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on Banking |
| By: | Chen Liu, Yan Wendy Wu (Wilfrid Laurier University) |
| Abstract: | Contrary to the theoretical prediction that CEOs with large debt-based compensation take lower levels of risk, we find that banks with higher CEO inside debt compensation extend syndicated loans with smaller number of lenders, lower spread, less covenant, and higher maturity. Using two-stage selection models, we reconciled these seemingly counter intuitive results of inside debt leads to less conservative loan contracting terms by incorporating banks selection effect. We find that the mechanism of inside debt limit bank risk-taking in loan contracting is through making loans to safer borrowers in the first place, but not through tighter loan terms. These results are consistent and robust to instrumental variables and structure models that control for the endogeneity of relationships. |
| Keywords: | Inside debt, Loan contracting, Bank Executive, CEO Compensation, risk-taking, syndicated loans |
| JEL: | G21 G28 G38 J48 M52 |
| Date: | 2017–04–01 |
| URL: | http://d.repec.org/n?u=RePEc:wlu:lcerpa:0101&r=ban |
| By: | Hamada, Miki |
| Abstract: | We used bank-level data of Indonesian commercial banks to examine the role of bank capital in bank lending. Indonesian commercial bank capitalization has improved with the implementation of bank restructuring programs after the Asian financial crisis. The capital adequacy ratio has returned to a sound level; however, bank loan disbursement continues to remain low. We examine the bank lending channel in Indonesian banks and investigate the effects of monetary policy on bank lending through bank capital. The results indicate that a well-capitalized bank can increase its provisions of bank loans while still not responding to monetary policy, excepting non-forex banks. |
| Keywords: | Banks,Monetary policy,Bank capital,Bank capital channel,Bank lending channel,Indonesia |
| JEL: | G21 G30 N25 |
| Date: | 2017–03 |
| URL: | http://d.repec.org/n?u=RePEc:jet:dpaper:dpaper662&r=ban |
| By: | Yan Wendy Wu, Cindy Truong, Chen Liu (Wilfrid Laurier University) |
| Abstract: | This paper studies the impact of female executives on risk-taking within US banks. An examination of US bank panel data from 2002 to 2010 provides evidence that female executives reduce levels of risk-taking in banks. We also find that a more balanced gender ratio has a greater impact on bank risk-taking than merely with the presence of female executive. The results are robust to alternative specifications of riskiness and instrument variable approach. However, when we only use part of the sample period surrounding the financial crises of 2007-2008, the results do not hold. We interpret the results as suggesting that having female executives and more balanced gender ratios in the executive team reduces bank risk-taking overall. But the risk-reduction becomes less effective during crisis years. |
| Keywords: | Gender, Female, Bank Executive, Diversity, Risk-taking, Lehman sister |
| JEL: | G21 G28 J16 J48 |
| Date: | 2017–03–01 |
| URL: | http://d.repec.org/n?u=RePEc:wlu:lcerpa:0100&r=ban |
| By: | Andrés Alegría; Kevin Cowan; Pablo García |
| Abstract: | This paper assesses the spillovers from the global financial crisis on the cost and structure of crossborder funding of Chilean banks. To do so it uses a novel dataset of individual debt transactions between Chilean banks and their foreign counterparties between 2008 and 2016. We find that global banks that experienced the largest hike in their funding costs charged the highest spreads to Chilean banks in this period. We also find that after the financial crisis of 2008 and 2009 the Chilean banking system underwent a significant shift in its sources of funding, with a larger reliance on bond issuance and a shift to new bank counterparties. We find evidence that distance matters for the cost of crossborder borrowing, as well as the intensity and age of banking relationships. Hence, shifting sources of funding is a costly process, but over time as banking relationships develop with new counterparties, the cost of this shift decreases. |
| Date: | 2017–06 |
| URL: | http://d.repec.org/n?u=RePEc:chb:bcchwp:804&r=ban |
| By: | Gaetano Gaballo (Banque de France); Ariel Zetlin-Jones (Tepper School of Business) |
