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

  1. Foreign Banks and International Transmission of Monetary Policy: Evidence from the Syndicated Loan Market By Demirguc-Kunt, Asli; Horvath, Balint; Huizinga, Harry
  2. Identifying contagion in a banking network By Morrison, Alan; Vasios, Michalis; Wilson, Mungo; Zikes, Filip
  3. Bank lending technologies and credit availability in Europe. What can we learn from the crisis? By Giovanni Ferri; Pierluigi Murro; Valentina Peruzzi; Zeno Rotondi
  4. Leverage and Risk Weighted Capital Requirements By Leonardo Gambacorta; Sudipto Karmakar
  5. Creating associations as a substitute for direct bank credit. Evidence from Belgium By Mikel Bedayo
  6. Nonconsolidated Affiliates, Bank Capitalization, and Risk Taking By Gong, Di; Huizinga, Harry; Laeven, L.A.H.
  7. Fire buys of central bank collateral assets By de Roure, Calebe
  8. Why Do Bank-Dependent Firms Bear Interest-Rate Risk? By Divya Kirti
  9. Surviving the perfect storm: the role of the lender of last resort By Nuno Alves; Diana Bonfim; Carla Soares
  10. Costs of capital under credit risk By Peter Reichling; Anastasiia Zbandut
  11. The time-varying price of financial intermediation in the mortgage market By Fuster, Andreas; Lo, Stephanie; Willen, Paul S.
  12. Macro-economic Management in an Electronic Credit/Financial System By Joseph E. Stiglitz
  13. Mission Drift in Microcredit and Microfinance Institution Incentives By Sara Biancini; David Ettinger; Baptiste Venet

  1. By: Demirguc-Kunt, Asli; Horvath, Balint; Huizinga, Harry
    Abstract: This paper uses loan-level data from 124 countries over 1995–2015 to examine the transmission of monetary policy through the cross-border syndicated loan market. The results show that the expansion of monetary policy increases cross-border credit supply especially to weaker firms. However, greater foreign bank presence in the borrower country appears to reduce the potentially destabilizing impact of lower policy interest rates on cross-border lending, as it attenuates increases in loan volume and maturity while magnifying increases in collateralization and covenant use. The mitigating effect of foreign banking presence in the borrowing country on the transmission of monetary policy is robust to controlling for borrower-country economic and financial development, and a range of borrower and lender country policies and institutions, including the strength of bank regulation and supervision, exchange rate flexibility, and restrictions on capital flows. The findings qualify the characterization of international banks as sources of credit instability, and suggest that foreign bank entry can improve the stability of cross-border credit in the face of international monetary policy shocks.
    Keywords: Bank Regulation; Banking FDI; capital controls; Cross-border lending; Monetary Transmission
    JEL: E44 E52 F34 F38 F42 G15 G20
    Date: 2017–01
  2. By: Morrison, Alan (Said Business School, Oxford University); Vasios, Michalis (Bank of England); Wilson, Mungo (Said Business School, Oxford University); Zikes, Filip (Federal Reserve Board)
    Abstract: This paper studies the impact of trading profits and losses on bank counterparty borrowing costs using data from a derivatives trade depositary. We use the network of credit default swap (CDS) transactions between banks to identify bank CDS returns attributable to counterparty losses. Any bank’s exposure to corporate default increases whenever counterparties from whom it has purchased default protection themselves experience losses. In line with this statement, we document an increase in the own CDS spread of such a bank. We find no such effect from losses of non-counterparties, nor from counterparties who have bought protection from, rather than sold protection to, the bank. We also find that the effect on bank CDS returns through this counterparty loss channel is large relative to the direct effect on a bank’s CDS returns from its own trading losses.
    Keywords: Contagion; counterparty risk; credit default swaps; networks
    JEL: G21 G28
    Date: 2017–01–20
  3. By: Giovanni Ferri (LUMSA University); Pierluigi Murro (LUMSA University); Valentina Peruzzi (Università Politecnica delle Marche); Zeno Rotondi (UniCredit Bank)
    Abstract: Using a unique sample of European manufacturing firms, we empirically investigate how differences in main banks’ lending technology and use of soft information affected firms’ credit availability during the 2007-2009 crisis. We find that the probability of credit rationing was higher for firms matching with transactional – i.e., using transactional lending technologies – banks. However, we show that soft information marginally reduced that probability in those firm-bank matches. Soft information would bene?t most the small and medium enterprises and ?rms relating with large banks. Thus, reducing credit exclusion during crises requires either relationship lending or enticing transactional banks to use soft information.
