nep-ban New Economics Papers
on Banking
Issue of 2017‒02‒05
twenty 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 Asli Demirguc-Kunt; Balint Horvath; Harry Huizinga
  2. Economic policy uncertainty and the credit channel: aggregate and bank level U.S. evidence over several decades By Bordo, Michael D.; Duca, John V.; Koch, Christoffer
  3. Aggregate Investment Externalities and Macroprudential Regulation By Hans Gersbach; Jean-Charles Rochet
  4. Does Competition Affect Bank Risk? By Liangliang Jiang; Ross Levine; Chen Lin
  5. Bank lending technologies and credit availability in Europe. What can we learn from the crisis? By Giovanni Ferri; Pierluigi Murro; Valentina Peruzzi; Zeno Rotondi
  6. Banking Crises and the Performance of MIFs By Rui, Chen; Hartarska, Valentina
  7. Optimal Dynamic Capital Requirements By Caterina Mendicino; Kalin Nikolov; Javier Suarez; Dominik Supera
  8. Collateral, Central Bank Repos, and Systemic Arbitrage By Falko Fecht; Kjell G. Nyborg; Jörg Rocholl; Jiri Woschitz
  9. Will German banks earn their cost of capital? By Dombret, Andreas; Gündüz, Yalin; Rocholl, Jörg
  10. CoCo Design, Risk Shifting Incentives and Financial Fragility By Chan, Stephanie; Wijnbergen, Sweder
  11. Lending to unhealthy firms in Japan during the lost decade: distinguishing between technical and financial health By Chakraborty, Suparna; Peek, Joe
  12. Determinants of Bank Profitability in the Euro Area: Has Anything Changed? By Mariarosa Borroni; Mariacristina Piva; Simone Rossi
  13. Credit Constraints and Firm Productivity: Evidence from Italy By Francesco Manaresi; Nicola Pierri
  14. Backtesting European Stress Tests By Thomas Philippon; Pierre Pessarossi; Boubacar Camara
  15. Banks, Firms, and Jobs By Fabio Berton; Sauro Mocetti; Andrea F. Presbitero; Matteo Richiardi
  16. The Unintended Consequences of Employer Credit Check Bans on Labor and Credit Markets By Kristle Cortes; Andrew Glover; Murat Tasci
  17. Mission Drift in Microcredit and Microfinance Institution Incentives By Sara Biancini; David Ettinger; Baptiste Venet
  18. Banking crises, external crises and gross capital flows By Janus, Thorsten; Riera-Crichton, Daniel
  19. The Macroeconomic Effects of Government Asset Purchases: Evidence from Postwar US Housing Credit Policy By Andrew Fieldhouse; Karel Mertens; Morten O. Ravn
  20. Bank-specific shocks and house price growth in the U.S. By Bremus, Franziska; Krause, Thomas; Noth, Felix

  1. By: Asli Demirguc-Kunt; Balint Horvath; Harry Huizinga
    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: Cross-border lending, monetary transmission, banking FDI, bank regulation, capital controls.
    JEL: E44 E52 F34 F38 F42 G15 G20
    Date: 2017–01–25
  2. By: Bordo, Michael D. (Rutgers University); Duca, John V. (Federal Reserve Bank of Dallas); Koch, Christoffer (Federal Reserve Bank of Dallas)
    Abstract: Economic policy uncertainty aspects decisions of households, businesses, policy makers and financial intermediaries. We first examine the impact of economic policy uncertainty on aggregate bank credit growth. Then we analyze commercial bank entity level data to gauge the effects of policy uncertainty on financial intermediaries' lending. We exploit the cross-sectional heterogeneity to back out indirect evidence of its effects on businesses and households. We ask (i) whether, conditional on standard macroeconomic controls, economic policy uncertainty affected bank level credit growth, and (ii) whether there is variation in the impact related to banks' balance sheet conditions; that is, whether the effects are attributable to loan demand or, if impact varies with bank level financial constraints, loan supply. We find that policy uncertainty has a significant negative effect on bank credit growth. Since this impact varies meaningfully with some bank characteristics - particularly the overall capital-to-assets ratio and bank asset liquidity-loan supply factors at least partially (and significantly) help determine the influence of policy uncertainty. Because other studies have found important macroeconomic effects of bank lending growth on the macroeconomy, our findings are consistent with the possibility that high economic policy uncertainty may have slowed the U.S. economic recovery from the Great Recession by restraining overall credit growth through the bank lending channel.
