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on Banking |
| By: | Bouther, Regis (Bank of England); Francis, Bill (Bank of England) |
| Abstract: | Using quarterly data on FAS 157 fair value disclosures for US bank holding companies from 2008 to 2013, we test whether capital ratios and the effects of market discipline differ according to extent and nature of assets recognized under Level 3 standards. These standards offer management significant discretion for measuring fair values, potentially reducing bank transparency and affecting market perceptions about bank risk. We find limited evidence that capital ratios are lower at institutions engaging in Level 3 trading activities for given risk levels, consistent with opportunistic behaviour. We also find that market discipline, as measured by whether an institution has a US stock exchange listing or dependence on short-term, uninsured funding sources, is effective in moderating this behaviour. At these institutions capital ratios are higher, consistent with there being a direct (ex ante) disciplining effect on bank behaviour. |
| Keywords: | Banking; market discipline; accounting discretion; regulatory capital ratios |
| JEL: | G21 G28 G32 |
| Date: | 2017–02–17 |
| URL: | http://d.repec.org/n?u=RePEc:boe:boeewp:0647&r=ban |
| By: | Ahnert, Toni; Anand, Kartik; Gai, Prasanna; Chapman, James |
| Abstract: | How does asset encumbrance affect the fragility of intermediaries subject to rollover risk? We offer a model of covered bonds that features the bankruptcy remoteness and replenishment of the asset pool that backs secured funding. Encumbering assets allows a bank to raise cheap secured debt and expand profitable investment, but it also concentrates risk on unsecured debt and thus exacerbates fragility. Deposit insurance or guarantees induce excessive encumbrance, shifting risks to the deposit insurance fund or the guarantor. Prudential regulation to correct this negative externality are limits on encumbrance, capital requirements, and surcharges on deposit insurance premia. |
| JEL: | G01 G21 G28 |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc16:145782&r=ban |
| By: | Gehrig, Thomas Paul; Iannino, Maria Chiara |
| Abstract: | This paper analyses the evolution of the resiliency of the European banking sector after the implementation of the Basel Capital Accord. In particular, by analysing SRISK and CoVaR we trace systemic risk and measures of systematic risk as the Basel process unfolds. We observe that, though systematic risk for European banks have been decreasing over the last three decades, systemic risk has heightened especially for the largest systemic banks. While the Basel process has succeeded in containing systemic risk of small banks, it has been less successful for the larger institutions. The latter ones opportunistically exploited the option of self-regulation by employing internal models and effectively increasing SRISK. Hence, the sub-prime crisis found the largest and more systemic banks ill-prepared and lacking resiliency. This condition was even aggravated during the European sovereign crisis. |
| JEL: | G21 G01 B26 |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc16:145743&r=ban |
| By: | Ana Fostel (Dept. of Economics, George Washington University); John Geanakoplos (Cowles Foundation, Yale University); Gregory Phelan (Department of Economics, Williams College) |
| Abstract: | We show that cross-border financial flows arise when countries differ in their abilities to use assets as collateral. Financial integration is a way of sharing scarce collateral. The ability of one country to leverage and tranche assets provides attractive financial contracts to investors in the other country, and general equilibrium effects on prices create opportunities for investors in the financially advanced country to invest abroad. Foreign demand for collateral and for collateral-backed financial promises increases the collateral value of domestic assets, and cheap foreign assets provide attractive returns to investors who do not demand collateral to issue promises. Gross global flows respond dynamically to fundamentals, exporting and amplifying financial volatility. |
| Keywords: | Collateral, Financial innovation, Asset prices, Capital flows, Securitized markets, Asset-backed securities, Global imbalances |
| JEL: | D52 D53 E32 E44 F34 F36 G01 G11 G12 |
| Date: | 2017–02 |
| URL: | http://d.repec.org/n?u=RePEc:cwl:cwldpp:2076&r=ban |
| By: | Stijn Claessens; Nicholas Coleman; Michael S. Donnelly |
| Abstract: | Interest rates in many advanced economies have been low for almost a decade now and are often expected to remain so. This creates challenges for banks. Using a sample of 3,385 banks from 47 countries from 2005 to 2013, we find that a one percentage point interest rate drop implies an 8 basis points lower net interest margin, with this effect greater (20 basis points) at low rates. Low rates also adversely affect bank profitability, but with more variation. And for each additional year of "low for long", margins and profitability fall by another 9 and 6 basis points, respectively. |
| Keywords: | Interest rates ; Bank profitability ; Net interest margin ; Low-for-long |
| JEL: | G21 E43 |
| Date: | 2017–02 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgif:1197&r=ban |
| By: | Piergiorgio Alessandri (Banca d'Italia); Margherita Bottero (Banca d'Italia) |
| Abstract: | We study the impact of economic uncertainty on the supply of bank credit using a monthly dataset that includes all loan applications submitted by a sample of 650,000 Italian firms between 2003 and 2012. We find that an increase in aggregate uncertainty has three effects. First, it reduces banks' likelihood to accept new credit applications. Second, it lengthens the time firms have to wait for their loans to be released. Third, it makes banks less responsive to fluctuations in short-term interest rates, weakening the bank lending channel of monetary policy. The influence of uncertainty is relatively stronger for poorly capitalized lenders and geographically distant borrowers. |
