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on Banking |
| By: | Fabiano Schivardi; Enrico Sette; Guido Tabellini |
| 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 uential 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 classification number: D23, E24, G21 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:igi:igierp:600&r=ban |
| By: | Iftekhar HASAN (Gabelli School of Business, Fordham University); Jean-Loup SOULA (LaRGE Research Center, Université de Strasbourg) |
| Abstract: | This paper generates an optimum bank liquidity creation benchmark by tracing an efficient frontier in liquidity creation (bank intermediation) and questions why some banks are more efficient than others in such activities. Evidence reveals that medium size banks are most correlated to efficient frontier. Small (large) banks - focused on traditional banking activities - are found to be the most (least) efficient in creating liquidity in on-balance sheet items whereas large banks – involved in non-traditional activities – are found to be most efficient in off-balance sheet liquidity creation. Additionally, the liquidity efficiency of small banks is more resilient during the 2007-2008 financial crisis relative to other banks. |
| Keywords: | banks, technical efficiency, liquidity creation, diversification |
| JEL: | G21 G28 G32 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:lar:wpaper:2017-08&r=ban |
| By: | Òscar Jordà; Björn Richter; Moritz Schularick; Alan M. Taylor |
| 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 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:23287&r=ban |
| By: | Damiano Bruno Silipo; Giovanni Verga; Sviatlana Hlebik (Dipartimento di Economia, Statistica e Finanza "Giovanni Anania" - DESF, Università della Calabria) |
| Abstract: | The paper investigates the causes of confidence and overconfidence and their effects on banking behavior and performance for a large sample of American banks in the period 2000-2013. We construct a new indicator of confidence based on banks’ loss provisions and show that before 2007 risk-taking, lending and leverage increased relatively more for banks with an intermediate degree of confidence (mid-confidents) than for the overconfident. The former also suffered the greatest losses in the financial crash of 2007-2008. Hence, unlike the previous literature on overconfidence, we find that the financial crisis was determined mainly by the increased confidence of the mid-confident bank CEOs and not the behavioral biases of overconfident CEOs. The latter, in fact, have more persistent beliefs and react less strongly to news during cyclical upswings. Finally, we show that overconfident behavior is unlikely to maximize a bank’s value. |
| Keywords: | Confidence and Overconfidence Index, Banking behavior, Confidence and Bank Value |
| JEL: | G01 G02 G21 |
| Date: | 2017–04 |
| URL: | http://d.repec.org/n?u=RePEc:clb:wpaper:201703&r=ban |
| By: | Stefan Avdjiev; Stephan Binder; Ricardo Sousa |
| Abstract: | We assess the role of external debt in shaping the dynamics of domestic credit cycles. Using quarterly data for 40 countries between 1980 and 2015, we examine four dimensions of external debt composition: instrument, sector, currency and maturity. We show that the first two dimensions provide valuable information about the likelihood of credit booms and busts. In particular, we find that a higher share of external bank lending in the form of bonds is associated with a greater likelihood of credit booms. Our results also reveal that credit busts tend to be associated with a lower share of interbank lending and a higher share of lending from banks to nonbanks. |
| Keywords: | credit cycles, external debt composition |
| Date: | 2017–04 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:627&r=ban |
| By: | José-Luis Peydró; Andrea Polo; Sette Enrico |
| Abstract: | The potency of the bank lending channel of monetary policy may be limited if banks rebalance their portfolios towards securities, e.g. to pursue risk-shifting or liquidity hoarding. To test for the bank lending and risk-taking (reach-for-yield) channels, we therefore analyze banks’ securities trading, in addition to credit supply, in turn allowing us to also study the empirical relevance of key financial frictions. For identification, since the creation of the euro, we exploit the security and credit application registers owned by the central bank of Italy. In crisis times, we find that, with softer monetary policy, less capitalized banks prefer buying securities rather than increasing credit supply (not due to lack of good loan applications), thereby impacting firm-level real outcomes. Moreover, more – not less – capitalized banks reach-for-yield, which is inconsistent with the risk-shifting hypothesis. Results suggest that the main drivers at work are access to liquidity and risk-bearing capacity, and not regulatory capital arbitrage. Finally, in pre-crisis times, when financial frictions are limited, less capitalized banks do not expand securities holdings over credit supply. |
