nep-ban New Economics Papers
on Banking
Issue of 2017‒01‒08
29 papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Banking industry dynamics and size-dependent capital regulation By Tirupam Goel
  2. Non-performing loans and Financial Development: New Evidence By Ozili, Peterson K
  3. The currency dimension of the bank lending channel in international monetary transmission By Elod Takats; Judit Temesvary
  4. Real Regulatory Capital Management and Dividend Payout: Evidence from Available-for-Sale Securities / Gestion du capital réglementaire et politique de dividende : Le cas des valeurs mobilières disponibles à la vente By Michele Fabrizi; Elisabetta Ipino; Michel Magnan; Antonio Parbonetti
  5. Bank networks: contagion, systemic risk and prudential policy By Iñaki Aldasoro; Domenico Delli Gatti; Ester Faia
  6. The credibility of European banks’ risk-weighted capital: structural differences or national segmentations? By Brunella Bruno; Giacomo Nocera; Andrea Resti
  7. Interconnectedness Among Banks, Financial Stability, and Bank Capital Regulation By Yehning Chen; Iftekhar Hasan
  8. Economics of Regulation: Credit Rationing and Excess Liquidity By cho, hyejin
  9. Bank lending and loan quality: the case of India By Pallavi Chavan; Leonardo Gambacorta
  10. Do Social Networks Encourage Risk-Taking? Evidence from Bank CEOs By Yiwei Fang; Iftekhar Hasan; LiuLing Liu; Haizhi Wang
  11. Did the founding of the Federal Reserve affect the vulnerability of the interbank system to contagion risk? By Mark A Carlson; David C Wheelock
  12. Challenges for ensuring the information security of commercial banks By Bojinov, Bojidar
  13. Advanced Lending Operations and Credit Risk Assessment Using Purchase Order Information By Suguru Yamanaka
  14. Central Bankers as Supervisors: Do Crises Matter? By Donato Masciandaro; Davide Romelli
  15. Evaluating the Impact of Macroprudential Policies in Colombia's Credit Growth By Esteban Gómez; Angélica Lizarazo; Juan Carlos Mendoza; Andrés Murcia
  16. The Real Effects of Capital Requirements and Monetary Policy: Evidence from the United Kingdom By Filippo De Marco; Tomasz Wieladek
  17. Hazardous tango: Sovereign-bank interdependencies across countries and time By Jack Bekooij; Jon Frost; Remco van der Molen; Krzysztof Muzalewski
  18. Externality of Stock Liquidity to the Cost of Borrowing By Bill Francis; Iftekhar Hasan; Suresh Babu Mani; An Yan
  19. A Spark from the Public Sector: Co-lending by Government-owned and Private-sector Lenders By Veljko Fotak
  20. Bank Secrecy in Offshore Centres and Capital Flows: Does Blacklisting Matter? By Olga Balakina; Angelo D’Andrea; Donato Masciandaro
  21. Macroeconomics of bank capital and liquidity regulations By Frederic Boissay; Fabrice Collard
  22. The Impact of Anti-Money Laundering Regulation on Payment Flows: Evidence from SWIFT Data - Working Paper 445 By Matt Collin , Samantha Cook and Kimmo Soramäki
  23. Banks' strategies and cost of money: effects of the financial crisis on the European electronic overnight interbank market By Giulia Iori; Mauro Politi; Guido Germano; Giampaolo Gabbi
  24. The Price of Being a Systemically Important Financial Institution (SIFI) By Dacorogna, Michel M; Busse, Marc
  25. Interbank Markets and Credit Policies amid a Sovereign Debt Crisis By Lakdawala, Aeimit; Minetti, Raoul; Olivero, María Pía
  26. The Volcker Rule and Market-Making in Times of Stress By Jack Bao; Maureen O'Hara; Xing Zhou
  27. Bank Finance for Private Firms in China: Does Political Capital Still Pay Off? By Wenli Cheng; Yongzeng Wu
  28. Fear, Anger and Credit. On Bank Robberies and Loan Conditions By Paola Morales Acevedo; Steven Ongena
  29. The bank lending channel of conventional and unconventional monetary policy By Ugo Albertazzi; Andrea Nobili; Federico M. Signoretti

  1. By: Tirupam Goel
