nep-ban New Economics Papers
on Banking
Issue of 2017‒03‒19
twenty papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Did pre-crisis mortgage lending limit post-crisis corporate lending? Evidence from UK bank balance sheets By Zhang, Lu; Uluc, Arzu; Bezemer, Dirk
  2. Market Discipline Through Credit Ratings and Too-Big-To-Fail in Banking? By Sascha KOLARIC; Florian KIESEL; Steven ONGENA
  3. Banks’ Adjustment to Basel III Reform; A Bank-Level Perspective for Emerging Europe By Michal Andrle; Vladimír Tomšík; Jan Vlcek
  4. Changing business models in international bank funding By Leonardo Gambacorta; Adrian Van Rixtel; Stefano Schiaffi
  5. Bank Size, Returns to Scale and Cost Efficiency By Sapci, Ayse; Miles, Bradley
  6. What happened to global banking after the crisis? By Dirk Schoenmaker
  7. Observables and residuals: exploring cross-border differences in Small and Medium Enterprise borrowing costs By Carroll, James; McCann, Fergal
  8. Suppliers as liquidity insurers By Corsten, Daniel; Gropp, Reint; Markou, Panos
  9. The time-varying price of financial intermediation in the mortgage market By Fuster, Andreas; Lo, Stephanie; Willen, Paul S.
  10. Credit Misallocation During the European Financial Crisis By Schivardi, Fabiano; Sette, Enrico; Tabellini, Guido
  11. Re-Use of Collateral: Leverage, Volatility, and Welfare By Johannes Brumm; Michael Grill; Felix Kubler; Karl Schmedders
  12. Credit Misallocation During the European Financial Crisis By Fabiano Schivardi; Enrico Sette; Guido Tabellini
  13. The Determinants of Loan Loss Provisions: An Analysis of the Greek Banking System in Light of the Sovereign Debt Crisis By Platon Monokroussos; Dimitrios D. Thomakos; Thomas A. Alexopoulos
  14. Countercyclical Capital Regulation in a Small Open Economy DSGE Model By Lozej, Matija; Onorante, Luca; Rannenberg, Ansgar
  15. Local Versus International Crises, Foreign Subsidiaries and Bank Stability: Evidence from the MENA Region By Tammuz Alraheb; Amine Tarazi
  16. Cyclicality of bank liquidity creation By Davydov, Dennis; Fungáčová, Zuzana; Weill, Laurent
  17. Risk Taking and Interest Rates; Evidence from Decades in the Global Syndicated Loan Market By Seung Jung Lee; Lucy Qian Liu; Viktors Stebunovs
  18. Bank Performance, Financial Stability and Market Competition: do Cooperative and Non-Cooperative Banks Behave Differently? By BARRA, Cristian; ZOTTI, Roberto
  19. Equilibrium theory of banks’ capital structure By GALE, Douglas; GOTTARDI, Piero
  20. Housing Wealth Reallocation Between Subprime and Prime Borrowers During Recessions By Sapci, Ayse; Vu, Nam

  1. By: Zhang, Lu (Sustainable Finance Lab, The Netherlands.); Uluc, Arzu (Bank of England); Bezemer, Dirk (Global Economics and Management, University of Groningen, The Netherlands.)
    Abstract: Was the bank credit crunch following the collapse of Lehman Brothers in September 2008 in many economies due to a loan supply collapse or to a decrease in loan demand? This paper investigates the effects of UK banks’ pre-crises exposure to residential property markets on their post-crisis business lending to explore the existence of a negative post-crisis loan supply shock. We isolate the loan supply effect from a loan demand effect by using a unique quasi-experimental setting and a rich, tailor-made micro-level data set on bank lending volumes, bank balance sheets and mortgage loan characteristics. Controlling for a range of bank-specific factors, we find that banks with larger shares of residential mortgages in total loans in 2008 Q2 reduced their lending to business more after 2008 Q3. Post-crisis lending to business is also sensitive to the riskiness of banks’ mortgage portfolios. Banks having more mortgages to borrowers with impaired credit history, or more mortgages to the self-employed, or mortgages with higher loan to value ratios prior to the crisis reduced their lending to non-financial businesses more.
