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on Banking |
| By: | Rafael Matta (University of Amsterdam, The Netherlands); Enrico Perotti (University of Amsterdam, The Netherlands) |
| Abstract: | Can the risk of losses upon premature liquidation produce bank runs? We show how a unique run equilibrium driven by asset liquidity risk arises even under minimal fundamental risk. To study the role of illiquidity we introduce realistic norms on bank default, such that mandatory stay is triggered before all illiquid assets are sold. Since illiquid assets are not available in a run, asset liquidity risk has a concave effect on run incentives, quite unlike fundamental risk. Runs are rare when asset liquidity is abundant, become more frequent as it falls and decrease again under very low asset liquidity. The socially optimal demandable debt contract limits inessential runs by targeting a high rollover yield. However, the private choice minimizes funding costs, tolerating more frequent runs when illiquid states are sufficiently rare. |
| Keywords: | liquidity risk; bank runs; global games; demandable debt; mandatory stay |
| JEL: | G21 |
| Date: | 2016–10–19 |
| URL: | http://d.repec.org/n?u=RePEc:tin:wpaper:20160087&r=ban |
| By: | Jef Boeckx (National Bank of Belgium, Research Department); Maite de Sola Perea (National Bank of Belgium, Research Department); Gert Peersman (Ghent University) |
| Abstract: | We use an original monthly dataset of 131 individual euro area banks to examine the effectiveness and transmission mechanism of the Eurosystem?s credit support policies since the start of the crisis. First, we show that these policies have indeed been succesful in stimulating the credit ?ow of banks to the private sector. Second, we ?nd support for the "bank lending view" of monetary transmission. Speci?cally, the policies have had a greater impact on loan supply of banks that are more constrained to obtain unsecured external funding, i.e. small banks (size effect), banks with less liquid balance sheets (liquidity effect), banks that depend more on wholesale funding (retail effect) and low-capitalized banks (capital effect). The role of bank capital is, however, ambiguous. Besides the above favorable direct e¤ect on loan supply, lower levels of bank capitalization at the same time mitigate the size, retail and liquidity effects of the policies. The drag on the other channels has even been dominant during tthe sample period, i.e. better capitalized banks have on average responded more to the credit support policies of the Eurosystem as a result of more favourable size, retail and liquidity effects. |
| Keywords: | unconventional monetary policy, bank lending, monetary transmission mechanism |
| JEL: | E51 E52 E58 G01 G21 |
| Date: | 2016–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbb:reswpp:201610-302&r=ban |
| By: | Mª Pilar García-Alcober (Department of Economics and Business, Universidad CEU-Cardenal Herrera, Valencia, Spain); Manuel Illueca (IVIE and Department of Finance and Accounting, Universitat Jaume I, Castellón, Spain); Diego Prior (Department of Business, Universitat Autònoma de Barcelona); Emili Tortosa-Ausina (IVIE, Valencia and Department of Economics, Universidad Jaume I, Castellón, Spain) |
| Abstract: | After the financial crisis of 2007–2008 two bank performance dimensions, among others, have become partly subject to debate. One of them is bank efficiency, and the other one bank risk taking behavior. The literature on bank efficiency and productivity has expanded remarkably since almost three decades ago, and has regained momentum over the last few years in the aftermath of the financial crisis. Regarding bank risk taking behavior, whose focus has been usually on its links to monetary policy, the interest has been comparatively minor but it has also increased exponentially more recently. This paper mixes these two stems of research. Specifically, we test if more inefficient banks are riskier when selecting their borrowers, when charging interests and pledge collateral, and if these links between inefficiency and risk change depending on the type of bank. We perform this analysis on the Spanish banking system, which has been severely affected by the burst of the housing bubble and has gone through deep restructuring. In order to test our hypotheses, we build a database with information on banks and savings banks, their borrowers (non-financial firms), and the links between them. On the methodology side, we also try to contribute to the literature by considering a novel profit frontier approach. Our results suggest that more inefficient banks are riskier when selecting their borrowers, and that his high risk-taking behavior is not offset by higher interest rates. |
