nep-ban New Economics Papers
on Banking
Issue of 2017‒01‒01
eighteen papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. International Business Cycle and Financial Intermediation By Tamas Csabafi; Max Gillman; Ruthira Naraidoo
  2. Determinants of borrowers' default in P2P lending under consideration of the loan risk class By Michal Polena; Tobias Regner
  3. Peer-Group Detection of Banks and Resilience to Distress By Andrea Flori; Simone Giansante; Fabio Pammolli
  4. The Effects of Mortgage Credit Availability : Evidence from Minimum Credit Score Lending Rules By Steven Laufer; Andrew D. Paciorek
  5. How Home Equity Extraction and Reverse Mortgages Affect the Credit Outcomes of Senior Households By Stephanie Moulton; Donald Haurin; Samuel Dodini; Maximilian D. Schmeiser
  6. Does bank competition reduce cost of credit ? Cross-country evidence from Europe By Zuzana FUNGACOVA; Anastasiya SHAMSHUR; Laurent WEILL
  7. Prudential Policies and Their Impact on Credit in the United States By Paul S. Calem; Ricardo Correa; Seung Jung Lee
  9. Non-Bank Investors and Loan Renegotiations By Teodora Paligorova; João Santos
  10. Cross border banking: Pull-push effects of parent banks on subsidiaries' credit extensions By Gattini, Luca; Zagorisiou, Angeliki
  11. Habits and Leverage By Tano Santos; Pietro Veronesi
  12. Trust in banks By Zuzana FUNGACOVA; Iftekhar HASAN; Laurent WEILL
  13. Interest Rates or Haircuts? Prices Versus Quantities in the Market for Collateralized Risky Loans By Barsky, Robert; Bogusz, Theodore; Easton, Matthew
  14. A Look Under the Hood : How Banks Use Credit Default Swaps By Cecilia Caglio; R. Matthew Darst; Eric Parolin
  15. The Effect of Banks' Financial Position on Credit Growth : Evidence from OECD Countries By David Rappoport
  16. The effect of personal financing disruptions on entrepreneurship By Hanspal, Tobin
  17. Creating associations to substitute banks’direct credit. Evidence from Belgium By Mikel Bedayo
  18. Why Do Banks in Developing Countries Hold Government Securities? By S.M. Ali Abbas; Raphael Espinoza

  1. By: Tamas Csabafi (Office No. C58, Cardiff Business School, Colum Drive, Cardiff, CF10 3EU, UK); Max Gillman (Office N. 408 SSB, 1 University Boulevard, St. Louis, Missouri 63121, USA); Ruthira Naraidoo (Faculty of Economics and Management Sciences, Department of Economics, University of Pretoria, South Africa)
    Abstract: The world-wide financial crisis of 2007 to 2009 caused bankruptcy and bank failures in the US and many other parts such as Europe. Recent empirical evidence suggests that this simultaneous drop in output was strongest in countries with greater financial ties to the US economy with important cross border deposit and lending. This paper develops a two-country framework to allow for banking structures within an international real business cycle model. The banking structure across countries is modelled using the production approach to financial intermediation. We allow both countries. banks to be able to take deposits both locally and internationally. We analyze the transmission mechanism of both goods and banking sector productivity shocks. We show that goods total factor productivity (TFP) and bank TFP have different effects on the finance premium. Most countries have shown procyclic equity premium over their histories but with evidence that these are countercyclic during the Great Recession especially. The model has the ability to explain the countercyclical movements of credit spreads during major recession and financial crisis when goods TFP also affects banking productivity. This we model as a cross correlation of shocks to replicate the recent events during the crisis period. Importantly, the model can also explain business cycles facts and the countercyclical behaviour of the trade balance.
    Keywords: : International Business Cycles, Financial Intermediation, Credit Spread
    JEL: E13 E32 E44 F41
    Date: 2016–12
  2. By: Michal Polena (School of Economics and Business Administration, Friedrich-Schiller-University Jena); Tobias Regner (School of Economics and Business Administration, Friedrich-Schiller-University Jena)
    Abstract: We study the determinants of borrowers' default in P2P lending with a new data set consisting of 70,673 loan observations from Lending Club. Previous research identified a number of default determining variables but did not distinguish between different loan risk levels. We define four loan risk classes and test the significance of the default determining variables within each loan risk class. Our findings suggest that the significance of most variables depends on the loan risk class. Only few variables are consistently significant across all risk classes. The debt-to-income ratio, inquiries in the past 6 months and a loan intended for a small business are positively correlated with the default rate. Annual income and credit card as loan purpose are negatively correlated.
