nep-ban New Economics Papers
on Banking
Issue of 2016‒11‒13
fourteen papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. How banks price loans in leveraged buy-outs: an empirical analysis of spreads determinants By João Pinto; Luís Pacheco; Paulo Alves; M. Ricardo Cunha
  2. Confidence Cycles and Liquidity Hoarding By Volha Audzei
  3. Does credit scoring improve the selection of borrowers and credit quality? By Giorgio Albareto; Roberto Felici; Enrico Sette
  4. Should the advanced measurement approach be replaced with the standardized measurement approach for operational risk? By Gareth Peters; Pavel Shevchenko; Bertrand Hassani; Ariane Chapelle
  5. Are European banks too big? evidence on economies of scale By Elena Beccalli; Mario Anolli; Giuliana Borello
  6. Should I stay or should I go? Firms’ mobility across banks in the aftermath of financial turmoil By Davide Arnaudo; Giacinto Micucci; Massimiliano Rigon; Paola Rossi
  7. The Impact of regulatory capital regulation on balance sheet structure, intermediation cost and growth By Pierre-Charles Pradier; Hamza El Khalloufi
  8. The Secured Credit Card Market By Santucci, Lawrence
  9. Counterparty Risk and Counterparty Choice in the Credit Default Swap Market By Wenxin Du; Salil Gadgil; Michael B. Gordy; Clara Vega
  10. Combining risk measures to overcome their limitations - spectrum representation of the sub-additivity issue, distortion requirement and added-value of the Spatial VaR solution: An application to Regulatory Requirement for Financial Institutions By Dominique Guegan; Bertrand Hassani
  11. Partially Disaggregated Household-level Debt Service Ratios: Construction and Validation By Elvery, Joel; Schweitzer, Mark E.
  12. Institutional Reform and Depositors' Portfolio Choice - Evidence from Bank Account Data By Berlemann, Michael; Luik, Marc-André
  13. Housing and credit markets in Italy in times of crisis By Michele Loberto
  14. Economic Scarcity and Consumers’ Credit Choice By Bos, Marieke; Le Coq, Chloé; van Santen, Peter

  1. By: João Pinto (Católica Porto Business School, Universidade Católica Portuguesa); Luís Pacheco (Católica Porto Business School, Universidade Católica Portuguesa); Paulo Alves (Católica Porto Business School, Universidade Católica Portuguesa); M. Ricardo Cunha (Católica Porto Business School, Universidade Católica Portuguesa)
    Abstract: This paper investigates which factors determine the pricing of loans in LBOs, using a worldwide sample of 12,673 syndicated loans closed during the 2000-2013 period. We find that spreads and pricing processes differ significantly in market-based versus bank-based financial systems as well as in the U.S. vis-à-vis W.E. In the pre-crisis period borrowers in market-based financial systems face higher spreads (33.59 bps) than those in bank-based financial systems and loans closed in common law countries are associated with higher spreads (50.71 bps) than those closed in civil law countries. During the crisis period only loans in common law legal systems are associated with higher spreads. In line with Carey and Nini’s (2007) findings, we show that U.S. borrowers face higher spreads than W.E. borrowers. We also find that the pricing of loans in LBOs depends mainly on marketability and default factors and that acquired firms with a higher cash flow potential and asset tangibility face lower spreads. Finally, a robust convex relationship between spread and maturity is found for loans in LBOs.
    Keywords: loan pricing, LBOs, financial crisis, term structure of credit spreads.
    JEL: F34 G01 G21 G34
    Date: 2016–10
  2. By: Volha Audzei
    Abstract: Market confidence has proved to be an important factor during past crises. However, many existing general equilibrium models do not account for agents' expectations, market volatility, or overly pessimistic investor forecasts. In this paper, we incorporate a model of the interbank market into a DSGE model, with the interbank market rate and the volume of lending depending on market confidence and the perception of counterparty risk. In our model, a credit crunch occurs if the perception of counterparty risk increases. Our results suggest that changes in market confidence can generate credit crunches and contribute to the depth of recessions. We then conduct an exercise to mimic some central bank policies: targeted and untargeted liquidity provision, and reduction of the policy rate. Our results indicate that policy actions have a limited effect on the supply of credit if they fail to influence agents' expectations. Interestingly, a policy of a low policy rate worsens recessions due to its negative impact on banks' revenues. Liquidity provision stimulates credit slightly, but its efficiency is undermined by liquidity hoarding.