| Keywords: | bank, profit frontier, risk-taking behavior, savings bank |
| JEL: | C14 C61 G21 L50 |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:jau:wpaper:2016/19&r=ban |
| By: | Miguel Rivera-Castro (ICMA Centre, Henley Business School, University of Reading); Andrea Ugolini (Dipartimento di Statistica, Informatica, Applicazioni ‘G. Parenti’, Universita di Firenze); Juan Arismendi Z (ICMA Centre, Henley Business School, University of Reading) |
| Abstract: | In this study the tail systemic risk of the Brazilian banking system is examined, using the conditional quantile as the risk measure. Multivariate conditional dependence between Brazilian banks is modelled with a vine copula hierarchical structure. The results demonstrate that Brazilian nancial systemic risk increased drastically during the global nancial crisis period. Our empirical ndings show that Bradesco and Itau are the origin of the larger systemic shocks from the banking system to the nancial system network. The results have implications for the capital regulation of nancial institutions and for risk managers' decisions. |
| Keywords: | Systemic Risk, Brazilian Banking System, Banking Network, Financial Contagion, Financial Crisis |
| JEL: | G01 G21 G32 G38 |
| Date: | 2016–09 |
| URL: | http://d.repec.org/n?u=RePEc:rdg:icmadp:icma-dp2016-05&r=ban |
| By: | Hajime Tomura (Faculty of Political Science and Economics, Waseda University) |
| Abstract: | This paper presents a three-period model to analyze the need for bank reserves in the presence of other liquid assets like Treasury securities. If a pair of banks settle bank transfers without bank reserves, they must prepare extra liquidity for interbank payments, because depositors' demand for timely payments causes a hold-up problem in the bilateral settlement of bank transfers. In light of this result, the interbank payment system provided by the central bank can be regarded as an implicit interbank settlement contract to save liquidity. The central bank is necessary for this contract as the custodian of collateral. Bank reserves can be characterized as the balances of liquid collateral submitted by banks to participate into this contract. This result explains the rate-of-return dominance puzzle and the need for substitution between bank reserves and other liquid assets simultaneously. The optimal contract is the floor system, not only because it pays interest on bank reserves, but also because it eliminates the over- the-counter interbank money market. The model indicates it is efficient if all banks share the same custodian of collateral, which justifies the current practice that a public institution provides the interbank payment system. |
| Keywords: | bank reserves; large value payment system; interbank money market; clear- ing house; collateral; legal tender. |
| JEL: | E41 E42 |
| Date: | 2015–08 |
| URL: | http://d.repec.org/n?u=RePEc:upd:utppwp:072&r=ban |
| By: | Mathias Lé (ACPR - Autorité de Contrôle Prudentiel et de Résolution - Autorité de Contrôle Prudentiel et de Résolution, PSE - Paris-Jourdan Sciences Economiques - CNRS - Centre National de la Recherche Scientifique - INRA - Institut National de la Recherche Agronomique - EHESS - École des hautes études en sciences sociales - ENS Paris - École normale supérieure - Paris - École des Ponts ParisTech (ENPC), PSE - Paris School of Economics) |
| Abstract: | This paper empirically investigates the bank leverage adjustments after deposit insurance adoption. Banks are found to increase significantly their leverage after the introduction of deposit insurance. However, the banks’ responses appear to be heterogenous. The magnitude of the change in bank leverage decreases with (i) the size, (ii) the systemicity and (iii) the initial capitalisation of banks so that the most systemic and the most highly leveraged banks are unresponsive to deposit insurance. As a result, implementing a deposit insurance scheme could have important competitive effects. |
| Keywords: | Deposit Insurance,Bank Risk-Taking,Leverage,Systemic Bank,Capital Buffer,Market Discipline,Too Big to Fail |
| Date: | 2014–10–16 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:halshs-01074956&r=ban |
| By: | Stefan Avdjiev; Catherine Koch; Patrick McGuire; Goetz von Peter |
