nep-ban New Economics Papers
on Banking
Issue of 2016‒11‒20
eight papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Banks' internal rating models - time for a change? The system of floors as proposed by the Basel committee By Haselmann, Rainer; Wahrenburg, Mark
  2. A positive analysis of bank behaviour under capital requirements By Bahaj, Saleem; Malherbe, Frédéric
  3. Competition and bank stability By Goetz, Martin
  4. Resolution of International Banks: Can Smaller Countries Cope? By Schoenmaker, Dirk
  5. Regulation and Rational Banking Bubbles in Infinite Horizon By Claire Océane Chevallier; Sarah El Joueidi
  6. Mortgage Credit: Lending and Borrowing Constraints in a DSGE Framework By Sánchez, Elmer
  7. Reserve Requirements, Liquidity Risk, and Bank Lending Behavior By Koray Alper; Mahir Binici; Selva Demiralp; Hakan Kara; Pınar Ozlu
  8. Stress Testing in a Structural Model of Bank Behavior By Thomas Siemsen; Sigurd Mølster Galaasen; Pablo D'Erasmo; Alfonso Irarrazabal; Dean Corbae

  1. By: Haselmann, Rainer; Wahrenburg, Mark
    Abstract: We provide an assessment of the Basel Committee on Banking Supervision (BCBS) proposal to restrict the internal ratings-based approach on bank risk and to introduce risk-weighted asset floors. If well enforced, risk-sensitive capital regulation results in a more efficient credit allocation compared to the standard approach. Thus, the internal ratings-based approach should be maintained. Further, the use of internal ratings-based output floors potentially results in unintended negative side effects. Input floors are likely a valuable tool to achieve risk-weighted assets comparability. Finally, the proposed measures have a potential detrimental impact for European banks as compared to others.
    Keywords: internal rating models,floors,banking regulation,BCBS
    Date: 2016
  2. By: Bahaj, Saleem; Malherbe, Frédéric
    Abstract: We propose a theory of bank behaviour under capital requirements. The sign of the lending response to a change in capital requirement is ambiguous due to the interplay between risk-taking incentives and debt overhang considerations. Optimal lending is typically U-shaped in the capital requirement. Changes in expected returns on loans shift this relationship. The lower expected returns the lower its slope. Using UK regulatory data (1989-2007), we find support for this prediction. It follows that a bank mainly adjusts to a higher capital requirement through cutting lending when expected returns are low, and by raising capital when they are high.
    JEL: G21 G28
    Date: 2016–11
  3. By: Goetz, Martin
    Abstract: Does an increase in competition increase or decrease bank stability? I exploit how the state-specific process of interstate banking deregulation lowered barriers to entry into urban banking markets and find that greater competition significantly increases bank stability. This result is robust to the inclusion of additional fixed effects and other influences, such as merger and acquisitions or diversification. Moreover, I find that greater competition reduces banks' nonperforming loans and increases bank profitability. These findings suggest that competition increases stability as it improves bank profitability and asset quality.
    Keywords: Risk,Stability,Competition,Contestability,Entry,Bank Deregulation,Lending
    JEL: G21 G28 G32
    Date: 2016
  4. By: Schoenmaker, Dirk
    Abstract: The stability of a banking system ultimately depends on the strength and credibility of the fiscal backstop. While large countries can still afford to resolve large global banks on their own, small and medium-sized countries face a policy choice. This paper investigates the impact of resolution on banking structure. The financial trilemma model indicates that smaller countries can either conduct joint supervision and resolution of their global banks (based on single point of entry resolution) or reduce the size of their global banks and move to separate resolution of these banks' national subsidiaries (based on multiple point of entry resolution). Our empirical results show that the euro-area countries are heading for joint resolution based on burden sharing, while the UK and Switzerland have started a process of downsizing their banks.
