nep-ban New Economics Papers
on Banking
Issue of 2017‒06‒04
ten papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. When Japanese Banks Become Pure Creditors: Effects of declining shareholding by banks on bank lending and firms' risk taking By ONO Arito; SUZUKI Katsushi; UESUGI Iichiro
  2. Safe Collateral, Arm's-Length Credit : Evidence from the Commercial Real Estate Mortgage Market By Lamont K. Black; John Krainer; Joseph B. Nichols
  3. Origins of Too-Big-to-Fail Policy By Prescott, Edward Simpson; Nurisso, George
  4. Knightian uncertainty and credit cycles By Gerba, Eddie; Żochowski, Dawid
  5. The Impact of Warnings Published in a Financial Stability Report on the Loan to Value Ratio By Andrés Alegría,; Rodrigo Alfaro; Felipe Córdova
  6. An Equilibrium Model of Housing and Mortgage Markets with State-Contingent Lending Contracts By Tomasz Piskorski; Alexei Tchistyi
  7. Bail-in as an instrument protecting the banking sector from system risk vs. capital adequacy of banks in the EU By Zbigniew Kurylek
  8. Conditions of Operation and Development Prospects of Regional Banks By Khromov, Michael
  9. Business models of the banks in the euro area By Farne, Matteo; Vouldis, Angelos
  10. The introduction of the distributed ledger technology in banking system as an alernative for Single European Payment Area solutions By Michal Elzbieta Jantoñ-Drozdowska; Alicja Mikolajewicz-Wozniak

  1. By: ONO Arito; SUZUKI Katsushi; UESUGI Iichiro
    Abstract: Utilizing the regulatory change relating to banks' shareholding in Japan as an instrument, this study examines the causal effects of declining shareholding by banks on bank lending and firms' risk taking. Banks may hold equity claims over client firms for either of the following two reasons: (i) gaining a competitive advantage by exploiting complementarity between shareholding and lending activities, and (ii) mitigating shareholder-creditor conflict. Exogenous reduction in a bank's shareholding would then impair the competitiveness of the bank's lending activities and aggravate the risk-shifting behavior of client firms. Using a firm-bank matched dataset of Japan's listed firms during the period 2001-2006, we empirically tested several hypotheses and obtain the following findings. First, a bank's removal from the list of major shareholders of a client firm (extensive margin) and the reduction in the ratio of the bank's shareholding to the firm's total shares on issue (intensive margin) decreases the bank's share of the firm's loans. Second, a reduction in the extensive margin of a bank's shareholding increases the volatility of the client firm's return on assets and reduces its Sharpe ratio. However, we do not find the same effect when a bank reduces the intensive margin of its shareholding.
    Date: 2017–05
  2. By: Lamont K. Black; John Krainer; Joseph B. Nichols
    Abstract: When collateral is safe, there are less opportunities for things to go wrong. We examine matching between collateral and creditors in the commercial real estate mortgage market by comparing loans in commercial mortgage backed securities (CMBS) conduits and bank portfolios. We model CMBS financing as lower cost but less informed, such that only safe collateral is funded by CMBS. This prediction is tested using the 2007-2009 shutdown of the CMBS market as a natural experiment. The loans funded by banks that would have been securitized are less likely to default or be renegotiated, indicating that the securitization channel, when available, funds safe collateral.
    Keywords: Collateral ; Commercial banking ; Commercial real estate ; Securitization
    JEL: G21 G24 G33
    Date: 2017–05
  3. By: Prescott, Edward Simpson (Federal Reserve Bank of Cleveland); Nurisso, George (Federal Reserve Bank of Cleveland)
    Abstract: This paper traces the origin of the too-big-to-fail problem in banking to the bailout of the $1.2 billion Bank of the Commonwealth in 1972. It describes this bailout and those of subsequent banks through that of Continental Illinois in 1984. Motivations behind the bailouts are described with a particular emphasis on those provided by Irvine Sprague in his book Bailout. During this period, market concentration due to interstate banking restrictions is a factor in most of the bailouts, and systemic risk concerns were raised to justify the bailouts of surprisingly small banks. Sprague’s descriptions are also used to describe the trade offs and the time-consistency problem faced by bank regulators. Finally, most of the bailouts in this period relied on the Federal Deposit Insurance Corporation’s use of the Essentiality Doctrine. A discussion of this doctrine is provided and used to illustrate how legal constraints on regulators may become less constraining over time.