    Keywords: DSGE, expectations, financial intermediation, liquidity provision
    JEL: E22 E32 G01 G18
    Date: 2016–10
  3. By: Giorgio Albareto (Bank of Italy); Roberto Felici (Bank of Italy); Enrico Sette (Bank of Italy)
    Abstract: This paper studies the effect of credit scoring by banks on bank lending to small businesses by addressing the following questions: does credit scoring increase or decrease the propensity of banks to grant credit? Does it improve the selection of borrowers? Does credit scoring improve or reduce the likelihood that a borrower defaults on its loan? We answer these questions using a unique dataset that collects data from both a targeted survey on credit scoring models and the Central Credit Register. We rely on instrumental variables to control for the potential endogeneity of credit scoring. We find that credit scoring does not change the propensity of banks to grant loans to the generality of borrowers but helps them select borrowers. We also find that credit scoring reduces the likelihood that a borrower defaults, in particular for smaller borrowers and for banks that declare to use credit scoring mainly as a tool to monitor borrowers. These results are homogeneous across bank characteristics such as size, capital, and profitability. Overall our results suggest that credit scoring has a positive effect on the selection of borrowers and on credit performance.
    Keywords: credit scoring, credit supply, bank risk-taking, loan defaults
    JEL: G21
    Date: 2016–10
  4. By: Gareth Peters (Department of Statistical Sciences - University College of London [London]); Pavel Shevchenko (CSIRO - Commonwealth Scientific and Industrial Research Organisation - CSIRO - Commonwealth Scientific and Industrial Research Organisation [Canberra]); Bertrand Hassani (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique); Ariane Chapelle (Department of Computer Science - University College of London [London])
    Abstract: Recently, Basel Committee for Basel Committee for Banking Supervision proposed to replace all approaches, including Advanced Measurement Approach (AMA), for operational risk capital with a simple formula referred to as the Standardised Measurement Approach (SMA). This paper discusses and studies the weaknesses and pitfalls of SMA such as instability, risk insensitivity, super-additivity and the implicit relationship between SMA capital model and systemic risk in the banking sector. We also discuss the issues with closely related operational risk Capital-at-Risk (OpCar) Basel Committee proposed model which is the precursor to the SMA. In conclusion, we advocate to maintain the AMA internal model framework and suggest as an alternative a number of standardization recommendations that could be considered to unify internal modelling of operational risk. The findings and views presented in this paper have been discussed with and supported by many OpRisk practitioners and academics in Australia, Europe, UK and USA, and recently at OpRisk Europe 2016 conference in London.
    Keywords: Basel Committee for Banking Supervision regulations,loss distribution approach,advanced measurement approach,operational risk,standardised measurement approach
    Date: 2016–07
  5. By: Elena Beccalli; Mario Anolli; Giuliana Borello
    Abstract: In light of the policy debate on too-big-to-fail we investigate evidence of economies of scale for 103 European listed banks over 2000 to 2011. Using the Stochastic Frontier Approach, the results show that economies of scale are widespread across different size classes of banks and are especially large for the biggest banks. At the country level, banks operating in the smallest financial systems and the countries most affected by the financial crises realize the lowest scale economies (including diseconomies) due to the reduction in production capacity. As for the determinants of scale economies, these mainly emanate from banks oriented towards investment banking, with higher liquidity, lower Tier 1 capital, those that contributed less to systemic risk during the crises, and those with too-big-to-fail status.
    Keywords: bank; economies of scale; regulation; too-big-to-fail; EU
    JEL: G21
    Date: 2015–09
  6. By: Davide Arnaudo (Bank of Italy); Giacinto Micucci (Bank of Italy); Massimiliano Rigon (Bank of Italy); Paola Rossi (Bank of Italy)
    Abstract: We study the mobility of Italian firms across different lending banks in the aftermath of Lehman Brothers’ collapse, when 40 per cent of the firms analysed changed their pool of lending banks. Using a unique dataset on a sample of about 3,000 Italian firms that encompasses financial and economic records, information on the existence of credit constraints and data on lending relationships with banks, we provide evidence that mobility within the credit market helped to ease credit constraints. Firms that started new banking relationships were able to maintain or even increase their outstanding loans. These firms were generally large and credit-rationed. At the same time, access to new credit lines was more difficult for small and more opaque firms, for which a long-term relationship with their main bank has been the most effective way of overcoming financial constraints. Geographical proximity is also important in affecting credit constraints: the closer the firms are to the lending banks, the lower is the probability of their closing an existing credit relationship and start a new one.