| Abstract: | This paper shows that an increase in banks’ holdings of domestic sovereign debt decreases the ability of domestic sovereigns to successfully enact bailouts. When sovereigns finance bailouts with newly issued debt and the price of sovereign debt is sensitive to unanticipated debt issues, then bailouts dilute the value of banks’ sovereign debt holdings rendering bailouts less effective. We explore this feedback mechanism in a model of financial intermediation in which banks are subject to managerial moral hazard and ex ante optimality requires lenders to commit to ex post inefficient bank liquidations. A benevolent sovereign may desire to enact bailouts to prevent such liquidations thereby neutralizing lenders’ commitment. In this context, home bias for sovereign debt may arise as a mechanism to deter bailouts and restore lenders’ commitment. |
| Keywords: | Bailout, Sovereign debt, Home bias, Time inconsistency, Commitment, Macroprudential regulation |
| JEL: | E0 E44 E6 E61 |
| Date: | 2016–07–15 |
| URL: | http://d.repec.org/n?u=RePEc:stm:wpaper:16&r=ban |
| By: | Amiti, Mary (Federal Reserve Bank of New York); McGuire, Patrick M. (Bank for International Settlements); Weinstein, David E. (Columbia University) |
| Abstract: | What is the role of supply and demand forces in determining movements in international banking flows? Answering this question is crucial for understanding the international transmission of financial shocks and formulating policy. This paper addresses the question by using the method developed in Amiti and Weinstein (forthcoming) to exactly decompose the growth in international bank credit into common shocks, idiosyncratic supply shocks, and idiosyncratic demand shocks for the 2000-16 period. A striking feature of the global banking flows data can be characterized by what we term the “Anna Karenina Principle”: all healthy credit relationships are alike, but each unhealthy credit relationship is unhealthy in its own way. During non-crisis years, bank flows are well explained by a common global factor and a local demand factor. But during times of crisis flows are affected by idiosyncratic supply shocks to a borrower country’s creditor banks. This has important implications for why standard models break down during crises. |
| Keywords: | international banking; global financial crisis; supply shocks versus demand shocks; BIS consolidated banking statistics |
| JEL: | F34 G01 G21 |
| Date: | 2017–06–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:818&r=ban |
| By: | Christophe Blot (Observatoire français des conjonctures économiques); Paul Hubert (Observatoire français des conjonctures économiques) |
| Abstract: | Since 2014, the ECB has applied a negative interest rate on the excess reserves (and deposit facilities) of commercial banks. This policy is complementary to Quantitative Easing (QE), a program whereby the ECB purchases securities on financial markets. Indeed, the QE provides liquidity to the banks and negative interest rates encourage them to reallocate this liquidity. The negative reserve rate amplifies the fall in short-term and long-term market rates and reinforces the incentive for commercial banks to operate reallocation on their portfolios towards riskier assets. The total amount of liquidity subject to a negative interest rate is 1047 billion euros. Negative interest rates should reduce interest rate margins but the impact on profitability is mitigated by the capital gains banks realise when selling securities to the ECB under QE, by the possibility banks have to finance themselves at negative rates, by a decrease in the risk of default and by the possibility to raise non-interest income. |
| JEL: | E5 |
| Date: | 2016–11 |
| URL: | http://d.repec.org/n?u=RePEc:spo:wpmain:info:hdl:2441/4becfeb5av97abu32kpfiu3srd&r=ban |
| By: | Kyungmin Kim |
| Abstract: | Rate curves for overnight loans between bank pairs, as functions of loan values, can be used to infer valuation of reserves by banks. The inferred valuation can be used to interpret shifts in rate curves between bank pairs, for example, in response to a financial crisis. This paper proposes a model of lending by a small bank to a large monopolistic bank to generate a tractable rate curve. An explicit calibration procedure for model parameters is developed and applied to a dataset from Mexico around the 2008 financial crisis. During the crisis, relatively small banks were lending to large banks at lower rates than usual, and the calibration suggests that a broad decline in valuation of reserves is responsible for this outcome, rather than a general increase in the supply of lending or compositional effects. |
| Keywords: | Banking ; Crisis ; Interbank |
| JEL: | E50 G21 |