    Abstract: This paper presents a general equilibrium model with a dynamic banking sector to characterize optimal size-dependent bank capital regulation (CR). Bank leverage choices are subject to the risk-return trade-off: high leverage increases expected return on capital, but also increases return variance and bank failure risk. Financial frictions imply that bank leverage choices are socially inefficient, providing scope for a welfare-enhancing CR that imposes a cap on bank leverage. The optimal CR is tighter relative to the pre-crisis benchmark. Optimal CR is also bank specific, and tighter for large banks than for small banks. This is for three reasons. First, allowing small banks to take more leverage enables them to potentially grow faster, leading to a growth effect. Second, although more leverage by small banks results in a higher exit rate, these exits are by the less efficient banks, leading to a cleansing effect. Third, failures are more costly among large banks, because these are more efficient in equilibrium and intermediate more capital. Therefore, tighter regulation for large banks renders them less prone to failure, leading to a stabilization effect. In terms of industry dynamics, tighter CR results in a smaller bank exit rate and a larger equilibrium mass of better capitalized banks, even though physical capital stock and wages are lower. The calibrated model rationalizes various steady state moments of the US banking industry, and provides general support for the Basel III GSIB framework.
    Keywords: Size distribution, entry & exit, heterogeneous agent models, size dependent policy
    Date: 2016–12
  2. By: Ozili, Peterson K
    Abstract: This paper examine the relationship between non-performing loans (NPLs) and financial (sector) development. The study is motivated by the scant knowledge on how financial development structures impact non-performing loans across banking sectors around the world. In the pooled full country empirical analysis, we find that (i) private credit to GDP ratio is positively associated with non-performing loans, (ii) NPLs are inversely associated with bank efficiency, loan loss coverage, banking competition and banking system stability, and (iii) NPL is positively associated with foreign bank presence, banking crises and bank concentration. We also find that efficient and stable banking sectors experience higher non-performing loans. In the regional empirical analysis, NPLs are negatively associated with regulatory capital ratio and bank liquidity while the graphical analysis show that NPLs are inversely related to financial development and profitability in several regions.
    Keywords: Non-performing loans; credit risk; financial development; banking crisis; foreign banks; financial intermediation; banking sector development; efficiency; liquidity; asset quality; bank concentration, banking stability; Sub-saharan Africa; MENA; Europe; Asia-Pacific; Latin America
    JEL: E3 E32 E6 G1 G2 G21
    Date: 2017–01–02
  3. By: Elod Takats; Judit Temesvary
    Abstract: We investigate how the use of a currency transmits monetary policy shocks in the global banking system. We use newly available unique data on the bilateral crossborder lending flows of 27 BIS-reporting lending banking systems to over 50 borrowing countries, broken down by currency denomination (USD, EUR and JPY). We have three main findings. First, monetary shocks in a currency significantly affect cross-border lending flows in that currency, even when neither the lending banking system nor the borrowing country uses that currency as their own. Second, this transmission works mainly through lending to non-banks. Third, this currency dimension of the bank lending channel works similarly across the three currencies suggesting that the cross-border bank lending channel of liquidity shock transmission may not be unique to lending in USD.
