nep-ban New Economics Papers
on Banking
Issue of 2017‒02‒12
sixteen papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. BANK-SPECIFIC DETERMINANTS OF SENSITIVITY OF LOAN-LOSS PROVISIONS TO BUSINESS CYCLE By Malgorzata Olszak; Iwona Kowalska; Patrycja Chodnicka-Jaworska; Filip Switala
  2. Macroprudential policy instruments and procyclicality of loan-loss provisions – cross-country evidence By Malgorzata Olszak; Iwona Kowalska; Sylwia Roszkowska
  3. Bank Ratings: What Determines Their Quality? By Harald Hau; Sam Langfield; David Marques-Ibanez
  4. Capital Flows and the International Credit Channel By Yusuf Soner Baskaya; Julian di Giovanni; Sebnem Kalemli-Özcan; José-Luis Peydró; Mehmet Fatih Ulu
  5. Bank-Specific Shocks and House Price Growth in the U.S. By Franziska Bremus; Thomas Krause; Felix Noth
  6. Backtesting European Stress Tests By Camara, Boubacar; Pessarossi, Pierre; Philippon, Thomas
  7. Cross-Border Banking and Macroeconomic Determinants By Mary Everett; Vahagn Galstyan
  8. On the effect of Cournot and Stackelberg competition in the banking sector on the investment cycle By Eleni Dalla
  9. Bank Response to Higher Capital Requirements: Evidence from a Quasi-Natural Experiment By Reint Gropp; Thomas C. Mosk; Steven Ongena; Carlo Wix
  10. International Spillovers and Local Credit Cycles By Yusuf Soner Baskaya; Julian di Giovanni; Sebnem Kalemli-Özcan; Mehmet Fatih Ulu
  11. Foreign booms, domestic busts: the global dimension of banking crises By Cesa-Bianchi, Ambrogio; Eguren-Martin, Fernando; Thwaites, Gregory
  12. Microcredit: Points of Promise By Field, Erica; Holland, Abraham; Pande, Rohini
  13. Liquidity Traps and Monetary Policy: Managing a Credit Crunch By Buera, Francisco J.; Nicolini, Juan Pablo
  14. Systemic Risk in Europe By Robert F. Engle; Eric Jondeau; Michael Rockinger
  15. Bank Capital Regulation with an Opportunistic Rating Agency By Matthias Efing
  16. A novel multivariate risk measure: the Kendall VaR By Matthieu Garcin; Dominique Guegan; Bertrand Hassani

  1. By: Malgorzata Olszak (Department of Banking and Money Markets, Faculty of Management, University of Warsaw, Poland); Iwona Kowalska (Department of Mathematics and Statistical Methods, Faculty of Management, University of Warsaw, Poland); Patrycja Chodnicka-Jaworska (Department of Banking and Money Markets, Faculty of Management, University of Warsaw, Poland); Filip Switala (Chair of Market Economy, Faculty of Management, University of Warsaw)
    Abstract: In this paper we explore several new factors which may affect the procyclicality of loan-loss provisions. In particular, we test whether there are visible differences in sensitivity of loan-loss provisions to the business cycle between commercial and cooperative banks as well as between large, medium and small banks. We also aim to find out whether the level of bank capital ratio and the application of discretionary income-smoothing affect procyclicality of loan-loss provisions. Our results show that loan-loss provisions of banks are procyclical. This procyclicality is particularly visible and stronger in the sample of commercial banks. We also find that loan-loss provisions of large banks are more negatively affected by the business cycle than those of medium or small banks. We show that banks with low capital ratios exhibit increased procyclicality of loan-loss provisions. And finally, we also find empirical evidence that banks with a greater degree of discretionary income-smoothi
    Keywords: loan-loss provisions, procyclicality, bank size, capital ratio, discretionary income-smoothing
    JEL: G21 G28 G32 M41
    Date: 2016–11
  2. By: Malgorzata Olszak (Department of Banking and Money Markets, Faculty of Management, University of Warsaw, Poland); Iwona Kowalska (Department of Mathematics and Statistical Methods, Faculty of Management, University of Warsaw, Poland); Sylwia Roszkowska (Faculty of Economic and Social Sciences, University of £ódŸ, National Bank of Poland, Poland)
    Abstract: We analyze the effectiveness of various macroprudential policy instruments in reducing the procyclicality of loan-loss provisions (LLPs) using individual bank information from over 65 countries and applying the two-step GMM Blundell-Bond (1998) approach with robust standard errors. Our research identifies several new facts. Firstly, borrower restrictions are definitely more effective in reducing the procyclicality of loan-loss provisions than other macroprudential policy instruments. This effect is supported in both unconsolidated and consolidated data and is robust to several robustness checks. Secondly, dynamic provisions, large exposure concentration limits and taxes on specific assets are effective in reducing the procyclicality of loan-loss provisions. And finally, we find that both loan-to-value caps and debt-to-income ratios, are especially effective in reducing the procyclicality of LLP of large banks. Off-balance-sheet restrictions, concentration limits and taxes are also effective in reducing the procyclicality of LLP of large banks. Dynamic provisions reduce the procyclicality of LLP independently of bank size.