    Keywords: money and banking; economic policy uncertainty; business cycles
    JEL: E40 E50 G21
    Date: 2016–07–08
  3. By: Hans Gersbach (Swiss Federal Institute of Technology Zurich, Institute for the Study of Labor (IZA), CESifo (Center for Economic Studies and Ifo Institute) and Centre for Economic Policy Research (CEPR)); Jean-Charles Rochet (University of Zurich, University of Toulouse I, Ecole Polytechnique Fédérale de Lausanne, and Swiss Finance Institute)
    Abstract: Evidence suggests that banks tend to lend a lot during booms, and very little during recessions. We propose a simple explanation for this phenomenon. We show that, instead of dampening productivity shocks, the banking sector tends to exacerbate them, leading to excessive fluctuations of credit, output and asset prices. Our explanation relies on three ingredients that are characteristic of modern banks' activities. The first ingredient is moral hazard: banks are supposed to monitor the small and medium sized enterprises that borrow from them, but they may shirk on their monitoring activities, unless they are given sufficient informational rents. These rents limit the amount that investors are ready to lend them, to a multiple of the banks' own capital. The second ingredient is the banks' high exposure to aggregate shocks: banks' assets have positively correlated returns. Finally the third ingredient is the ease with which modern banks can reallocate capital between different lines of business. At the competitive equilibrium, banks offer privately optimal contracts to their investors but these contracts are not socially optimal: banks' decisions of reallocating capital react too strongly to aggregate shocks. This is because banks do not internalize the impact of their decisions on asset prices. This generates excessive fluctuations of credit, output and asset prices. We examine the efficacy of several possible policy responses to these properties of credit markets, and show that it can provide a rationale for macroprudential regulation.
    Keywords: Bank Credit Fluctuations, Macroprudential Regulation, Investment Externalities
    JEL: G21 G28 D86
  4. By: Liangliang Jiang; Ross Levine; Chen Lin
    Abstract: Although policymakers often discuss tradeoffs between bank competition and stability, past research provides differing theoretical perspectives and empirical results on the impact of competition on risk. In this paper, we employ a new approach for identifying exogenous changes in the competitive pressures facing individual banks and discover that an intensification of competition materially boosts bank risk. With respect to the mechanisms, we find that competition reduces bank profits, charter values, and relationship lending and increases banks’ provision of nontraditional banking services.
    JEL: G21 G28 G32 L1
    Date: 2017–01
  5. By: Giovanni Ferri (LUMSA, CERBE and MoFiR); Pierluigi Murro (LUMSA, CERBE and CASMEF); Valentina Peruzzi (Universita' Politecnica delle Marche and MoFiR); Zeno Rotondi (UniCredit, CERBE and MoFiR)
    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 benefit most the small and medium enterprises and firms 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
  6. By: Rui, Chen; Hartarska, Valentina
    Abstract: The global financial crisis that started in 2007 and 2008 affected financial markets across the world. In many countries, it was followed by local financial crises with severe consequences for marginalized borrowers such as micro and small businesses and consumers with already limited access to financial services. Such clients are typically served by Microfinance Institutions, which provide loans, savings and payment facilities to a target clientele. We study how the spread of the financial troubles resulting from the 2007-2008 crisis affected these MFIs institutions’ ability to achieve their double bottom line to remain financially sustainable and to reach as many marginalized clients as possible. Our data consist of 2,611 MFIs from 118 countries and is for the 1998-2011 period. We employ the fixed effect model with Difference in Difference (DID) specification and control for country and organization-specific characteristics. Results show that the global financial crisis had a negative impact on the ability of MFIs to serve many clients (measured by the number of active borrowers) but it had no negative impact on financial sustainability (measured by operational self-sufficiency and return on assets). This suggests that MFIs have dealt with the crises just like banks, namely restricting credit and serving fewer presumably larger borrowers.