    Keywords: Cross-border bank lending, bank lending channel, monetary transmission, currency denomination
    Date: 2016–12
  4. By: Michele Fabrizi; Elisabetta Ipino; Michel Magnan; Antonio Parbonetti
    Abstract: The 2007–2009 financial crisis has re-ignited a long-running debate about the relative merits of historical cost accounting (HCA) or fair value accounting as foundations for prudential oversight, including the calculation of regulatory capital. Available-for-sale securities provide a good setting to further explore this issue. Using a sample of 5,333 firm-year observations representing 721 unique U.S. banks and bank holding companies between 1998 and 2013, we present evidence that regulatory capital based on HCA induces banks to engage in gains trading activities to improve their capital position and pay dividends. We also document that banks experiencing a decrease in regulatory capital and banks with a higher percentage of institutional investors are more prone to engage in gains trading to pay dividends. Finally, our findings reveal that to counterbalance the increased risk, banks change their lending behavior and decrease the riskiness of their trading portfolios. Overall, our results reveal the potential side effects linked to the use of HCA as a foundation to compute regulatory capital and suggest that HCA is not a panacea. La crise financière de 2007-2009 a relancé le débat quant aux avantages et inconvénients comparés de la comptabilité au coût historique (ou amorti) et de la comptabilité à la juste valeur à des fins de réglementation, notamment en ce qui a trait au calcul du capital. Compte tenu de leur comptabilité particulière, les valeurs mobilières disponibles à la vente offrent un contexte intéressant pour l’étude de cette question. À partir des données financières d’un échantillon de 721 banques américaines au cours de la période 1998-2013, nous constatons que le calcul du capital réglementaire basé sur le coût historique amène les banques à effectuer des opérations de cessions de titres disponibles à la vente en vue de réaliser des gains constatés aux résultats, ce qui leur permet d’améliorer leur ratio de capital réglementaire et d’augmenter leurs dividendes. Nous constatons également que les banques souffrant de pressions à la baisse quant à leur ratio de capitalisation et ayant une plus grande proportion d’investisseurs institutionnels dans leur actionnariat ont une plus grande propension à effectuer de telles opérations. Par contre, nous constatons également qu’afin de contrer l’accroissement du risque financier qui en résulte, les banques modifient leur stratégie de prêt et réduisent le niveau de risque de leur portefeuille de négociation. Dans l’ensemble, nos résultats tendent à montrer les effets secondaires découlant de l’utilisation du coût historique en tant que fondement du calcul du capital réglementaire.
    Keywords: Banks, Regulatory capital, Available-for-sale securities, Realized gains, Realized losses, Dividend payout, banques, capital réglementaire, titres disponibles à la vente, gains réalisés, pertes constatées, politique de dividende
    Date: 2016–12–19
  5. By: Iñaki Aldasoro; Domenico Delli Gatti; Ester Faia
    Abstract: We present a network model of the interbank market in which optimizing risk averse banks lend to each other and invest in non-liquid assets. Market clearing takes place through a tâtonnement process which yields the equilibrium price, while traded quantities are determined by means of an assortative matching process. Contagion occurs through liquidity hoarding, interbank interlinkages and fire sale externalities. The resulting network configuration exhibits a core-periphery structure, disassortative behavior and low density. Within this framework we analyse the effects of a stylized set of prudential policies on the stability/efficiency trade-off. Liquidity requirements unequivocally decrease systemic risk, but at the cost of lower efficiency (measured by aggregate investment in non-liquid assets). Equity requirements also tend to reduce risk (hence increase stability), though without reducing significantly overall investment. On this basis, our results provide general support for the Basel III approach based on complementary regulatory metrics.
    Keywords: Banking networks, systemic risk, contagion, fire sales, prudential regulation
    Date: 2016–12
  6. By: Brunella Bruno; Giacomo Nocera; Andrea Resti
    Abstract: Supranational institutions, academics and market analysts have increasingly questioned the reliability of bank risk-weighted assets (RWAs), a cornerstone of the system of minimum capital ratios designed by the Basel Committee on Banking Supervision. In fact, significant differences can be found in the banks’ average risk weights, both over time and across countries. Such differences can be explained by several factors, some of which may reflect the actual risk content of bank’s assets, while others may conceal distortions due to “RWA tweaking” and supervisory segmentations. We analyze a sample of 50 large European banks between 2008 and 2012 and document several meaningful findings. First, risk weights are affected by the banks’ size, business model and asset mix. Second, the adoption of internal ratings based (IRB) approaches is (as expected) a powerful driver of bank risk-weighted assets. Third, lower risk weights are positively linked to the banks’ capital cushion. Fourth, IRB adoption is more widespread in countries where supervisory capture is potentially stronger, due to a banking industry that is both larger (compared to GDP) and concentrated. Fifth, regulatory risk weights are not disconnected from market-based measures of bank risk.
