nep-ban New Economics Papers
on Banking
Issue of 2017‒05‒21
seventeen papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Evaluating regulation within an artificial financial system: A framework and its application to the liquidity coverage ratio regulation By Riedler, Jesper; Brueckbauer, Frank
  2. Do conventional monetary policy instruments matter in unconventional times? By Buchholz, Manuel; Schmidt, Kirsten; Tonzer, Lena
  3. Bank Balance Sheets and the Value of Lending By Jiaqian Chen; Giuseppe Vera
  4. Bank-Firm Relationship and Small Business Innovation By XU Peng
  5. Crony banking and local growth in China By Wang, Chunyang
  6. Financial stability assessment of EU candidate and potential candidate countries By Gächter, Martin; Macki, Piotr; Moder, Isabella; Polgár, Éva Katalin; Savelin, Li; Żuk, Piotr
  7. Capital requirements, risk shifting and the mortgage market By Uluc, Arzu; Wieladek, Tomasz
  8. Services trade and credit frictions: evidence from matched bank-firm data By Francesco Bripi; David Loschiavo; Davide Revelli
  9. The impact of warnings published in a financial stability report on loan-to value ratios By Andrés Alegría; Rodrigo Alfaro; Felipe Córdova
  10. Does concentration matter for bank stability - evidence from Albanian Banking System By Shijaku, Gerti
  11. Bank lending in uncertain times By Piergiorgio Alessandri; Margherita Bottero
  12. Does bank competition affect bank stability after the global financial crisis? By Shijaku, Gerti
  13. Should bank capital requirements be less risk-sensitive because of credit constraints? By Ambrocio, Gene; Jokivuolle, Esa
  14. Impact of Japanese Banks' Strategic Stockholdings on their Cost of Capital By Kei Ikeda
  15. Multilateral Development Bank Credit Rating Methodology: Overcoming the Challenges in Assessing Relative Credit Risk in Highly Rated Institutions Based on Public Data By David Xiao Chen; Philippe Muller; Hawa Wagué
  16. Systematic Monetary Policy and the Macroeconomic Effects of Shifts in Loan-to-Value Ratios By Bachmann, Rüdiger; Rueth, Sebastian
  17. The effect of financial inclusion on welfare in sub-Saharan Africa: Evidence from disaggregated data By Anthanasius Fomum Tita; Meshach Jesse Aziakpono

  1. By: Riedler, Jesper; Brueckbauer, Frank
    Abstract: We develop a general model of the financial system that allows for the evaluation of bank regulation. Our framework comprises the agents and institutions that have proved crucial in the propagation of the subprime mortgage shock in the U.S. into a global financial crisis: Commercial banks and investment banks, which can also be interpreted as shadow banks, interact on wholesale debt markets. Beside a market for short term interbank loans and long term bank bonds, other funding sources include insured customer deposits, uninsured investor deposits and repos. While credit to the real sector is the principal asset of commercial banks, investment banks specialize in trading securities, which may differ according to risk, maturity and liquidity. As a first application of the model we implement the liquidity coverage ratio (LCR) regulation and analyze its impact on bank balance sheets, interest rates, the transmission of monetary policy and the stability of bank lending in the face of shocks. We find that the LCR regulation reduces the supply of loans to the real sector, increases the maturity and interest rate of long term wholesale debt, and strongly diminishes the role of the overnight interbank market as a funding source. Our simulations suggest that the transmission of changes to short term monetary policy rates is severely impaired when the LCR regulation is binding. Furthermore, we find that a strong confidence shock can lead to a protracted credit crunch under the liquidity regulation.
