|
on Banking |
| By: | Fabian Schupp (Deutsche Bundesbank); Leonid Silbermann (Deutsche Bundesbank) |
| Abstract: | We analyze whether, and if so by how much, stable funding would have contributed to the financial soundness of German banks in the time period between 1995 and 2013, before the Basel III liquidity regulation to address excessive maturity mismatches in the wake of the financial crisis via the Net Stable Funding Ratio can be expected to have been fully implemented. Using a dataset that contains information on critical events of German banks, we find that financing loans using fewer customer deposits would have been associated with a higher probability of financial distress for savings banks and credit cooperatives. A one percent rise in the loanto- deposit ratio from 1995 to 2013 corresponds to an increase in the probability of experiencing a critical event, implying approximately two additional savings banks and two additional credit cooperatives in financial distress. No such effect can be detected for commercial banks (excluding big banks), which are found to be far more heterogeneous with respect to their business models. |
| Keywords: | Banks, financial distress, stable funding, Basel III liquidity regulation, NSFR, financial stability, panel data, random effects logit |
| JEL: | G21 G28 C23 C25 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:mar:magkse:201717&r=ban |
| By: | Jalal Etesami; Ali Habibnia; Negar Kiyavash |
| Abstract: | Financial instability and its destructive effects on the economy can lead to financial crises due to its contagion or spillover effects to other parts of the economy. Having an accurate measure of systemic risk gives central banks and policy makers the ability to take proper policies in order to stabilize financial markets. Much work is currently being undertaken on the feasibility of identifying and measuring systemic risk. In principle, there are two main schemes to measure interlinkages between financial institutions. One might wish to construct a mathematical model of financial market participant relations as a network/graph by using a combination of information extracted from financial statements like the market value of liabilities of counterparties, or an econometric model to estimate those relations based on financial series. In this paper, we develop a data-driven econometric framework that promotes an understanding of the relationship between financial institutions using a nonlinearly modified Granger-causality network. Unlike existing literature, it is not focused on a linear pairwise estimation. The method allows for nonlinearity and has predictive power over future economic activity through a time-varying network of relationships. Moreover, it can quantify the interlinkages between financial institutions. We also show how the model improve the measurement of systemic risk and explain the link between Granger-causality network and generalized variance decompositions network. We apply the method to the monthly returns of U.S. financial Institutions including banks, broker and insurance companies to identify the level of systemic risk in the financial sector and the contribution of each financial institution. |
| Keywords: | Systemic risk; Risk Measurement; Financial Linkages and Contagion; Nonlinear Granger Causality; Directed Information Graphs |
| JEL: | C14 C51 D8 D85 G1 G14 G21 G28 G31 |
| Date: | 2017–03 |
| URL: | http://d.repec.org/n?u=RePEc:ehl:lserod:70769&r=ban |
| By: | Stefano Giglio |
| Abstract: | "This paper measures the joint default risk of financial institutions by exploiting information about counterparty risk in credit default swaps (CDS). A CDS contract written by a bank to insure against the default of another bank is exposed to the risk that both banks default. From CDS spreads we can then learn about the joint default risk of pairs of banks. From bond prices we can learn the individual default probabilities. Since knowing individual and pairwise probabilities is not sufficient to fully characterize multiple default risk, I derive the tightest bounds on the probability that many banks fail simultaneously." JEL Classification: G21, E44, G28 |
| Keywords: | credit default swaps, counterparty risk, default risk, simultaneous failures |
| Date: | 2016–06 |
| URL: | http://d.repec.org/n?u=RePEc:srk:srkwps:201615&r=ban |
| By: | Jorda, Oscar (Federal Reserve Bank of San Francisco); Richter, Björn (University of Bonn); Schularick, Moritz (University of Bonn); Taylor, Alan M. (University of California, Davis) |