| Keywords: | uncertainty, credit supply, bank lending channel, loan applications. |
| JEL: | E51 G21 |
| Date: | 2017–02 |
| URL: | http://d.repec.org/n?u=RePEc:bbk:bbkcam:1703&r=ban |
| By: | Schüwer, Ulrich; Gropp, Reint; Noth, Felix |
| Abstract: | Why do some banks react to deregulation by expanding geographically while others do not? This paper examines this question using exogenous variation in locally non-diversifiable risk that banks face in their home state. As a measure of locally non-diversifiable risk we use data on damages arising from natural disasters in the U.S. Combining this data with information on the staggered deregulation in the 90s, we find that banks facing such risks expand significantly more into other states after deregulation than banks that do not face such risks. Only large banks are able to take advantage of deregulation, small banks are not. Finally, banks that do expand, do not necessarily seek to reduce their exposure to risk when expanding. |
| JEL: | G21 G28 G20 |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc16:145885&r=ban |
| By: | Schäfer, Alexander |
| Abstract: | We analyze the reaction of European bank CDS spreads in response to the SIFI-regulation. Our results suggest that new regulation prepared by the FSB did not succeed in lowering bail-out expectations for the targeted banks. The findings show an overall decrease in CDS spreads and hence indicating both: an unintended rise in bail-out expectations and distortionary funding cost advantages for banks equipped with a SIFI-badge. The strongest drop in CDS spreads occurred when the SIFI list was published for the first time, revealing that the effect is particularly pronounced upon the initial designation. We furthermore show that the inadvertent rise in bail-out expectations is driven by the countries bail-out capacity, measured as total country bank assets over GDP. As a result, the SIFI badge creates a particular large value for SIFIs hosted in countries with small banking sectors that are credibly expected to be bailed-out by the government. |
| JEL: | G01 G14 G21 |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc16:145754&r=ban |
| By: | Kara, Alper; Marqués-Ibáñez, David; Ongena, Steven |
| Abstract: | Banks are usually better informed on the loans they originate than other financial intermediaries. As a result, securitized loans might be of lower credit quality than otherwise similar non-securitized loans. We assess the effect of securitization activity on loans’ relative credit quality employing a uniquely detailed dataset from the euro-denominated syndicated loan market. We find that, at issuance, banks do not seem to select and securitize loans of lower credit quality. Following securitization, however, the credit quality of borrowers whose loans are securitized deteriorates by more than those in the control group. We find tentative evidence suggesting that poorer performance by securitized loans might be linked to banks’ reduced monitoring incentives. From our findings it follows that current iniciatives on risk retention by the originator, and more detailed loan-by-loan information on loan credit quality would be useful to reap out the benefits of securitization. JEL Classification: G21, G28 |
| Keywords: | credit risk, European market, securitization |
| Date: | 2017–02 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20172009&r=ban |
| By: | Noth, Felix; Schüwer, Ulrich |
| Abstract: | We document that natural disasters significantly weaken the stability of banks with business activities in affected regions, as reflected in lower z-scores, higher probabilities of default, higher non-performing assets ratios, higher foreclosure ratios, lower returns on assets and lower bank equity ratios. The effects are economically relevant and suggest that insurance payments and public aid programs do not sufficiently protect bank borrowers against financial difficulties. We also find that the adverse effects on bank stability dissolve after some years if no further disasters occur in the meantime. |
| Keywords: | natural disasters,bank stability,non-performing assets,bank performance |
| JEL: | G21 Q54 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:safewp:167&r=ban |
| By: | Fabio Berton (University of Torino); Sauro Mocetti (Bank of Italy); Andrea F. Presbitero (International Monetary Fund); Matteo Richiardi (University of Oxford) |
| Abstract: | Unemployment is one of the most visible effects of financial crises. We contribute to the empirical literature on the employment effects of a decline in bank credit, investigating individual heterogeneity across firms, workers and jobs in response to a financial shock. We use a rich data set of over 1.5 million individual job contracts in an Italian region, which is matched with the universe of firms and their lending banks. To isolate the effect of the financial shock we construct a firm-specific time-varying measure of credit supply. Our findings indicate that a 10 percent supply-driven credit contraction reduces employment by 2.5 percent. The effect is mostly concentrated among relatively less-educated and less-skilled workers with temporary contracts, and is consistent with the presence of a “dual” labor market and a skill-upgrade strategy adopted by firms in response to the financial shock. |
| Keywords: | bank lending channel, job contracts, employment, financing constraints, skill upgrade |
| JEL: | G01 G21 J23 J63 |
| Date: | 2017–02 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:wptemi:td_1097_17&r=ban |
| By: | Leonardo Gambacorta (Bank for International Settlements); Giacomo Ricotti (Bank of Italy); Suresh Sundaresan (Columbia University, Graduate School of Business); Zhenyu Wang (Indiana University, Kelley School of Business) |