    Keywords: financial system,agent-based model,liquidity coverage ratio
    Date: 2017
  2. By: Buchholz, Manuel; Schmidt, Kirsten; Tonzer, Lena
    Abstract: This paper investigates how declines in the deposit facility rate set by the European Central Bank (ECB) affect bank behavior. The ECB aims to reduce banks' incentives to hold reserves at the central bank and thus to encourage loan supply. However, given depressed margins in a low interest environment, banks might reallocate their liquidity toward more profitable liquid assets other than traditional loans. Our analysis is based on a sample of euro area banks for the period from 2009 to 2014. Three key findings arise. First, banks reduce their reserve holdings following declines in the deposit facility rate. Second, this effect is heterogeneous across banks depending on their business model. Banks with a more interest-sensitive business model are more responsive to changes in the deposit facility rate. Third, there is evidence of a reallocation of liquidity toward loans but not toward other liquid assets. This result is most pronounced for non-GIIPS countries of the euro area.
    Keywords: bank portfolio,central bank reserves,monetary policy
    JEL: E52 G11 G21
    Date: 2017
  3. By: Jiaqian Chen; Giuseppe Vera
    Abstract: We study 1,400 UK syndicated loans, together with the financial history of the lead bank and the borrowing firm. We interpret abnormal equity returns around loan announcements as the value of the lending relationship to the firm. We find that: (i) Consistent with previous evidence, the value of lending is higher when the firm is riskier or more opaque, suggesting that it primarily reflects the lead bank’s screening and monitoring activities. (ii) As a bank becomes larger, more profitable or more capitalized, the value of its loans first increases and then decreases. The largest, most capitalised or most profitable banks do not give the most valuable loans. (iii) Firms which receive low-value loans are more likely to experience low profitability and financial distress during the lending relationship. By relating the state of bank balance sheets to borrower performance, we offer a new angle to evaluate the impact of financial conditions on the real economy.
    Date: 2017–05–05
  4. By: XU Peng
    Abstract: This paper empirically investigates the effect of banks' soft information on small business innovations. Using data from a sample of Japanese small and medium enterprises (SMEs), we find that multiple banking prevails. Moreover, besides the main bank, the sub bank also acquires soft information for a number of multiple banking firms. Nonetheless, there coexists no bank information: the main bank's information monopoly and multiple bank information competition. Importantly, such information competition in multiple banking is positively related to both product and process innovation while the main bank's information monopoly has no significant effects on innovation. Also, we offer additional consistent evidence that information competition decreases the likelihood of worsening of the lending attitude of the main bank during the financial crisis. For single banking firms, bank information monopolies have a negative effect on product and process innovation.
    Date: 2017–04
  5. By: Wang, Chunyang
    Abstract: The rise of city commercial banks (CCBs) in Chinese cities provides a unique opportunity to study the finance and growth nexus at the city level. Given the notorious inefficiency of China's “Big Four” state banks, policymakers attempted to correct the situation in 1995 through the creation of a new kind of local bank designed to promote local growth by lending to small and medium-sized enterprises. Using 1990-2009 panel data for 283 prefectural-level cities and four provincial-status municipalities, we find that the establishment of CCBs significantly reduced local economic growth overall. We suggest this outcome stems from the ability of firms to bribe local government officials to obtain credit from their local CCBs. In our proposed model for crony banking relations, large firms spend disproportionately larger amounts of time and bribe money cultivation relations with local officials involved in CCB lending decisions, so we expect large firms to have easier access to credit than small firms even if it results in inefficient lending. Using data on 206,771 firms for 1999-2007, we find that cities with CCBs had significantly lower overall growth rates. Small firms, in particular, were negatively impacted by the presence of CCBs, while large firms benefited from their presence. In the cities with CCBs, large firms, even those with relatively poor return-on-assets ratios, obtained more credit than small firms in aggregate. Using data from the 2005 World Bank Business Environment Survey, we find that an increase in a firm's crony relations with the government, measured in terms of the average number of days a month top managers of the firm spend interacting with government officials, increases the likelihood a firm will be granted bank credit. This effect was quite distinct for cities with CCBs.
