nep-ban New Economics Papers
on Banking
Issue of 2017‒06‒18
seventeen papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Shocks and Shock Absorbers in Japanese Bonds and Banks During the Global Financial Crisis By KIM, Hyonok; WILCOX, James A.; YASUDA, Yukihiro
  2. Relationships matter: The impact of bank-firm relationships on mergers and acquisitions in Japan By FRENCH, Joseph; YAN, Juxin; YASUDA, Yukihiro
  3. The shifting drivers of global liquidity By Stefan Avdjiev; Leonardo Gambacorta; Linda Goldberg; Stefano Schiaffi
  4. Benefits and Costs of Bank Capital By Jihad Dagher; Giovanni Dell'Ariccia; Luc Laeven; Lev Ratnovski; Hui Tong
  5. Multiple lending, credit lines, and financial contagion By Giuseppe Cappelletti; Paolo Emilio Mistrulli
  6. The Optimal Response of Bank Capital Requirements to Credit and Risk in a Model with Financial Spillovers By Occhino, Filippo
  7. Dynamics of Housing Debt in the Recent Boom and Great Recession By Manuel Adelino; Antoinette Schoar; Felipe Severino
  8. The End of Market Discipline? Investor Expectations of Implicit Government Guarantees By Acharya, Viral; Anginer, Deniz; Warburton, Joe
  9. Bank Diversification into the Insurance Business: The Effects of the Deregulation of the Bank-Sales Channel at Japanese Banks By KONISHI, Masaru; OKUYAMA, Eiji; YASUDA, Yukihiro
  10. Illiquid Collateral and Bank Lending during the European Sovereign Debt Crisis By J. Barthélemy; V. Bignon; B. Nguyen
  11. The interbank network across the global financial crisis: evidence from Italy By Massimiliano Affinito; Alberto Franco Pozzolo
  12. A Deep Causal Inference Approach to Measuring the Effects of Forming Group Loans in Online Non-profit Microfinance Platform By Thai T. Pham; Yuanyuan Shen
  13. Did quantitative easing boost bank lending? The Slovak experience. By Lojschova, Adriana
  14. Rollover and Capital Adequacy Requirements By YASUDA, Yukihiro
  15. Bank Solvency and Funding Cost; New Data and New Results By Stefan W. Schmitz; Michael Sigmund; Laura Valderrama
  16. What Explains Month-End Funding Pressure in Canada? By Christopher S. Sutherland
  17. The international dimensions of macroprudential policies By Pierre-Richard Agénor; Enisse Kharroubi; Leonardo Gambacorta; Giovanni Lombardo; Luiz Awazu Pereira da Silva

  1. By: KIM, Hyonok; WILCOX, James A.; YASUDA, Yukihiro
    Abstract: During the global financial crisis (GFC), Japan and the U.S. differed in at least two important ways: (1) while markets were stable in Japan then, the bubbles in the U.S. housing and financial markets burst and (2) while Japanese banks suffered few losses, huge losses badly weakened U.S. banks. In addition, and unlike the U.S., Japan requires firms' balance sheets to show, not only their total debt, but also the components of their debt: bonds, loans, and other debt. We used data for listed, non-financial, Japanese firms' bonds, bank loans, and other debt to investigate whether the 2008 "Lehman shock" in the U.S. disrupted Japanese bond markets. The Japanese data al-lowed us to estimate how much the Lehman shock affected Japanese firms' bonds outstanding and issued and to estimate how much, in turn, the Lehman shock resulted in firms' getting more loans from Japanese banks. The estimates revealed important cross-currents during the crisis. Our estimates implied that, while the crisis reduced bond issuance, it was accompanied by enough more bank loans to raise total debt. During the crisis, both bonds outstanding and bond issuance responded less to prior bond shortfalls and responded less to their maturing bonds. Second, while it greatly reduced bonds issued and outstanding at smaller, listed firms, the crisis boosted them at the very largest firms. In contrast, bank loans then rose more at smaller firms. Third, bank loans rose more, and bonds outstanding fell more, at firms with greater exposure to foreign sales. Fourth, the crisis led firms, and especially larger firms, to hold more cash and fewer securities and to reduce costs. Fifth, capital expenditures generally declined during the crisis, but declined significantly less at larger firms.