| Abstract: | Higher capital ratios are unlikely to prevent a financial crisis. This is empirically true both for the entire history of advanced economies between 1870 and 2013 and for the post-WW2 period, and holds both within and between countries. We reach this startling conclusion using newly collected data on the liability side of banks’ balance sheets in 17 countries. A solvency indicator, the capital ratio has no value as a crisis predictor; but we find that liquidity indicators such as the loan-to-deposit ratio and the share of non-deposit funding do signal financial fragility, although they add little predictive power relative to that of credit growth on the asset side of the balance sheet. However, higher capital buffers have social benefits in terms of macro-stability: recoveries from financial crisis recessions are much quicker with higher bank capital. |
| JEL: | E44 G01 G21 N20 |
| Date: | 2017–03–28 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedfwp:2017-06&r=ban |
| By: | Timotej Homar |
| Abstract: | This paper analyzes the effect of bank recapitalizations on lending, funding and asset quality of European banks between 2000 and 2013. Controlling for market implied capital shortfall of banks, we find that banks that receive a sufficiently large recapitalization increase lending, attract more deposits and clean up their balance sheets. In contrast, banks that receive a small recapitalization relative to their capital shortfall reduce lending and shrink assets. These results suggest recapitalizations need to be large enough to lead to new lending. JEL Classification: G21, G28 |
| Keywords: | bank recapitalization, lending, zombie banks, bank restructuring, banking crisis |
| Date: | 2016–06 |
| URL: | http://d.repec.org/n?u=RePEc:srk:srkwps:201616&r=ban |
| By: | Dirk Schoenmaker; Peter Wierts |
| Abstract: | Financial supervision focuses on the aggregate (macroprudential) in addition to the individual (microprudential). But an agreed framework for measuring and addressing financial imbalances is lacking. We propose a holistic approach for the financial system as a whole, beyond banking. Building on our model of financial amplification, the financial cycle is the key variable for measuring financial imbalances. The cycle can be curbed by leverage restrictions that might vary across countries. We make concrete policy proposals for the design of macroprudential instruments to simplify the current framework and make it more consistent. JEL Classification: E44, G01, G28 |
| Keywords: | financial cycle, macroprudential policy, financial supervision, leverage ratio |
| Date: | 2016–02 |
| URL: | http://d.repec.org/n?u=RePEc:srk:srkwps:201602&r=ban |
| By: | Viral Acharya; Guillaume Plantin |
| Abstract: | We study optimal monetary policy in the presence of financial stability concerns. We build a model in which monetary easing can lower the cost of capital for firms and restore the natural level of investment, but does also subsidize inefficient maturity transformation by financial intermediaries in the form of “carry trades" that borrow cheap at the short-term against illiquid long-term assets. Carry trades not only lead to financial instability in the form of rollover risk, but also crowd out real investment since intermediaries equate the marginal return on lending to firms to that on carry trades. Optimal monetary policy trades off any stimulative gains against these costs of carry trades. The model provides a framework to understand the puzzling phenomenon that the unprecedented post-2008 monetary easing has been associated with below-trend real investment, even while returns to real and financial capital have been historically high. |
| Keywords: | Monetary policy; quantitative easing; financial stability; financial fragility; shadow banking; maturity transformation; carry trades |
| JEL: | E52 E58 G00 G21 G23 G28 |
| Date: | 2017–01 |
| URL: | http://d.repec.org/n?u=RePEc:ehl:lserod:70715&r=ban |
| By: | Andolfatto, David (Federal Reserve Bank of St. Louis); Nosal, Ed (Federal Reserve Bank of Chicago) |
| Abstract: | A bank panic is an expectation-driven redemption event that results in a self-fulfilling prophecy of losses on demand deposits. From the standpoint of theory in the tradition of Diamond and Dybvig (1983) and Green and Lin (2003), it is surprisingly di¢ cult to generate bank panic equilibria if one allows for a plausible degree of contractual flexibility. A common assumption employed in the standard banking model is that returns are linear in the scale of investment. Instead, we assume the existence of a fixed investment cost, so that a higher risk-adjusted rate of return is available only if investment exceeds a minimum scale requirement. With this simple and empirically-plausible modification to the standard model, we find that bank panic equilibria emerge easily and naturally, even under highly flexible contractual arrangements. While bank panics can be eliminated through an appropriate policy, it is not always desirable to do so. We use our model to examine a number of issues, including the likely effectiveness of recent financial market regulations. Our model also lends some support for the claim that low-interest rate policy induces a “reach-for-yield” phenomenon resulting in a more panic-prone financial system. |