| Keywords: | monetary policy, securities, loan applications, bank capital, reach-for-yield, held to maturity, available for sale, trading book, haircuts, regulatory arbitrage, sovereign debt. |
| JEL: | E51 E52 E58 G01 G21 |
| Date: | 2017–04 |
| URL: | http://d.repec.org/n?u=RePEc:upf:upfgen:1565&r=ban |
| By: | Federico Nucera (LUISS Guido Carli University, Rome); Andre Lucas (Vrije Universiteit Amsterdam and Tinbergen Institute); Julia Schaumburg (Vrije Universiteit Amsterdam and Tinbergen Institute); Bernd Schwaab (European Central Bank, Financial Research) |
| Abstract: | We study the impact of increasingly negative central bank policy rates on banks' propensity to become undercapitalized in a financial crisis (`SRisk'). We find that the risk impact of negative rates depends on banks' business models: Large banks with diversified income streams are perceived as less risky, while smaller and more traditional banks are perceived as more risky. Policy rate cuts below zero trigger different SRisk responses than an equally-sized cut to zero. |
| Keywords: | negative interest rates; bank business model; systemic risk; unconventional monetary policy measures |
| JEL: | G20 G21 |
| Date: | 2017–04–25 |
| URL: | http://d.repec.org/n?u=RePEc:tin:wpaper:20170041&r=ban |
| By: | Irene Sanchez Arjona; Ester Faia; Gianmarco Ottaviano |
| Abstract: | We exploit an original dataset on European G-SIBs to assess how expansion in foreign markets affects their riskiness. We find a robust negative correlation between foreign expansion and bank risk (proxied by various individual and systemic risk metrics). Given individual bank riskiness, banks' expansion reduces the average riskiness of the banks' pool (between effect). Moreover, foreign expansion of any given bank reduces its own risk (within effect). Diversification, competition and regulation channels are all important. Expansion in destination countries with different business cycle co-movement, stricter regulations and higher competition than the origin country decreases a bank's riskiness. |
| Keywords: | banks risk, systemic risk, global expansion, competition, diversification, regulation |
| JEL: | F32 G21 |
| Date: | 2017–04 |
| URL: | http://d.repec.org/n?u=RePEc:cep:cepdps:dp1481&r=ban |
| By: | Opeoluwa Banwo; Fabio Caccioli; Paul Harrald; Francesca Medda |
| Abstract: | We consider a model of financial contagion in a bipartite network of assets and banks recently introduced in the literature, and we study the effect of power law distributions of degree and balance-sheet size on the stability of the system. Relative to the benchmark case of banks with homogeneous degrees and balance-sheet sizes, we find that if banks have a power-law degree distribution the system becomes less robust with respect to the initial failure of a random bank, and that targeted shocks to the most specialised banks (i.e. banks with low degrees) or biggest banks increases the probability of observing a cascade of defaults. In contrast, we find that a power-law degree distribution for assets increases stability with respect to random shocks, but not with respect to targeted shocks. We also study how allocations of capital buffers between banks affects the system's stability, and we find that assigning capital to banks in relation to their level of diversification reduces the probability of observing cascades of defaults relative to size based allocations. Finally, we propose a non-capital based policy that improves the resilience of the system by introducing disassortative mixing between banks and assets. |
| Date: | 2017–04 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1704.06791&r=ban |
| By: | Mohaddes, Kamiar (University of Cambridge); Raissi, Mehdi (International Monetary Fund); Weber, Anke (International Monetary Fund) |