    Keywords: Banks, capital, risk-weighted assets, regulation, Basel accords
    JEL: G21 G28
    Date: 2015
  7. By: Yehning Chen; Iftekhar Hasan
    Abstract: This paper proposes that whether interconnectedness among banks leads to financial instability depends on banks’ leverage decisions. It extends the network model in Allen et al. (2012) to study the relationship between interconnectedness and the banks’ failure probability. In the model, banks adopt the Value-at-Risk rule to make the capital structure decisions and the risk of contagion is neglected. The paper finds that interconnectedness may either increase or decrease the banks’ failure probability. It also shows that interconnection is more harmful when banks are more over-optimistic about their prospects, and that financial integration may hurt financial stability. In addition, the adverse impact of interconnectedness on the banks’ failure probability can be alleviated if bank capital regulation is properly designed. This paper supports the conclusion in Allen and Gale (2000) that a complete financial system in which each bank is connected to all the other banks is superior to incomplete ones in which banks are connected to only a part of other banks.
    Keywords: financial network, contagion, interconnectedness, diversification, bank capital regulation
    JEL: G01 G21
    Date: 2016
  8. By: cho, hyejin
    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: D51 E58 L51
    Date: 2016
  9. By: Pallavi Chavan; Leonardo Gambacorta
    Abstract: This paper analyses how non-performing loans (NPLs) of Indian banks behave through the cycle. We find that a one-percentage point increase in loan growth is associated with an increase in NPLs over total advances (NPL ratio) of 4.3 per cent in the long run with the response being higher during expansionary phases. Furthermore, NPL ratios of banks are found to be sensitive to the interest rate environment and the overall growth of the economy. Notwithstanding differences in management and governance structures, there is a procyclical risk-taking response to credit growth in the case of both public and private banks with private banks being more reactive to changes in interest rate and business cycle conditions.
    Keywords: Procylicality, loan quality, bank lending, bank ownership, moral hazard
    Date: 2016–12
  10. By: Yiwei Fang; Iftekhar Hasan; LiuLing Liu; Haizhi Wang
    Abstract: This paper studies how CEO social networks affect bank risk-taking. Using a sample of 481 publicly traded U.S. banks, we find that bank risk increases with CEOs’ social networks. Our results are robust with a bank fixed-effects model and a difference-in-difference approach, as well as with various alternative bank risk measures. Alternative explanations such as corporate governance, managerial ownership, compensation, or CEO ability do not drive the findings. We evaluate potential channels through which social networks affect bank risk and find that CEO social networks increase bank risk more when banks face opaque information environments, when CEO job market conditions worsen, and when there are higher odds of group-think mentality in the networks. We further find that social networks present banks with an inefficient trade-off between risk and return, showing a “dark side” of social networks.
    Keywords: Risk-taking, social networks, bank CEOs
    JEL: L14 G21 G31
    Date: 2016
  11. By: Mark A Carlson; David C Wheelock
    Abstract: As a result of legal restrictions on branch banking, an extensive interbank system developed in the United States during the 19th century to facilitate interregional payments and flows of liquidity and credit. Vast sums moved through the interbank system to meet seasonal and other demands, but the system also transmitted shocks during banking panics. The Federal Reserve was established in 1914 to reduce reliance on the interbank market and correct other defects that caused banking system instability. Drawing on recent theoretical work on interbank networks, we examine how the Fed's establishment affected the system's resilience to solvency and liquidity shocks and whether these shocks might have been contagious. We find that the interbank system became more resilient to solvency shocks, but less resilient to liquidity shocks, as banks sharply reduced their liquidity after the Fed's founding. The industry's response illustrates how the introduction of a lender of last resort can alter private behavior in a way that increases the likelihood that the lender may be needed.
    Keywords: Federal Reserve System, contagion, systemic risk, seasonal liquidity demand, interbank networks, banking panics, National Banking system
    Date: 2016–12
  12. By: Bojinov, Bojidar
    Abstract: The introduction of new information and communication technology into banking has radically altered the essence and character of banking activity. Alongside the competitive advantages and the direct economic effect of the advent of high-tech innovation in the banking sector, credit institutions are facing a number of challenges, one of them being to ensure the security of their products and related information. The main objective of this research is to elucidate the nature, instances, and methods of managing data security in commercial banks. An emphasis is put on some sources of operational risk in commercial banks which have a direct impact on the potentially growing risk in terms of data security. The research also focuses on the role of bank management in governing that process, as well as the methods and mechanisms for reducing the occurrence of the risk related to information security.