| JEL: | G01 G21 G28 |
| Date: | 2017–03–29 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2017-009&r=ban |
| By: | David M. Arseneau; David Rappoport; Alexandros Vardoulakis |
| Abstract: | We show that trade frictions in OTC markets result in inefficient private liquidity provision. We develop a dynamic model of market-based financial intermediation with a two-way interaction between primary credit markets and secondary OTC markets. Private allocations are generically inefficient because investors and firms fail to internalize how their actions affect liquidity in secondary markets. This inefficiency can lead to liquidity that is suboptimally low or high compared to the second best. Our analysis provides a rationale for the regulation and public provision of liquidity and the effect of quantitative easing or tightening on capital markets and investment. |
| Keywords: | Liquidity provision ; Market liquidity ; Over-the-counter markets ; OTC ; Quantitative easing ; Quantitative tightening ; Monetary policy normalization |
| JEL: | E44 G18 G30 |
| Date: | 2017–03–29 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2017-33&r=ban |
| By: | Carlo Altavilla; Marco Pagano; Saverio Simonelli |
| Abstract: | Using novel monthly data for 226 euro-area banks from 2007 to 2015, we investigate the causes and effects of banks’ sovereign exposures during and after the euro crisis. First, in the vulnerable countries, the publicly owned, recently bailed out and less strongly capitalized banks reacted to sovereign stress by increasing their domestic sovereign holdings more than other banks, suggesting that their choices were affected both by moral suasion and by yield-seeking. Second, their exposures significantly amplified the transmission of risk from the sovereign and its impact on lending. This amplification of the impact on lending cannot be ascribed to spurious correlation or reverse causality. JEL Classification: E44, F3, G01, G21, H63 |
| Keywords: | sovereign exposures, sovereign risk, credit risk, diabolic loop, lending, euro debt crisis |
| Date: | 2016–05 |
| URL: | http://d.repec.org/n?u=RePEc:srk:srkwps:201611&r=ban |
| By: | Victor Echevarria-Icaza (Complutense Institute for International Studies, Universidad Complutense de Madrid. 28223 Madrid, Spain.); Simón Sosvilla-Rivero (Complutense Institute for International Studies, Universidad Complutense de Madrid; 28223 Madrid, Spain.) |
| Abstract: | This paper shows that systemic banks are prone to increase their regulatory capital ratio through a decline in risk-weighted assets density and an intense use of lower level capital. The market access of systemic banks, and the fact that they were singled out for higher capital requirements seem to have biased them towards lower level capital, consistent with the theory that asymmetric information drives capital decisions. These effects are particularly strong for institutions that had a rather low level of capitalization at the start of the period and for those that exhibited a strong use of Additional Tier I capital before the regulatory changes. Strict capital composition requirements for firms with lower buffers would be an improvement. |
| Keywords: | Contingent capital, banking regulation, risk-taking incentives, asset substitution, systemic risk. JEL classification: G12,G21, G28. |
| Date: | 2017–04 |
| URL: | http://d.repec.org/n?u=RePEc:ira:wpaper:201707&r=ban |
| By: | Claire-Océane Chevallier (CREA, Université du Luxembourg) |
| Abstract: | The objective of this study is to empirically test whether bank loan supply affects output in the Euro-zone from 1999Q1 to 2014Q4. It uses shocks to bank deposits and shocks to bank wholesale debt issuance as instruments in a linear two stage least square specification to evaluate the role of loan supply in affecting output. The findings show that banks' changed preferences for wholesale debt funding are important determinants of loan supply, in particular during the crisis. I also find evidence that loan supply affects output significantly and positively. The validity of the model is also tested by verifying the linearity assumption using non-parametric estimation techniques. |
| Keywords: | Bank lending channel; Bank funding; Bond issuance; Credit; Euro-area |
| JEL: | E41 E44 E51 G21 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:luc:wpaper:17-04&r=ban |
