nep-ban New Economics Papers
on Banking
Issue of 2016‒10‒23
nineteen papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Government Support of Banks and Bank Lending By William Bassett; Selva Demiralp; Nathan Lloyd
  2. Measuring Liquidity Mismatch in the Banking Sector By Arvind Krishnamurthy; Jennie Bai; Charles-Henri Weymuller
  3. Income and funding structures, banking regulation and bank risk-taking: The role of ownership in Central and Eastern European banks By Ion Lapteacru
  4. The Eurozone deposit rates' puzzle: choosing the right benchmark By Julien Pinter; Charles Boissel
  5. Leverage and Risk Weighted Capital Requirements By Gambacorta, Leonardo; Karmakar, Sudipto
  6. Market liquidity after the financial crisis By Adrian, Tobias; Fleming, Michael J.; Vogt, Erik
  7. Loan Loss Provisions and Lending Behavior of Banks: Do Information Sharing and Borrower Legal Rights Matter? By Wahyoe Soedarmono; Amine Tarazi; Agusman Agusman; Gary S. Monroe; Dominic Gasbarro
  8. Risk-Based Capital Requirements for Banks and International Trade By Michalski, Tomasz; Örs, Evren; Pakel, Banu Demir
  9. Prudential filters, portfolio composition and capital ratios in European banks By I. Argimon; M. Dietsch; A. Estrada
  10. Dynamic Effects of Credit Shocks in a Data-Rich Environment By Jean Boivin; Marc P. Giannoni; Dalibor Stevanovic
  11. Falling under the control of a different type of owner : risk-taking implications for Banks By Thierno Barry; Amine Tarazi; Paul Wachtel
  12. Epidemics of Liquidity Shortages in Interbank Markets By Giuseppe Brandi; Riccardo Di Clemente; Giulio Cimini
  13. Minimum Payments and Debt Paydown in Consumer Credit Cards By Benjamin J. Keys; Jialan Wang
  14. Regulation, tax and capital structure: evidence from administrative data on Italian banks By Steve Bond; Kyung Yeon Ham; Giorgia Maffini; Andrea Nobili; Giacomo Ricotti
  15. Auto credit and the 2005 bankruptcy reform: the impact of eliminating cramdowns By Chakrabarti, Rajashri; Pattison, Nathaniel
  16. Interdependencies between Leverage and Capital Ratios in the Banking Sector of the Czech Republic By Janda, Karel; Kravtsov, Oleg
  17. An inquiry into the determinants of the profitability of Italian banks By Ugo Albertazzi; Alessandro Notarpietro; Stefano Siviero
  18. The Stock Market and Bank Risk-Taking By Antonio Falato; David Scharfstein
  19. Convergence of bank competition in Central and Eastern European countries: Does ownership matter? By Ion Lapteacru

  1. By: William Bassett (Board of Governors of the Federal Reserve System); Selva Demiralp (Koc University); Nathan Lloyd (Board of Governors of the Federal Reserve System)
    Abstract: The extraordinary steps taken by governments during the 2007-2009 financial crisis to prevent the failure of large financial institutions and support credit availability have invited heated debate. This paper comprehensively reviews empirical assessments of the benefits of those programs—such as their effectiveness in reducing bank failures or supporting new lending—introduces a combined dataset of five key programs that provided term debt or equity to banks in the U.S., and assesses the effects of such support on lending by U.S. banks. The results, using an instrumental variable approach, suggest that bank loans did not increase at institutions receiving government support.
    Keywords: Bank Loans, TAF, TARP, Capital Purchase Program.
