nep-ban New Economics Papers
on Banking
Issue of 2017‒03‒26
sixteen papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Fire sales, indirect contagion and systemic stress testing By Rama Cont; Eric Schaanning
  2. Banking on Trust: How Debit Cards Enable the Poor to Save More By Pierre Bachas; Paul Gertler; Sean Higgins; Enrique Seira
  3. Bank Market Power and Non-Interest Income in Emerging Markets By Canan Yildirim; Adnan Kasman
  4. Do professional norms in the banking industry favor risk-taking? By Alain Cohn; Ernst Fehr; Michel André Maréchal
  5. Initial conditions and the private debt renegotiation process By Christophe J. GODLEWSKI
  6. Identifying early warning indicators for real estate-related banking crises By Stijn Ferrari; Mara Pirovano; Wanda Cornacchia
  7. Foreign Investment, Regulatory Arbitrage, and the Risk of U.S. Banking Organizations By Frame, W. Scott; Mihov, Atanas; Sanz, Leandro
  8. How Would US Banks Fare in a Negative Interest Rate Environment? By David M. Arseneau
  9. Impact of multimodality of distributions on VaR and ES calculations By Dominique Guegan; Bertrand Hassani; Kehan Li
  10. A theory of repurchase agreements, collateral re-use, and repo intermediation By GOTTARDI, Piero; MAURIN, Vincent; MONNET, Cyril
  12. Trade and Access to Finance of SMEs: is There a Nexus? By Hala El-Said; Mahmoud Al-Said; Chahir Zaki
  13. The macroeconomic effects of the regulatory LTV and LTI ratios in the Central Bank of Ireland's DSGE model By Lozej, Matija; Rannenberg, Ansgar
  14. Does Differential Treatment Translate to Differential Outcomes for Minority Borrowers? Evidence from Matching a Field Experiment to Loan-Level Data By Martin, Hal; Hanson, Andrew; Hawley, Zackary
  15. How to Reconcile Financial Incentives and Prosocial Motivation of Loan Officers in Microfinance? By Julie De Pril; Cécile Godfroid
  16. An overview of the UK banking sector since the Basel Accord: insights from a new regulatory database By de Ramon, Sebastian; Francis, William; Milonas, Kristoffer

  1. By: Rama Cont (Imperial College London); Eric Schaanning (Norges Bank (Central Bank of Norway))
    Abstract: We present a framework for quantifying the impact of re sales in a network of financial institutions with common asset holdings, subject to leverage or capital constraints. Asset losses triggered by macro-shocks may interact with one-sided portfolio constraints, such as leverage or capital constraints, resulting in liquidation of assets, which in turn affects market prices, leading to contagion of losses and possibly new rounds of fire sales when portfolios are marked to market. Price-mediated contagion occurs through common asset holdings, which we quantify through liquidity-weighted overlaps across portfolios. Exposure to price-mediated contagion leads to the concept of indirect exposure to an asset class, as a consequence of which the risk of a portfolio depends on the matrix of asset holdings of other large and leveraged portfolios with similar assets. Our model provides an operational stress testing method for quantifying the systemic risk arising from these effects. Using data from the European Banking Authority, we examine the exposure of the EU banking system to price-mediated contagion. Our results indicate that, even with optimistic estimates of market depth, moderately large macro-shocks may trigger fire sales which may then lead to substantial losses across bank portfolios, modifying the outcome of bank stress tests. Price-mediated contagion leads to a heterogeneous cross-sectional loss distribution across banks, which cannot be replicated simply by applying a macro-shock to bank portfolios in absence of fire sales. Unlike models based on `leverage targeting', which assume symmetric reactions to gains or losses, our approach is based on the asymmetric interaction of portfolio losses with one-sided constraints, distinguishes between insolvency and illiquidity and leads to substantially different loss estimates in stress scenarios.
    Date: 2017–03–17
  2. By: Pierre Bachas; Paul Gertler; Sean Higgins; Enrique Seira
    Abstract: Trust is an essential element of economic transactions, but trust in financial institutions is low, especially among the poor. Debit cards provide not only easier access to savings, but also a mechanism to monitor bank account balances and thereby build trust in a financial institution. We study a natural experiment in which debit cards are rolled out to beneficiaries of a Mexican conditional cash transfer program whose benefits are already directly deposited into a savings account. Using administrative data on over 340,000 bank accounts over four years, we find that prior to receiving a debit card, beneficiaries do not save in these accounts. Beneficiaries then begin to increase their savings after 9 to 12 months with the card. During this initial stagnant period, they use the card to check their balances frequently, and the number of checks decreases over time as their reported trust in the bank increases. After 1 to 2 years, the debit card causes the savings rate to increase by 3 to 5 percent of income. Using household survey panel data, we find that this effect represents an increase in overall savings.