| By: | Raslan Alzubi (Department of Economics, University of Sheffield); Mustafa Caglayan (School of Social Sciences, Heriot-Watt University); Kostas Mouratidis (Department of Economics, University of Sheffield) |
| Abstract: | Employing data from thirty large banks in the US, we examine banks' risk-taking behaviour in response to monetary policy shocks. Our investigation provides support for the presence of a risk-taking channel: banks' nonperforming loans increase in medium to long run following an expansionary monetary policy shock. We also find that banks' capital structure plays an important role in explaining bank's risk-taking appetite. Impulse response analysis shows that shocks emanating from larger banks spillover to the rest of the sector but no such effect is observed for smaller banks. The results are confirmed for banks' Z-score. |
| Keywords: | Risk-taking channel; GVAR; monetary policy shocks; spilloverover effects |
| JEL: | E44 E52 G01 G19 G29 |
| Date: | 2017–03 |
| URL: | http://d.repec.org/n?u=RePEc:shf:wpaper:2017009&r=ban |
| By: | Anatoli Segura; Javier Suarez |
| Abstract: | We quantify the gains from regulating maturity transformation in a model of banks which finance long-term assets with non-tradable debt. Banks choose the amount and maturity of their debt trading off investors’ preference for short maturities with the risk of systemic crises. Pecuniary externalities make unregulated debt maturities inefficiently short. The calibration of the model to Eurozone banking data for 2006 yields that lengthening the average maturity of wholesale debt from its 2.8 months to 3.3 months would produce welfare gains with a present value of euro 105 billion, while the lengthening induced by the NSRF would be too drastic. JEL Classification: G01,G21,G28 |
| Keywords: | liquidity risk, maturity regulation, pecuniary externalities, systemic crises |
| Date: | 2016–03 |
| URL: | http://d.repec.org/n?u=RePEc:srk:srkwps:201603&r=ban |
| By: | Rosengren, Eric S. (Federal Reserve Bank of Boston) |
| Abstract: | Because many financial intermediaries lend to households and businesses with real estate as the collateral, recessions that are accompanied by significant declines in real estate valuations can lead to broader problems. |
| Date: | 2017–03–22 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedbsp:115&r=ban |
| By: | Sarah El Joueidi (CREA, Université du Luxembourg) |
| Abstract: | This paper studies the banks' decisions to self-regulate their activities and their selection of the financial markets where they raise their capital. We show that in an economy with a single financial market, self-regulation increases investors' demand for banks' stocks while weaker bank concentration reduces incentives to self-regulate. In addition, in an economy with separate financial markets, banks preferably raise capital in financial markets hosting larger number of investors. However, when self-regulation costs vary across financial places, banks may list their stocks in the country with the smaller number of investors. |
| Keywords: | Endogenous quality, self-regulation, economic geography, banks, financial markets, macroprudential effort. |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:luc:wpaper:17-05&r=ban |
| By: | Keuschnigg, Christian; Kogler, Michael |
| Abstract: | Capital reallocation from unprofitable to profitable firms is a key source of productivity gain in an innovative economy. We present a model of credit reallocation and focus on the role of banks: Weakly capitalized banks hesitate to write off non-performing loans to avoid a violation of regulatory requirements or even insolvency. Such behavior blocks credit to expanding industries and results in insufficient credit reallocation across sectors and a distorted capital allocation. Reducing the cost of bank equity, tightening capital requirements, and improving insolvency laws relaxes constraints and mitigates distortions. |
| Keywords: | Banking, credit reallocation, regulations, finance and growth |
| JEL: | D92 G21 G28 G33 |
| Date: | 2017–03 |
| URL: | http://d.repec.org/n?u=RePEc:usg:econwp:2017:04&r=ban |
| By: | S. Demiralp (Koc University); J. Eisenschmidt (ECB); T. Vlassopoulos (ECB) |
| Abstract: | In June 2014 the ECB became the first major central bank to lower one of its key policy rates to negative territory. The theoretical and empirical literature is silent on whether banks’ reaction would be different when the policy rate is lowered to negative levels compared to a standard reaction to a rate cut. In this paper we examine this question empirically by using individual bank data for the euro area to identify possible adjustments by banks triggered by the introduction of negative interest rates through three channels: government bond holdings, bank lending, and wholesale funding. We find evidence of a significant adjustment of banks’ balance sheets during the negative interest rate period. Banks tend to extend more loans, hold more non-domestic government bonds and rely less on wholesale funding. The nature and scope of the adjustment depends on banks’ business models. |