    JEL: G21 G28 G38
    Date: 2017–05–12
  6. By: Gächter, Martin; Macki, Piotr; Moder, Isabella; Polgár, Éva Katalin; Savelin, Li; Żuk, Piotr
    Abstract: This paper reviews and assesses financial stability challenges in countries preparing for EU membership i.e. Albania, Bosnia and Herzegovina, Kosovo, the former Yugoslav Republic of Macedonia, Montenegro, Serbia and Turkey. The paper focuses on the period since 2014 and on the banking sectors that dominate financial systems in this group of countries. It identifies two main near-term challenges applying to most of them. The first relates to credit risk, which remains substantial despite some progress in reducing the burden of non-performing loans on banks’ balance sheets in the period under review. However, progress so far is limited, partly owing to structural impediments. The second relates to the still high share of foreign exchange denominated loans and deposits, which poses an indirect credit risk in the case of lending to unhedged borrowers and impairs the monetary transmission channel. In addition, profitability is worth monitoring going forward, as it remains subdued in many countries given high provisioning needs and a lacklustre credit growth and low interest rate environment. These concerns are generally met with a solid shock-absorbing capacity, as exemplified by robust capital and liquidity buffers. JEL Classification: F31, F34, F36, G15, G21, G28
    Keywords: banking sector, credit growth, cross-border flows, deleveraging., EU accession, financial stability, foreign exchange lending, Western Balkans
    Date: 2017–05
  7. By: Uluc, Arzu; Wieladek, Tomasz
    Abstract: We study the effect of changes to bank-specific capital requirements on mortgage loan supply with a new loan-level dataset containing all mortgages issued in the UK between 2005Q2 and 2007Q2. We find that a rise of a 100 basis points in capital requirements leads to a 5.4% decline in individual loan size by bank. Loans issued by competing banks rise by roughly the same amount, which is indicative of credit substitution. Borrowers with an impaired credit history (verified income) are not (most) affected. This is consistent with origination of riskier loans to grow capital by raising retained earnings. No evidence for credit substitution of non-bank finance companies is found. JEL Classification: G21, G28
    Keywords: capital requirements, credit substitution, loan-level data, mortgage market
    Date: 2017–05
  8. By: Francesco Bripi (Bank of Italy); David Loschiavo (Bank of Italy); Davide Revelli (Bank of Italy)
    Abstract: This paper investigates the relationship between bank credit and exports of services by Italian firms. In order to identify the role of credit supply in services exports we use matched data on bank-firm relationships and the shocks affecting banks’ funding during the sovereign debt crisis. The study suggests that credit supply shocks had a significant impact on services exports: a bank credit reduction of 1% led to a fall in exports of about 0.40%. These results hold even after controlling for alternative sources of firms’ external finance, unobserved credit demand heterogeneity and a number of robustness checks.
    Keywords: Trade in services, credit frictions, bank-firm relationships
    JEL: F10 F14 F36 G21 L80
    Date: 2017–04
  9. By: Andrés Alegría; Rodrigo Alfaro; Felipe Córdova
    Abstract: This paper shows how central bank communications can play a role in macroprudential supervision. We document how specific warnings about real estate markets, published in the Central Bank of Chile's Financial Stability Reports of 2012, affected bank lending policies. We provide empirical evidence of a rebalancing in the characteristics of mortgage loans granted, with a reduction in the number of mortgage loans with high loan-to-value ratios (LTV), along with an increase in loans with lower LTV ratios.
    Keywords: macroprudential policy, LTV ratios, central bank communications
    Date: 2017–05
  10. By: Shijaku, Gerti
    Abstract: Motivated by the debate on concentration-stability nexus, this paper studies the impact of bank concentration on the likelihood of a country suffering systemic bank fragility. For this reason, we followed a new approach using on-site bank balance sheet information to construct our proxy that represent each bank stability condition and use a variety of internal and external factors to estimate a balance panel dynamic two-step General Method of Moments (GMM) approach for the period 2008 – 2015. First, results provide supportive evidence consistent with the concentration-fragility view. Second, macroeconomic variables seem to have a significant effect on bank stability, which is not found for the sovereignty primary risk. By contrast, the bank-specific variables have also a significant effect on bank stability conditions. Finally, non-systemic banks are found to be more sensitive to macroeconomic condition and market concentration, while the better capitalised banks are less sensitive to fragility at the expense of lower operation efficiency.