    Keywords: financial crisis, mobility in the credit market, relationship lending
    JEL: G01 G21 G32
    Date: 2016–10
  7. By: Pierre-Charles Pradier (Centre d'Economie de la Sorbonne & LabEx RéFi); Hamza El Khalloufi (PRISM & LabEx RéFi)
    Abstract: As Europe is subject to a protracted recession, it should be asked whether the reform of the financial sector is not costly in terms of potential growth. Our analysis shows that the negative effect of the Basel III package excepted by the pre-QE studies are almost annihilated today. The recession must then have other causes: falling corporate lending volumes resulted from falling demand in the aftermath of the financial crisis, but this is longer the case. The EU is trying to incentivize corporate lending, via forward guidance as well as ‘supporting factor’ cutting down the Basel capital requirements. The macroeconomic theorists are trying to account for future success of monetary policy around zero nominal interest rate via the risk-taking channel. All these clever initiatives failed to deliver. As a consequence, we might infer that banks are simply not taking any risks: rather than appealing to risk aversion, we would like to argue that the banks seem especially embarrassed by future regulatory developments, which appear remote and uncertain. The binding constraint for corporate lending and growth in the EU is then plausibly a combination of banks' expectations of future regulation and strong uncertainty aversion. While we offer some mitigation prospects, we hope that the theoretical developments of the recent years will quickly yield both theoretical advances and practical results
    Keywords: banking, financial regulation
    JEL: G22 G28 G01
    Date: 2016–09
  8. By: Santucci, Lawrence (Federal Reserve Bank of Philadelphia)
    Abstract: In this paper, we present a brief exposition of the history of the secured credit card, beginning with its origins in California in the 1970s. We present a series of stylized facts based on a December 2015 cross section of the secured card market. We find that most secured cards require an annual fee, tend not to have promotional offers or rewards, and often have higher purchase annual percentage rates than their unsecured counterparts. We also find that the percentage of secured card accounts in a delinquency status is more than double that of unsecured cards and that far fewer secured cards are inactive compared with unsecured cards. In addition, the annual income of secured card consumers is about 43 percent lower than unsecured card consumers. Last, we examine how the credit scores of consumers opening a secured card account change during the first two years of account history. We find that keeping a secured card account open is correlated with improved creditworthiness, while closing an account, either in good standing or in default, is correlated with significantly reduced creditworthiness.
    Keywords: secured; credit cards
    JEL: D14
    Date: 2016–11–01
  9. By: Wenxin Du; Salil Gadgil; Michael B. Gordy; Clara Vega
    Abstract: We investigate how market participants price and manage counterparty risk in the post-crisis period using confidential trade repository data on single-name credit default swap (CDS) transactions. We find that counterparty risk has a modest impact on the pricing of CDS contracts, but a large impact on the choice of counterparties. We show that market participants are significantly less likely to trade with counterparties whose credit risk is highly correlated with the credit risk of the reference entities and with counterparties whose credit quality is relatively low. Furthermore, we examine the impact of central clearing on CDS pricing. Contrary to the previous literature, but consistent with our main findings on pricing, we find no evidence that central clearing increases transaction spreads.
    Keywords: Counterparty credit risk ; Credit default swaps ; Central clearing
    JEL: G12 G13 G24
    Date: 2016–09–08
  10. By: Dominique Guegan (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique); Bertrand Hassani (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique)
    Abstract: To measure the major risks experienced by financial institutions, for instance Market, Credit and Operational, regarding the risk measures, the distributions used to model them and the level of confidence, the regulation either offers a limited choice or demands the implementation of a particular approach. In this paper, we highlight and illustrate the paradoxes and issues observed when implementing an approach over another, the inconsistencies between the methodologies suggested and the problems related to their interpretation. Starting from the notion of coherence, we discuss their properties, we propose alternative solutions, new risk measures like spectrum and spatial approaches, and we provide practitioners and supervisor with some recommendations to assess, manage and control risks in a financial institution.