| Keywords: | negative rates, bank balance sheets, monetary transmission mechanism. |
| JEL: | E43 E52 G11 G21 |
| Date: | 2017–03 |
| URL: | http://d.repec.org/n?u=RePEc:koc:wpaper:1708&r=ban |
| By: | Puriya Abbassi; Rajkamal Iyer; José-Luis Peydró; Francesc R. Tous |
| Abstract: | We analyze securities trading by banks during the crisis and the associated spillovers to the supply of credit. We use a proprietary dataset that has the investments of banks at the security level for 2005-2012 in conjunction with the credit register from Germany. We find that – during the crisis – banks with higher trading expertise (trading banks) increase their investments in securities, especially in those that had a larger price drop, with the strongest impact in low-rated and long-term securities. Moreover, trading banks reduce their credit supply, and the credit crunch is binding at the firm level. All of the effects are more pronounced for trading banks with higher capital levels. Finally, banks use central bank liquidity and government subsidies like public recapitalization and implicit guarantees mainly to support trading of securities. Overall, our results suggest an externality arising from fire sales in securities markets on credit supply via the trading behavior of banks. JEL Classification: G01, G21, G28 |
| Keywords: | banking, investments, bank capital, credit supply, risk-taking, public subsidies |
| Date: | 2016–03 |
| URL: | http://d.repec.org/n?u=RePEc:srk:srkwps:201605&r=ban |
| By: | Matthias Neuenkirch; Matthias Nöckel |
| Abstract: | In this paper, we provide evidence for a risk-taking channel of monetary policy transmission in the euro area. Our dataset covers the period 2003Q1-2016Q2 and includes, in addition to the standard variables for real GDP growth, inflation, and the main refinancing rate, indicators of bank lending standards and bank lending margins. Based on vector autoregressive models with (i) recursive identification and (ii) sign restrictions, we show that banks react quickly and aggressively to an expansionary monetary policy shock by decreasing their lending standards. The banks' efforts to keep their lending margins stable are successful, as we find only an insignificant decrease in the margins over the medium-run. |
| Keywords: | European Central Bank, Macroprudential Policy, Monetary Policy Transmission, Risk-Taking Channel, Vector Autoregression |
| JEL: | E44 E51 E52 E58 G28 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:trr:wpaper:201702&r=ban |
| By: | Tammuz Alraheb Ab (LAPE - Laboratoire d'Analyse et de Prospective Economique - UNILIM - Université de Limoges - IR SHS UNILIM - Institut Sciences de l'Homme et de la Société); Christina Nicolas (LAPE - Laboratoire d'Analyse et de Prospective Economique - UNILIM - Université de Limoges - IR SHS UNILIM - Institut Sciences de l'Homme et de la Société); Amine Tarazi (LAPE - Laboratoire d'Analyse et de Prospective Economique - UNILIM - Université de Limoges - IR SHS UNILIM - Institut Sciences de l'Homme et de la Société) |
| Abstract: | Please do not quote without the permission of the authors. Abstract We investigate the influence of the institutional environment on bank capital levels. Using a sample of 187 banks operating in the MENA region for the period 2004 to 2014, we find that low corruption levels, high political stability, as well as high economic and financial freedom are associated with higher capital adequacy levels. The effect of institutional factors on bank capital ratios is also more pronounced for conventional versus Islamic banks, for listed banks and for non-government owned banks. |
| Keywords: | Bank Capital Structure,Institutions,MENA Region |
| Date: | 2017–02–24 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:hal-01475923&r=ban |
| By: | Alexander Schäfer; Isabel Schnabel; Beatrice Weder di Mauro |
| Abstract: | The declared intention of policy makers is that future bank restructuring should be conducted through bail-in rather than bail-out. Over the past years there have been a few cases of European banks being restructured where creditors were bailed in. This paper exploits these events to investigate the market reactions of stock prices and credit default swap (CDS) spreads of European banks in order to gauge the extent to which it is expected that bail-in will indeed become the new regime. We find evidence of increased CDS spreads and falling stock prices most notably after the bail-in in Cyprus. However, bail-in expectations appear to depend on the sovereign’s fiscal strength, i. e., reactions are stronger for banks in countries with limited fiscal space for bail-out. Moreover, actual bail-ins lead to stronger market reactions than the legal implementation of bank resolution regimes, supporting the saying that actions speak louder than words. JEL Classification: G21, G28 |