    Keywords: microfinance institutions, financial crisis, financial system, outreach and sustainability, Industrial Organization, Institutional and Behavioral Economics, International Development,
    Date: 2017
  7. By: Caterina Mendicino (European Central Bank); Kalin Nikolov (European Central Bank); Javier Suarez (CEMFI); Dominik Supera (CEMFI, Centro de Estudios Monetarios y Financieros)
    Abstract: We characterize welfare maximizing capital requirement policies in a macroeconomic model with household, firm and bank defaults calibrated to Euro Area data. We optimize on the level of the capital requirements applied to each loan class and their sensitivity to changes in default risk. We find that getting the level right (so that bank failure risk remains small) is of foremost importance, while the optimal sensitivity to default risk is positive but typically smaller than under Basel IRB formulas. When starting from low levels, initially both savers and borrowers benefit from higher capital requirements. At higher levels, only savers are in favour of tighter and more time-varying capital charges.
    Keywords: Macroprudential policy, bank fragility, capital requirements, financial frictions, default risk.
    JEL: E3 E44 G01 G21
    Date: 2016–12
  8. By: Falko Fecht (Frankfurt School of Finance & Management); Kjell G. Nyborg (University of Zurich, Centre for Economic Policy Research (CEPR), and Swiss Finance Institute); Jörg Rocholl (ESMT European School of Management and Technology); Jiri Woschitz (University of Zurich)
    Abstract: Central banks are under increased scrutiny because of the rapid growth in, and composition of, their balance sheets. Therefore, understanding the processes that shape these balance sheets and their consequences is crucial. We contribute by studying an extensive dataset of banks’ liquidity uptake and pledged collateral in central bank repos. We document systemic arbitrage whereby banks funnel credit risk and low-quality collateral to the central bank. Weaker banks use lower quality collateral to demand disproportionately larger amounts of central bank money (liquidity). This holds both before and after the financial crisis and may contribute to financial fragility and fragmentation.
    Keywords: Collateral, repo, systemic arbitrage, central bank, collateral policy, banks, liquidity, interbank market, financial stability, financial fragmentation
    JEL: G12 G21 E42 E51 E52 E58
  9. By: Dombret, Andreas; Gündüz, Yalin; Rocholl, Jörg
    Abstract: In recent years, the German banking sector has overcome major challenges such as the global financial crisis and the European debt crisis. This paper analyses a recent development as a particular determinant of the future outlook for the German banking sector. Interest rates are at historically low levels and may remain at these levels for a considerable period of time. Such levels pose a specific challenge to banks which are heavily dependent on interest income, as is the case for most German banks. We consider different interest rate scenarios and analyse the extent to which they cause a further narrowing of the interest rate margin. Our results indicate that a projected decline in this margin will result in no more than 20% of German banks earning a cost of capital of 8% by the end of this decade. This decline is somewhat alleviated by the fact that German banks can apply a special feature of German accounting standards by using hidden and open reserves.
    Keywords: German banking sector,low interest period,profitability,hidden and open reserves
    JEL: G21 G28
    Date: 2017
  10. By: Chan, Stephanie; Wijnbergen, Sweder
    Abstract: Contingent convertible capital (CoCo) is a debt instrument that converts to equity or is written off if the issuing bank fails to meet a distress threshold. The conversion increases the issuer’s loss-absorption capacity, but results in wealth transfers between CoCo holders and shareholders, which in turn gives rise to risk-shifting incentives to shareholders. Using the framework of call options, this paper finds that the risk-shifting incentives arising from issuing CoCos relative to subordinated debt have two opposite effects: higher risk increases the probability of CoCo conversion, while lowering the benefit of the wealth transfer relative to the same amount of subordinated debt. For writedown CoCos, the risk-shifting incentive is always positive, while for equity-converting CoCos, it depends on the dilutive power of the CoCo. While recent regulation has deemed CoCos suitable for increasing loss absorption capacity, our results show that some CoCos are potentially riskier than issuing subordinated debt in their place. To sidestep these consequences, their use by banks must be tempered by increasing capital requirements, and as such, they should not be treated as true substitutes for equity.