| Abstract: | This paper examines the effects of taxation on the liability structure of banks. We derive testable predictions from a dynamic model of optimal bank liability structure that incorporates bank runs, regulatory closure and endogenous default. Using the supervisory data provided by the Bank of Italy, we empirically test these predictions by exploiting exogenous variations of the Italian tax rates on productive activities (IRAP) across regions and over time (especially since the global financial crisis). We show that banks endogenously respond to a reduction in tax rates by reducing non-deposit liabilities more than deposits in addition to lowering leverage. The response on the asset side depends on the financial strength of the bank: well-capitalized banks respond to a reduction in tax rates by increasing their assets, but poorly-capitalized banks respond by cleaning up their balance sheet. |
| Keywords: | bank liability structure, corporate tax, leverage |
| JEL: | G21 G32 G38 H25 |
| Date: | 2017–02 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:wptemi:td_1101_17&r=ban |
| By: | Wayne Passmore; Alexander H. von Hafften |
| Abstract: | The Basel Committee promulgates bank regulatory standards that many major economies enact to a significant extent. One element of the Basel III capital standards is a system of capital surcharges for global systemically important banks (G-SIBs). If the purpose of the surcharges is to ensure the survival of G-SIBs through serious crises (like the 2007-09 financial crisis) without extraordinary public assistance, our analysis suggests that current surcharges are too low because of three shortcomings: (1) the Basel system underestimates the probability that a G-SIB can fail, (2) the Basel system fails to account for short-term funding, and (3) the Basel system excludes too many banks from current surcharges. Our best estimate suggests that the current surcharges should be between 225 and 525 basis points higher for G-SIBs that are not reliant on short-term funding; G-SIBs that are reliant on short-term funding should have even higher surcharges. Furthermore, we find that, even with significant confidence in the effectiveness of other Basel III reforms, modest increases in surcharges appear needed. |
| Keywords: | Basel III ; G-SIBs ; G-SIFIs ; Bank capital ; Bank equity ; Bank regulation ; Banks |
| JEL: | G01 G18 G21 |
| Date: | 2017–02–21 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2017-21&r=ban |
| By: | Edith X. Liu; Jonathan Pogach |
| Abstract: | This paper examines the effect of foreign lending on the domestic lending for US global banks. We show that greater foreign loan growth complements, rather than detracts from, domestic commercial lending. Exploiting a confidential data (FFIEC 009) on international loan exposure of US banks, we estimate that a 1% increase in foreign office lending is associated with a 0.6% growth in domestic commercial lending, suggesting complementarity across these lending channels. However, when capital raising is tight during the Global Financial Crisis of 2008, we find that foreign lending did come at the expense of domestic lending. |
| Keywords: | Multinational ; Global Banking ; Commercial Loans ; Foreign Investments |
| JEL: | F21 F23 F36 G21 |
| Date: | 2017–02 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgif:1198&r=ban |
| By: | Daniel Grigat; Fabio Caccioli |
| Abstract: | We reverse engineer dynamics of financial contagion to find the scenario of smallest exogenous shock that, should it occur, would lead to a given final systemic loss. This reverse stress test can be used to identify the potential triggers of systemic events, and it removes the arbitrariness in the selection of shock scenarios in stress testing. We consider in particular the case of distress propagation in an interbank market, and we study a network of 44 European banks, which we reconstruct using data collected from Bloomberg. By looking at the distribution across banks of the size of smallest exogenous shocks we rank banks in terms of their systemic importance, and we show the effectiveness of a policy with capital requirements based on this ranking. We also study the properties of smallest exogenous shocks as a function of the largest eigenvalue $\lambda_{\rm max}$ of the matrix of interbank leverages, which determines the endogenous amplification of shocks. We find that the size of smallest exogenous shocks reduces and that the distribution across banks becomes more localized as $\lambda_{\rm max}$ increases. |
| Date: | 2017–02 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1702.08744&r=ban |
| By: | Leonardo Gambacorta; Giacomo Ricotti; Suresh Sundaresan; Zhenyu Wang |
| Abstract: | This paper examines the effects of taxation on the liability structure of banks. We derive testable predictions from a dynamic model of optimal bank liability structure that incorporates bank runs, regulatory closure and endogenous default. Using the supervisory data provided by the Bank of Italy, we empirically test these predictions by exploiting exogenous variations of the Italian tax rates on productive activities (IRAP) across regions and over time (especially since the global financial crisis). We show that banks endogenously respond to a reduction in tax rates by reducing non-deposit liabilities more than deposits in addition to lowering leverage. The response on the asset side depends on the financial strength of the bank: well-capitalized banks respond to a reduction in tax rates by increasing their assets, but poorly-capitalized banks respond by cleaning up their balance sheet. |
| Keywords: | bank liability structure, corporate tax, leverage |
| Date: | 2017–02 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:611&r=ban |