    Keywords: crowdfunding, peer-to-peer lending, P2P, credit grade, FICO score, default risk
    JEL: D14 E41 G23
    Date: 2016–12–14
  3. By: Andrea Flori (IMT School for advanced studies); Simone Giansante (School of management, University of Bath); Fabio Pammolli (Politecnico di Milano)
    Abstract: The paper looks at the importance of the true business model in shaping the risk profile of financial institutions. We adopt a novel indirect clustering approach to enrich the classic bank business model classification on a global data set including about 11,000 banks, both listed and non-listed representing more than 180 countries over the period 2005-2014. A comprehensive list of global distress events, which combines bankruptcies, liquidations, defaults, distressed mergers, and public bailouts, is regressed against financial statement ratios (i.e. proxies for CAMELS) and controlling for macro and sectoral effects using a rare-event logit model. Our findings suggest that individual characteristics along with macro and sectoral factors contribute differently, sometimes with opposite sign, to the likelihood of distress and to the volatility of business models with the exception of liquidity whose contribution appears exogenous to business model choice. By capturing the switching behaviour across groups, we find that business model volatility exacerbates vulnerability and distress, especially if moving from wholesale-oriented to deposit oriented groups.
    Keywords: Peer Group Risk Assessment; Bank Distress; Bank Business Models; Financial Crisis; Bank Balance Sheets
    JEL: F01 G01 G21 G28 G33
    Date: 2016–12
  4. By: Steven Laufer; Andrew D. Paciorek
    Abstract: Since the housing bust and financial crisis, mortgage lenders have introduced progressively higher minimum thresholds for acceptable credit scores. Using loan-level data, we document the introduction of these thresholds, as well as their effects on the distribution of newly originated mortgages. We then use the timing and nonlinearity of these supply-side changes to credibly identify their short- and medium-run effects on various individual outcomes. Using a large panel of consumer credit data, we show that the credit score thresholds have very large negative effects on borrowing in the short run, and that these effects attenuate over time but remain sizable up to four years later. The effects are particularly concentrated among younger adults and those living in middle-income or moderately black census tracts. In aggregate, we estimate that lenders' use of minimum credit scores reduced the total number of newly originated mortgages by about 2 percent in the years following the financial crisis. We also find that, among individuals who already had mortgages, retaining access to mortgage credit reduced delinquency on both mortgage and non-mortgage debt and increased their propensity to take out auto loans, but had little effect on migration across metropolitan areas.
    Keywords: Credit scores ; Credit supply ; Mortgages and credit ; Residential Real Estate
    JEL: D14 G21 D12 R3
    Date: 2016–12–08
  5. By: Stephanie Moulton (The Ohio State University); Donald Haurin (The Ohio State University); Samuel Dodini (Cornell University); Maximilian D. Schmeiser (Amazon and the University of Wisconsin)
    Abstract: This paper examines how the extraction of home equity, including but not limited to equity extracted through reverse mortgages, affects credit outcomes of senior households. We use data from the Federal Reserve Bank of New York/Equifax Consumer Credit Panel, supplemented with our unique credit panel dataset of reverse mortgage borrowers. We track credit outcomes for seniors who extracted equity through cash-out refinancing, home equity lines of credit or home equity loans between 2008 and 2011, and a random sample of nonextractors. We estimate differences-in-differences by extraction channel using individual, fixed-effects panel regression. We find that seniors extracting equity through reverse mortgages have greater reductions in consumer debt, and are less likely to become delinquent or foreclose three years post origination relative to other extractors and nonextractors. These effects are greater among households who experienced a credit shock within the two years prior to loan origination. To help isolate the effect of the extraction channel on credit outcomes, we re-estimate our models with a matched sample of consumers at the time of extraction. We find that otherwise similar HECM borrowers have larger reductions in credit card debt post-extraction than other equity borrowers and non-borrowers, with no significant difference in the rates of delinquency on non-housing debt post extraction. For HECM borrowers, we find that increased initial withdrawal and increased monthly cash flow contribute to the reduction in credit card debt.