    Keywords: crisis, bonds, Lehman, bond issuance, Japan, loans, cash, banks
    JEL: G21 G28
    Date: 2016–03–15
  2. By: FRENCH, Joseph; YAN, Juxin; YASUDA, Yukihiro
    Abstract: We dissect the influence of bank-firm relationships on mergers and acquisitions in Japan. Using a comprehensive data set spanning fifteen years, we show that stronger bank-firm relationships generally increase the likelihood and size of M&A. Contrary to conventional wisdom of the adverse effects of bank-firm relationships in Japan, such as ‘zombie lending', our results indicate that Japanese banks facilitate restructuring in the 2000's. However, in cases where a bank plays a dual role as a lender and shareholder to a firm, the likelihood and size of M&A declines. This result stems from a bank's desire to maintain existing corporate governance mechanisms and control rights.
    Keywords: Mergers and Acquisitions, Relationship Banking, Japan
    JEL: G01 G21 G34
    Date: 2016–06–14
  3. By: Stefan Avdjiev; Leonardo Gambacorta; Linda Goldberg; Stefano Schiaffi
    Abstract: The post-crisis period has seen a considerable shift in the composition and drivers of international bank lending and international bond issuance, the two main components of global liquidity. The sensitivity of both types of flow to US monetary policy rose substantially in the immediate aftermath of the Global Financial Crisis, peaked around the time of the 2013 Fed "taper tantrum", and then partially reverted towards pre-crisis levels. Conversely, the responsiveness of international bank lending to global risk conditions declined considerably post-crisis and became similar to that of international debt securities. The increased sensitivity of international bank flows to US monetary policy has been driven mainly by post-crisis changes in the behaviour of national lending banking systems, especially those that ex ante had less well capitalized banks. By contrast, the post-crisis fall in the sensitivity of international bank lending to global risk was mainly due to a compositional effect, driven by increases in the lending market shares of better-capitalized national banking systems. The post-2013 reversal in the sensitivities to US monetary policy partially reflects the expected divergence of the monetary policy of the US and other advanced economies, highlighting the sensitivity of capital flows to the degree of commonality of cycles and the stance of policy. Moreover, global liquidity fluctuations have largely been driven by policy initiatives in creditor countries. Policies and prudential instruments that reinforced lending banks' capitalization and stable funding levels reduced the volatility of international lending flows.
    Keywords: Keywords: Global liquidity, international bank lending, international bond flows, capital flows
    JEL: G10 F34 G21
    Date: 2017–06
  4. By: Jihad Dagher; Giovanni Dell'Ariccia; Luc Laeven; Lev Ratnovski; Hui Tong
    Abstract: The appropriate level of bank capital and, more generally, a bank’s capacity to absorb losses, has been at the core of the post-crisis policy debate. This paper contributes to the debate by focusing on how much capital would have been needed to avoid imposing losses on bank creditors or resorting to public recapitalizations of banks in past banking crises. The paper also looks at the welfare costs of tighter capital regulation by reviewing the evidence on its potential impact on bank credit and lending rates. Its findings broadly support the range of loss absorbency suggested by the Financial Stability Board (FSB) and the Basel Committee for systemically important banks.