    JEL: G11 G21 E58
    Date: 2016–10
  2. By: Arvind Krishnamurthy; Jennie Bai; Charles-Henri Weymuller
    Abstract: This paper implements a liquidity measure, “Liquidity Mismatch Index (LMI),” to gauge the mismatch between the market liquidity of assets and the funding liquidity of liabilities. We construct the LMIs for 2882 bank holding companies during 2002-2014 and investigate the time-series and cross-sectional patterns of banks' liquidity and liquidity risk. Aggregate banking sector liquidity worsens from +$4 trillion before the crisis to -$6 trillion in 2008, and reverses back to the pre-crisis level in 2009. We also show how a macro-prudential liquidity stress test can be conducted with the LMI metric, and that such a stress test could have revealed the fragility of the banking system in early 2007. In the cross section, we find that banks with more ex-ante liquidity mismatch have a higher stock-market crash probability and are more likely to borrow from the government during the financial crisis. Thus the LMI measure is informative regarding both individual bank liquidity risk as well as the liquidity risk of the entire banking system. We compare the LMI measure of liquidity to other measures such as Basel III's liquidity coverage ratio and net stable funding ratio, and show that LMI performs better in many dimensions. The outperformance of LMI partially results from the contract-specific time-varying liquidity sensitivity weights which are driven by market prices.
    JEL: E44 E51 G21 G28
    Date: 2016–10
  3. By: Ion Lapteacru (Larefi - Laboratoire d'analyse et de recherche en économie et finance internationales - Université Montesquieu - Bordeaux 4)
    Abstract: This paper explores the effects of CEE banks’ balance sheet strategies and the impact of banking reforms on their risk-taking behaviour and assesses them with respect to banks’ ownership profile. With our asymmetric Z-score and Distance to Default, we find that state-owned banks are the riskiest and foreign banks the safest institutions. Moreover, the market perceives the former as being riskier regardless of their balance sheet policies. More interbank deposits and long-term funds increase the Z-scores of these banks to a larger extent, but more income diversification has the opposite effect. As for domestic private and foreign banks, these balance sheet policies do not affect the accounting-based risk measure of these institutions. Finally, in countries and periods with banking regulations that conform to the Basel requirements to a greater degree, foreign and private banks are less risky with respect to their Z-score and this effect is stronger for foreign institutions.
    Keywords: Foreigns Banks, Basel
    Date: 2016
  4. By: Julien Pinter (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique, University of Amsterdam [Amsterdam] - UvA - University of Amsterdam, Université Saint-Louis Bruxelles - Université Saint-Louis Bruxelles); Charles Boissel (Paris HEC - Campus HEC Paris)
    Abstract: The paper proposes an alternative benchmark to the EURIBOR to analyze the post-crisis puzzling behavior of deposit rates in the Eurozone. Using bank-level CDS data for 6 major euro-countries, we build a simple country-level index for banks' cost of unsecured funding. The use of this index instead of the traditionally used EURIBOR restores the cointegration relationship between deposit rates and their reckoned opportunity cost. It also suggests that deposits have actually not been significantly over-remunerated in most euro area countries since the financial crisis, in contrast with what is often argued. Our index appears as a good alternative to the EURIBOR, which we show has become irrelevant for many countries.
    Keywords: deposit rates,euribor,cointegration,panel estimates,banks
    Date: 2016–08
  5. By: Gambacorta, Leonardo; Karmakar, Sudipto
    Abstract: The global financial crisis has highlighted the limitations of risk-sensitive bank capital ratios. To tackle this problem, the Basel III regulatory framework has introduced a minimum leverage ratio, defined as a bank’s Tier 1 capital over an exposure measure, which is independent of risk assessment. Using a medium sized DSGE model that features a banking sector, financial frictions and various economic agents with differing degrees of creditworthiness, we seek to answer three questions: 1) How does the leverage ratio behave over the cycle compared with the risk-weighted asset ratio? 2) What are the costs and the benefits of introducing a leverage ratio, in terms of the levels and volatilities of some key macro variables of interest? 3) What can we learn about the interaction of the two regulatory ratios in the long run? The main answers are the following: 1) The leverage ratio acts as a backstop to the risk-sensitive capital requirement: it is a tight constraint during a boom and a soft constraint in a bust; 2) the net benefits of introducing the leverage ratio could be substantial; 3) the steady state value of the regulatory minima for the two ratios strongly depends on the riskiness and the composition of bank lending portfolios.
