|
on Banking |
| By: | Heather D. Gibson; Stephen G. Hall; George S. Tavlas |
| Abstract: | We construct a measure of systemic risk in selected EU banking systems using an indirect measure of the system covariance which is also time-varying. We proceed to examine to what extent the resulting measures of systemic stress provide a convincing narrative of events during the period January 2000 to March 2016. The results provide evidence of: (i) rising stress prior to the outbreak of the international financial crisis in 2007/08 in countries with banks exposed to toxic assets; (ii) stress associated with the euro area sovereign debt crisis from 2009/10; and (iii) continued concerns from 2013 out the need for euro area banks to clean up their balance sheets and raise new capital at a time of sluggish profitability. |
| Keywords: | euro area financial crisis, systemic stress, financial instability, European banks |
| URL: | http://d.repec.org/n?u=RePEc:lec:leecon:16/19&r=ban |
| By: | Tim Landvoigt (University of Texas Austin); Juliane Begenau (Harvard Business School) |
| Abstract: | This paper builds a quantitative general equilibrium model with commercial banks and shadow banks to study the unintended consequences of capital requirements. In particular, we investigate how the shadow banking system responds to capital regulation changes for traditional banks. A key feature of our model are defaultable bank liabilities that provide liquidity services to households. In case of default, commercial bank debt is fully insured and thus provides full liquidity services. In contrast, shadow banks are only randomly bailed out. Thus, shadow banks' liquidity services also depend on their default rate. Commercial banks are subject to a capital requirement. Tightening the requirement from the status quo, leads households to substitute shadow bank liquidity for commercial bank liquidity and therefore to more shadow banking activity in the economy. But this relationship is non-monotonic due to an endogenous leverage constraint on shadow banks that limits their ability to deliver liquidity services. The basic trade-off of a higher requirement is between bank liquidity provision and stability. Calibrating the model to data from the Financial Accounts of the U.S., the optimal capital requirement is around 20\%. |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed016:1462&r=ban |
| By: | Hye-Jin Cho (Centre d'Economie de la Sorbonne) |
| Abstract: | In examining the global imbalance by the excess liquidity level, the argument is whether commercial banks want to hold excess reserves for the precautionary aim or expect to get better return through risky decision. By pictorial representations, risk preference in the Machina's triangle (1982, 1987) encapsulates motivation to hold excess liquidity. This paper introduces an endogenous liquidity model for the financial sector where the imbalance argument comes from credit rationing extended from outside liquidity (holmstrom and Tirole, 2011). We also conduct a stylistic analysis of excess liquidity in Jordan and Lebanon from 1993 to 2015. As such, the proposed model exemplifies the combination of credit, liquidity and regulation |
| Keywords: | credit rationing; excess liquidity; inside liquidity; risk preference; machina triangle |
| JEL: | D81 E58 L51 |
| Date: | 2016–11 |
| URL: | http://d.repec.org/n?u=RePEc:mse:cesdoc:16075&r=ban |
| By: | Claire Océane Chevallier (CREA, Université du Luxembourg); Sarah El Joueidi (CREA, Université du Luxembourg) |
| Abstract: | This paper 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 |
| URL: | http://d.repec.org/n?u=RePEc:luc:wpaper:16-15&r=ban |
| By: | Paul S. Calem; Rafael Rob |
| Abstract: | In this paper, we model the dynamic portfolio choice problem facing banks, calibrate the model using empirical data from the banking industry for 1984-1993, and assess quantitatively the impact of recent regulatory developments related to bank capital. The model suggests that two aspects of the new regulatory environment may have unintended effects: higher capital requirements may lead to increased portfolio risk, and capital-based premia do not deter risk-taking by well-capitalized banks. On the other hand, risk-based capital standards may have favorable effects provided the requirements are stringent enough.Full paper (249 KB Postscript) |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:1996-12&r=ban |
| By: | Manh D. Pham (School of Economics, The University of Queensland); Valentin Zelenyuk (Centre for Efficiency and Productivity Analysis, The University of Queensland) |
| Abstract: | In this paper we extend the slack-based directional distance function introduced by F ̈are and Grosskopf (2010) to measure efficiency in the presence of bad outputs and illustrate it through an application on data of Vietnamese commercial banks. We also compare results from the slack-based directional distance function relative to the directional distance function, the enhanced hyperbolic efficiency measure (F ̈are et al., 1989) and the Farrell-type technical efficiency and confirm that it has greater discriminative power. |
