adrian van Rixtel; Honglin Wang
  7. Interest on Reserves, Interbank Lending, and Monetary Policy By Stephen Williamson
  8. Mortgage modifications and loan performance By Danne, Christian; McGuinness, Anne
  9. Did the Founding of the Federal Reserve Affect the Vulnerability of the Interbank System to Systemic Risk? By Carlson, Mark A.; Wheelock, David C.
  10. Macroprudential Measures and Irish Mortgage Lending: A Review of Recent Data By Keenan, Enda; Kinghan, Christina; McCarthy, Yvonne; O'Toole, Conor
  11. International banking and cross-border effects of regulation: Lessons from Germany By Ohls, Jana; Pramor, Marcus; Tonzer, Lena
  12. An Analysis of Consumer Debt Restructuring Policies By Joao Cocco; Nuno Clara
  13. Tracking and stress-testing U.S. household leverage By Fuster, Andreas; Guttman-Kenney, Benedict; Haughwout, Andrew F.
  14. The Consequences of Gentrification: A Focus on Residents’ Financial Health in Philadelphia By Ding, Lei; Hwang, Jackelyn

  1. By: Ranaldo, Angelo; Wrampelmeyer, Jan
    Abstract: We provide the first joint analysis of the secured and unsecured money markets of the euro area using bank-level data. After the Lehman crisis, two important substitution mechanisms emerge: banks with higher credit risk offset reductions of unsecured borrowing with secured funding. Riskier banks replace unsecured lending by granting more secured loans. However, high leverage and reliance on short-term funding hamper banks' ability to substitute. Moreover, banks enduring money market strains contribute to the credit crunch. Overall, our findings suggest that the secured segment of the euro money market contributes to financial stability, mitigating systemic effects such as short-term funding strains and contagion.
    Keywords: Money markets, bank funding, short-term debt, financial crisis, counterparty risk, liquidity
    JEL: E42 E43 E58 G01 G21 G28
    Date: 2016
  2. By: de Roure, Calebe; Pelizzon, Loriana; Tasca, Paolo
    Abstract: Why do retail consumers look for P2P financial intermediation? Are internetbased peer-to-peer (P2P) loans a substitute for or a complement to bank loans? In this study we answer these questions by comparing P2P lending with the nonconstruction consumer credit market in Germany. We show that P2P lending is servicing a slice of the consumer credit market neglected by banks, namely highrisk and small-sized loans. Nevertheless, when accounting for the risk differential, interest rates are very similar. Our conclusion is that P2P lending is substituting the banking sector for high-risk consumer loans since banks are unwilling or unable to supply this slice of the market. Our study serves to show where the institutionalization of credit provision has left a slice of the market unsupplied.
    Keywords: P2P lending,financial intermediation,consumer credit
    JEL: D40 G21 G23 L86
    Date: 2016
  3. By: Anand, Kartik; Gauthier, Céline; Gai, Prasanna S.; Souissi, Moez
    Abstract: We develop an operational model of information contagion and show how it may be integrated into a mainstream, top-down, stress-testing framework to quantify systemic risk. The key transmission mechanism is a two-way interaction between the beliefs of secondary market investors and the coordination failure between the creditors of financial institutions. Pessimism about macroeconomic fundamentals triggers creditor runs, but also influences the fire sale discount applied to illiquid assets by secondary market investors. This hampers a troubled bank's recourse to liquidity and increases the incidence of bank runs, potentially unleashing a wave of investor pessimism that can drive otherwise solvent banks into illiquidity. We quantify this contagion channel in the context of the Bank of Canada's model of the Canadian banking system and a stress-test scenario used by the IMF during its 2013 evaluation of the Canadian financial sector.
    Keywords: liquidity risk,contagion,stress testing,global games
    JEL: G01 G21 G28 C72 E58
    Date: 2016
  4. By: Kelly, Robert (Central Bank of Ireland); O'Toole, Conor (Central Bank of Ireland)
    Abstract: This research considers one approach as to how originating lending conditions on debtservice ratios and loan-to-value ratios affect future default risk in the “Buy-to-Let” market. Using a sample of mortgage loans for the UK, we estimate a “double trigger” default model, with originating equity and affordability terms. We find default increasing with originating loan-to-value (OLTV) and falling in original rent coverage (ORC). A non-linear cubic spline model is used to identify threshold effects in the relationship between OLTV, ORC and default, with loans of OLTV greater than 75 and ORC below 1.5 showing a large increase in default risk. These results provide empirical evidence for the non-linear nature of default in these origination terms and provides useful insights into for understanding OLTV and ORC limits in a macro prudential context. In addition, we investigate how multiple loan portfolios interact with these thresholds. While there is no impact on the main findings of 75 and 1.5, there is strong evidence to support tighter restrictions on loans for second and subsequent properties.
    Keywords: Macroprudential, Credit Risk, Mortgages, UK.