    Keywords: Bank Capital Buffers; leverage; regulation; Risk-Weighted Assets
    JEL: G21 G28 G32
    Date: 2016–10
  6. By: Adrian, Tobias (Federal Reserve Bank of New York); Fleming, Michael J. (Federal Reserve Bank of New York); Vogt, Erik (Federal Reserve Bank of New York)
    Abstract: This paper examines market liquidity in the post-crisis era, in light of concerns that regulatory changes might have reduced banks’ ability and willingness to make markets. We begin with a discussion of the broader trading environment, including a discussion of regulations and their potential effect on dealer balance sheets and market making, but also considering plausible alternative drivers of market liquidity. Using both high- and low-frequency data on U.S. Treasury securities and corporate bonds, we then investigate empirically whether liquidity has in fact deteriorated, and we review market behavior around three key post-crisis events. Overall, our findings, and those of recent papers we survey, do not suggest a significant decline in bond market liquidity. We conclude with ideas for future research, including the evaluation of additional data, methodological improvements, and closer analyses of liquidity risk and the interplay between market liquidity and funding liquidity.
    Keywords: liquidity; market making; Treasury market; corporate bonds; regulation
    JEL: G12 G21 G28
    Date: 2016–10–19
  7. By: Wahyoe Soedarmono (Universitas Siswa Bangsa Internasional, Faculty of Business / Sampoerna School of Business); Amine Tarazi (LAPE - Laboratoire d'Analyse et de Prospective Economique - UNILIM - Université de Limoges - IR SHS UNILIM - Institut Sciences de l'Homme et de la Société); Agusman Agusman (bank indonesia - bank indonesia); Gary S. Monroe (University of New South Wales [Sydney]); Dominic Gasbarro (Murdoch University, Australia)
    Abstract: We examine the roles of information sharing and borrower’s legal rights in affecting the procyclical effect of bank loan loss provisions. Based on a sample of Asian banks, our empirical results highlight that higher non-discretionary provisions reduce loan growth and, hence, non-discretionary provisions are procyclical. A closer investigation suggests that better information sharing through public credit registries managed by central banks, not private credit bureaus managed by the private sector, might substitute for the role of dynamic provisioning systems in mitigating the procyclicality of non-discretionary provisions. We also document that higher discretionary provisions in countries with stronger legal rights for borrowers temper the procyclical effect of non-discretionary provisions. However, these findings hold only for small banks. This suggests that the implementation of dynamic provisioning systems to mitigate the procyclicality of non-discretionary provisions is more crucial for large banks.
    Keywords: Borrower’s legal rights , Loan growth, Information sharing,Loan loss provisions
    Date: 2016–05–17
  8. By: Michalski, Tomasz; Örs, Evren; Pakel, Banu Demir
    Abstract: We find that changes in banks' risk-based capital requirements can affect firm-level exports. We exploit the mandatory Basel II adoption in its Standardized Approach by all banks in Turkey on July 1, 2012. This change affects risk-weights for letters of credit and generates two identification schemes with opposite predicted signs. Using data that cover 16,662 exporters shipping 2,888 different products to 158 countries, we find that the share of letter of credit-based exports decreases (increases) at the firm- country-product level when the associated counterparty risk-weights increase (decrease) after Basel II adoption. However, growth of firm-product-country level exports remains unaffected.