| Abstract: | This paper examines whether a tipping point exists for real GDP growth in Italy above which the ratio of non-performing loans (NPLs) to total loans falls significantly. Estimating a heterogeneous dynamic panel-threshold model with data on 17 Italian regions over the period 1997-2014, we provide evidence for the presence of growth-threshold effects on the NPL ratio in Italy. More specifically, we find that real GDP growth above 1.2 percent, if sustained for a number of years, is associated with a significant decline in the NPLs ratio. Achieving such growth rates requires decisively tackling long-standing structural rigidities and improving the quality of fiscal policy. Given the modest potential growth outlook, however, under which banks are likely to struggle to grow out of their NPL overhang, further policy measures are needed to put the NPL ratio on a firm downward path over the medium term. |
| JEL: | C23 E44 G33 |
| Date: | 2017–03–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:feddgw:309&r=ban |
| By: | Peydró, José Luis; Polo, Andrea; Sette, Enrico |
| Abstract: | The potency of the bank lending channel of monetary policy may be limited if banks rebalance their portfolios towards securities, e.g. to pursue risk-shifting or liquidity hoarding. To test for the bank lending and risk-taking (reach-for-yield) channels, we therefore analyze banks' securities trading, in addition to credit supply, in turn allowing us to also study the empirical relevance of key financial frictions. For identification, since the creation of the euro, we exploit the security and credit application registers owned by the central bank of Italy. In crisis times, we find that, with softer monetary policy, less capitalized banks prefer buying securities rather than increasing credit supply (not due to lack of good loan applications), thereby impacting firm-level real outcomes. Moreover, more - not less - capitalized banks reach-for-yield, which is inconsistent with the risk-shifting hypothesis. Results suggest that the main drivers at work are access to liquidity and risk-bearing capacity, and not regulatory capital arbitrage. Finally, in pre-crisis times, when financial frictions are limited, less capitalized banks do not expand securities holdings over credit supply. |
| Keywords: | bank capital; loan applications; monetary policy; reach-for-yield; regulatory arbitrage; securities; Sovereign debt |
| JEL: | E51 E52 E58 G01 G21 |
| Date: | 2017–04 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:12011&r=ban |
| By: | Busch, Ramona; Drescher, Christian; Memmel, Christoph |
| Abstract: | Using unique supervisory survey data on the impact of a hypothetical interest rate shock on German banks, we analyse price and quantity effects on banks' net interest margin components under different balance sheet assumptions. In the first year, the cross-sectional variation of banks' simulated price effect is nearly eight times as large as the one of the simulated quantity effect. After five years, however, the importance of both effects converges. Large banks adjust their balance sheets more strongly than small banks, but they are impacted more strongly by the price effect. The quantity effects are explained better by a bank's current balance sheet composition, the longer the forecast horizon. The opposite holds for banks' price effect. |
| Keywords: | stress testing,low-interest-rate environment,net interest margin,static balance sheet,dynamic balance sheet,price effect,quantity effect |
| JEL: | G11 G21 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubdps:072017&r=ban |
| By: | Aldasoro, Iñaki; Unger, Robert |
| 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 |
| JEL: | E30 E40 E50 G20 G30 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubdps:042017&r=ban |
| By: | Sergey Nadtochiy; Mykhaylo Shkolnikov |
| Abstract: | We propose an interacting particle system to model the evolution of a system of banks with mutual exposures. In this model, a bank defaults when its normalized asset value hits a lower threshold, and its default causes instantaneous losses to other banks, possibly triggering a cascade of defaults. The strength of this interaction is determined by the level of the so-called non-core exposure. We show that, when the size of the system becomes large, the cumulative loss process of a bank resulting from the defaults of other banks exhibits discontinuities. These discontinuities are naturally interpreted as systemic events, and we characterize them explicitly in terms of the level of non-core exposure and the fraction of banks that are "about to default". The main mathematical challenges of our work stem from the very singular nature of the interaction between the particles, which is inherited by the limiting system. A similar particle system is analyzed in [DIRT15a] and [DIRT15b], and we build on and extend their results. In particular, we characterize the large-population limit of the system and analyze the jump times, the regularity between jumps, and the local uniqueness of the limiting process. |