    Keywords: banks, data security, information technology, distance banking, online banking
    JEL: G21
    Date: 2016
  13. By: Suguru Yamanaka (Bank of Japan)
    Abstract: This paper proposes advanced lending operations and credit risk assessment using purchase order information from borrower firms. Purchase order information from a borrower firm is useful for financial institutions to evaluate the actual business conditions of the firm. This paper shows the application of purchase order information to lending operations and credit risk assessment, and reveals its effectiveness. First, we illustrate purchase order financing, which is the lending method backed by purchase order information from borrowers. With purchase order financing, firms that consistently receive purchase orders from credit-worthy firms can borrow money under more favorable lending terms than the usual lending terms based on the financial statements of the borrower firm. Second, we propose real-time credit risk monitoring of firms. Financial institutions can monitor the actual business conditions of borrower firms by evaluating the firm's asset value using purchase order information. A combination of traditional firm monitoring using financial statements and high-frequency monitoring using purchase order information enables financial institutions to assess the business conditions of borrower firms more precisely and efficiently. Then, with high-frequency data, financial institutions can give borrower firms appropriate support if necessary on a timely basis.
    Keywords: Purchase order; Lending operations; Credit risk
    Date: 2016–12–27
  14. By: Donato Masciandaro; Davide Romelli
    Abstract: Following the 2007-09 Global Financial Crisis many countries have changed their financial supervisory architecture by increasing the involvement of central banks in supervision. This has led many scholars to argue that financial crises are an important driver in explaining the evolution of the role of central banks as supervisors. In this paper, we formally test whether there is any link between supervisory reforms and the occurrence of financial crises. We study the evolution of financial sector supervision by constructing a new database that captures the full set of supervisory reforms implemented during the period 1996-2013 in a large sample of countries. Our findings support the view that systemic banking crises are important drivers of reforms in supervisory structure. However, we also highlight an equally important “bandwagon” effect, namely a tendency of countries to reform their financial supervisory architecture when others do so as well. Our finding can explain how it is possible to identify a political driver in reforming the supervisory settings notwithstanding the economic theory does not indicate an optimal institutional setting. We construct several measures of spatial spillover effects and show that they can explain institutional similarities among countries and impact the probability of reforming the role of the central bank in financial sector supervision. We also stress the importance of the degree of central bank independence in the choice to concentrate financial supervision in the hands of the central bank. Our results support the view that the traditional theory of central banking has to be integrated with political economy considerations.
    Keywords: Financial Supervision, Central Banking, Central Bank Independence, Political Economy, Banking Supervision
    JEL: E58 E63 G18
    Date: 2015
  15. By: Esteban Gómez (Banco de la República de Colombia); Angélica Lizarazo (Banco de la República de Colombia); Juan Carlos Mendoza (Banco de la República de Colombia); Andrés Murcia (Banco de la República de Colombia)
    Abstract: Macroprudential tools have been used around the world as a mechanism to control potential risks and imbalances in the financial sector. Colombia is a good example of a country that has employed different regulatory measures to manage systemic risks in the economy. The purpose of this paper is to evaluate the effectiveness of two policies employed in said country to increase the resilience of the system and to moderate exuberance in credit supply. The first measure, the countercyclical reserve requirement, was implemented in 2007 to control excessive credit growth. The second tool corresponds to the dynamic provisioning scheme for commercial loans, whose objective was to consolidate a countercyclical buffer through loan loss provision requirements. To perform this analysis a rich data set based on loan-by-loan information for Colombian banks during the period between 2006 and 2009 is used. A fixed effects panel model is estimated using debtors', banks' and macroeconomic characteristics as control variables. In addition, a difference in differences estimation is performed to evaluate the impact of the aforementioned policies. Findings suggest that dynamic provisions and the countercyclical reserve requirement had a negative effect on credit growth, and that said effect differs conditioned on bank-specific characteristics. Results also suggest that the aggregate macroprudential policy stance in Colombia has worked as an effective stabilizer of credit cycles, with some preliminary evidence also pointing towards significant effects in reducing bank risk-taking. Moreover, evidence is found that macroprudential policies have worked as a complement of monetary policy, accompanying the stabilizing effects of changes in interest rates on credit growth. Classification JEL: E58, G28, C23
    Keywords: Macroprudential policies, Reserve requirements, Credit growth, Dynamic provisioning, Credit registry data.