| Abstract: | We combine the BIS international banking statistics with the IBRN prudential instruments database in a global study analyzing the effect of prudential measures on international lending. Our bilateral setting, which features multiple home and destination countries, allows us to simultaneously estimate both the international transmission and the local effects of such measures. We find that changes in macroprudential policy via loan-to-value limits and local currency reserve requirements have a significant impact on international bank lending. Balance sheet characteristics play an important role in determining the strength of these effects, with better capitalized banking systems and those with more liquid assets and less core deposits reacting more. Overall, our results suggest that the tightening of these macroprudential measures can be associated with international spillovers. |
| Keywords: | International banking, macroprudential measures, spillovers |
| Date: | 2016–10 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:589&r=ban |
| By: | McPhilemy, Samuel (Bank of England); Vaughan, Rory (Bank of England) |
| Abstract: | International standards for banking regulation leave individual countries with discretion to determine how the separate legal entities within a banking group should be brought together for the purposes of prudential regulation and supervision. This paper documents differences in the levels of application of prudential requirements drawing on a survey of national rules and regulations in eight jurisdictions. Most jurisdictions apply prudential requirements on a consolidated basis, meaning that they require groups to meet standards for minimum capital and liquidity adequacy as if they constituted a single financial unit. However, consolidated requirements do not account for potential impediments to the transferability of financial resources within banking groups. Reflecting this, international banking standards suggest prudential requirements should be applied also at lower levels. The Basel Accord sets out two alternatives for applying prudential requirements beneath the consolidated level: solo application and sub-consolidation. Solo application involves applying prudential standards to individual operating banks within a group, as if those banks were separate standalone entities; sub-consolidation involves regulating sub-groupings of entities as if those sub-groupings were themselves a single financial unit. These approaches have differing implications with respect to the allocation of financial resources across the legal entities within banking groups. However, in practice different jurisdictions arrive at similar outcomes through their differentiated application of certain other regulations, notably restrictions on intragroup exposures. The final part of the paper considers how forthcoming standards on bank resolution affect the economic rationales for sub-consolidated and solo application of prudential requirements. |
| Keywords: | Banks; regulation; scope of regulatory consolidation; solo requirements; sub-consolidation levels of application. |
| JEL: | G21 G28 G38 |
| Date: | 2016–10–21 |
| URL: | http://d.repec.org/n?u=RePEc:boe:boeewp:0625&r=ban |
| By: | Ozlem Akin; Nicholas S. Coleman; Christian Fons-Rosen; José-Luis Peydró |
| Abstract: | We exploit the 2008-2010 TARP bank bailouts after Lehman’s failure to test for private information leakages from banking regulators to top corporate bank executives using insider trading data and information on political connections. In politically-connected banks, buying during the pre-TARP period is associated with increases in abnormal returns around TARP. For unconnected banks, insider trading and returns are uncorrelated. Results hold when comparing connected to unconnected executives within the same bank and are driven by political connections to financial branches of government. Through a FOIA request we obtained the previously unknown TARP funds requested by each bank. The ratio of requested to received funds strongly correlates with abnormal returns and is also a predictor of buying behavior by connected banks. |
| Keywords: | Political connections, Political economy in banking, Insider trading, TARP. |
| JEL: | D72 G01 G21 G28 |
| Date: | 2016–10 |
| URL: | http://d.repec.org/n?u=RePEc:upf:upfgen:1542&r=ban |
| By: | Vivien Lewis (Department of Economics, KU Leuven); Stefania Villa (Department of Economics, KU Leuven, Department of Economics, University of Foggia) |
| Abstract: | This paper considers the interdependence of monetary and macroprudential policy in a New Keynesian business cycle model under the zero lower bound constraint. Entrepreneurs borrow in nominal terms from banks and are subject to idiosyncratic default risk. The realized loan return to the bank varies with aggregate risk, such that bank balance sheets are affected by higher-than-expected rm defaults. Monetary and macroprudential policies are given by an interest rate rule and a capital requirement rule, respectively. We first characterize the model's stability properties under different steady state policies. We then analyze the transmission of a risk shock under the zero lower bound and different macroprudential policies. We finally investigate whether these policies are indeed optimal. |