    Keywords: Lending technologies, Credit rationing, Financial crisis, Soft information
    JEL: G21 D82 G30 O16
    Date: 2017–01
  4. By: Leonardo Gambacorta; Sudipto Karmakar
    Abstract: The global financial crisis has highlighted the limitations of risk-sensitive bank capital ratios. To tackle this problem, the Basel III regulatory framework has introduced a minimum leverage ratio, defined as a bank's Tier 1 capital over an exposure measure, which is independent of risk assessment. Using a medium sized DSGE model that features a banking sector, financial frictions and various economic agents with difering degrees of creditworthiness, we seek to answer three questions: 1) How does the leverage ratio behave over the cycle compared with the risk-weighted asset ratio? 2) What are the costs and the benefits of introducing a leverage ratio, in terms of the levels and volatilities of some key macro variables of interest? 3) What can we learn about the interaction of the two regulatory ratios in the long run? The main answers are the following: 1) The leverage ratio acts as a backstop to the risk-sensitive capital requirement: it is a tight constraint during a boom and a soft constraint in a bust; 2) the net benefits of introducing the leverage ratio could be substantial; 3) the steady state value of the regulatory minima for the two ratios strongly depends on the riskiness and the composition of bank lending portfolios.
    JEL: G21 G28 G32
    Date: 2016
  5. By: Mikel Bedayo (Banco de España)
    Abstract: Firms’ incentives to join up with other firms to apply collectively for a single loan are studied empirically in this paper. When several firms make a joint application for a single 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 made up each association, observing the amount of credit that both the firms and the associations obtained from each financial institution they used. We analyse the amount of credit obtained by firms according to whether or not they belonged to an association, the likelihood of firms forming associations, the impact of belonging to an association on the amount of credit firms receive from banks and the effect of firms not obtaining any direct credit on the amount obtained by the associations formed by such firms. We also analyse whether associations formed by common-ownership firms are able to access more credit than other associations. We find that large and long-established firms are more likely to join up with other firms to make joint loan applications and that associations obtain more credit if all their members use the same bank as the association does to obtain credit. Furthermore, the lower a firm’s credit over the previous year, the more likely it is to form an association to obtain credit, and we show that associations comprising small firms with no credit history are especially credit constrained.
    Keywords: associations, finance, access to credit, relationship banking, Belgium
    JEL: G21 G30
    Date: 2017–01
  6. By: Gong, Di (Tilburg University, Center For Economic Research); Huizinga, Harry (Tilburg University, Center For Economic Research); Laeven, L.A.H. (Tilburg University, Center For Economic Research)
    Abstract: This paper is the first to show that financial institutions may be effectively undercapitalized as a result of incomplete consolidation of minority ownership. Using two approaches – consolidating the minority-owned affiliates with the parent or deducting equity investments in minority ownership from the parent’s capital – we find that the effective capitalization ratios of small US bank holding companies (BHCs) are substantially lower than the reported ratios. Empirical evidence suggests that the effectively lower capitalization ratios are associated with higher riskiness at the BHC level. Capital adjustments following pro forma consolidation better capture the additional risks than capital adjustments in the form of equity deductions for investments in minority-owned affiliates. These findings have important implications for the regulation of bank capital.
    Keywords: capital regulation; organizational structure; undercapitalization; bank leverage; risk taking
    JEL: G21 G32
    Date: 2017
  7. By: de Roure, Calebe
    Abstract: In times of financial distress, central banks provide unlimited liquidity to avoid fire sales. In response, banks raise their demand for collateral assets, and the short-term scarcity of collateral securities leads to higher prices, the Fire Buy premium. To avoid collateral scarcity, central banks increase the set of eligible collateral assets. However, if the risk-shifting channel is open for these newly eligible securities, banks prefer to pledge them and pay another premium, the Risk-Shifting premium. With the full fixed-income trading book of 26 German banks, I identify each trade of each bank and investigate how unlimited liquidity provision affects collateral prices. Also, I match banks' trades with their balance sheet and show how funding liquidity impacts premia payment. I quantify the Fire Buy premium to be 15.6 bps; and the Risk-Shifting premium on BBB-rated assets to be 65.6 bps.
    Keywords: Fire Buy,Risk-Shifting,Haircut Subsidy,ECB,Over-the-Counter Markets
    JEL: E41 E44 E58 G11 G14 G15 G21
    Date: 2016
  8. By: Divya Kirti
    Abstract: I document that floating-rate loans from banks (particularly important for bank-dependent firms) drive most variation in firms' exposure to interest rates. I argue that banks lend to firms at floating rates because they themselves have floating-rate liabilities, supporting this with three key findings. Banks with more floating-rate liabilities, first, make more floating-rate loans, second, hold more floating-rate securities, and third, quote lower prices for floating-rate loans. My results establish an important link between intermediaries' funding structure and the types of contracts used by non-financial firms. They also highlight a role for banks in the balance-sheet channel of monetary policy.
    Date: 2017–01–18
  9. By: Nuno Alves; Diana Bonfim; Carla Soares
    Abstract: When banks are hit by a severe liquidity shock, central banks have a key role as lenders of last resort. Despite the well-established importance of this mechanism, there is scarce empirical evidence that allows analyzing this key role of central banks. We are able to explore a unique setting in which banks suddenly lose access to market funding due to contagion fears at the onset of the euro area sovereign debt crisis. Using monthly data at the loan, bank, and firm level, we are able to test the role of the central bank in a scenario of imminent collapse. We find that the liquidity obtained from the central bank played a critical role in avoiding the materialization of such a scenario.