    Keywords: Too big to fail; deposit insurance; banking; time consistency; TBTF;
    JEL: G21 G28 N22
    Date: 2017–05–24
  4. By: Gerba, Eddie; Żochowski, Dawid
    Abstract: The Great Recession has been characterised by the two stylized facts: the buildup of leverage in the household sector in the period preceding the recession and a protracted economic recovery that followed. We attempt to explain these two facts as an information friction, whereby agents are uncertain about a new state of the economy following a financial innovation. To this end, we extend Boz and Mendoza (2014) by explicitly modelling the credit markets and by modifying the learning to an adaptive set-up. In our model the build-up of leverage and the collateral price cycles takes longer than in a stylized DSGE model with financial frictions. The boom-bust cycles occur as rare events, with two systemic crises per century. Financial stability is achieved with an LTV-cap regulation which smooths the leverage cycles through quantity (higher equity participation requirement) and price (lower collateral value) effects, as well as by providing an anchor in the learning process of agents. JEL Classification: G14, G17, G21, G32, E44, E58
    Keywords: deregulation, financial engineering, leverage forecasting, macroprudential policy, uncertainty
    Date: 2017–05
  5. 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.
    Date: 2017–02
  6. By: Tomasz Piskorski; Alexei Tchistyi
    Abstract: We develop a tractable general equilibrium framework of housing and mortgage markets with aggregate and idiosyncratic risks, costly liquidity and strategic defaults, empirically relevant informational asymmetries, and endogenous mortgage design. We show that adverse selection plays an important role in shaping the form of an equilibrium contract. If borrowers' homeownership values are known, aggregate wages and house prices determine the optimal state-contingent mortgage payments, which efficiently reduces the costs of liquidity default. However, when lenders are uncertain about homeownership values, the equilibrium contract only depends on house prices and takes the form of a home equity insurance mortgage (HEIM) that eliminates the strategic default option and insures the borrower's equity position. Interestingly, we show that widespread adoption of such loans has ambiguous effects on the homeownership rate and household welfare. In economies in which recessions are expected to be severe, the HEIM equilibrium Pareto dominates the equilibrium with fixed-rate mortgages. However, if economic downturns are not severe, HEIMs can lower the homeownership rate and make some marginal home buyers worse-off. We also note that adjustable-rate mortgages (ARMs) may share some benefits with HEIMs, which may help justify a high concentration of ARMs among riskier borrowers. Finally, we find that unrestricted competition between lenders may lead to a non-existence of equilibrium. This suggests that government-sponsored enterprises may stabilize mortgage markets by subsidizing certain mortgage contracts.
    JEL: D1 D5 E44 G01 G21 G28
    Date: 2017–05
  7. By: Zbigniew Kurylek (WSB School of Banking in Wroclaw)
    Abstract: Research background: The article refers to the introduced bank regulations aiming at maintaining capital adequacy of banks and a stable situation in the banking sector, allowing to keep the financial system stable at a time of a possible financial or systemic crisis. Purpose of the article: This article aims at presenting methods of protecting banks. It mostly focuses on the capital structure and the use of capital assets to repay liabilities in a situation that poses a risk to the continued functioning of a banking sector or a financial system. Methodology/methods: Our research was conducted by ways of analysing literature on using bail-in in the banking sector during an ordered bank restructuring or a winding up process. Data analysis was conducted with the use of statistical methods, including correlation analysis, followed by a comparative analysis of obtained results. The level of interdependence was determined on the basis of Pearson’s correlation analysis, and the results were verified with the use of J. Guildford’s classification of interdependence. Findings & Value added: The article presents bail-in — an instrument aiming at performing ordered restructuring or winding up of a bank in the context of capital adequacy of banks in the European Union. The text shows how quickly and strongly capital adequacy rate of banks was changing in specific EU member states between 2006 and 2016, including the variation value evaluated with regard to the division into developed and developing countries. What is more, the article also points at current directions of changes in capital structure of banks in EU member states.