    Date: 2017–01
  16. By: Filippo De Marco; Tomasz Wieladek
    Abstract: We study the effects of bank-specific capital requirements on Small and Medium Enterprises (SMEs) in the UK from 1998 to 2006. Following a 1% increase in capital requirements, SMEs’ asset growth contracts by 6.9% in the first year of a new bankfirm relationship, but the effect declines over time. We also compare the effects of capital requirements to those of monetary policy. Monetary policy only affects firms with higher credit risk and those borrowing from small banks, whereas capital requirements affect both. Capital requirement changes, instead, do not affect firms with alternative sources of finance, but monetary policy shocks do.
    Keywords: Capital requirements, SME real effects, relationship lending, microprudential and monetary policy
    JEL: G21 G28 E51
    Date: 2016
  17. By: Jack Bekooij; Jon Frost; Remco van der Molen; Krzysztof Muzalewski
    Abstract: Sovereign-bank feedback loops have been at the heart of the euro area crisis and many previous debt crises. We regress a market measure of interdependency - the correlation between sovereign and bank credit default swaps (CDS) - against various fundamental indicators of interlinkages and risk for 65 banks from 23 countries from Q1 2006 to Q4 2015. We find evidence that direct sovereign debt holdings of banks, implicit contingent liabilities of the government to banks and market volatility are significantly linked to higher correlations. While such CDS correlations are generally higher for banks in countries bank-based financial systems, we do not find these channels to be stronger in these countries than market-based systems. Finally, we find that bank CDS levels perform better in explaining sovereign CDS levels in periods of high volatility. Overall, these results support the notion of non-linear effects and spillovers in CDS markets.
    Keywords: sovereign debt; banking crises; financial stability; CDS markets
    JEL: G01 G21 H63
    Date: 2016–12
  18. By: Bill Francis; Iftekhar Hasan; Suresh Babu Mani; An Yan
    Abstract: The paper investigates whether stock liquidity of firms is valued by lending banks revealing that firms with higher liquidity in the capital market pay lower spreads for the loans they obtain. This relationship is causal as evidenced by using the decimalization of tick size as an exogenous shock to stock liquidity in a difference-in-differences setting. Reduction in financial constraint and improvement in corporate governance induced by higher stock liquidity are potential mechanisms through which liquidity impacts loan spreads. These higher liquidity firms also receive less stringent non-price loan terms, e.g., longer loan maturity and less required collateral.
    Keywords: Stock liquidity, Cost of bank loans
    JEL: G12 G21
    Date: 2016
  19. By: Veljko Fotak
    Abstract: Co-lending by private-sector and government-owned lenders accounts for nearly one-tenth of all syndicated-loan funding to corporate borrowers over the three decades spanning 1980 to 2010. I find evidence that private-sector institutions co-lend with government-owned lenders to benefit from better legal protection and implicit debt guarantees. This leads to loans with lower spreads, longer maturities, larger syndicates, less collateral, and a greater participation of foreign lenders, particularly for borrowers headquartered in countries with weak property rights. Yet, firms that receive loans from a mixed syndicate comprised of both private and government-owned lenders show a decline in profitability and valuation in subsequent years, which suggests that governmentowned lenders fail to efficiently allocate funding.
    Keywords: Government-owned banks, Syndicated loans
    JEL: G15 G32 G38
    Date: 2016
  20. By: Olga Balakina; Angelo D’Andrea; Donato Masciandaro
    Abstract: This study analyses cross-border capital flows in order to verify the existence and direction of the effect of the soft regulation promoted by international organizations against banking secrecy which characterized the so called tax and financial heavens. This effect is called in the literature Stigma Effect but both the existence and the direction of the stigma effect are far from being obvious. The international capital flows can simply neglect the relevance of the blacklisting, or worst, the attractiveness of banking secrecy can produce a race to the bottom: the desire to elude more transparent regulation can sensibly influence the capital movements. We test whether being included and later excluded from the FATF blacklist is an effective measure that influences countries’ cross-border capital flows. Using annual panel data for the period 1996-2014, we apply our framework to 126 countries worldwide. We find evidence that in general the stigma effect does not exist.