| Keywords: | Triffin, European Payments Union (EPU), international monetary system (IMS) |
| JEL: | A11 B31 F02 F33 F36 N24 |
| Date: | 2016–09 |
| URL: | http://d.repec.org/n?u=RePEc:nbb:reswpp:201610-310&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:102016&r=ban |
| By: | Koen Schoors (National Research University Higher School of Economics); Maria Semenova (National Research University Higher School of Economics); Andrey Zubanov (University of Wisconsin-Madison) |
| Abstract: | We analyse whether depositor familiarity with a bank affects depositor behaviour during a financial crisis. We measure familiarity by looking for regional or local cues in the bank’s name. We measure depositor behaviour by the their sensitivity to observable bank risk (market discipline). Using 2001–2010 bank-level and region-level data for Russia, we find that depositors of familiar banks become less sensitive to bank risk after a financial crisis relative to depositors of unfamiliar banks. To check that the results are not driven by any implicit support of banks with regional cues in their names by regional governments, but indeed by familiarity bias, we interact the variables of interest with measures of trust in local governments and regional affinity. We find that the flight to familiarity effect is strongly present in regions with strong regional affinity, while the effect is rejected in regions with more trust in regional and local governments. This indicates our results are driven by familiarity and not by any implicit protection from a trusted regional or local government |
| Keywords: | Market discipline, Bank, Personal deposit, Region, Russia, Flight to familiarity, Trust, Implicit guaranty, Regional authorities. |
| JEL: | G21 G01 P2 |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:hig:wpaper:58/fe/2016&r=ban |
| By: | Altavilla, Carlo; Canova, Fabio; Ciccarelli, Matteo |
| Abstract: | We analyse the pass-through of monetary policy measures to lending rates to firms and households in the euro area using a unique bank-level dataset. Banks' characteristics such as the capital ratio and the exposure to sovereign debt are responsible for the heterogeneity of pass-through of conventional monetary policy changes. The location of a bank is instead irrelevant. Non-standard measures normalized the capacity of banks to grant loans resulting in a significant compression in lending rates. Banks with a high level of non-performing loans and a low capital ratio were the most responsive to the measures. Finally, we quantify the effects of non-standard policies on the real economic activity using a standard macroeconomic model and find that in absence of these measures both inflation and output gap would have been significantly lower. |
| Keywords: | European Banks; Heterogeneity; Monetary pass-through; VARs |
| JEL: | C23 E44 E52 G21 |
| Date: | 2016–10 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:11584&r=ban |
| By: | Laura Bartiloro (Banca d'Italia); Cristiana Rampazzi (Banca d'Italia) |
| Abstract: | The financial support provided by family and friends has increased during the crisis, both in frequency and amount. For the beneficiaries, the extent of the support from this informal network is similar to that of consumer credit; its distribution, however, is more limited than indebtedness with financial intermediaries. The probability of exploiting the informal network is greater when the head of the household is unemployed and increases with the difficulty of meeting monthly expenses and with the use of consumer credit because the amount of the loan granted by the intermediaries is too low to cover financial needs or to pay the instalments on the debt itself. The probability diminishes as financial wealth increases. The analysis also highlights the fact that the relief provided by the informal network is not enough to support consumption in the event of a drop in income. In this case financial wealth, the number of income earners in the household and, to a lesser extent, consumer credit all contribute to some kind of consumption smoothing. |
| Keywords: | Informal credit, households indebtedness, consumption smoothing |
| JEL: | D91 E26 |
| Date: | 2015–09 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:opques:qef_291_15&r=ban |
| By: | Martien Lamers (University of Groningen, Netherlands); Frederik Mergaerts (Ghent University, Belgium); Elien Meuleman (Ghent University, Belgium); Rudi Vander Vennet (Ghent University, Belgium) |