| Date: | 2017–05 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1705.00691&r=ban |
| By: | Piotr Bańbuła (Narodowy Bank Polski, Warsaw School of Economics); Marcin Pietrzak (Narodowy Bank Polski) |
| Abstract: | We built Early Warning Models (EWM) for determining the optimal moment for build-up phase of the countercyclical capital buffer. For this purpose we estimate a number of early warning models based on the wide panel of countries. We test many potential variables from the early 1970s until 2014, their combinations, and the stability of their signals. Our setting includes country-specific information without using country-specific effects. This allows for direct application of EWM we obtain to any country, including those that have not experienced a banking crisis. Models with three explanatory variables outperform models with smaller number of variates. The probability of extracting a correct signal from best-performing EWM exceeds 0.9. We find that low levels of VIX tend to precede crises, and this was also true before 2006. This corroborates Minsky’s hypothesis about periodic underestimation of risk in the financial sector. Other variables that generate signals with the highest accuracy and stability are those associated with credit growth, property prices and growth in the contribution of financial sector to GDP. This last finding suggests that substantial increases in measured value added of the financial sector seem to reflect augmented exposure to systemic risk, rather than welfare improvements. |
| Keywords: | countercyclical capital buffer, early warning models, financial stability |
| JEL: | E44 G01 G21 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:nbp:nbpmis:257&r=ban |
| By: | Stefano Cosma; Riccardo Ferretti; Elisabetta Gualandri; Andrea Landi; Valeria Venturellivaleria.venturelli@unimore.ita.h.o.vansoest@uvt.nl |
| Abstract: | This paper investigates the way in which the financial market defines and evaluates different business models/business mix, using a sample of listed European banking groups, with a total asset value greater than 50 billion US$, for the period 2006-2015. The main results suggest that non-interest components foster market valuation and that financial market seems to associate a better risk-return trade-off to non-banking fees compared to the banking ones. This evidence enables us to identify 3 clusters of European banking groups based on the main components of income. These findings have strategic implications both for bank managers, regulators and supervisors due to the impact of the crisis on banking business, bank profitability and riskiness and the new challenges they entail. |
| Keywords: | banking strategies; business mix; market-to book value; panel data; cluster analysis |
| JEL: | G20 G21 |
| Date: | 2017–05 |
| URL: | http://d.repec.org/n?u=RePEc:mod:wcefin:17105&r=ban |
| By: | Vittoria Cerasi; Sebastian M Deininger; Leonardo Gambacorta; Tommaso Oliviero |
| Abstract: | This paper assesses whether compensation practices for bank Chief Executive Officers (CEOs) changed after the Financial Stability Board (FSB) issued post-crisis guidelines on sound compensation. Banks in jurisdictions which implemented the FSB's Principles and Standards of Sound Compensation in national legislation changed their compensation policies more than other banks. Compensation in those jurisdictions is less linked to short-term profits and more linked to risks, with CEOs at riskier banks receiving less, by way of variable compensation, than those at less-risky peers. This was particularly true of investment banks and of banks which previously had weaker risk management, for example those that previously lacked a Chief Risk Officer. |
| Keywords: | banks, managerial compensation, prudential regulation, risk-taking |
| Date: | 2017–04 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:630&r=ban |
| By: | Pierre Brugière (CEREMADE - CEntre de REcherches en MAthématiques de la DEcision - Université Paris-Dauphine - CNRS - Centre National de la Recherche Scientifique) |
| Abstract: | We study some correlation models to analyze the risk of Collateralized Debt Obligations (CDOs) |
| Keywords: | Risk Neutral Probability, Girsanov, Copula, Infection Models,Credit Risk, CDOs, Reduced Form Model, Intensity Models, Structural Form Models |
| Date: | 2017–04–20 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:cel-01511112&r=ban |