    Keywords: macroprudential policy, loan-loss provisions, business cycle, procyclicality
    JEL: E32 G21 G28 G32
    Date: 2016–12
  3. By: Harald Hau (University of Geneva, Swiss Finance Institute, Centre for Economic Policy Research (CEPR), and CESifo (Center for Economic Studies and Ifo Institute)); Sam Langfield (European Central Bank - European Systemic Risk Board Secretariat); David Marques-Ibanez (European Central Bank (ECB))
    Abstract: This paper examines the quality of credit ratings assigned to banks in Europe and the United States by the three largest rating agencies over the past two decades. We interpret credit ratings as relative assessments of creditworthiness, and define a new ordinal metric of rating error based on banks’ expected default frequencies. Our results suggest that rating agencies assign more positive ratings to large banks and to those institutions more likely to provide the rating agency with additional securities rating business (as indicated by private structured credit origination activity). These competitive distortions are economically significant and help perpetuate the existence of ‘too-big-to-fail’ banks. We also show that, overall, differential risk weights recommended by the Basel accords for investment grade banks bear no significant relationship to empirical default probabilities.
    Keywords: Rating Agencies, Credit Ratings, Conflicts of Interest, Prudential Regulation
    JEL: G21 G23 G28
  4. By: Yusuf Soner Baskaya; Julian di Giovanni; Sebnem Kalemli-Özcan; José-Luis Peydró; Mehmet Fatih Ulu
    Abstract: We examine the role of the international credit channel in Turkey over 2005–2013. We show that larger, more capitalised banks with higher non-core liabilities increase credit supply when capital inflows are higher. This result is stronger for domestic banks relative to foreign banks and survives during the crisis period of post 2008, when foreign banks in general stop lending in emerging markets and retreat to their home countries. By decomposing capital inflows into bank and non-bank flows, we show the importance of domestic banks’ external borrowing for domestic credit growth.
    Keywords: Capital flows, bank-lending channel, bank heterogeneity
    JEL: E0 F0 F1
    Date: 2017–01
  5. By: Franziska Bremus; Thomas Krause; Felix Noth
    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
  6. By: Camara, Boubacar; Pessarossi, Pierre; Philippon, Thomas
    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: E2 G2 N2
    Date: 2017–01
  7. By: Mary Everett (Central Bank of Ireland); Vahagn Galstyan (Trinity College Dublin)
    Abstract: This paper studies the bilateral determinants of the international asset positions of banks, and subsequent bilateral adjustment during the global financial crisis and ensuing recovery phase. We find empirical support for traditional gravity-type variables. Exploiting a comprehensive dataset of bilateral bank assets, combined with a cross-country database on capital controls and macroeconomic policies, empirical evidence is provided for the effects of macroeconomic tools on the portfolio reallocation of internationally active banks. Specifically, higher current account balances in recipient countries are associated with higher inflows in debt assets, while restrictions on asset inflows and higher central bank reserves are related to lower cross-border flows of bank investment during the crisis and post-crisis periods, with heterogeneous effects across asset type. Finally, stronger institutions in recipient countries are positively associated with the international investment of banks, with inflows to debt assets being the most sensitive asset category across the financial cycle.