    Date: 2016–09
  6. By: Zuzana FUNGACOVA (Bank of Finland); Anastasiya SHAMSHUR (University of East Anglia); Laurent WEILL (LaRGE Research Center, Université de Strasbourg)
    Abstract: Despite the extensive debate on the effects of bank competition, only a handful of single-country studies deal with the impact of bank competition on the cost of credit. We contribute to the literature by investigating the impact of bank competition on the cost of credit in a cross-country setting. Using a panel of firms from 20 European countries covering the period 2001–2011, we consider a broad set of measures of bank competition, including two structural measures (Herfindahl-Hirschman index and CR5), and two non-structural indicators (Lerner index and H-statistic). We find that bank competition increases the cost of credit and observe that the positive influence of bank competition is stronger for smaller companies. Our findings accord with the information hypothesis, whereby a lack of competition incentivizes banks to invest in soft information and conversely increased competition raises the cost of credit. This positive impact of bank competition is however influenced by the institutional and economic framework, as well as by the crisis.
    JEL: G21 L11
    Date: 2016
  7. By: Paul S. Calem; Ricardo Correa; Seung Jung Lee
    Abstract: We analyze how two types of recently used prudential policies affected the supply of credit in the United States. First, we test whether the U.S. bank stress tests had any impact on the supply of mortgage credit. We find that the first Comprehensive Capital Analysis and Review (CCAR) stress test in 2011 had a negative effect on the share of jumbo mortgage originations and approval rates at stress-tested banks—banks with worse capital positions were impacted more negatively. Second, we analyze the impact of the 2013 Supervisory Guidance on Leveraged Lending and subsequent 2014 FAQ notice, which clarified expectations on the Guidance. We find that the share of speculative-grade term-loan originations decreased notably at regulated banks after the FAQ notice.
    Keywords: Bank stress tests ; CCAR ; Home Mortgage Disclosure Act (HMDA) data ; Jumbo mortgages ; Leveraged lending ; Macroprudential policy ; Shared National Credit (SNC) data ; Interagency Guidance on Leveraged Lending ; Syndicated loan market
    JEL: G21 G23 G28
    Date: 2016–12–13
  8. By: Gergely Patrik Balla (Magyar Nemzeti Bank (Central Bank of Hungary)); Tamás Ilyés (Magyar Nemzeti Bank (Central Bank of Hungary))
    Abstract: In our study we analysed the effect of the introduction of an instant payment system in Hungary, using a large number of transaction level data of an extended time period, simulating the operation of the payment system. We analysed the two main theoretical models of instant payments: instant settlement in central bank money, and instant clearing with prefunded cyclical settlement. For both models we estimated the effect of using low and high transaction limits. We differentiated three liquidity costs associated with the operation of such a system. First, we estimated the impact on settlement queues in the real-time gross settlement system and calculated the costs of extra liquidity needed to dissolve the queues and support the continuous operation of the system. In the second step we estimated the liquidity needs of a prefunded instant payment system by different confidence levels and prudential requirements. Lastly, we analysed the effects of the different models on the stability of the payment system. The results clearly show that the costs associated with the dissolution of queues are marginal because retail payments comprise a very small percentage of the inter-bank payment flows, thus the instant payment system would not generate additional settlement queues. On the other hand, liquidity needs of a prefunded model can be significant, especially with high collateral confidence levels and high transaction value limits. However, these liquidity needs can be lowered by seasonal adjustments to the prefunded amounts and by using a robust but rational collateral confidence level. We also show that these costs are relatively higher for institutions with fewer customers as their payments turnover is more volatile, and so they have to make relatively larger prefunded deposits.
    Keywords: instant payments, retail payments, liquidity management, RTGS
    JEL: C53 G17 G29
    Date: 2016
  9. By: Teodora Paligorova; João Santos
    Abstract: We document that the structure of syndicates affects loan renegotiations. Lead banks with large retained shares have positive effects on renegotiations. In contrast, more diverse syndicates deter renegotiations, but only for credit lines. The former result can be explained with coordination theories. The puzzling effect of syndicate diversity in term loan renegotiations derives from the growth of collateralized loan obligations (CLOs) in the syndicated loan market and the coordination between these vehicles and lead banks. CLOs that have a relationship with the lead bank of the renegotiated loan are strong supporters of amount-increase renegotiations, arguably because this gives them access to attractive investments. Related CLOs fund not only their portion of the loan increase, but also the portion that was supposed to be funded by the lead bank. Our findings highlight the previously unrecognized role of the growing presence of non-bank lenders in corporate lending.