| Keywords: | Banking, Bad outputs, Data Envelopment Analysis, Directional distance function, Slack-based efficiency, Performance analysis |
| JEL: | C14 C15 C44 D24 G21 |
| Date: | 2016–11 |
| URL: | http://d.repec.org/n?u=RePEc:qld:uqcepa:117&r=ban |
| By: | Glenn Boyle (University of Canterbury); Roger Stover; Amrit Tiwana; Oleksandr Zhylyevskyy |
| Abstract: | How do informed depositors respond to a banking crisis? To shed light on this question, we apply conjoint analysis to a sample of 417 finance professionals from six countries. For a range of bank accounts that differ in the type and level of depositor protection that they offer, we ask each participant to indicate how they would respond to a banking system shock that could potentially affect their own bank. We find that intended withdrawal rates depend only on account profile attributes and are independent of respondent characteristics and respondent expectations about deposit interest rate changes. The most important account attributes are the existence of a formal deposit insurance fund and the fraction of the deposit at risk (particularly for under-capitalized banks). |
| Keywords: | finance professionals; banking crisis; conjoint analysis, deposit insurance |
| JEL: | G21 G28 |
| Date: | 2016–11–14 |
| URL: | http://d.repec.org/n?u=RePEc:cbt:econwp:16/28&r=ban |
| By: | Schmitt-Grohé, Stephanie; Uribe, Martin |
| Abstract: | This paper contributes to a literature that studies optimal capital control policy in open economy models with pecuniary externalities due to flow collateral constraints. It shows that the optimal policy calls for capital controls to be lowered during booms and to be increased during recessions. Moreover, in the run-up to a financial crisis optimal capital controls rise as the contraction sets in and reach their highest level at the peak of the crisis. These findings are at odds with the conventional view that capital controls should be tightened during expansions to curb capital inflows and relaxed during contractions to discourage capital flight. |
| JEL: | E44 F41 G01 H23 |
| Date: | 2016–11 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:11619&r=ban |
| By: | Bastian von Beschwitz; Daniel Foos |
| Abstract: | Several papers find a positive association between a bank's equity stake in a borrowing firm and lending to that firm. While such a positive cross-sectional correlation may be due to equity stakes benefiting lending, it may also be driven by endogeneity. To distinguish the two, we study a German tax reform that permitted banks to sell their equity stakes tax-free. After the reform, many banks sold their equity stakes, but did not reduce lending to the firms. Thus, our findings suggest that the prior evidence cannot be interpreted causally and that banks’ equity stakes are immaterial for their lending. |
| Keywords: | Relationship banking ; Ownership ; Monitoring |
| JEL: | G21 G32 |
| Date: | 2016–10 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgif:1183&r=ban |
| By: | Angelo Baglioni (Università Cattolica del Sacro Cuore; Dipartimento di Economia e Finanza, Università Cattolica del Sacro Cuore); Marcello Esposito |
| Abstract: | To protect retail investors from the bail-in rule, we propose that banks should issue subordinated “contractual bail-in instruments”, as defined in the BRRD, for an amount (together with Tier1 capital) at least equal to 8% of their liabilities. We support our argument by means of a theoretical model, where retail investors are uncertainty averse, due to their lack of information about the new “bailinable” regime. To the contrary, institutional investors are better informed. Within this framework, a bank is able to reduce the cost of debt by splitting it into a junior and a senior tranche, sold to institutional and retail investors respectively. This result is a deviation from the Modigliani – Miller theorem. We also provide some estimates of the amounts of contractual bail-in instruments that European banks should issue in order to reach the 8% target level. Such amounts are considerable, implying that the solution proposed here should be implemented gradually over a transition period. |
| Keywords: | banks, capital structure, bail-in, resolution, regulation. |
| JEL: | G21 G28 |
| Date: | 2016–11 |
| URL: | http://d.repec.org/n?u=RePEc:ctc:serie1:def052&r=ban |
| By: | Andras Komaromi; Metodij Hadzi-Vaskov; Torsten Wezel |
| Abstract: | This paper assesses the resilience of Panamanian banks to (i) a very severe short-term, and (ii) a significant long-lasting liquidity shock scenario. Short-term liquidity buffers are evaluated by approximating the Liquidity Coverage Ratio (LCR) defined in the Basel III accord. The risk of losing a substantial part of foreign funding is analyzed through a conventional liquidity stress test scrutinizing several layers of liquidity across maturity buckets. The results of this study point to some vulnerabilities. First, our approximations indicate that about half of Panamanian banks would need to adjust their liquid asset portfolios to meet current LCR standards. Second, while most banks would be able to meet funding outflows in the stress-test scenario, a number of banks would have to use up all of their liquidity buffers, and a few even face a final shortfall. Nonetheless, most banks displaying sizable liquidity shortfalls have robust solvency positions. |