    Keywords: Bank capital;Cost of capital;United States;Banking crisis;Capital requirements;Risk management;General equilibrium models;Bank Capital, TLAC, Financial Regulation, bank, capital, banks, capital requirements, General, All Countries,
    Date: 2016–03–03
  5. By: Giuseppe Cappelletti (European Central Bank); Paolo Emilio Mistrulli (Bank of Italy)
    Abstract: Multiple lending has been widely investigated from both an empirical and a theoretical perspective. Nevertheless, the implications of multiple lending for the stability of the banking system still need to be understood. By lending to a common set of borrowers, banks are interconnected and then exposed to financial contagion phenomena, even if not directly. In this paper, we investigate a specific type of externality that originates from those borrowers that obtain liquidity from more than one bank. In this case, contagion may occur if a bank hit by a liquidity shock calls in some loans and borrowers then pay them back by drawing money from other banks. We show that, under certain circumstances that make other sources of liquidity unavailable or too costly, multiple lending might be responsible for a large liquidity shortage.
    Keywords: financial contagion, multiple lending, credit lines
    JEL: G21 G28
    Date: 2017–06
  6. By: Occhino, Filippo (Federal Reserve Bank of Cleveland)
    Abstract: This paper studies optimal bank capital requirements in an economy where bank losses have financial spillovers. The spillovers amplify the effects of shocks, making the banking system and the economy less stable. The spillovers increase with banks’ financial distortions, which in turn increase with banks’ credit risk. Higher capital requirements dampen the current supply of banks’ credit, but mitigate banks’ future financial distortions. Capital requirements should be raised in response to both an expansion of banks’ credit supply and an increase in the expected future credit risk of banks. They should be lowered close to one-to-one in response to bank losses.
    Keywords: Debt overhang; financial vulnerabilities; financial stability; macro prudential regulation;
    JEL: G20 G28
    Date: 2017–06–06
  7. By: Manuel Adelino; Antoinette Schoar; Felipe Severino
    Abstract: This paper documents a number of key facts about the evolution of mortgage debt, homeownership, debt burden and subsequent delinquency during the recent housing boom and Great Recession. We show that the mortgage expansion was shared across the entire income distribution, i.e. the flow and stock of debt rose across all income groups (except for the top 5%). The mortgage expansion was especially pronounced in areas with increased house prices, and the speed at which houses turned over (churn) in these areas went up significantly. However, the average loan-to-value ratios (LTV) at origination did not increase over the boom period. While homeownership rates increased for the middle and upper income households, there was no increase in homeownership for the lowest income groups. Finally, default rates post-crisis went up predominantly in areas with large house price drops, especially for high income and high-FICO borrowers. These results are consistent with a view that the run up in mortgage debt over the pre-crisis period was driven by rising home values and expectations of increasing prices.
    JEL: G01 G1 G18 G20 G21
    Date: 2017–06
  8. By: Acharya, Viral; Anginer, Deniz; Warburton, Joe
    Abstract: Using unsecured bonds traded in the U.S. between 1990 and 2012, we find that bond credit spreads are sensitive to risk for most financial institutions, but not for the largest financial institutions. This “too big to fail” relation between firm size and the risk sensitivity of bond spreads is not seen in the non-financial sectors. The results are robust to using different measures of risk, controlling for bond liquidity, conducting an event study around shocks to investor expectations of government guarantees, examining explicitly and implicitly guaranteed bonds of the same firm, and using agency ratings of government support for financial institutions.
    Keywords: Too big to fail, Dodd-Frank, bailout, implicit guarantee, moral hazard
    JEL: G21 G24 G28
    Date: 2016–05–01
  9. By: KONISHI, Masaru; OKUYAMA, Eiji; YASUDA, Yukihiro
    Abstract: In this paper we empirically examine the diversification effects of the deregulation of bank-sales channel into the insurance business by Japanese banks. Using the Japanese unique data set on fee-based revenues, we identify separate fee-based revenues, such as insurance and/or mutual fund sales. We find that banks with a higher BIS ratio, more branches, more monopolistic power in loan market, and higher loan-to-deposit ratios tend to have shifted towards an insurance fee-based business. This indicates that bank health and branch expansion can affect the fee business strategy at each bank. We also find that banks with lower mutual fund fee revenues tend to earn more insurance fee revenues, implying that a substitute relationship has developed between them after the Global Financial Crisis of 2007. We find that banks with higher insurance revenues are positively associated with return volatilities (such as ROA and/or ROE) but are not related with total risk or Z score. The results indicate that although increased fee-based activities can increase the volatility of bank earnings, they have only had a small impact on equity and/or insolvency risks at Japanese banks.