    Keywords: Financial Institutions, Financial system regulation and policies
    JEL: G21 G23
    Date: 2016
  10. By: Gattini, Luca; Zagorisiou, Angeliki
    Abstract: This study contributes to the analysis of cross border banking behavior in CESEE (Central Eastern and South Eastern Europe). It detects potential transmission channels from parent to subsidiary banks based on a newly constructed database (323 banks operating in the region and 84 parent banks over the period 2000-2014), which allows for the identification of ultimate ownership over time. On the whole, we find that subsidiary banks provide an extra boost to credit growth at the domestic level. However we detect that domestic and subsidiary banks contracted credit similarly after the financial crisis. Moreover, subsidiaries' ability to extend credit is dependent on home country macroeconomic and financial conditions as well as parent banks' characteristics such as asset quality. Finally, an excessive credit expansions coupled with reductions of capital ratios at the parent bank level jeopardizes subsidiaries' lending capacity. Our findings call for home and host actors to continue to foster cross-border coordination and dialogue.
    Keywords: Cross border banking,Parent and subsidiary banks,Central and Eastern Europe,Asset quality
    JEL: C23 E44 F23 G21
    Date: 2016
  11. By: Tano Santos; Pietro Veronesi
    Abstract: Many stylized facts of leverage, trading, and asset prices follow from a frictionless general equilibrium model that features agents’ heterogeneity in endowments and habit preferences. Our model predicts that aggregate debt increases in good times when stock prices are high, return volatility is low, and levered agents enjoy a “consumption boom.” Our model is consistent with poorer agents borrowing more and with recent evidence on intermediaries’ leverage being a priced factor of asset returns. In crisis times, levered agents strongly deleverage by “fire selling” their risky assets as asset prices drop. Yet, consistently with the data, their debt-to-wealth ratios increase because their wealth decline faster due to higher discount rates.
    JEL: E21 E44 G12
    Date: 2016–12
  12. By: Zuzana FUNGACOVA (Bank of Finland); Iftekhar HASAN (Fordham University and Bank of Finland); Laurent WEILL (LaRGE Research Center, Université de Strasbourg)
    Abstract: Trust in banks is considered essential for an effective financial system, yet little is known about what determines trust in banks. Only a handful of single-country studies discuss the topic, so this paper aims to fill the gap by providing a cross-country analysis on the level and determinants of trust in banks. Using World Values Survey data covering 52 countries during the period 2010–2014, we observe large cross-country differences in trust in banks and confirm the influence of several sociodemographic indicators. Our main findings include: women tend to trust banks more than men; trust in banks tends to increase with income, but decrease with age and education; access to television enhances trust, while internet access erodes trust; and religious, political, and economic values may affect trust in banks. Notably, religious individuals tend to put greater trust in banks, but differences are observed across denominations. The holding of pro-market economic views is also associated with greater trust in banks.
    JEL: G21 O16 Z1
    Date: 2016
  13. By: Barsky, Robert (Federal Reserve Bank of Chicago); Bogusz, Theodore (University of Michigan); Easton, Matthew (Federal Reserve Bank of Chicago)
    Abstract: Markets for risky loans clear on two dimensions - an interest rate (or equivalently a spread above the riskless rate) and a specification of the amount of collateral per dollar of lending. The latter is summarized by the margin or "haircut" associated with the loan. Some key models of endogenous collateral constraints imply that the primary equilibrating force will be in the form of haircuts rather than movements in interest rate spreads. Indeed, an important benchmark model, derived in a two-state world, implies that haircuts will adjust to render all lending riskless, and that a loss of risk capital on the part of borrowers has profound effects on asset prices. Quantitative analysis of a model of collateral equilibrium with a continuum of states turns these results on their heads. The bulk of the response to lenders' perception of increased default risk is in the form of higher default premia. Further, with high initial leverage, reductions in risk capital decrease equilibrium margins almost proportionately, while asset prices barely move. To the extent that one believes that it is a stylized fact that haircuts move more than spreads - as seen, for example, in bilateral repo data from 2007-2008 - this reversal is disturbing.