    Keywords: Cross-Border Banking, Loans, International Portfolio Securities, Capital Controls, Institutional Quality
    JEL: F30 F41 G15 G21
    Date: 2017–02
  8. By: Eleni Dalla (Department of Economics, University of Macedonia)
    Abstract: Following the industrial organization approach to banking, we investigate the effects of banking conduct on the investment cycle. To achieve this, we extend the second order accelerator (SOA) model in discrete time, introducing the interest rate on loans. To the extent that the banking sector is concerned, we consider two different types of banking conduct: a Cournot game where the banks make their decision on the quantities of loans and deposits simultaneously, and a Stackelberg game in which they decide over these amounts sequentially. In addition, we follow a simulation process to confirm the dynamic properties of our theoretical findings and examine the effects of monetary policy on capital over time..
    Keywords: Cournot game, Stackelberg game, investment cycle, second order accelerator, monetary policy.
    JEL: G21 L13 D92 E32 E52
    Date: 2017–12
  9. By: Reint Gropp (Halle Institute for Economic Research); Thomas C. Mosk (Goethe University Frankfurt); Steven Ongena (University of Zurich and Swiss Finance Institute); Carlo Wix (Goethe University Frankfurt)
    Abstract: We study the impact of higher capital requirements on banks' balance sheets and its transmission to the real economy. The 2011 EBA capital exercise provides an almost ideal quasi-natural experiment, which allows us to identify the effect of higher capital requirements using a difference-in-differences matching estimator. We find that treated banks increase their capital ratios not by raising their levels of equity, but by reducing their credit supply. We also show that this reduction in credit supply results in lower firm-, investment-, and sales growth for firms which obtain a larger share of their bank credit from the treated banks.
    Keywords: bank capital requirements, bank lending, real economy
    JEL: E51 E58 G21 G28
  10. By: Yusuf Soner Baskaya; Julian di Giovanni; Sebnem Kalemli-Özcan; Mehmet Fatih Ulu
    Abstract: We show that capital inflows are important drivers of domestic credit cycles using a firm-bank-loan level dataset for a representative emerging market. Instrumenting inflows by changes in global risk appetite (VIX), we find that a fall in VIX leads to a large decline in real borrowing rates and an expansion in credit supply. Estimates explain 40% of observed cyclical corporate credit growth. The OLS-elasticity of interest rates vis-à-vis capital inflows is smaller than the IV-elasticity. Banks with higher non- core funding offer relatively lower rates to low net worth firms, but do not extend more credit to them given collateral constraints.
    Keywords: Capital flows, VIX, risk premium, bank credit, firm heterogeneity
    JEL: E0 F0 F1
    Date: 2017–02
  11. By: Cesa-Bianchi, Ambrogio (Bank of England); Eguren-Martin, Fernando (Bank of England); Thwaites, Gregory (Bank of England)
    Abstract: This paper provides novel empirical evidence showing that foreign financial developments are a powerful predictor of domestic banking crises. Using a new data set for 38 advanced and emerging economies over 1970–2011, we show that credit growth in the rest of the world has a large positive effect on the probability of banking crises taking place at home, even when controlling for domestic credit growth. Our results suggest that this effect is larger for financially open economies, and is consistent with transmission via cross-border capital flows and market sentiment. Direct contagion from foreign crises plays an important role, but does not account for the whole effect.
    Keywords: Financial crises; global credit cycle; banking; financial stability; sentiment
    JEL: E32 E44 E52 G01
    Date: 2017–02–03
  12. By: Field, Erica (Duke University); Holland, Abraham (Harvard Institute for Quantitative Social Science, Harvard University); Pande, Rohini (Harvard University)
    Abstract: A majority of the world's impoverished lack adequate access to financial services. Typically, formal banks do not target the poor because lending without collateral is considered too risky. Poor households seeking credit are subsequently forced into informal markets where the prices are high, the quantities limited, and the methods of insuring repayment can be brutal.