    Keywords: Bank Fragility, Primary Sovereignty Risk, Panel Data, Dynamic GMM
    JEL: C26 E32 E43 G21 H63
    Date: 2016–08–31
  11. By: Piergiorgio Alessandri (Bank of Italy); Margherita Bottero (Bank of Italy)
    Abstract: We study the impact of economic uncertainty on the supply of bank credit using a monthly dataset that includes all loan applications submitted by a sample of 650,000 Italian firms between 2003 and 2012. We find that an increase in aggregate uncertainty has three effects. First, it reduces banks' likelihood to accept new credit applications. Second, it lengthens the time firms have to wait for their loans to be released. Third, it makes banks less responsive to fluctuations in short-term interest rates, weakening the bank lending channel of monetary policy. The influence of uncertainty is relatively stronger for poorly capitalized lenders and geographically distant borrowers.
    Keywords: uncertainty, credit supply, bank lending channel, loan applications
    JEL: E51 G20
    Date: 2017–04
  12. By: Shijaku, Gerti
    Abstract: This paper addresses the dynamic relationship between competition and bank stability in Albanian banking system during the period 2008 - 2015. To this purpose, we construct a proxy for bank competition as referred to the Boone indicator. We also calculated the Lerner index and the efficient adjusted Lerner index, as well as the profit elasticity index and the Herfindahl–Hirschman Index. The main results provide support for the “competition – stability” view – that lower degree of market power sets banks to less overall risk exposure. The results further show that increasing concentration will have a larger impact on bank’s fragility. Similar, bank stability is positively linked with macroeconomic conditions and capital ratio and inverse with operational efficiency. We also used a quadratic term of the competition measures to capture a possible non-linear relationship between competition and stability, but find no supportive evidence.
    Keywords: Bank Fragility, Competition, Boone and Lerner indicator, Panel Data, GMM.
    JEL: C26 C32 E32 E43 G21 H63
    Date: 2016–11–17
  13. By: Ambrocio, Gene; Jokivuolle, Esa
    Abstract: We consider optimal capital requirements for banks' lending activities when the potential trade-off between financial stability and economic (productivity) growth is taken into account. Both sides of the trade-off are affected by banks' credit allocation, which in turn is affected by the risk weights used to set capital requirements on bank loans. We find that when firms are credit constrained, the optimal risk weights are flatter than those that are only set to safeguard against bank failures and their social costs. This provides an additional rationale for capital requirements to be less 'risk-sensitive'. Differences in company productivity have a further effect on the profile of optimal risk weights, and may amplify the ‘flattening’ effect.
    JEL: E44 G21 G28
    Date: 2017–05–15
  14. By: Kei Ikeda (Bank of Japan)
    Abstract: In this paper, we examine the impact of banks' strategic stockholdings on their cost of equity capital using the framework of Capital Asset Pricing Model (CAPM) theory employing panel data from 2006 to 2015 on internationally active Japanese banks. The results of our analysis show that strategic stockholdings could raise the cost of equity capital. Strategic stockholdings put upward pressure on beta in CAPM theory by increasing the volatility of returns on banks' share prices, and increasing the correlation between returns on banks' share prices and returns on a market portfolio. Although it is argued that the cost of equity capital of Japanese banks is generally higher than that of U.S. banks, our estimation results suggest that if Japanese banks decreased the share of strategic stockholdings to the same level as U.S. peers, the gap between the cost of equity capital in Japan and the U.S. could reduce to a certain extent.