    Keywords: Basel II; international trade finance; letters of credit
    JEL: F14 G21 G28
    Date: 2016–10
  9. By: I. Argimon; M. Dietsch; A. Estrada
    Abstract: European banks hold 10% of their total assets in portfolios that give rise to unrealised gains and losses which under Basel III will no longer be allowed to be excluded from banks’ regulatory capital. Using a sample of European banks, and taking advantage of the different regulatory treatments that are allowed, under Basel II, to account for such gains and losses among jurisdictions and instruments and over time, we find evidence that: a) the inclusion of unrealised gains and losses in capital ratios increases their volatility; b) the partial inclusion of unrealised gains and total inclusion of losses on fixed-income securities in regulatory capital, compared with the complete exclusion of both (or “neutralization”), reduces the volume of securities categorised as Available For Sale (AFS), thus potentially affecting liquidity management and demand for bonds (most of which are currently government bonds); and c) the higher the partial inclusion of gains from debt instruments, the lower the holdings of such instruments in the AFS category and the higher the regulatory Tier 1 capital ratio, thus affecting banks’ capital buffer strategy. We do not find evidence that the absence of neutralisation would impact capital ratios.
    Keywords: Bank capital ratios, Bank regulation, Fair Value Accounting, Prudential Filters.
    JEL: G21 M41
    Date: 2016
  10. By: Jean Boivin; Marc P. Giannoni; Dalibor Stevanovic
    Abstract: We examine the dynamic effects of credit shocks using a large data set of U.S. economic and financial indicators in a structural factor model. An identified credit shock reflecting an unexpected deterioration in credit market conditions results in an immediate increase in credit spreads, a decrease in yields of Treasury securities, and causes large and persistent downturns in the activity of many economic sectors. Such shocks are found to have important effects on real activity measures, labor market indicators, aggregate prices, and leading indicators. Our identification procedure which imposes restrictions on the impact response of a small number of economic indicators yields interpretable estimated factors.
    Keywords: Credit shocks, FAVAR, structural factor analysis,
    JEL: C55 C32 E32 E44
    Date: 2016–10–13
  11. By: Thierno Barry (LAPE - Laboratoire d'Analyse et de Prospective Economique - UNILIM - Université de Limoges - IR SHS UNILIM - Institut Sciences de l'Homme et de la Société); Amine Tarazi (LAPE - Laboratoire d'Analyse et de Prospective Economique - UNILIM - Université de Limoges - IR SHS UNILIM - Institut Sciences de l'Homme et de la Société); Paul Wachtel (New York University, Stern School of Business, 44 West 4th Street New York, NY, USA)
    Abstract: European banks have experienced significant changes in the type of entity that owns them (another bank, an individual or a family, a non-financial company, an institutional investor, a government, a foreign entity, a domestic entity…). In this paper, we look at the influence of ownership type changes on performance. Working with a panel of commercial banks from 17 European countries, we find that although banks that experience a change in ownership type do not exhibit lower or higher risk or profitability than other banks, their risk and profitability is significantly affected after the change takes place. The type of the acquirer plays a significant role in explaining the observed changes. When the acquirer is a non-financial company, the state or an institutional investor, the level of risk increases after the change while the level of profitability remains unchanged. Conversely, when the acquirer is a bank, we find that the level of risk-adjusted profitability decreases. Banks acquired by a different type of owner during the global financial crisis do not perform better or worse than they did before.
    Keywords: European banking,ownership change,type of ultimate owner,profitability,risk
    Date: 2016–06–17
  12. By: Giuseppe Brandi; Riccardo Di Clemente; Giulio Cimini
    Abstract: Financial contagion from liquidity shocks has being recently ascribed as a prominent driver of systemic risk in interbank lending markets. Building on standard compartment models used in epidemics, here we develop an EDB (Exposed-Distressed-Bankrupted) model for the dynamics of liquidity shocks reverberation between banks, and validate it on electronic market for interbank deposits data. We show that the interbank network was highly susceptible to liquidity contagion at the beginning of the 2007/2008 global financial crisis, and that the subsequent micro-prudential and liquidity hoarding policies adopted by banks increased the network resilience to systemic risk, yet with the undesired side effect of drying out liquidity from the market. We finally show that the individual riskiness of a bank is better captured by its network centrality than by its participation to the market, along with the currently debated concept of "too interconnected to fail".