    Keywords: Burden Sharing; global financial architecture; International Banks; Multiple Point of Entry; Resolution Planning; single point of entry
    JEL: F30 G21 G28
    Date: 2016–11
  5. By: Claire Océane Chevallier (CREA, Université du Luxembourg); Sarah El Joueidi (CREA, Université du Luxembourg)
    Abstract: This chapter develops a dynamic stochastic general equilibrium model in infinite horizon with a regulated banking sector where stochastic banking bubbles may arise endogenously. We analyze the conditions under which stochastic bubbles exist and their impact on macroeconomic key variables. We show that when banks face capital requirements based on Value-at- Risk, two different equilibria emerge and can coexist: the bubbleless and the bubbly equilibria. Alternatively, under a regulatory framework where capital requirements are based on credit risk only, as in Basel I, bubbles are explosive and, as a consequence, cannot exist. The stochastic bubbly equilibrium is characterized by positive or negative bubbles depending on the tightness of capital requirements based on Value-at-Risk. We find a maximum value of capital requirements under which bubbles are positive. Below this threshold, the stochastic bubbly equilibrium provides larger wel- fare than the bubbleless equilibrium. In particular, our results suggest that a change in banking policies might lead to a crisis without external shocks.
    Keywords: Banking bubbles; banking regulation; DSGE; infinitely lived agents; multiple equilibria; Value-at-Risk
    JEL: E2 E44 G01 G20
    Date: 2016
  6. By: Sánchez, Elmer (Banco Central de Reserva del Perú)
    Abstract: This paper develops a Dynamic Stochastic General Equilibrium (DSGE) framework to evaluate the relative importance of the easing of lending and borrowing constraints in mortgage credit markets for business cycle fluctuations in small open emerging economies. Credit markets are characterized by partial dollarization and are subject to demand shocks, innovations to stochastic loan-to-value ratios (borrowing constraints) imposed on borrowers, and supply shocks, innovations to stochastic bank capital-to-asset ratios (lending constraints) imposed on financial intermediaries. In addition, the model features a set of real and nominal domestic shocks to demand, productivity, and fiscal and monetary policy, as well as foreign shocks. The model is calibrated and estimated using data on the Peruvian economy. A historical decomposition conducted on household leverage ratios reveals that these variables’ cyclical dynamics were mainly driven by borrowing constraint shocks or credit demand shifts, while lending constraint shocks played a residual role. Counterfactual simulations also provide evidence in favor of this channel: turning off the borrowing constraint shocks significantly attenuates the fluctuations of leverage ratios from their steady-state levels. The importance of the demand channel in Peru is consistent with mortgage demand-boosting public programs enacted in the 2000s. While applied in the Peruvian context here, the framework is easily adaptable to the historical evolution of credit markets in a large variety of emerging market economies.
    Keywords: fricciones financieras, DSGE con sector bancario.
    JEL: E37 E44 E52
    Date: 2016–09
  7. By: Koray Alper (Central Bank of the Republic of Turkey); Mahir Binici (Central Bank of the Republic of Turkey); Selva Demiralp (Koc University); Hakan Kara (Central Bank of the Republic of Turkey); Pınar Ozlu (Central Bank of the Republic of Turkey)
    Abstract: Although reserve requirements have been used in emerging markets to smooth credit cycles, the exact transmission mechanism remains to be explored. Using bank level data, this study looks inside the black-box to unveil the interaction of reserve requirement policy with bank lending. We identify a new channel that works through a decline in bank liquidity and loan supply due to an increase in reserve requirements. We show that “quantitative tightening” through reserve requirements affect the funding needs and the liquidity position of the banking system. The consequent changes in bank liquidity have a significant impact on the bank lending behavior.
    Keywords: Monetary transmission mechanism; liquidity channel; reserve requirements; Turkey.
    JEL: E44 E51 E52
    Date: 2016–11
  8. By: Thomas Siemsen (Ludwig-Maximilians-University Munich); Sigurd Mølster Galaasen (Norges Bank); Pablo D'Erasmo (FRB Philadelphia); Alfonso Irarrazabal (BI Norwegian Business School); Dean Corbae (University of Wisconsin)
    Abstract: We develop a structural banking model for microprudential stress testing. We model a single bank that optimally chooses portfolio allocation, dividend policy and exit, facing regulatory and technological constraints. In our calibrated model, the bank has an incentive to hold a buffer stock of capital even in excess of regulatory requirements to protect its charter value. We explore optimal behavior during severe macroeconomic stress. We employ bank’s endogenous exit choice as a novel metric for counterfactual stress outcomes. Finally, we discuss implications for current stress testing framework.
    Date: 2016

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