    JEL: G21 G22 G28
    Date: 2016–05–26
  10. By: J. Barthélemy; V. Bignon; B. Nguyen
    Abstract: We assess the effect of accepting illiquid assets as collateral at the central bank on banks’ lending activity. We study the lending activity of the 177 largest banks in the Euro area between 2011m1 and 2014m12 and the composition of their pool of collateral pledged with the Eurosystem. Panel regression estimates show that the banks that pledged more illiquid collateral with the Eurosystem increased their lending to non-financial firms and households: a one standard deviation increase in the volume of illiquid collateral increase lending by 0.6%..
    Keywords: collateral, loans, central bank, euro crisis.
    JEL: E52 E58 G01 G21
    Date: 2017
  11. By: Massimiliano Affinito (Bank of Italy); Alberto Franco Pozzolo (Università degli Studi del Molise)
    Abstract: This study examines the effects of the global financial crisis (GFC) on interbank market connectivity using network analysis. More specifically, using data on Italian banks’ bilateral interbank positions between 1998 and 2013, we analyze the impact of the following events on each bank’s network centrality: the liquidity crisis in August 2007, the collapse of Lehman Brothers in September 2008, Eurosystem’s long term refinancing operations (LTROs) between 2009 and 2012, the sovereign debt crisis in July 2011, and the announcement of Outright Monetary Transactions (OMT) in 2012. The results show that the 2007 liquidity crisis and especially the collapse of Lehman Brothers are associated with a marked reduction of the relative interconnectedness of the Italian banking sector (i.e., a shift in the distribution of banks’ centrality to the left, away from the most connected bank). In the following years, the system progressively recovered its initial patterns of integration among banks, which coincided wih the main Eurosystem’s monetary policy interventions. However, the average outcome conceals different results across banks, depending on their characteristics and initial positions within the system.
    Keywords: global financial crisis, interbank markets, networks, central bank operations
    JEL: E52 E58 G21
    Date: 2017–06
  12. By: Thai T. Pham; Yuanyuan Shen
    Abstract: Kiva is an online non-profit crowdsouring microfinance platform that raises funds for the poor in the third world. The borrowers on Kiva are small business owners and individuals in urgent need of money. To raise funds as fast as possible, they have the option to form groups and post loan requests in the name of their groups. While it is generally believed that group loans pose less risk for investors than individual loans do, we study whether this is the case in a philanthropic online marketplace. In particular, we measure the effect of group loans on funding time while controlling for the loan sizes and other factors. Because loan descriptions (in the form of texts) play an important role in lenders' decision process on Kiva, we make use of this information through deep learning in natural language processing. In this aspect, this is the first paper that uses one of the most advanced deep learning techniques to deal with unstructured data in a way that can take advantage of its superior prediction power to answer causal questions. We find that on average, forming group loans speeds up the funding time by about 3.3 days.
    Date: 2017–06
  13. By: Lojschova, Adriana
    Abstract: We find evidence that households in Slovakia do benefit from the ECB asset purchase programme. On the individual bank-level data of 26 financial institutions (full representation of the banking sector) we establish and confirm a traditional relationship between bank lending and changes to deposit ratio. We find the long-run relationship to be twice as strong in the household sector as in the sector of non-financial corporations. Controlling for interest rate changes and other factors, we also introduce asset purchases into the model. We document some, although limited, evidence of the presence of the bank lending channel of asset purchases in the household sector.