    Date: 2016–09
  13. By: Buera, Francisco J. (Federal Reserve Bank of Chicago); Nicolini, Juan Pablo (Federal Reserve Bank of Minneapolis)
    Abstract: We study a model with heterogeneous producers that face collateral and cash-in-advance constraints. A tightening of the collateral constraint results in a credit-crunch-generated recession that reproduces several features of the financial crisis that unraveled in 2007 in the United States. The model can be used to study the effects of the credit-crunch on the main macroeconomic variables and the impact of alternative policies. The policy implications regarding forward guidance are in contrast with the prevalent view in most central banks, based on the New Keynesian explanation of the liquidity trap.
    Keywords: Liquidity trap; Credit crunch; Collateral constraints; Monetary policy; Ricardian equivalence
    JEL: E44 E52 E58 E63
    Date: 2017–02–02
  14. By: Robert F. Engle (New York University, New York University (NYU), and National Bureau of Economic Research (NBER)); Eric Jondeau (University of Lausanne and Swiss Finance Institute); Michael Rockinger (University of Lausanne, Centre for Economic Policy Research (CEPR), and Swiss Finance Institute)
    Abstract: Systemic risk may be defined as the propensity of a financial institution to be undercapitalized when the financial system as a whole is undercapitalized. In this paper, we investigate the case of non-U.S. institutions, with several factors explaining the dynamics of financial firms returns and with asynchronicity of time zones. We apply this methodology to the 196 largest European financial firms and estimate their systemic risk over the 2000-2012 period. We find that, for certain countries, the cost for the taxpayer to rescue the riskiest domestic banks is so high that some banks might be considered too big to be saved.
    Keywords: Systemic Risk, Marginal Expected Shortfall, Multi-factor Model
    JEL: C32 G01 G20 G28 G32
  15. By: Matthias Efing (Ecole Polytechnique Fédérale de Lausanne, Swiss Finance Institute, University of Geneva, and CESifo (Center for Economic Studies and Ifo Institute for Economic Research))
    Abstract: This paper models the strategic interaction between a rating agency, a bank and a bank regulator who lacks information about bank asset risk. The regulator can either (1) make bank capital requirements contingent on credit ratings; or (2) set rating independent capital requirements. Truthful ratings provide efficiency gains because they allow the regulator to constrain high risk bank investment without simultaneously reducing overall investment volume. However, if collusion between the rating agency and the bank corrupts rating quality, rating independent regulation enhances welfare. The welfare benefits are largest if regulators maintain rating contingent capital requirements and discipline rating agencies.
    Keywords: Bank Regulation, Lucas Critique, Collusion, Ratings Inflation, Risk-shifting
    JEL: D82 G21 G24 G28
  16. By: Matthieu Garcin (Natixis Asset Management and LabEx ReFi); Dominique Guegan (Centre d'Economie de la Sorbonne and LabEx ReFi); Bertrand Hassani (Grupo Santander and Centre d'Economie de la Sorbonne and LabEx ReFi)
    Abstract: The definition of multivariate Value at Risk is a challenging problem, whose most common solutions are given by the lower- and upper-orthant VaRs, which are based on copulas: the lower-orthant VaR is indeed the quantile of the multivariate distribution function, whereas the upper-orthant VaR is the quantile of the multivariate survival function. In this paper we introduce a new approach introducing a total-order multivariate Value at Risk, referred to as the Kendall Value at Risk, which links the copula approach to an alternative definition of multivariate quantiles, known as the quantile surface, which is not used in finance, to our knowledge. We more precisely transform the notion of orthant VaR thanks to the Kendall function so as to get a multivariate VaR with some advantageous properties compared to the standard orthant VaR: it is based on a total order and, for a non-atomic and Rd-supported density function, there is no distinction anymore between the d-dimensional VaRs based on the distribution function or on the survival function. We quantify the differences between this new kendall VaR and orthant VaRs. In particular, we show that the Kendall VaR is less (respectively more) conservative than the lower-orthant (resp. upper-orthant) VaR. The definition and the properties of the Kendall VaR are illustrated using Gumbel and Clayton copulas with lognormal marginal distributions and several levels of risk
    Keywords: Value at Risk; multivariate quantile; risk measure; Kendall function; copula; total order
    JEL: C1 C6
    Date: 2017–01

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