    Keywords: bank secrecy, offshore centres, international capital flows, name and shame regulation, money laundering
    JEL: F21 K42
    Date: 2016
  21. By: Frederic Boissay; Fabrice Collard
    Abstract: We study the transmission mechanisms of liquidity and capital regulations as well as their effects on the economy and welfare. We propose a macro-economic model in which a regulator faces the following trade-off. On the one hand, banking regulations may reduce the aggregate supply of credit. On the other hand, they promote the allocation of credit to its best uses. Accordingly, in a regulated economy there is less, but more productive lending. Based on a version of the model calibrated on US data, we find that both liquidity and capital requirements are needed, and must be set relatively high. They also mutually reinforce each other, except when liquid assets are scarce. Our analysis thus provides broad support for Basel III's "multiple metrics" framework.
    Keywords: Financial frictions, externalities, banking regulation
    Date: 2016–12
  22. By: Matt Collin , Samantha Cook and Kimmo Soramäki
    Abstract: Regulatory pressure on international banks to fight money laundering (ML) and terrorist financing (TF) increased substantially in the past decade. At the same time there has been a rise in the number of complaints of banks denying transactions or closing the accounts of customers either based in high risk countries or attempting to send money there, a process known as de-risking. In this paper, we investigate the impact of an increase in regulatory risk, driven by the inclusion of countries on an internationally-recognized list of high risk jurisdictions, on subsequent cross-border payments. We find countries that have been added to a high risk greylist face up to a 10 percent decline in the number of cross border payments received from other jurisdictions, but no change in the number sent. We also find that a greylisted country is more likely to see a decline in payments from other countries with weak AML/CFT institutions. We find limited evidence that these effects manifest in cross border trade or other flows. Given that countries that are placed on these lists tend to be poorer on average, these impacts are likely to be more strongly felt in developing countries.
    Keywords: Money laundering, de-risking, banking, payment flows
    Date: 2016–12
  23. By: Giulia Iori; Mauro Politi; Guido Germano; Giampaolo Gabbi
    Abstract: We present an empirical analysis of the European electronic interbank market of overnight lending e-MID during the years 1999-2009. After introducing the market mechanism, we consider the activity, defined as the number of trades per day; the spreads, defined as the difference between the rate of a transaction and the key rates of the European Central Bank; the lending conditions, defined as the difference between the costs of a lent and a borrowed Euro; the bank strategies, defined through different variants of the cumulative volume functions; etc. Among other facts, it emerges that the lending conditions differ from bank to bank, and that the bank strategies are not strongly associated either to the present, past or future spreads. Moreover, we show the presence of a bid-ask spread-like effect and its behavior during the crisis.
    JEL: J1
    Date: 2015–07
  24. By: Dacorogna, Michel M; Busse, Marc
    Abstract: After reviewing the notion of Systemically Important Financial Institution (SIFI), we propose a first principles way to compute the price of the implicit put option that the State gives to such an institution. Our method is based on important results from Extreme Value Theory (EVT), one for the aggregation of heavy tailed distributions and the other one for the tail behavior of the Value-at-Risk (VaR) versus the Tail-Value-at-Risk (TVaR). We show how to value in practice is proportional to the VaR of the institution and thus would provide the wrong incentive to the banks even if not explicitly granted. We conclude with a proposal to make the institution pay the price of this option to a fund, whose task would be to guarantee the orderly bankruptcy of such an institution. This fund would function like an insurance selling a cover to clients.