    Date: 2017–01
  11. By: Chakraborty, Suparna (University of San Francisco); Peek, Joe (Federal Reserve Bank of Boston)
    Abstract: We investigate the misallocation of credit in Japan associated with banks’ evergreening loans, distinguishing between two types of firm distress: (perhaps temporary) financial distress and technical distress, which reflects weak operational capabilities, as indicated by low total factor productivity. We show that previous evidence related to firms’ financial health is problematic due to the mixing of loan-demand and loan-supply effects. Using a direct measure of operational health, we provide unambiguous, direct evidence of evergreening behavior, as well as confirming evidence based on the relative impacts on subsequent firm viability of loans by bank types with different incentives to evergreen loans.
    Keywords: total factor productivity; bank lending; Japan; zombie firms; financial crisis
    JEL: E44 E51 G21
    Date: 2016–12–01
  12. By: Mariarosa Borroni (Dipartimento di Scienze Economiche e Sociali, Università Cattolica); Mariacristina Piva (Dipartimento di Scienze Economiche e Sociali, Università Cattolica); Simone Rossi (Dipartimento di Scienze Economiche e Sociali, Università Cattolica)
    Abstract: During the recent financial crisis bank profitability has become an element of strong concern for regulators and policymakers; in fact, both self-financing strategies and capital increases - necessary to provide a higher level of capitalization - rely on the ability of a bank to generate profits. However, the determinants of bank profitability, which seemed to be unequivocally identified by previous literature, appear to have changed under the effect of regulatory and competitive dynamics. We test this hypothesis on commercial, cooperative and saving banks, employing a random effect panel regression on a dataset comprising bank-level data and macroeconomic information (covering the period 2006-2013) for nine countries of the Euro area. Our findings suggest that after a period of "irrational exuberance" in which credit growth and high leverage were seen as proper and fast ways to boost profitability, a sound financial structure and a wiser and objective credit portfolio management have become the main drivers to ensure higher returns.
    Keywords: Financial crisis, Bank profitability, Euro Area
    JEL: G01 G21 L25
    Date: 2016–11
  13. By: Francesco Manaresi (Bank of Italy, Structural Economic Department); Nicola Pierri (Stanford University)
    Abstract: This paper studies the impact of credit constraints on manufacturers' production. We exploit a matched firm-bank panel data covering all Italian companies over the period 1998-2012 to derive a measure of supply-side shock to rm speci c credit constraints, and study how it affects input accumulation and value added productivity. We show that an expansion in the credit supply faced by a firm increases both input accumulation (size effect) and its ability to generate value added for a given level of inputs (productivity effect). Results are robust to various productivity estimation techniques, and to an alternative measure of credit supply shock that uses the 2007-2008 interbank market freeze to control for assortative matching between firms and banks. We discuss different potential channels for the estimated e ect and explore their empirical implications.
    Date: 2017–01
  14. By: Thomas Philippon; Pierre Pessarossi; Boubacar Camara
    Abstract: We provide a first evaluation of the quality of banking stress tests in the European Union. We use stress tests scenarios and banks’ estimated losses to recover bank level exposures to macroeconomic factors. Once macro outcomes are realized, we predict banks’ losses and compare them to actual losses. We find that stress tests are informative and unbiased on average. Model-based losses are good predictors of realized losses and of banks’ equity returns around announcements of macroeconomic news. When we perform our tests for the Union as a whole, we do not detect biases in the construction of the scenarios, or in the estimated losses across banks of different sizes and ownership structures. There is, however, some evidence that exposures are underestimated in countries with ex-ante weaker banking systems. Our results have implications for the modeling of credit losses, quality controls of supervision, and the political economy of financial regulation.
    JEL: G01 G18 G2 G21 G28 G32
    Date: 2017–01
  15. By: Fabio Berton (University of Torino); Sauro Mocetti (Bank of Italy); Andrea F. Presbitero (International Monetary Fund and MoFiR); Matteo Richiardi (Institute for New Economic Thinking, University of Oxford; Nuffield College, and Collegio Carlo Alberto)
    Abstract: We analyze the employment effects of financial shocks using a rich data set of job contracts, matched with the universe of firms and their lending banks in one Italian region. To isolate the effect of the financial shock we construct a firm-specific time-varying measure of credit supply. The contraction in credit supply explains one fourth of the reduction in employment. This result is concentrated in more levered and less productive firms. Also, the relatively less educated and less skilled workers with temporary contracts are the most affected. Our results are consistent with the cleansing role of financial shocks.