| Abstract: | This paper investigates how monetary policy interventions by the European Central Bank and the Federal Reserve affect the stock market perception of bank systemic risk. In a first step, we identify monetary policy shocks using a structural VAR approach by exploiting the changes of the volatility of these shocks on days on which there are monetary policy announcements. The second step consists of a panel regression analysis, in which we relate monetary policy shocks to market-based measures of bank systemic risk. Our sample includes information on both Euro Area and U.S. listed banks, covering a sample period from October 2008 to December 2015. We condition the impact of the monetary policy shocks on a set of bank-specific variables, thereby allowing for a heterogeneous transmission of monetary policy. We furthermore use the differences between Euro Area core and periphery countries and the additional granularity of U.S. accounting data to assess which channels determine the transmission of monetary policy. Our results indicate that by supporting weaker banks and allowing banks to delay recognizing bad loans, accommodative monetary policy may contribute to the buildup of vulnerabilities in the banking sector and may make an eventual policy tightening more difficult. On the other hand, a continuation of expansionary monetary policy may increase risk-taking incentives by further compressing banks’ net interest margins. |
| Keywords: | Triffin, European Payments Union (EPU), international monetary system (IMS) |
| JEL: | G21 G32 E52 |
| Date: | 2016–09 |
| URL: | http://d.repec.org/n?u=RePEc:nbb:reswpp:201610-308&r=ban |
| By: | Stefan Behrendt (School of Economics and Business Administration, Friedrich Schiller University Jena) |
| Abstract: | Empirical estimations of the drivers for loan extension mainly apply the outstanding stock of bank credit as the dependent variable. This paper picks up the critique of Behrendt (2016), namely that such estimations may lead to misleading results, as the change of the stock is not only driven by extended loans, but also by repayments, write-downs, revaluations and securitisation activity. This paper specifically applies a variable of new credit extensions for eight Euro area countries in a simultaneous equation panel model to evaluate potential determinants for credit extension, and compares the findings with a conventional specification using the outstanding stock. It is found that the new lending variable performs exceedingly better in respect to the underlying theory than the stock variable. This result has vast implications for the conduct of monetary policy while looking at credit trends. As most determinants have different coefficients, not only by magnitude, but also by significance and sign, central banks might react in a different way to changing trends in lending when looking at the stock variable rather than the underlying credit extension. |
| Keywords: | credit channel, monetary transmission, bank lending |
| JEL: | C18 C82 E51 E52 |
| Date: | 2016–10–18 |
| URL: | http://d.repec.org/n?u=RePEc:jrp:jrpwrp:2016-017&r=ban |
| By: | Laura Spierdijk; Sherrill Shaffer; Tim Considine |
| Abstract: | For banks, cost management has gained importance in the current environment of low interest rates. In this environment, banks' revenues from interest are under pressure, leading to renewed interest in the substitutability of banks' input factors. Substitution elasticities typically depend on two factors: cost technology and economic conditions (relative input prices or cost shares). Technological shifts and policy changes are therefore expected to affect firms' elasticities of substitution. This study estimates U.S. commercial banks' substitution elasticities during the 2000-2013 period. It analyzes the total effects of the technological shifts and policy changes on banks' substitution elasticities during that period. An endogenous-break test divides the sample into a precrisis period (2000-2008) and a crisis period (2009-2013). During the pre-crisis period, banks' inputs are inelastic substitutes. After the onset of the crisis, especially the long-run substitutability of most input factors decreases to even lower levels due to changes in both cost technology and economic conditions. At the same time, banks' response to input price changes becomes more sluggish. The results indicate that the availability of substitutes is substantially worse during the (post-) crisis period, which limits banks' possibilities for cost management. |
| Keywords: | financial crisis, substitution elasticities, US commercial banks |
| JEL: | G21 D24 C30 |
| Date: | 2016–10 |
| URL: | http://d.repec.org/n?u=RePEc:een:camaaa:2016-64&r=ban |