    Keywords: Systemic Risk; "Too Big to Fail"; Risk Measure; Value-at-Risk and Tail Value-at- Risk; Option Price; Risk Neutral Distribution; Heavy tail; Pareto; Insurance
    JEL: C10 E58 E61
    Date: 2016–06–27
  25. By: Lakdawala, Aeimit (Michigan State University); Minetti, Raoul (Michigan State University); Olivero, María Pía (Drexel University)
    Abstract: Interbank markets have been at the core of the international transmission of recent financial crises, including the European sovereign debt crisis. We study the transmission of shocks in a two-country DSGE model where banks pledge government bonds as collateral in interbank markets. A standard “bank net worth channel” amplifies negative shocks to the returns of private loans. However, an “interbank collateral channel” can partially contrast the bank net worth channel. The stabilizing interbank collateral channel works through banks' portfolio switch towards government bonds, which helps sustain the value of banks' bond holdings and partially relax collateral constraints in the interbank market. Unconventional credit policies raise banks' liquidity but, if financed through government debt issuance, can undermine the stabilizing effect of the interbank collateral channel. The analysis yields insights for the optimal design of credit policies during sovereign debt crises.
    Keywords: Sovereign debt; credit crunch; interbank markets; international contagion
    JEL: E32 E44 F44
    Date: 2017–01–01
  26. By: Jack Bao; Maureen O'Hara; Xing Zhou
    Abstract: Focusing on downgrades as stress events that drive the selling of corporate bonds, we document that the illiquidity of stressed bonds has increased after the Volcker Rule. Dealers regulated by the Rule have decreased their market-making activities while non-Volcker-affected dealers have stepped in to provide some additional liquidity. Furthermore, even Volcker-affected dealers that are not constrained by Basel III and CCAR regulations change their behavior, inconsistent with the effects being driven by these other regulations. Since Volcker-affected dealers have been the main liquidity providers, the net effect is that bonds are less liquid during times of stress due to the Volcker Rule.
    Keywords: Volcker Rule ; Corporate Bond Illiquidity ; Regulation ; Capital Commitment ; Dealer Inventory ; Market-Making ; Financial Crisis
    JEL: G14 G21 G23 G24 G28
    Date: 2016–09
  27. By: Wenli Cheng; Yongzeng Wu
    Abstract: This paper investigates whether political connections help private firms in China gain access to commercial bank loans. Based on data from the 2012 Nationwide Survey of Private Enterprises in China, it finds that (1) politically connected firms were more likely to have access to commercial bank loans; (2) political connections were more important for smaller private firms and for private firms in industries where state-owned enterprises had a stronger presence; (3) political connection was less important in provinces where private sector development was more advanced; and (4) loan allocation based on political connections did not appear to be inconsistent with commercial principles as politically connected firms were also more profitable.
    Keywords: bank lending, private firms, political connection, China
    JEL: G21
    Date: 2016–01
  28. By: Paola Morales Acevedo; Steven Ongena
    Abstract: We study the impact of emotions on real-world decisions made by loan officers by analyzing the loan conditions of loans granted immediately after a bank branch robbery. We find significant differences in conditions of the loans granted after a robbery compared to changes in loan conditions that occur contemporaneously at unaffected branches. In general loan officers seem to adopt so-called avoidance behaviour. In accordance with the literature on posttraumatic stress their avoidance behavior is halved within two weeks after the robbery and the effect further varies depending on the presence of a firearm during the robbery.
    Keywords: behavioural finance, bank robberies, transactional versus relationship lending
    JEL: G02 G2
    Date: 2016
  29. By: Ugo Albertazzi (Bank of Italy); Andrea Nobili (Bank of Italy); Federico M. Signoretti (Bank of Italy)
    Abstract: Using a new monthly dataset on bank-level lending rates, we study the transmission of conventional and unconventional monetary policy in the euro area via shifts in the supply of credit. We find that a bank lending channel is operational for both types of measures, though its functioning differs: for standard operations the transmission is weaker for banks with more capital and a more solid funding structure, in line with an important role of asymmetric information. However, in response to non-standard measures lending supply expands by more at banks with stronger capital and funding positions, suggesting a crucial role for regulatory and economic constraints. We also find that the transmission of unconventional measures is attenuated by their negative effect on future bank’s capital position via the net interest income (reverse bank capital channel). Finally, we find that large sovereign exposures mute the response of lending rates to conventional policy, but amplify the transmission of unconventional measures.
    Keywords: unconventional monetary policy, lending rates, bank lending channel, bank capital channel, fragmentation
    JEL: E30 E32 E51
    Date: 2016–12

This nep-ban issue is ©2017 by Christian Calmès. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.