    Keywords: Credit crunch; bank balance sheets; mortgage lending; micro data; United Kingdom
    JEL: E20 E32 E51
    Date: 2017–03–03
  2. By: Sascha KOLARIC (Technische Universität Darmstadt); Florian KIESEL (Technische Universität Darmstadt); Steven ONGENA (University of Zurich and Swiss Finance Institute)
    Abstract: We assess whether credit ratings help enforce market discipline on banks. We nd that rating downgrades for internal reasons, such as adverse changes in the operating performance or capital structure of the banks, are associated with a significant CDS spread widening, but only for banks that are not perceived to be Too-Big-to-Fail. Our findings question the reliability of credit ratings as a tool to discipline large banks and suggests regulatory monitoring should remain the main mechanism for disciplining these banks.
    Keywords: Credit Ratings, CDS, Too-Big-To-Fail
    JEL: G21 G13 G14
    Date: 2017–03
  3. By: Michal Andrle; Vladimír Tomšík; Jan Vlcek
    Abstract: The paper seeks to identify strategies of commercial banks in response to higher capital requirements of Basel III reform and its phase-in. It focuses on a sample of nine EU emerging market countries and picks up 5 largest banks in each country assessing their response. The paper finds that all banking sectors raised CAR ratios mainly through retained earnings. In countries where the banking sector struggled with profitability, banks have resorted to issuance of new equity or shrunk the size of their balance sheets to meet the higher capital-adequacy requirements. Worries echoed at the early stage of Basel III compilation, namely that commercial banks would shrink their balance sheet by reducing their lending to meet stricter capital requirements, did materialize only in banks struggling with profitability.
    Keywords: Banking sector;Europe;Commercial banks;Emerging markets;Bank supervision;Basel Core Principles;Bank reforms;capital adequacy, Basel III, balance sheet
    Date: 2017–02–10
  4. By: Leonardo Gambacorta; Adrian Van Rixtel; Stefano Schiaffi
    Abstract: This paper investigates the foreign funding mix of globally active banks. Using BIS international banking statistics for a panel of 12 advanced economies, we detect a structural break in international bank funding at the onset of the global financial crisis. In their post-break business model, banks rely less on cross-border liabilities and, instead, tap funds from outside their jurisdictions by making more active use of their subsidiaries and branches, as well as inter-office accounts within the same banking group.
    Keywords: bank funding, structural reform initiatives, international banks
    Date: 2017–03
  5. By: Sapci, Ayse (Department of Economics, Colgate University); Miles, Bradley (Department of Economics, Colgate University)
    Abstract: Since the passage of Dodd-Frank, government regulators have become more interested than ever in the significant increase of bank size in the U.S. financial sector. To shed light on the reasons of the bank size increase and its effects on banks, we study the dynamic interactions between size, cos efficiency and returns to scale. Using Fourier flexible form, we show that banks of all but the largest sizes exhibit increasing returns to scale. As banks grow, they tend to benefit from cost efficiencies more, but they lose returns to scale gains. Banks seem to exploit increasing returns to scale until they become too large; however, they continue to enjoy their cost efficiency. We also analyze the effects of regulations in the past 25 years to understand whether imposing (or removing) limits on the size of banks causes real economic costs. Our findings show that both restrictive and loose regulation help larger banks, but hurt smaller banks by creating extra costs.
    JEL: C11 C14 G21 L11
    Date: 2017–03–01
  6. By: Dirk Schoenmaker
    Abstract: The large global banks were at the heart of the global financial crisis. In response to the crisis, the international Financial Stability Forum was upgraded to the Financial Stability Board (FSB) in 2009, with the full participation of finance ministers and even heads of government. The newly established FSB then published an integrated set of policy measures, such as capital surcharges and resolution plans, to address the systemic and moral hazard risks associated with global systemically important banks (G-SIBs). Eight years later, it is time to take stock of the impact of these measures. We answer three questions on what happened to the G-SIBs. First, have they shrunk in size? Second, are they better capitalised? Third, and in reference to the reported end of global banking, have they reduced their global reach? Overall, the conclusion is that reports of the demise of global banking are premature, especially in the euro area.