    Date: 2016–10
  13. By: Benjamin J. Keys; Jialan Wang
    Abstract: Using a dataset covering one quarter of the U.S. general-purpose credit card market, we document that 29% of accounts regularly make payments at or near the minimum payment. We exploit changes in issuers' minimum payment formulas to distinguish between liquidity constraints and anchoring as explanations for the prevalence of near-minimum payments. Nine to twenty percent of all accounts respond more to the formula changes than expected based on liquidity constraints alone, representing a lower bound on the role of anchoring. Disclosures implemented by the CARD Act, an example of one potential policy solution to anchoring, resulted in fewer than 1% of accounts adopting an alternative suggested payment. Based on back-of-envelope calculations, the disclosures led to $62 million in interest savings per year, but would have saved over $2 billion per year if all anchoring consumers had adopted the new suggested payment. Our results show that anchoring to a salient contractual term has a significant impact on household debt.
    JEL: D14 G02 G21 G28
    Date: 2016–10
  14. By: Steve Bond (University of Oxford); Kyung Yeon Ham (University of Oxford); Giorgia Maffini (University of Oxford); Andrea Nobili (Associazione Bancaria Italiana); Giacomo Ricotti (Bank of Italy)
    Abstract: This paper explores the effect of taxation on the capital structure of banks. For identification, we exploit exogenous regional variations in the rate of the Italian tax on productive activities (IRAP) using administrative, confidential data on regional banks provided by the Bank of Italy (1998-2011). We find that IRAP rate changes do not always lead to a change in banks’ leverage: banks close to the regulatory constraints do not change their leverage when tax rates change. This holds true for both tax cuts and tax hikes. Among less constrained entities, the leverage of smaller banks is more responsive to changes in tax rates than that of larger banks. Overall, the tax system has little effect on the capital structure of banks, especially for larger and possibly more systemically important institutions; regulatory constraints instead seem to be a first-order determinant. Our findings cast doubt on the role of the tax system as a cause or tool for addressing the negative externalities of excessive leverage in the banking system.
    Keywords: capital structure, debt, regulation, corporate tax, banks
    JEL: G21 G32 G38 H25 H32
    Date: 2016–10
  15. By: Chakrabarti, Rajashri (Federal Reserve Bank of New York); Pattison, Nathaniel (University of Virginia)
    Abstract: Auto lenders were perhaps the biggest winners of the 2005 Bankruptcy Reform. Cars depreciate quickly, so borrowers often owe more than their car is worth. Prior to the Reform, these borrowers could reduce the principal on their auto loan to the market value of the car through a “cramdown” in Chapter 13 bankruptcy. The Reform prohibited cramdowns during the first two and a half years of an auto loan. This paper is the first to estimate the causal effect of this anticramdown provision on the price and quantity of auto credit. The authors use a novel empirical strategy that relies on the fact that eliminating cramdowns affected only one of the two types of consumer bankruptcy: Chapter 13. They exploit persistent historical variation in states’ usage of Chapter 13 generated by differences in local legal culture. Using difference-in-differences regressions, their empirical strategy compares pre-Reform and post-Reform auto loans across states with persistent historical differences in the share of bankruptcies filed under Chapter 13. They find that eliminating cramdowns decreased interest rates on auto loans in the average state by 15 basis points, with a larger decline in states where Chapter 13 is more common. The decline in interest rates occurs in the exact month that the Reform went into effect, and the authors rule out other aspects of the Reform as possible causes. Next, the authors estimate the effect on the quantity of auto credit. Using quarterly data from the FRBNY Consumer Credit Panel based on Equifax credit reports, they examine the effect of eliminating cramdowns on the number and size of new auto loans. The estimates show a small, negative, and insignificant impact on the number of new auto loans. The authors do find some evidence, however, that loan sizes increased among subprime borrowers.