    Date: 2017–05–16
  15. By: David Xiao Chen; Philippe Muller; Hawa Wagué
    Abstract: The investment of foreign exchange reserves or other asset portfolios requires an assessment of the credit quality of counterparties. Traditionally, foreign exchange reserve managers and other investors have relied on credit rating agencies (CRAs) as the main source for credit assessments. The Financial Stability Board issued a set of principles in support of financial stability to reduce reliance on CRA ratings in standards, laws and regulations. To support efforts to end mechanistic reliance on CRA ratings and instead establish stronger internal credit assessment practices, this paper provides a detailed technical description of a methodology developed to assign an internal credit rating to multilateral development banks (MDBs), using only publicly available data. The methodology relies on fundamental credit analysis that produces a forward-looking assessment of the investment entity’s capacity and willingness to pay its financial obligations, resulting in an opinion on the relative credit standing or likelihood of default. This methodology proposes four key innovations: (i) a simple way of estimating the capital adequacy ratio, (ii) new metrics to evaluate the liquidity and funding profile of an MDB, (iii) a straightforward approach to evaluating the exceptional support from shareholders, and (iv) a new criterion related to corporate governance, which provides a high level of objectivity in assessing some of the qualitative indicators. The methodology is a key component of the joint Bank of Canada and Department of Finance Canada initiative to develop internal credit assessment capabilities and is currently used to assess eligibility and inform investment decisions in the management of Canada’s foreign exchange reserves.
    Keywords: Credit risk management, Foreign reserves management
    JEL: G24 G28 G32 F31
    Date: 2017
  16. By: Bachmann, Rüdiger; Rueth, Sebastian
    Abstract: What are the macroeconomic consequences of changing aggregate lending standards in residential mortgage markets, as measured by loan-to-value (LTV) ratios? In a structural VAR, GDP and business investment increase following an expansionary LTV shock. Residential investment, by contrast, falls, a result that depends on the systematic reaction of monetary policy. We show that, historically, the Fed tended to respond directly to expansionary LTV shocks by raising the monetary policy instrument, and, as a result, mortgage rates increase and residential investment declines. The monetary policy reaction function in the US appears to include lending standards in residential markets, a finding we confirm in Taylor rule estimations. Without the endogenous monetary policy reaction residential investment increases. House prices and household (mortgage) debt behave in a similar way. This suggests that an exogenous loosening of LTV ratios is unlikely to explain booms in residential investment and house prices, or run ups in household leverage, at least in times of conventional monetary policy.
    Keywords: Cholesky identification; loan-to-value ratios; monetary policy; residential investment; structural VAR; Taylor rules
    JEL: E30 E32 E44 E52
    Date: 2017–05
  17. By: Anthanasius Fomum Tita; Meshach Jesse Aziakpono
    Abstract: Over two decades sub-Saharan Africa has grown an average by 4.8% per annum. A trend called “Africa rising in the literature†but this robust economic growth seem to have benefited only a minority of elite individuals as poverty in the region remains high and income inequality continues to rise. Critics attribute this to a lack of financial inclusion. This study analyses the relationship between various aspects of financial inclusion and income inequality in sub-Saharan African using the Findex 2011 dataset with the intention to determine which aspects of financial inclusion have the greatest effect on income inequality.Our results show that formal account use for business, electronic payments and formal savings have a positive relationship with income inequality. This possibly reflects the low level of financial inclusion in the region. Furthermore, the positive relationship may suggest that owning a formal account does not necessarily lead to improvement in access to credit. That is, most of the account owners are likely first time users and problems such as moral hazard and information asymmetries, which are associated with a lack of financial infrastructure in the region still holds. This is likely to encourage banks to hold excess liquidity and thus grant fewer loans. The study accordingly recommends efforts to increase financial inclusion as well as reduce excess liquidity in the banking system through the development of financial infrastructure in order to encourage banks to support economic activities through lending.
    Keywords: financial inclusion, financial institutions, financial services, welfare and poverty
    JEL: D6 G2 O1 I3
    Date: 2017–05

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.