    JEL: D14 D83 G21 O16
    Date: 2017–03
  3. By: Canan Yildirim (Kadir Has University); Adnan Kasman
    Abstract: This paper examines how market power in traditional intermediation affects Turkish banks’ involvement in non-interest income generating activities, in particular, fee and commission income. The results show that banks have different levels of market power in the loan and deposit markets and these, in turn, affect banks’ commitment to non-interest generating activities differently. While banks with a limited market power in the loan market are engaged more in fee and commission generating activities, banks with a high market power in the deposit market are able to generate higher commission and fee income.
    Date: 2015–07
  4. By: Alain Cohn; Ernst Fehr; Michel André Maréchal
    Abstract: In recent years, the banking industry has witnessed several cases of excessive risk-taking that frequently have been attributed to problematic professional norms. We conduct experiments with employees from several banks in which we manipulate the saliency of their professional identity and subsequently measure their risk aversion in a real stakes investment task. If bank employees are exposed to professional norms that favor risk-taking, they should become more willing to take risks when their professional identity is salient. We find, however, that subjects take significantly less risk, challenging the view that the professional norms generally increase bank employees’ willingness to take risks.
    Keywords: Risk culture, banking industry, experiment
    JEL: G02 M14 C93
    Date: 2017–03
  5. By: Christophe J. GODLEWSKI (LaRGE Research Center, Université de Strasbourg)
    Abstract: I investigate whether and how initial conditions around loan origination influence private debt renegotiation process. I model the renegotiation likelihood, and the conditional probability of multiple renegotiation rounds or multiple amended terms using a sequential logit model. I use a large sample of 15,000 loans on the European credit market. I find that contractual (covenants and collateral) and organizational (lenders pool size, reputation and relationship) mechanisms mitigating adverse selection and moral hazard risks have the largest and positive economic impacts. Lenders financial conditions (capitalization and credit portfolio exposure) and institutional arrangement aiming at creditors protection significantly impact the renegotiation process.
    Keywords: financial contracts, private debt, renegotiation, sequential logit, Europe.
    JEL: G21 G24 G32 G34
    Date: 2017
  6. By: Stijn Ferrari; Mara Pirovano; Wanda Cornacchia
    Abstract: This Occasional Paper presents a formal statistical evaluation of potential early warning indicators for real estate-related banking crises. Relying on data on real estate-related banking crises for 25 EU countries, a signalling approach is applied in both a non-parametric and a parametric (discrete choice) setting. Such an analysis evaluates the predictive power of potential early warning indicators on the basis of the trade-off between correctly predicting upcoming crisis events and issuing false alarms. The results in this paper provide an analytical underpinning for decision-making based on guided discretion with regard to the activation of macro-prudential instruments targeted to the real estate sector. After the publication of the ESRB Handbook and the Occasional Paper on the countercyclical capital buffer, it represents a next step in the ESRB’s work on the operationalisation of macroprudential policy in the banking sector. This Occasional Paper highlights the important role of both real estate price variables and credit developments in predicting real estate-related banking crises. The results indicate that, in addition to cyclical developments in these variables, it is crucial to monitor the structural dimension of real estate prices and credit. In multivariate settings macroeconomic and market variables such as the inflation rate and short-term interest rates may add to the early warning performance of these variables. Overall, the findings indicate that combining multiple variables improves early warning signalling performance compared with assessing each indicator separately, both in the non-parametric and the parametric approach. Combinations of the abovementioned indicators lead to lower probabilities of missing crises while at the same time not issuing too many false alarms. In addition to EU level, they also perform relatively well at individual country level. Even though the best performing indicators have relatively good signalling abilities at the individual country level, national authorities are encouraged to perform their own complementary analyses in abroader framework of systemic risk detection, which augments potential early warning indicators and methods with other relevant inputs and expert judgement. JEL Classification: G21, G18, E58
    Keywords: early warning indicators, real estate, banking crises
    Date: 2015–08
  7. By: Frame, W. Scott (Federal Reserve Bank of Atlanta); Mihov, Atanas (Federal Reserve Bank of Richmond); Sanz, Leandro (Federal Reserve Bank of Richmond)
    Abstract: This study investigates the implications of cross-country differences in banking regulation and supervision for the international subsidiary locations and risk of U.S. bank holding companies (BHCs). We find that U.S. BHCs are more likely to operate subsidiaries in countries with weaker regulation and supervision and that such location decisions are associated with elevated BHC risk and higher contribution to systemic risk. The quality of BHCs’ internal controls and risk management play an important role in these location choices and risk outcomes. Overall, our study suggests that U.S. banking organizations engage in cross-country regulatory arbitrage with potentially adverse consequences.