| Keywords: | bail-in, bank restructuring, Single Resolution Mechanism, creditor participation, event study |
| Date: | 2016–04 |
| URL: | http://d.repec.org/n?u=RePEc:srk:srkwps:201607&r=ban |
| By: | Iñaki Aldasoro; Robert Unger |
| Abstract: | Using a Bayesian vector autoregression (BVAR) identified with a mix of sign and zero restrictions, we show that a restrictive bank loan supply shock has a strong and persistent negative impact on real GDP and the GDP deflator. This result comes about even though flows of other sources of financing, such as equity and debt securities, expand strongly and act as a "spare tire" for the reduction in bank loans. We show that this result can be rationalized by a recently revived view of banking, which holds that banks increase the nominal purchasing power of the economy when they create additional deposits in the act of lending. Consequently, our findings indicate that a substitution of bank loans by other sources of financing might have negative macroeconomic repercussions. |
| Keywords: | bank loans, Bayesian VAR, credit creation, ECB, euro area, external financing, financing structure |
| Date: | 2017–03 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:622&r=ban |
| By: | Lukas Altermatt |
| Abstract: | In this paper I build a new monetarist model that includes inside money and investment to analyze why an economy can fall into a liquidity trap, and what the effects of unconventional monetary policy measures like helicopter money and negative interest rates are under these circumstances. I find that the liquidity trap can be caused by a scarcity of savings instruments, by insufficient investment opportunities, by too much supply of bank deposits or by a combination of any of these reasons. I also find that unconventional monetary policies can get an economy out of a liquidity trap, but at a welfare cost, while issuing more government debt can do the same and also improve welfare. |
| Keywords: | New monetarism, liquidity trap, helicopter money, negative interest rates, government debt, Ricardian equivalence, banking |
| JEL: | E4 E5 G2 |
| Date: | 2017–03 |
| URL: | http://d.repec.org/n?u=RePEc:zur:econwp:247&r=ban |
| By: | Filippo Ippolito; José-Luis Peydró; Andrea Polo; Enrico Sette |
| Abstract: | By providing liquidity to depositors and credit line borrowers, banks are exposed to doubleruns on assets and liabilities. For identification, we exploit the 2007 freeze of the European interbank market and the Italian Credit Register. After the shock, there are sizeable, aggregate double-runs. In the cross-section, pre-shock interbank exposure is (unconditionally) unrelated to post-shock credit line drawdowns. However, conditioning on firm observable and unobservable characteristics, higher pre-shock interbank exposure implies more post-shock drawdowns. We show that is the result of active pre-shock liquidity risk management by more exposed banks granting credit lines to firms that run less in a crisis. JEL Classification: G01, G21, G28 |
| Keywords: | Credit lines, Liquidity risk, Financial crisis, Runs, Risk management |
| Date: | 2016–04 |
| URL: | http://d.repec.org/n?u=RePEc:srk:srkwps:201608&r=ban |
| By: | Coimbra, Nuno; Rey, Hélène |
| Abstract: | This paper develops a dynamic macroeconomic model with heterogeneous financial intermediaries and endogenous entry. It features time-varying endogenous macroeconomic risk that arises from the risk-shifting behaviour of financial intermediaries combined with entry and exit. We show that when interest rates are high, a decrease in interest rates stimulates investment and increases financial stability. In contrast, when interest rates are low, further stimulus can increase systemic risk and induce a fall in the risk premium through increased risk-shifting. In this case, the monetary authority faces a trade-off between stimulating the economy and financial stability. |
| Keywords: | banks; cycle; leverage; risk-shifting; systemic risk |
| JEL: | E44 E58 G21 |
| Date: | 2017–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:11907&r=ban |
| By: | Rama Cont (Imperial College London) |