| Keywords: | Banking sector;Panama;Liquidity;External shocks;Stress testing;Bank liquidity, LCR, Liquidity stress tests |
| Date: | 2016–10–14 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:16/200&r=ban |
| By: | Rima Turk |
| Abstract: | Negative policy interest rates have prevailed for some years in Denmark and are a more recent development in Sweden. Among other potential side effects, negative rates could weaken banks’ profitability by reducing net interest income, their main source of earnings. However, an analysis of financial statements at the country rather than the consolidated group level shows that bank margins have been broadly stable. At least to date, lower interest income was offset by reductions in wholesale funding costs and higher fee income. Nonetheless, the impacts on bank health and lending from negative interest rates will need to continue to be monitored closely. |
| Keywords: | Negative interest rates;Denmark;Sweden;Euro Area;Banks;Profit margins;Interest rates;Interest rate policy;Stock markets;Negative interest rates; Bank Profitability; Denmark; Sweden. |
| Date: | 2016–10–14 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:16/198&r=ban |
| By: | Boel, Paola (Research Department, Central Bank of Sweden); Camera, Gabriele (Chapman University and University of Basel) |
| Abstract: | We extend the study of banking equilibrium in Berentsen, Camera and Waller (2007) by introducing an explicit production function for banks. Banks employ labor resources, hired on a competitive market, to run their operations. In equilibrium this generates a spread between interest rates on loans and on deposits, which naturally reflects the efficiency of financial intermediation and underlying monetary policy. In this augmented model, equilibrium deposits yield zero return in a deflation or very low inflation. Hence, if monetary policy is sufficiently tight then banks end up reducing aggregate efficiency, soaking up labor resources while offering deposits that do not outperform idle balances. |
| Keywords: | banks; frictions; matching |
| JEL: | C70 D40 E30 J30 |
| Date: | 2016–10–01 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:rbnkwp:0331&r=ban |
| By: | Joseph E. Stiglitz |
| Abstract: | In the aftermath of the Great Recession, there is a growing consensus, even among central bank officials, concerning the limitations of monetary policy. This paper provides an explanation for the ineffectiveness of monetary policy, and in doing so provides a new framework for thinking about monetary policy and macro-economic activity. What matters is not so much the money supply or the T-bill interest rate, but the availability of credit, and the terms at which credit is made available. The latter variables may not move in tandem with the former. In particular, the spread between the T bill rate and the lending rate may increase, so even as the T bill rate decreases, the lending rate increases. An increase in credit availability may not lead to more spending on produced goods, but increased prices for land or other fixed assets; it can go to increased margins associated with increases in speculative activity; or it may go to spending abroad rather than at home. The paper explains the inadequacy of theories based on the zero low bound, and argues that the ineffectiveness of monetary policy is more related to the multiple alternative uses—beyond the purchase of domestically produced goods—of additional liquidity and to its adverse distributional consequences. The paper shows that while monetary policy is less effective than has been widely presumed, it is also more distortionary, identifying several distinct distortions. |
| JEL: | E42 E44 E51 G01 G20 |
| Date: | 2016–11 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:22837&r=ban |
| By: | Li-Hsien Sun |
| Abstract: | We propose a simple model of inter-bank lending and borrowing incorporating a game feature where the evolution of monetary reserve is described by a system of coupled Feller diffusions. The optimization subject to the quadratic cost reflects the desire of each bank to borrow from or lend to a central bank through manipulating its lending preference and the intention of each bank to deposit in the central bank in order to control the volatility for cost minimization. We observe that the adding liquidity creates a flocking effect leading to stability or systemic risk depending on the level of the growth rate. The deposit rate diminishes the growth of the total monetary reserve causing a large number of bank defaults. The central bank acts as a central deposit corporation. In addition, the corresponding Mean Field Game in the case of the number of banks $N$ large and the infinite time horizon stochastic game with the discount factor are also discussed. |
| Date: | 2016–11 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1611.06672&r=ban |