    Keywords: regulation; supervision; bank holding companies; cross-border operations; subsidiary locations; risk; systemic risk
    JEL: G15 G21 G28
    Date: 2017–03–01
  8. By: David M. Arseneau
    Abstract: This paper uses a unique new data set to empirically examine bank-level expectations regarding the impact of negative short-term interest rates on bank profitability through net interest margins. The results show that banks differ significantly in their views regarding how profits might be affected in a negative interest rate environment and that much of this heterogeneity can be explained by cross-bank differences in the provision of liquidity services. We find that those banks that are more active in providing liquidity to borrowers anticipate suffering reduced profitability through declines in interest income on short-duration assets. The opposite is true of banks that are more active in providing liquidity to depositors as these banks expect to benefit from lower short-term funding costs. However, we find that these distributional effects wash out at the aggregate level, as liquidity provision is sufficiently well diversified across all banks.
    Keywords: Banking conditions ; Net interest margins ; Unconventional monetary policy
    JEL: E43 E44 G21
    Date: 2017–03
  9. By: 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); Kehan Li (Centre d'Economie de la Sorbonne and LabEx ReFi)
    Abstract: Unimodal probability distribution has been widely used for Value-at-Risk (VaR) computation by investors, risk managers and regulators. However, financial data may be characterized by distributions having more than one modes. Using a unimodal distribution may lead to bias for risk measure computation. In this paper, we discuss the influence of using multimodal distributions on VaR and Expected Shortfall (ES) calculation. Two multimodal distribution families are considered: Cobb's family and distortion family. We provide two ways to compute the VaR and the ES for them: an adapted rejection sampling technique for Cobb's family and an inversion approach for distortion family. For empirical study, two data sets are considered: a daily data set concerning operational risk and a three month scenario of market portfolio return built five minutes intraday data. With a complete spectrum of confidence levels from 0001 to 0.999, we analyze the VaR and the ES to see the interest of using multimodal distribution instead of unimodal distribution
    Keywords: Risks; Multimodal distributions; Value-at-Risk; Expected Shortfall; Moments method; Adapted rejection sampling; Regulation
    JEL: C13 C15 G28 G32
    Date: 2017–03
  10. By: GOTTARDI, Piero; MAURIN, Vincent; MONNET, Cyril
    Abstract: We show that repurchase agreements (repos) arise as the instrument of choice to borrow in a competitive model with limited commitment. The repo contract traded in equilibrium provides insurance against fluctuations in the asset price in states where collateral value is high and maximizes borrowing capacity when it is low. Haircuts increase both with counterparty risk and asset risk. In equilibrium, lenders choose to re-use collateral. This increases the circulation of the asset and generates a “collateral multiplier" effect. Finally, we show that intermediation by dealers may endogenously arise in equilibrium, with chains of repos among traders
    Keywords: Repos; Collateral re-use; Intermediation; Haircuts
    JEL: G10 G21 G23
    Date: 2017
  11. By: Pankaj Baag (Indian Institute of Management Kozhikode)
    Abstract: We use the asymptotic single risk factor model, which is a portfolio invariant model and preferred by BCBS with the factor based structural CreditMetrics portfolio default model to empirically estimate the Probability of default with asset correlation of a loan portfolio based on primary data from Public Sector Banks and compared the results with the estimated Probability of default without any asset correlation. We have used actual bank loan rating transition data for the period 2000-2010. Our study evidences that probability of default improves with asset correlation. We also find that asset correlation is an increasing function of probability of default. High rating firms have low correlation than low rating firms. These are opposite of BCBS assumptions for the developed nations. This implies that large corporate loans have the same systematic risk in times of economy distress. Our analyses suggest that it is imprudent to assume a decreasing relationship between average asset correlation and default probability in measuring portfolio credit risk. In light of this empirical evidence, we encourage the Basel Committee to revisit the use of this relationship in bank capital requirement.