    JEL: E32 E51 F30 G21 G28
    Date: 2016–06
  5. By: Deli, Yota; Delis, Manthos D.; Hasan, Iftekhar; Liu, Liuling
    Abstract: Formal enforcement actions issued against banks for violations of laws and regulations related to safety and soundness can theoretically have both positive and negative effects on the terms of lending. Using hand-collected data on such enforcement actions issued against U.S. banks, we show that they have a strong negative effect on price terms (loan spreads and fees) for corporate loans and a positive one on non-price terms (loan maturity, size, covenants, and collateral). The results also indicate that in the absence of enforcement actions, the cost of borrowing during the subprime crisis would have been much higher, while punished banks intensify use of collateral.
    Keywords: bank supervision, enforcement actions, syndicated loans, price and non-price terms of lending
    JEL: E44 E51 G21 G28
    Date: 2016–08–06
  6. By: Bing Xu (Universidad Carlos III, Madrid); Adrian van Rixtel (Banco de España); Honglin Wang (Hong Kong Monetary Authority)
    Abstract: The use of collateral is one of the defining characteristics of loan contracts. This paper investigates if relationship lending and market concentration allow for informational rent extraction through collateral. We use equity IPO data as informational shocks that erode rent-seeking opportunities. Using a new loan-level database for China, we find that collateral incidence increases with relationship intensity and banking market concentration for loans obtained pre- IPO, while this effect is more moderate post-IPO. We also show that the degree of rent extraction declines for lower-risk firms post-IPO, while it increases for higher-risk firms. These results are not driven by differences or changes in firm-specific financial risks. To our knowledge, our paper is the first to investigate the determinants of collateral for China using loan-level data.
    Keywords: Informational rents, collateral, relationship lending, market structure, IPOs, China
    JEL: G21 L11
    Date: 2016–08
  7. By: Stephen Williamson (Federal Reserve Bank of St. Louis)
    Abstract: A two-sector general equilibrium banking model is constructed to study the functioning of a floor system of central bank intervention. Only retail banks can hold reserves, and these banks are also subject to a capital requirement, which creates "balance sheet costs" of holding reserves. An increase in the interest rate on reserves has very different qualitative effects from a reduction in the central bank's balance sheet. Increases in the central bank's balance sheet can have redistributive effects, and can reduce welfare. A reverse repo facility at the central bank puts a floor under the interbank interest rate, and is always welfare improving. However, an increase in reverse repos outstanding can increase the margin between the interbank interest rate and the interest rate on government debt.
    Date: 2016
  8. By: Danne, Christian; McGuinness, Anne (Central Bank of Ireland)
    Abstract: This paper studies the determinants of receiving a loan modification and the factors explaining repayment after mortgage modification using a unique Irish dataset. Compared to previous studies, our dataset allows us to observe borrower and loan characteristics at the time the borrower experiences payment difficulties and to directly observe the outcome of the renegotiation process. The results show that current borrower characteristics rather than loan characteristics matter for receiving a permanent modification and making full payment after modification. A higher mortgage repayment to income ratio, higher household leverage, and higher household expenditure reduce the probability of receiving a permanent modification and the probability of full payment after modification. In addition, both unemployment and divorce prior to engaging in mortgage renegotiations, reduce the probability of receiving a permanent modification and the payment performance after modification. The change in borrowers mortgage repayment and thus their subsequent mortgage affordability is the key driver of a successful modification, irrespective of the modification type.
    Keywords: Mortgage, modification, arrears, banking
    JEL: D14 G01 G21 R31
    Date: 2016–06
  9. By: Carlson, Mark A.; Wheelock, David C. (Board of Governors of the Federal Reserve System (U.S.))
    Abstract: As a result of legal restrictions on branch banking, an extensive interbank system developed in the United States during the 19th century to facilitate interregional payments and flows of liquidity and credit. Vast sums moved through the interbank system to meet seasonal and other demands, but the system also transmitted shocks during banking panics. The Federal Reserve was established in 1914 to reduce reliance on the interbank market and correct other defects that caused banking system instability. Drawing on recent theoretical work on interbank networks, we examine how the Fed’s establishment affected the system’s resilience to solvency and liquidity shocks and whether these shocks might have been contagious. We find that the interbank system became more resilient to solvency shocks but less resilient to liquidity shocks as banks sharply reduced their liquidity after the Fed’s founding. The industry’s response illustrates how the introduction of a lender of last resort can alter private behavior in a way that increases the likelihood that the lender will be needed.