    Keywords: Financial regulation,Level of confidence,Distributions,Risk measures,Sub-additivity,Distortion,Spectral measure,Spectrum
    Date: 2016–10
  11. By: Elvery, Joel (Federal Reserve Bank of Cleveland); Schweitzer, Mark E. (Federal Reserve Bank of Cleveland)
    Abstract: Currently published data series on the United States household debt service ratio are constructed from aggregate household debt data provided by lenders and estimates of the average interest rate and loan terms of a range of credit products. The approach used to calculate those debt service ratios could be prone to missing changes in loan terms. Better measurement of this important indicator of financial health can help policymakers anticipate and react to crises in household finance. We develop and estimate debt service ratio measures based on individual-level debt payments data obtained from credit bureau data and published estimates of disposable personal income. Our results suggest that aggregate debt service ratios may have understated the payment requirements of households. To the extent possible with two very distinct data sources we examine the details on the composition of household debt service and identify some areas where required payments appear to have varied substantially from the assumptions used in the Board of Governors’ aggregate calculation. We then use our technique to calculate both national and state-level debt ratios and break these debt service ratios into debt categories at the national, state level, and metro level. This approach should allow detailed forecasts of debt service ratios based on anticipated changes to interest rates and incomes, which could serve to evaluate the ability of households to cope with potential economic shocks. The ability to disaggregate these estimates into geographic regions or age groups could help to identify the severity of the effects on more exposed groups.
    Keywords: debt service ratio; household finance; regional data;
    JEL: C8 D14 E50
    Date: 2016–10–31
  12. By: Berlemann, Michael (Helmut Schmidt University, Hamburg); Luik, Marc-André (Helmut Schmidt University, Hamburg)
    Abstract: This paper studies the effect of institutional reform on the decision to hold risky assets at the example of the natural experiment of German Division and Reunification. We present empirical evidence indicating that even 16 years after German Reunification risky portfolio choice and composition differed systematically between East and West German bank customers, even after controlling for socio-demographic factors. While these differences are especially pronounced for bank customers with experiences in the former communist system, even the younger generation of East Germans still differs remarkably from their West German counterpart in terms of risky asset choice. Thus, informal institutions tend to have more long-lasting effects on portfolio behavior as previous studies seem to imply.
    Keywords: Institutional reform; stockholding puzzle; portfolio choice; bank data
    JEL: G21 O16 P36
    Date: 2016–11–07
  13. By: Michele Loberto (Bank of Italy Author-Name Francesco Zollino; Bank of Italy)
    Abstract: We investigate the determinants of Italian house prices and residential investments in a structural model with possible disequilibria in the market for lending to both households and firms in the building sector. Based on a structural approach that takes into account the multifold relationships between demand and supply within the housing and the credit markets, we find that, while house prices react mostly to disposable income and demographic pressures, lending conditions also exert a significant impact. During the recent crises the contribution of declining bank rates to household lending was limited, due to the greater deleveraging needs of Italian banks. Conventional monetary policy has supported house prices, albeit with declining intensity as policy rates have gradually approached the lower bound. At the same time, unconventional monetary policy measures have sustained house prices via their effect on Italian sovereign spreads, which have shrunk by a sizeable amount since they peaked in the period between late 2011 and early 2013. Finally, we find that house price developments stayed in line with the fundamentals, during both the global financial and sovereign debt crisis, with only minor and occasional discrepancies.
    Keywords: house prices, credit, system of simultaneous equations
    JEL: E52 G21 R20 R30
    Date: 2016–10
  14. By: Bos, Marieke (Stockholm School of Economics (SHOF)); Le Coq, Chloé (Stockholm School of Economics (SITE)); van Santen, Peter (Research Department, Central Bank of Sweden)
    Abstract: This paper documents that increased scarcity right before a payday causally impacts credit choices. Exploiting a transfer system that randomly assigns the number of days between paydays to Swedish social welfare recipients, we find that low educated borrowers behave as if they are more present-biased when making credit choices during days when their budget constraints are exogenously tighter. As a result their default risk and debt servicing cost increase significantly. Access to mainstream credit or liquidity buffers cannot explain our results. Our findings highlight that increased levels of economic scarcity risk to reinforce the conditions of poverty.
    Keywords: household finance; present bias; scarcity; credit choice
    JEL: D14 D81 G02 G23
    Date: 2016–10–01

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