    Date: 2017–03
  7. By: Carroll, James (Trinity College Dublin); McCann, Fergal (Central Bank of Ireland)
    Abstract: Cross-country comparisons of average loan interest rates, often carried out using statistics provided by national and international authorities, should be accompanied by strong caveats. If underlying compositional differences in loans, borrowers or lenders are unaccounted for, claims of over/under-pricing may be unfounded. In this paper, we propose a simple methodology that compares interest rates between countries after controlling for such differences. We apply our method to loan-level data from three Irish banks operating in both Ireland and the UK. We find that controlling for such factors reduces the the cross-country interest rate premium significantly. We attribute any remaining interest rate “gap” to overall lending market conditions – for example, to differences in the recoverability of collateral, the level of competition among banks, the aggregate perception of risk, or banks’ expectations on the relative movements in policy rates and exchange rates between the UK and the euro area.
    Keywords: SME, loan-level data, interest rate differentials
    Date: 2017–01
  8. By: Corsten, Daniel; Gropp, Reint; Markou, Panos
    Abstract: We examine how financial constraints in portfolios of suppliers affect cash holdings at the level of the customer. Utilizing a data set of private and public French companies and their suppliers, we show that customers rely on their financially unconstrained suppliers to provide them with backup liquidity, and that they stockpile approximately 10% less cash than customers with constrained suppliers. This effect persisted during the global financial crisis, highlighting that suppliers may be viable insurers of liquidity even when financing from banks and other external channels is unavailable. We further show that customers with unconstrained suppliers also simultaneously receive more trade credit; that the reduction in cash holdings is greater for firms with stronger ties to their unconstrained suppliers; and that customers reduce their cash holdings following a significant relaxation in their suppliers' financial constraints through an IPO. Taken together, the results provide important nuance regarding the implications of supplier portfolios and financial constraints on firm liquidity management.
    Keywords: supply chain,cash,credit constraints,liquidity insurance
    JEL: D92 G20 G30
    Date: 2017
  9. By: Fuster, Andreas (Federal Reserve Bank of New York); Lo, Stephanie (Harvard University); Willen, Paul S. (Federal Reserve Bank of Boston)
    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 actually goes to the intermediaries that facilitate these transactions. Based on a new methodology and a new administrative dataset, 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 2008–2014 period. At daily frequencies, intermediaries pass on the 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 2008–2014, the price of intermediation increased about 30 basis points each 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 U.S. households of about $140 billion over this period. Finally, the 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
  10. By: Schivardi, Fabiano (LUISS School of European Political Economy); Sette, Enrico (Bank of Italy); Tabellini, Guido (Bocconi University)
    Abstract: Do banks with low capital extend excessive credit to weak firms, and does this matter for aggregate efficiency? Using a unique data set that covers almost all bank-firm relationships in Italy in the period 2004-2013, we find that, during the Eurozone financial crisis: (i) Under-capitalized banks were less likely to cut credit to non-viable firms. (ii) Credit misallocation increased the failure rate of healthy firms and reduced the failure rate of non viable firms. (iii) Nevertheless, the adverse effects of credit misallocation on the growth rate of healthier firms were negligible, and so were the effects on TFP dispersion. This goes against previous influential findings that, we argue, face serious identification problems. Thus, while banks with low capital can be an important source of aggregate inefficiency in the long run, their contribution to the severity of the great recession via capital misallocation was modest.
    Keywords: Bank capitalization; zombie lending; capital misallocation
    JEL: D23 E24 G21
    Date: 2017–03–10
  11. By: Johannes Brumm (Karlsruhe Institute of Technology); Michael Grill (European Central Bank (ECB)); Felix Kubler (University of Zurich and Swiss Finance Institute); Karl Schmedders (University of Zurich and Swiss Finance Institute)
    Abstract: We assess the quantitative implications of the re-use of collateral on financial market leverage, volatility, and welfare within an infinite-horizon asset-pricing model with heterogeneous agents. In our model, the ability of agents to re-use frees up collateral that can be used to back more transactions. Re-use thus contributes to the build-up of leverage and significantly increases volatility in financial markets. When introducing limits on re-use, we find that volatility is strictly decreasing as these limits become tighter, yet the impact on welfare is non-monotone. In the model, allowing for some re-use can improve welfare as it enables agents to share risk more effectively. Allowing reuse beyond intermediate levels, however, can lead to excessive leverage and lower welfare. So the analysis in this paper provides a rationale for limiting, yet not banning, re-use in financial markets.