    Keywords: Bank lending channel, quantitative easing, panel data
    JEL: E52 G21
    Date: 2017–05
  14. By: YASUDA, Yukihiro
    Abstract: This paper shows theoretically that if bank supervision is weak, capital adequacy requirements provide an incentive for troubled banks with their non-performing loans to refinance their client distressed firms, even those with poor prospects. We also argue that in some cases rollover is desirable because the bank can resolve the debt overhang problem of its clients. Therefore, results such as these indicate that loan rollovers need to be assessed more carefully.
    Keywords: Rollover, Capital adequacy requirements, Debt overhang
    JEL: G21 G28
    Date: 2016–05
  15. By: Stefan W. Schmitz; Michael Sigmund; Laura Valderrama
    Abstract: This paper presents new evidence on the empirical relationship between bank solvency and funding costs. Building on a newly constructed dataset drawing on supervisory data for 54 large banks from six advanced countries over 2004–2013, we use a simultaneous equation approach to estimate the contemporaneous interaction between solvency and liquidity. Our results show that liquidity and solvency interactions can be more material than suggested by the existing empirical literature. A 100 bps increase in regulatory capital ratios is associated with a decrease of bank funding costs of about 105 bps. A 100 bps increase in funding costs reduces regulatory capital buffers by 32 bps. We also find evidence of non-linear effects between solvency and funding costs. Understanding the impact of solvency on funding costs is particularly relevant for stress testing. Our analysis suggests that neglecting the dynamic features of the solvency-liquidity nexus in the 2014 EU-wide stress test could have led to a significant underestimation of the impact of stress on bank capital ratios.
    Date: 2017–05–15
  16. By: Christopher S. Sutherland
    Abstract: The Canadian overnight repo market persistently shows signs of latent funding pressure around month-end periods. Both the overnight repo rate and Bank of Canada liquidity provision tend to rise in these windows. This paper proposes three non-mutually exclusive hypotheses to explain this phenomenon. First, month-end funding pressure may be caused by search frictions. Market participants place a premium on liquidity around month-end periods because of the confluence of a generalized liquidity preference, heightened month-end forecast uncertainty, and resultant search frictions in the repo market. Second, this funding pressure could be attributed to spillovers from the US overnight repo market. Third, month-end funding pressure might be associated with large Canadian banks’ end-of-month repo adjustments. By combining market, central-bank and payments data, this paper provides evidence that the first hypothesis explains the latent funding pressure observed on the first day of the month. Using market and non-public regulatory data, this paper further argues that the second and third hypotheses are much less plausible.
    Keywords: Financial markets, Interest rates, Monetary policy framework, Monetary policy implementation, Transmission of monetary policy
    JEL: E41 E43 E52 E58 F36 G15 G14 G21
    Date: 2017
  17. By: Pierre-Richard Agénor; Enisse Kharroubi; Leonardo Gambacorta; Giovanni Lombardo; Luiz Awazu Pereira da Silva
    Abstract: The large economic costs associated with the Global Financial Crisis have generated renewed interest in macroprudential policies and their international coordination. Based on a core-periphery model that emphasizes the role of international financial centers, we study the effects of coordinated and non-coordinated macroprudential policies when financial intermediation is subject to frictions. We find that even when the only frictions in the economy consist of financial frictions and financial dependency of periphery banks, the policy prescriptions under international policy coordination can differ quite markedly from those emerging from self-oriented policy decisions. Optimal macroprudential policies must address both short run and long run inefficiencies. In the short run, the policy instruments need to be adjusted to mitigate the adverse consequences of the financial accelerator, and its cross-country spillovers. In the long run, policymakers need to take into account the effects of the higher cost of capital, due to the presence of financial frictions. The gains from cooperation appear to be sizable. Nevertheless, their magnitude could be asymmetric, pointing to potential political-economy obstacles to the implementation of cooperative measures.
    Keywords: Macroprudential policies, international spillovers, financial frictions, international cooperation
    JEL: E3 E5 F3 F5 G1
    Date: 2017–06

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