    Keywords: Bank lending channel; Job contracts; Employment; Financing constraints; Cleansing effect.
    JEL: G01 G21 J23 J63
    Date: 2017–01
  16. By: Kristle Cortes (Federal Reserve Bank of Cleveland); Andrew Glover (The University of Texas at Austin); Murat Tasci (Federal Reserve Bank of Cleveland)
    Abstract: Lenders have traditionally used credit reports to measure a borrower’s default risk, but credit agencies also market reports to employers for use in hiring. Since the onset of the Great Recession, eleven state legislatures have restricted the use of credit reports in the labor market. We document that county-level unemployment rose faster in states that restricted employer credit checks and counties with more sub-prime citizens experienced larger increases in the unemployment rate than average. Using data from individual credit reports, we find that access to credit declines and delinquencies increase significantly after the state-level policy changes, especially for subprime borrowers.
    Date: 2017–01
  17. By: Sara Biancini (Université de Caen-Normandie, CREM UMR CNRS 6211, France); David Ettinger (Université Paris Dauphine, PSL, LEDa and CEREMADE, France); Baptiste Venet (Université Paris Dauphine, PSL, IRD, LEDa, UMR225, DIAL, France)
    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 microfinance. We assume that both the donor and the MFI are pro-poor, possibly at different extents. Borrowers 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 first 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: 2017–02
  18. By: Janus, Thorsten (University of Wyoming); Riera-Crichton, Daniel (Bates College)
    Abstract: In this paper, we study the relationship between banking crises, external financial crises and gross international capital flows. First, we confirm that banking and external crises are correlated. Then, as we explore the role of gross capital flows, we find that declines of external liabilities in the balance of payments – a proxy for foreign capital repatriation we call gross foreign investment reversals (GIR) – predict banking as well as external crises. Finally, we estimate the effects of GIR-associated banking crises on the risk of currency and sudden stop crises in an instrumental-variables specification. In developing countries, GIR-associated banking crises increase the onset risk for currency and sudden stop crises by 39-50 and 28-30 percentage points per year respectively. For OECD countries, we show an increase in the currency crisis risk by 33-45 percentage points.
    JEL: F32 G01 G15 G21
    Date: 2016–06–01
  19. By: Andrew Fieldhouse (Cornell University); Karel Mertens (Centre for Economic Policy Research (CEPR); Department of Economics Cornell University; National Bureau of Economic Research (NBER)); Morten O. Ravn (Centre for Economic Policy Research (CEPR); Centre for Macroeconomics (CFM); Department of Economics University College London (UCL))
    Abstract: We document the portfolio activity of federal housing agencies and provide evidence on its impact on mortgage markets and the economy. Through a narrative analysis, we identify historical policy changes leading to expansions or contractions in agency mortgage holdings. Based on those regulatory events that we classify as unrelated to short-run cyclical or credit market shocks, we find that an increase in mortgage purchases by the agencies boosts mortgage lending and lowers mortgage rates. Agency purchases influence prices in other asset markets and stimulate residential investment. Using information in GSE stock prices to construct an alternative instrument for agency purchasing activity yields very similar results as our benchmark narrative identification approach.
    Keywords: Credit Policy, Monetary Policy, Mortgage Credit, Residential Investment, Government Sponsored Enterprises
    JEL: E44 E52 N22 R38 G28
    Date: 2017–01
  20. By: Bremus, Franziska; Krause, Thomas; Noth, Felix
    Abstract: This paper investigates the link between mortgage supply shocks at the banklevel and regional house price growth in the U.S. using micro-level data on mortgage markets from the Home Mortgage Disclosure Act for the 1990-2014 period. Our results suggest that bank-specific mortgage supply shocks indeed affect house price growth at the regional level. The larger the idiosyncratic shocks to newly issued mortgages, the stronger is house price growth. We show that the positive link between idiosyncratic mortgage shocks and regional house price growth is very robust and economically meaningful, however not very persistent since it fades out after two years.
    Keywords: house prices,idiosyncratic shocks,granularity,credit supply
    JEL: E44 G21 R20
    Date: 2017

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