    Keywords: leverage cycle; margins; financial crises; repo; risk; collateral; belief disagreements
    JEL: D53 E44 G00 G01
    Date: 2016–11–29
  14. By: Cecilia Caglio; R. Matthew Darst; Eric Parolin
    Abstract: This note uses a unique dataset that matches banks' securities and loan portfolios to bank credit derivative transactions to characterize the basic features of how the largest banks in the U.S. use the single name CDS market in their investment portfolios.
    Date: 2016–12–22
  15. By: David Rappoport
    Abstract: This paper presents empirical evidence on the effect of banks' financial position on credit growth using a sample of 29 OECD countries. The failure of the exogeneity assumption of explanatory variables is addressed using dynamic panel type instruments. The empirical results show that among capital, profits and liquidity at the end of the previous year, capital is the most important predictor of credit growth in the current year. The relationship between capital and credit growth is non-linear. Point estimates from the preferred econometric specification imply that at the sample mean a one standard deviation increase (decrease) in capital is associated with an increase (decrease) of 0.8 (0.3) percentage points in credit growth upon impact and 1.6 (0.6) percentage points in the long-run.
    Keywords: Bank lending ; Banking ; Bank financial position ; Credit supply ; OECD
    JEL: G21 E44 G28
    Date: 2016–09–19
  16. By: Hanspal, Tobin
    Abstract: I show that disruptions to personal sources of financing, aside from commercial lending supply shocks, impair the survival and growth of small businesses. Entrepreneurs holding deposit accounts at retail banking institutions that defaulted following the financial crisis reduce personal borrowing and are consequently more likely to exit their firm. Exposure to the corresponding investment losses from delisted publicly traded bank stocks strongly reduces the rate of firm survival, particularly for early-stage ventures. At the intensive margin, owners who remain in business reduce employees after personal wealth losses. My results suggest that personal finance is an important component of firm financing.
    Keywords: Entrepreneurship,Small business,Personal finance,Financial crisis,Bank defaults
    JEL: L26 D14 G01 G11 G21 G33
    Date: 2016
  17. By: Mikel Bedayo (Banco de España)
    Abstract: Firms’ incentives to join other firms to collectively apply for a unique loan is empirically studied in this paper. When several firms jointly apply for a unique loan an association of firms is created. We identify the associations that had access to credit in Belgium over the period 2001-2011 and the firms that created each association, observing the amount of credit both the firms and the associations obtained from each financial institution they used. We analyze the amount of credit obtained by firms depending on whether they belonged to any association, firms’ likelihood to form associations, the impact of belonging to an association on the amount of credit firms’ receive from banks, as well as the effect of not obtaining any credit directly on the amount the associations these firms create get. Further, we analyze whether associations formed by common-ownership firms have access to higher amount of credit than the rest of associations. We find that big and old firms are more likely to join other firms to mutually apply for credit and that associations get more credit if all its members use the same bank the association uses to get credit from. Furthermore, the lower firms’ credit over the last year the more likely they are to form associations to obtain credit, and we show that associations composed of small firms with no credit history are specially credit constrained.
    Keywords: Associations, Finance, Access to credit, Relationship banking, Belgium
    JEL: G21 G30
    Date: 2016–12
  18. By: S.M. Ali Abbas; Raphael Espinoza (UCL School of Slavonic and East European Studies)
    Abstract: This paper identifies the determinants of commercial banks’ holdings of government paper, using a new cross-sectional dataset on government and private returns for 594 banks from 70 emerging and low-income countries for the year 2005. The paper finds that demand for government securities responds intuitively and sizeably to variations in the mean and variance of government and private returns. Regulatory factors also matter: higher cash reserve requirements tilt banks’ portfolios away from government securities and toward riskier private lending while higher capital adequacy requirements work the other way. The association between actual portfolios and the identified determinants is noticeably weaker at low levels of government bond holdings.
    Keywords: Government bonds; government securities, mean-variance; CAPM; banks’ portfolio choice; regulatory constraints; crowding-out
    JEL: D22 G32
    Date: 2016

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