| Abstract: | The clearing of over-the-counter transactions through central counterparties (CCPs), one of the pillars of financial reform following the crisis of 2007-2008, has promoted CCPs as key elements of the new global financial architecture. It is important to examine how these reforms have affected risks in the financial system and whether central clearing has attained the initial objective of the reform, which is to enhance financial stability and reduce systemic risk. We show that, rather than eliminating counterparty risk, central clearing transforms it into liquidity risk: margin calls transform accounting losses into realised losses which affect the liquidity buffers of clearing members. Accordingly, initial margin and default fund calculations should account for this liquidity risk in a realistic manner, especially for large positions. While recent discussions have centred on the solvency of CCPs, their capital and 'skin-in-the-game' and capital requirements for CCP exposures of banks, we argue that these issues are secondary and that the main focus of risk management and financial stability analysis should be on the liquidity of clearing members and the liquidity resources of CCPs. Clearing members should assess their exposure to CCPs in terms of liquidity, rather than counterparty risk. Stress tests involving CCPs should focus on liquidity stress testing and adequacy of liquidity resources. |
| Keywords: | CCP, central clearing, central counterparty, systemic risk, liquidity risk, counterparty risk, default fund, OTC derivatives, collateral requirement, regulation, stress testing |
| Date: | 2017–03–31 |
| URL: | http://d.repec.org/n?u=RePEc:bno:worpap:2017_03&r=ban |
| By: | Ammann, Manuel; Arnold, Marc; Straumann, Simon |
| Abstract: | This paper investigates the impact of investor information on financial innovation. We identify specific channels through which issuers of financially engineered products exploit retail investors by using their privileged access to information. Our results imply that imperfect investor information regarding volatility and dividends is crucial to explain the pricing and design of financially engineered products. We confirm our conjecture by exploiting a discontinuity in issuers' informational advantage. The insights are of systemic importance because they suggest that product issuers' behavior in the financial innovation market aggravates investor information problems of the financial system. |
| Keywords: | Structured Products, Investor Information, Financial Innovation |
| JEL: | D8 G34 M52 |
| Date: | 2017–03 |
| URL: | http://d.repec.org/n?u=RePEc:usg:sfwpfi:2017:04&r=ban |
| By: | Franziska Bremus; Katja Neugebauer |
| Abstract: | This paper investigates how the withdrawal of banks from their cross-border business impacted the borrowing costs of European firms since the crisis. We combine aggregate information on total and cross-border credit with firm-level survey data for the period 2010 - 2014. We find that the decline in cross-border lending led to a deterioration in the borrowing conditions of small firms. In countries with more pronounced reductions in cross-border credit inflows, the likelihood of a rise in firms’ external financing costs has increased. This result is mainly driven by the interbank channel, which plays a crucial role in transmitting shocks to the real sector across borders. |
| Keywords: | International banking; firm finance; credit constraints. |
| JEL: | F34 F36 G15 G21 |
| Date: | 2017–03 |
| URL: | http://d.repec.org/n?u=RePEc:ehl:lserod:70774&r=ban |
| By: | Teruyoshi Kobayashi (Graduate School of Economics, Kobe University); Taro Takaguchi (National Institute of Information and Communication Technology) |
| Abstract: | The global financial crisis in 2007–2009 demonstrated that systemic risk can spread all over the world through a complex web of financial linkages. In particular, interbank credit networks shape the core of the financial system, in which interconnected risk emerges from a massive number of temporal transactions between banks. However, the lack of fundamental knowledge about the dynamic nature of interbank networks makes it difficult to evaluate and control systemic risk. Here, we analyze the dynamics of real interbank networks at a daily temporal resolution. While daily networks have been flexibly changing their structure from day to day, entailing entries and exits of banks, we discover explicit dynamical patterns that have been surprisingly stable over time even amid the global financial crisis. The emergence of these dynamical patterns is accurately reproduced by a model, in which banks’ demand for trading follows a random walk. The discovery of fundamental patterns in the daily evolution of interbank networks will enhance our ability to evaluate systemic risk and could contribute to the dynamic management of financial stability. |
| Date: | 2017–03 |
| URL: | http://d.repec.org/n?u=RePEc:koe:wpaper:1711&r=ban |