    Keywords: bankruptcy; cramdown; auto loans; consumer credit; BAPCPA
    JEL: D12 G21 K35
    Date: 2016–10–19
  16. By: Janda, Karel; Kravtsov, Oleg
    Abstract: In this paper we discuss the implications of the Basel III requirements on the leverage ratio for the banking sector in the Czech Republic. We identify the potential binding constraints from regulatory limits and analyze the interactions among leverage and capital ratios over the country’s economic cycle (during the period 2007-2014). The historical data confirm stronger capital ratios of the banks and an overall solid leverage level with only 5% of the total historical observations being lower than the regulatory recommendations. By analyzing the components of ratios, we conclude that the banks are focusing more on the optimization of risk weighted assets. Strong co-movement patterns between leverage and assets point to the active management of leverage as a means of expanding and contracting the size of balance sheets and maximizing the utility of the capital. The analysis of correlation patterns among the variables indicates that the total assets (and exposure) in contrast to Tier 1 capital are the main contributors to the cyclical movements in the leverage. The leverage and the total assets also demonstrate a weak correlation with GDP, but a strong co-movement with loans to the private sector.
    Keywords: Leverage ratio, capital ratio, Basel III, Czech Republic
    JEL: G30
    Date: 2016–10–11
  17. By: Ugo Albertazzi (Bank of Italy); Alessandro Notarpietro (Bank of Italy); Stefano Siviero (Bank of Italy)
    Abstract: This paper examines the history and the determinants of bank profits in Italy from 2005-15. We first identify a number of key stylized facts by comparing the income statement of Italian lenders with that of banks in other European countries. The comparison suggests that the profitability gap of Italian banks is partly related to a business model characterized by a more conservative positioning along the risk-return frontier. We then use the Bank of Italy’s Quarterly Model of the Italian Economy to provide quantitative estimates of the impact of four factors (the economic activity growth rate, taxation of bank income, dynamics of operating costs and dividend policy) on profits, regulatory capital and bad debt. Our counterfactual simulations suggest that the weak growth of the Italian economy is responsible for a sizeable share of the profitability gap of Italian banks, being by far the main driver of the increase in bad debts in the last decade; nonetheless, the impact of the other factors on their profitability (and capitalization) is far from negligible.
    Keywords: bank profits, bank capital, non-performing loans, Italian banks, Italian economy
    JEL: E37 E44 E47 G21
    Date: 2016–10
  18. By: Antonio Falato; David Scharfstein
    Abstract: We present evidence that pressure to maximize short-term stock prices and earnings leads banks to increase risk. We start by showing that banks increase risk when they transition from private to public ownership through a public listing or an acquisition. The increase in risk is greater than for a control group of banks that intended but failed to transition from private to public ownership, a result that is robust to using a plausibly exogenous instrument for failed transitions. The increase in risk is also greater than for a control group of banks that were acquired but did not change their listing status. We establish that pressure to maximize short-term stock prices helps to explain these findings by showing that the increase in risk is larger for newly public banks that are more focused on short-term stock prices and performance.
    JEL: G01 G2 G21
    Date: 2016–09
  19. By: Ion Lapteacru (Larefi - Laboratoire d'analyse et de recherche en économie et finance internationales - Université Montesquieu - Bordeaux 4)
    Abstract: Many reforms of banking market liberalization in CEE countries raised the question on the convergence of banks’ competitive behaviour, particularly because of the presence of foreign banks from same European regions. We find within-country convergence of three used bank competition measures, with higher convergence levels of market power and of competitive behaviour, and with faster convergence trend for foreign banks. Despite the efforts for banking market integration, there is no general movement toward across-countries convergence of competitive behaviour of CEE banks, neither for foreign nor for domestic institutions, higher dispersion of countries being however observed for the former.
    Keywords: Banking, competition, convergence, Central and Eastern European countries.
    Date: 2016

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