  12. By: Hala El-Said; Mahmoud Al-Said; Chahir Zaki (Cairo University)
    Abstract: Limited resources and barriers to entry are critically higher for small and medium enterprises (SMEs) than for large companies. One of the reasons explaining why the resources of SMEs are scarce is their limited access to financial services. This, in turn, reduces their likelihood of exporting. With this in mind, using the census of SMEs done by the Central Bank of Egypt and the Egyptian Banking Institute (EBI), we try to examine the impact of access to finance on SMEs’ export performance. We measure the latter by the extensive margin that means the probability of becoming an exporter and the probability of serving several markets. We found a significant and positive impact on the probability of exporting and that of exporting to more than one destination from dealing with banks and having banking facilities. Thus, wider and more efficient financial services are likely to increase the number of exporters and boost exports diversification.
    Date: 2015–04
  13. By: Lozej, Matija (Central Bank of Ireland); Rannenberg, Ansgar (Central Bank of Ireland)
    Abstract: We use the Central Bank of Ireland’s DSGE model to investigate the introduction of regulatory loan-to-value and loan-to-income ratios in the mortgage market in 2015, which form part of the Central Bank’s macroprudential measures. The main finding is that while the measures dampen economic activity in the short run, they bring benefits in the medium and long run. Household leverage declines, which lowers the default rate on bank loans. The economy as a whole deleverages and foreign debt decreases significantly.
    Date: 2017–03
  14. By: Martin, Hal (Federal Reserve Bank of Cleveland); Hanson, Andrew (Department of Economics College of Business Administration Marquette University); Hawley, Zackary (Texas Christian University)
    Abstract: This paper provides evidence on the relationship between differential treatment of minority borrowers and their mortgage market outcomes. Using data from a field experiment that identifies differential treatment matched to real borrower transactions in the Home Mortgage Disclosure Act (HMDA) data, we estimate difference-in-difference models between African American and white borrowers across lending institutions that display varying degrees of differential treatment. Our results show that African Americans are more likely to be in a high-cost (subprime) loan when borrowing from lenders that are more responsive to them in the field experiment. We also show that net measures of differential treatment are not related to the probability of African American borrowers having a high-cost loan. Our results suggest that differential outcomes are related to within-institution factors, not just across-institution factors like institutional access, as previous studies find.
    Keywords: discrimination; mortgage lending; loan outcomes;
    JEL: G2 J15
    Date: 2017–03–22
  15. By: Julie De Pril; Cécile Godfroid
    Abstract: It has been widely recognized that the microfinance sector should pursue both social and financial objectives (double bottom line objective). However, with the growing success of microfinance, numerous microfinance institutions (MFIs) experience mission drift when they focus only on their financial mission at the expense of their social one. The mainstream incentive schemes set up by MFIs for their loan officers are one of the factors contributing to mission drift for several reasons. First, monetary rewards based on financial criteria may lead unscrupulous loan officers to push clients into overindebtedness. Second, financial incentives may have a negative effect on the prosocial motivation animating numerous microfinance loan officers. In this paper, we attempt to suggest, with a mathematical model, an optimal incentive scheme double bottom line on which MFIs could rely in order to preserve loan officers’ prosocial motivation while paying attention to their financial profit.
    Keywords: microfinance; financial incentive; loan officer; financial performance; prosocial motivation
    JEL: G21 J30 M52
    Date: 2017–03–17
  16. By: de Ramon, Sebastian (Bank of England); Francis, William (Bank of England); Milonas, Kristoffer (Bank of England)
    Abstract: This paper provides an overview of the dramatic changes in the UK banking sector over the 1989–2013 period, seen through the lens of a newly assembled database built from banks’ regulatory reports. This database, which we refer to as the Historical Banking Regulatory Database (HBRD), covers financial statement and confidential regulatory information for all authorized UK banks and building societies at the consolidated (group) and standalone (bank) level. As a result, it permits both a more comprehensive picture of the UK banking sector as well as a more refined view of subsectors, such as small banks, than possible with other existing data sets (eg from external vendors or aggregate statistics). The overview focuses on developments in banks’ CAMEL characteristics (Capital adequacy, Asset quality, Management skills, Earnings performance and Liquidity), and relates these developments to concurrent regulatory changes, such as the Basel Market Risk Amendment. We also suggest ways in which the database can be used for evidence-based research and policy analysis.
    Keywords: Bank regulation; regulatory data; database; CAMEL; capital; capital requirements; asset quality; management; earnings performance; liquidity; funding
    JEL: G01 G21 G28 N20
    Date: 2017–03–20

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