    JEL: E44 E5 G21
    Date: 2016
  10. By: Peter Reichling (Faculty of Economics and Management, Otto-von-Guericke University Magdeburg); Anastasiia Zbandut (Faculty of Economics and Management, Otto-von-Guericke University Magdeburg)
    Abstract: Credit risk analysis represents a growing field in financial research since decades. However, in company valuation – to be more precise, in cost of capital computations – credit risk is merely taken into consideration at the level of the debt beta approach. Our paper proves that applications of the debt beta approach suffer from unrealistic assumptions. As an advantageous approach, we develop an alternative framework to determine costs of capital based on Merton’s model. We present (quasi-) analytic formulas for costs of equity and debt which are consistent with Modigliani-Miller theory in continuous-time and discrete-time settings without taxes. Our framework is superior to the debt beta approach regarding the quantity and quality of required data in peer group analysis. Since equity and debt are represented by options in Merton’s model, we compute expected option rates of return without resorting to betas. Thereby, our paper also contributes to the option pricing literature.
    Keywords: Company valuation, debt beta, expected option return, Merton’s model, WACC
    JEL: G13 G32 G33
    Date: 2017–01
  11. By: Fuster, Andreas (Federal Reserve Bank of New York); Lo, Stephanie (Harvard University); Willen, Paul S. (Federal Reserve Bank of Boston, NBER)
    Abstract: The U.S. mortgage market links homeowners with savers all over the world. In this paper, we ask how much of the flow of money from savers to borrowers goes to the intermediaries that facilitate these transactions. Based on a new methodology and a new administrative data set, we find that the price of intermediation, measured as a fraction of the loan amount at origination, is large— 142 basis points on average over the 2008-14 period. At daily frequencies, intermediaries pass on price changes in the secondary market to borrowers in the primary market almost completely. At monthly frequencies, the price of intermediation fluctuates significantly and is highly sensitive to volume, likely reflecting capacity constraints: a one standard deviation increase in applications for new mortgages leads to a 30-35 basis point increase in the price of intermediation. Additionally, over 2008-14, the price of intermediation increased about 30 basis points per year, potentially reflecting higher mortgage servicing costs and an increased legal and regulatory burden. Taken together, the sensitivity to volume and the positive trend led to an implicit total cost to borrowers of about $140 billion over this period. Finally, increases in application volume associated with “quantitative easing” (QE) led to substantial increases in the price of intermediation, which attenuated the benefits of QE to borrowers.
    Keywords: mortgage finance; financial intermediation; monetary policy transmission
    JEL: E44 E52 G21 L11
    Date: 2017–01–01
  12. By: Joseph E. Stiglitz
    Abstract: Modern technology provides the basis of an efficient low-cost electronic payments as an alternative to the current system where fiat money is the medium of exchange. This paper explores possible macro-economic implication, showing how such a financial system might enhance government’s ability to control the level of aggregate demand. As in other arenas, in second-best situations with uncertainty, systems where there is an attempt to directly control quantities directly may perform better (e.g. have less volatility) than those using prices and other indirect control mechanisms. The paper identifies conditions under which in a system of electronic money, macroeconomic variability is lower when the level and direction of credit creation is directly controlled, through appropriately designed credit auctions, than in a system of indirect control of, say, investment via the interest rate. This is especially important since much macro-economic instability is associated with instability in credit creation and in the fraction allocated to newly produced goods and services. The paper also explains how, in an open economy, in a system of electronic money, credit auctions combined with trade chits might enable the control of net exports, again enhancing macro-stability. Finally, we explain how under a system of electronic money, the rents that are currently associated with credit creation and that arise from bank franchises—that constitute a form of appropriation of the returns from trust in the government and its ability and willingness to bail-out banks in the event of a crisis or bank run—could be appropriated by the government to a greater degree than at present.
    JEL: E42 E44 E51 E52 F32 F38
    Date: 2017–01
  13. By: Sara Biancini (Universite de Caen Normandie, CREM); David Ettinger (Universite Paris Dauphine, PSL, LEDa and CEREMADE); Baptiste Venet (
    Abstract: We analyze the relationship between Micro nance Institutions (MFIs) and external donors, with the aim of contributing to the debate on \mission drift" in micro nance. We assume that both the donor and the MFI are pro-poor, possibly at different extents. Bor- rowers can be (very) poor or wealthier (but still unbanked). Incentives have to be provided to the MFI to exert costly effort to identify the more valuable projects and to choose the right share of poorer borrowers (the optimal level of poor outreach). We rst concentrate on hidden action. We show that asymmetric information can distort the share of very poor borrowers reached by loans, thus increasing mission drift. We then concentrate on hidden types, assuming that MFIs are characterized by unobservable heterogeneity on the cost of effort. In this case, asymmetric information does not necessarily increase the mission drift. The incentive compatible contracts push efficient MFIs to serve a higher share of poorer borrowers, while less efficient ones decrease their poor outreach.
    Keywords: Microfinance, Donors, Poverty, Screening.
    JEL: O12 O16 G21
    Date: 2017–01

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