    Keywords: Federal Reserve System; Contagion; Systemic risk; Seasonal liquidity demand; Interbank networks; Banking panics; National Banking system
    JEL: E42 E44 E58 G21 N11 N12 N21 N22
    Date: 2016–07–18
  10. By: Keenan, Enda (Central Bank of Ireland); Kinghan, Christina (Central Bank of Ireland); McCarthy, Yvonne (Central Bank of Ireland); O'Toole, Conor (Central Bank of Ireland)
    Abstract: Using loan-by-loan information collected by the Central Bank of Ireland to monitor compliance with the loan-to-value (LTV) and loan-to-income (LTI) macroprudential Regulations, this Economic Letter provides an overview of residential mortgage lending that took place in Ireland in 2015. We caution that these data cover a period in which the banking sector was transitioning to the new regulatory arrangement and drawing inference from one snapshot of data may be premature. A total of e4.6bn of mortgage loans was covered by these data in 2015, with 56 per cent in-scope of the measures. The average property price for first-time buyers in-scope of the measures was e234,599 at an average LTV of 78.7 per cent. For secondand subsequent borrowers, the average property price was e374,644 with an average LTV of 65.8 per cent. Comparing in-scope and out-of-scope lending for 2015, we find that average LTVs and LTIs for principal dwelling house (PDH) lending were marginally lower in-scope. Under the Irish Regulations, a proportion of lending is permitted at levels of LTV and LTI above the limits. A total of 13 per cent of in-scope PDH lending exceeded the LTV cap and 17 per cent of in-scope PDH lending exceeded the LTI cap. We observe differences in the characteristics of borrowers with and without an allowance. Notably, differences were evident across income, borrower age, marital status and region.
    Date: 2016–07
  11. By: Ohls, Jana; Pramor, Marcus; Tonzer, Lena
    Abstract: We analyze the inward and outward transmission of regulatory changes through German banks' (international) loan portfolio. Overall, our results provide evidence for international spillovers of prudential instruments, these spillovers are however quite heterogeneous between types of banks and can only be observed for some instruments. For instance, foreign banks located in Germany reduce their loan growth to the German economy in response to a tightening of sector-specific capital buffers, local reserve requirements and loan to value ratios in their home country. Furthermore, from the point of view of foreign countries, tightening reserve requirements was effective in reducing lending inflows from German banks. Finally, we find that business and financial cycles matter for lending decisions.
    Keywords: cross-border spillovers,prudential regulation,loan supply,German banks
    JEL: F30 G01 G21 G28
    Date: 2016
  12. By: Joao Cocco (London Business School); Nuno Clara (London Business School)
    Abstract: We solve a quantitative dynamic model of borrower behavior, whose income is subject to individual specific and aggregate shocks. Lenders provide loans competitively. Recessions are characterized by lower expected earnings growth and a higher likelihood of a large drop in earnings. The model generates procyclical credit demand and countercyclical default. We analyze alternative debt restructuring policies aimed at reducing default during recessions: (i) interest rate reduction; (ii) maturity extension; and (iii) refinancing. Outcomes are best for the maturity extension policy that allows borrowers to temporarily make interest-only payments on the loan. Not all borrowers exercise the option. The maturity extension policy leads to lower default rates, higher consumer welfare, and a smaller drop in consumption during recessions, without significantly increasing cash-flow risk for lenders.
    Date: 2016
  13. By: Fuster, Andreas (Federal Reserve Bank of New York); Guttman-Kenney, Benedict (U.K. Financial Conduct Authority); Haughwout, Andrew F. (Federal Reserve Bank of New York)
    Abstract: Borrowers’ housing equity is an important component of their wealth and a critical determinant of their vulnerability to shocks. In this paper, we create a unique data set that allows us to provide a comprehensive look at the ratio of housing debt to housing values—what we refer to as household leverage—at the micro level. An advantage of our data is that we are able to study the evolution of household leverage over time and across locations in the United States. We find that leverage was at a very low point just prior to the large declines in house prices that began in 2006, but it rose very quickly thereafter, despite reductions in housing debt. As of late 2015, leverage statistics are approaching their pre-crisis levels, as house prices have risen over 30 percent nationally since 2012. We use our borrower-level leverage measures and another unique feature of our data—updated borrower credit scores—to conduct “stress tests”: projecting leverage and defaults under various adverse house price scenarios. We find that while the riskiness of the household sector has declined significantly since 2012, it remains vulnerable to very severe declines in house prices.
    Keywords: mortgages; leverage; stress testing
    JEL: D14 E27 G21
    Date: 2016–08–01
  14. By: Ding, Lei (Federal Reserve Bank of Philadelphia); Hwang, Jackelyn (Princeton University)
    Abstract: There have been considerable debate and controversy about the effects of gentrification on neighborhoods and the people residing in them. This paper draws on a unique large-scale consumer credit database to examine the relationship between gentrification and the credit scores of residents in the City of Philadelphia from 2002 to 2014. We find that gentrification is positively associated with changes in residents’ credit scores on average for those who stay, and this relationship is stronger for residents in neighborhoods in the more advanced stages of gentrification. Gentrification is also positively associated with credit score changes for less advantaged residents (low credit score, older, or longer term residents, and those without mortgages) if they do not move, though the magnitude of this positive association is smaller than for their more advantaged counterparts. Nonetheless, moving from gentrifying neighborhoods is negatively associated with credit score changes for less advantaged residents, residents who move to lower-income neighborhoods, and residents who move to any other neighborhoods within the city (instead of outside the city) relative to those who stay. The results demonstrate how the association between gentrification and residents’ financial health is uneven, especially for less advantaged residents.
    Keywords: Gentrification; Credit scores; Residential mobility
    JEL: D14 J11 J6 R23
    Date: 2016–07–29

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.