    Keywords: bail–in, financial crisis, capital adequacy
    JEL: G21 G33
    Date: 2017–05
  8. By: Khromov, Michael (Russian Presidential Academy of National Economy and Public Administration (RANEPA))
    Abstract: The problems of regional banks are not given due attention in any strategic document of the Bank of Russia and the Government of the Russian Federation. In the academic literature, the topic of regional banks was not raised until the middle of 2016, when the Bank of Russia resumed the discussion. This research is devoted to the banking sector of the Urals Federal District and to credit organizations operating in the regions of this Federal District. The study is characterized by detailed portraits of banks registered in the UFD: a description of their history, information on shareholders and management, the characteristics of the main business, the analysis of financial indicators. The study presents not only the results of a survey of the views of UFD bankers on their assessment of the state of the banking business, but also a comparison of opinions with results in other federal districts.
    Date: 2017–02
  9. By: Farne, Matteo; Vouldis, Angelos
    Abstract: The paper identifies the business models followed by banks in the euro area utilising a proprietary dataset collected in the context of the supervisory reporting of the Single Supervisory Mechanism. The concept of a ‘business model’ has been neglected by economic theory and is defined here with respect to the set of activities performed by banks. We adopt a clustering methodology to provide evidence for the existence of distinct business models. Clustering is combined with dimensionality reduction optimally, given the nature of our dataset which features a large number of dimensions for each bank (‘fat’ data). The method produces a level and a contrast factor which are intuitive in the economic sense. Four business models are identified alongside a set of ‘outlier’ banks that follow unique business models. The risk and performance indicators of each cluster are examined and evidence is provided that they follow distinct statistical distributions. JEL Classification: C63, G21, L21, L25
    Keywords: banking sector, business models, cluster analysis, single supervisory mechanism
    Date: 2017–05
  10. By: Michal Elzbieta Jantoñ-Drozdowska (University in Poznañ, Poland); Alicja Mikolajewicz-Wozniak (University in Poznañ, Poland)
    Abstract: The year 2016 ended the period of migration from national payment services to the SEPA instruments and it has become apparent that some problems remained unresolved. Overcoming them requires finding suitable technological solutions. The potential of distributed ledger technology (DLT) is currently explored by financial sector and its implementation may affect the SEPA schemes in a variety of dimensions. The aim of the article is to determine the potential impact of the DLT transfer to banking sector on the future SEPA’s functioning. The paper presents SEPA’s assumptions and the project’s current status as well as DLT’s concept. It describes the technology transfer implications for banking industry and compares currently operating SEPA schemes with those based on DLT. It also indicates opportunities and threats being the consequence of the new technology implementation and their significance for SEPA.In the article the qualitative analysis is supplemented by the quantitative one. While characterizing the functioning of the main pillars of the SEPA Schemes the elements of descriptive statistics are used. The final conclusions are based on the comparative analysis of SEPA schemes and developed DLT applications. The existing problems might be solved by supplementing currently operating SEPA payment schemes with the applications based on DLT. The developed systems shall provide required real-time processing and a global reach as well as extend the SEPA schemes’ functionalities with the ability to transfer other currencies. The technology implementation shall result not only in new financial products but first of all – in creating new business models. Consequently, we shall expect the modification of currently operating SEPA schemes, based rather on their supplement than total replacement in a short time horizon.
    Keywords: SEPA; blockchain; distributed ledger technology; virtual currencies; financial integration
    JEL: F36 G15 G21
    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.