    Keywords: heterogeneous agents, leverage, re-use of collateral, volatility, welfare
    JEL: D53 G01 G12 G18
    Date: 2017–02
  12. By: Fabiano Schivardi (LUISS University, EIEF, IGIER and CEPR); Enrico Sette (Bank of Italy); Guido Tabellini (Bocconi University, IGIER, CEPR, CES-Ifo, CIFAR)
    Abstract: Do banks with low capital extend excessive credit to weak firms, and does this matter for aggregate efficiency? Using a unique data set that covers almost all bank-firm relationships in Italy in the period 2004-2013, we find that, during the Eurozone financial crisis: (i) Under-capitalized banks were less likely to cut credit to non-viable firms. (ii) Credit misallocation increased the failure rate of healthy firms and reduced the failure rate of non viable firms. (iii) Nevertheless, the adverse effects of credit misallocation on the growth rate of healthier firms were negligible, and so were the effects on TFP dispersion. This goes against previous in fluential findings that, we argue, face serious identification problems. Thus, while banks with low capital can be an important source of aggregate inefficiency in the long run, their contribution to the severity of the great recession via capital misallocation was modest.
    Date: 2017
  13. By: Platon Monokroussos; Dimitrios D. Thomakos; Thomas A. Alexopoulos
    Abstract: We utilize a new set of macroeconomic and regulatory data to analyze the evolution of loan loss provisioning practices in the Greek banking system over the period 2005-2015. We explore the determinants of the aggregate loan loss reserves to total loans ratio, which reflects the accumulation of provisions net of write-offs, and constitutes an important metric of the credit quality of loan portfolios. Our results suggest that domestic credit institutions respond relatively quickly to macroeconomic shocks, though the latter’s effects on the provisioning behavior of the domestic banking system show significant persistence. Furthermore, the impact of macroeconomic shocks on the loan loss reserves ratio has become stronger (both in terms of magnitude and statistical significance) following the outbreak of the Greek sovereign debt crisis. From a macro policy perspective, this result indicates that a sustainable stabilization of macroeconomic conditions is a key precondition for safeguarding domestic financial stability. For a regulatory standpoint, it suggests that the possibility of macroeconomic regime-related effects on banks’ provisioning policies should be taken into account when macro prudential stress tests of the banking system are designed and implemented.
    Date: 2016–11
  14. By: Lozej, Matija (Central Bank of Ireland); Onorante, Luca; Rannenberg, Ansgar (Central Bank of Ireland)
    Abstract: We assess the macroeconomic performance of different countercyclical capital buffer rules, where regulatory capital responds to deviation from a long-run trend in the credit-to-GDP ratio (the credit gap), in a medium scale DSGE model of the Irish economy. We find that rules based on the credit gap create a trade-off between the stabilisation of fluctuations originating in the housing market (which are attenuated) and stabilisation of fluctuations caused by foreign demand shocks (which are amplified) because the credit gap is not always procyclical. The trade-off disappears if the regulator follows a rule based on house prices instead of the credit gap.
    Keywords: Bank capital, Countercyclical capital regulation, Housing bubbles, boom-and-bust.
    JEL: F41 G21 G28 E32 E44
    Date: 2017–01
  15. By: Tammuz Alraheb (University of Limoges); Amine Tarazi
    Abstract: We investigate the impact of global and local crises on bank stability and examine the effect of owning bank subsidiaries in other countries. We consider banks from MENA countries which experienced both types of crises during our sample period. Our findings highlight a negative impact of the global financial crisis of 2007-2008 on bank stability but, on the whole, no negative impact of the 'Arab Spring'. A deeper investigation shows that owning subsidiaries outside the home country is a source of increased fragility during normal times, yet a source of higher stability during the 'Arab Spring' but not during the global financial crisis. Moreover, owning foreign subsidiaries in one or two world regions is insufficient to neutralize the ‘Arab Spring’ crisis, while being present in three or more regions is more stabilizing during the 'Arab Spring' but also more destabilizing during the global financial crisis. Our findings contribute to the literature examining bank stability and have several policy implications.
    Date: 2016–01–09
  16. By: Davydov, Dennis; Fungáčová, Zuzana; Weill, Laurent
    Abstract: This paper investigates the cyclicality of bank liquidity creation. Since liquidity creation is a major economic function of banks, their liquidity creation behavior may amplify business cycle fluctuations. Using the methodology of Berger and Bouwman (2009) to compute liquidity creation measures, we analyze the relation between GDP growth and liquidity creation of Russian banks from 2004 to 2015. Detailed quarterly data on a very large sample of banks and coexistence of different bank ownership types (state-owned, domestic private and foreign banks), makes Russia an ideal natural laboratory for study of cyclicality of liquidity creation for banks. We find that liquidity creation of banks is procyclical. We show that the liquidity creation behavior of state-owned banks and foreign banks is similar to that of domestic private banks in terms of procyclicality. We further find that the magnitude of procyclicality is higher for liquidity creation than for lending. Thus, while ownership of banks does not influence the liquidity creation behavior of banks, such behavior can amplify business cycle fluctuations.
    JEL: G21
    Date: 2017–03–10
  17. By: Seung Jung Lee; Lucy Qian Liu; Viktors Stebunovs
    Abstract: We study how low interest rates in the United States affect risk taking in the market of crossborder leveraged corporate loans. To the extent that actions of the Federal Reserve affect U.S. interest rates, our analysis provides evidence of a cross-border spillover effect of monetary policy. We find that before the crisis, lenders made ex-ante riskier loans to non- U.S. borrowers in response to a decline in short-term U.S. interest rates, and, after it, in response to a decline in longer-term U.S. interest rates. Economic uncertainty and risk appetite appear to play a limited role in explaining ex-ante credit risk. Our results highlight the potential policy challenges faced by central banks in affecting credit risk cycles in their own jurisdictions.
    Keywords: Interest rates on loans;Loans;Credit risk;United States;Monetary policy;Spillovers;Regression analysis;Syndicated loans, risk taking, monetary policy, international spillovers
    Date: 2017–01–27
  18. By: BARRA, Cristian (CELPE - Centre of Labour Economics and Economic Policy, University of Salerno - Italy); ZOTTI, Roberto (CELPE - Centre of Labour Economics and Economic Policy, University of Salerno - Italy)
    Abstract: We explore the relationship between bank performances and financial stability of the banking system taking into account the Italian context during the period 2001-2014 and relying upon highly territorially disaggregated data taken at municipality level, in order to better capture the differences across geographical areas. The z-score is used as financial stability indicator, while the performance of financial intermediaries is measured using a parametric method recently developed (Kumbhakar et al., 2014). By focusing both on cooperative and non-cooperative banks, the role of the market power, measured through a bank specific market share based on loans, deposits and assets, on the performances-stability nexus has been analyzed. The empirical evidence shows a positive relationship between bank performance and financial stability; furthermore, we provide evidence in line with the “competition-stability” view for cooperative banks while supporting the “competition-fragility” view for non-cooperative banks. Robustness checks have been performed in order to explore whether the results change at different level of concentration of the banking system.
    Keywords: Management; Local banks; Market structure; Financial stability
    JEL: C14 D21 G21 G28
    Date: 2017–03–05
  19. By: GALE, Douglas; GOTTARDI, Piero
    Abstract: We study an environment where the capital structure of banks and firms are jointly determined in equilibrium, so as to balance the benefits of the provision of liquidity services by bank deposits with the costs of bankruptcy. The risk in the assets held by firms and banks is determined by the technology choices by firms and the portfolio diversification choices by banks. We show competitive equilibria are efficient and the equilibrium level of leverage in banks and firms depend on the nature of the shocks affecting firm productivities. When these shocks are co-monotonic, banks optimally choose a zero level of equity. Thus all equity should be in firms, where it does “double duty” protecting both firms and banks from default. On the other hand, if productivity shocks have an idiosyncratic component, portfolio diversification by banks may be a more effective buffer against these shocks and, in these cases, it may be optimal for banks, as well as firms, to issue equity.
    Date: 2017
  20. By: Sapci, Ayse (Department of Economics, Colgate University); Vu, Nam (Department of Economics, Colgate University)
    Abstract: We study a general equilibrium model with a housing market to understand the role of credit access among borrowers and show that an adverse financial shock can increase the asymmetry in the housing wealth distribution of subprime and prime borrowers. Households with better credit access can take advantage of the low housing prices during recessions, especially when the subprimers are previously subjected to lax credit conditions. Our model is consistent with the data since the late 1980s, showing that the homeownership rates of the two groups move in opposite directions during turmoils as prime borrowers are more likely to invest in the housingmarket during recessions.
    Date: 2017–03–01

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.