| Date: | 2017–06–16 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2017-65&r=ban |
| By: | Rima Turk-Ariss |
| Abstract: | Concerns about excessive variability in bank risk weights have prompted their review by regulators. This paper provides prima facie evidence on the extent of risk weight heterogeneity across broad asset classes and by country of counterparty for major banks in the European Union using internal models. It also finds that corporate risk weights are sensitive to the riskiness of an average representative firm, but not to a market indicator of a firm’s probablity of default. Under plausible yet severe hypothetical scenarios for harmonized risk weights, counterfactual capital ratios would decline significantly for some banks, but they would not experience a shortfall relative to Basel III’s minimum requirements. This, however, does not preclude falling short of meeting additional national supervisory capital requirements. |
| Date: | 2017–06–09 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:17/137&r=ban |
| By: | Polanski, Arnold (University of East Anglia); Stoja, Evarist (School of Economics, Finance and Management, University of Bristol) |
| Abstract: | Multidimensional Value at Risk (MVaR) generalises VaR in a natural way as the intersection of univariate VaRs. We reduce the dimensionality of MVaRs which allows for adapting the techniques and applications developed for VaR to MVaR. As an illustration, we employ VaR forecasting and evaluation techniques. One of our forecasting models builds on the progress made in the volatility literature and decomposes multidimensional tail events into long-term trend and short-term cycle components. We compute short and long-term MVaR forecasts for several multidimensional time series and discuss their (un)conditional accuracy. |
| Keywords: | Multidimensional risk; multidimensional Value at Risk; two-factor decomposition; long-horizon forecasting |
| JEL: | C52 C53 |
| Date: | 2017–06–12 |
| URL: | http://d.repec.org/n?u=RePEc:boe:boeewp:0660&r=ban |
| By: | Dianfa Chen; Jun Deng; Jianfen Feng |
| Abstract: | In this paper, we establish a class of default risk models with possible dynamical contagion between different obligors. Thereby, we derive explicitly the pricing formulae by set-valued Markov chain approach. As an application, we employ the default contagion model to price synthetic CDOs. The calculation time is reduced dramatically comparing with related literatures, especially, when the number of reference obligors is large. |
| Date: | 2017–06 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1706.06285&r=ban |
| By: | Eglë Jakuèionytë (Tinbergen Institute and the University of Amsterdam, the Netherlands) |
| Abstract: | This paper explores the spillover effects from increasing personal bankruptcy protection. Innovatively, the paper shows that the spillover effects can be influenced by the bank portfolio choice. Since a low level of personal bankruptcy protection keeps an insolvent individual liable until her debt is repaid in full, lender’s returns on mortgages are less uncertain than returns on other assets ceteris paribus. Risk-averse banks would prefer mortgages over other types of assets such as corporate loans. Corporate lending and thus equilibrium output would fall. In contrary to the popular view that creditor protection smooths credit provision and makes the allocation of resources more efficient, I show that in some cases a low level of personal bankruptcy protection can lead to aggregate consumption losses. Also I show that macroprudential policies (LTV ratios) can successfully complement higher personal bankruptcy protection in ensuring even higher welfare. |
| Keywords: | Personal bankruptcy, household debt, housing, general equilibrium, bank portfolio choice |
| JEL: | E44 G11 G21 K35 R21 |
| Date: | 2017–04–24 |
| URL: | http://d.repec.org/n?u=RePEc:lie:wpaper:44&r=ban |
| By: | Efraim Benmelech; Nittai K. Bergman |
| Abstract: | Credit market freezes in which debt issuance declines dramatically and market liquidity evaporates are typically observed during financial crises. In the financial crisis of 2008-09, the structured credit market froze, issuance of corporate bonds declined, and secondary credit markets became highly illiquid. In this paper we analyze liquidity in bond markets during financial crises and compare two main theories of liquidity in markets: (1) asymmetric information and adverse selection, and (2) heterogenous beliefs. Analyzing the 1873 financial crisis as well as the 2008-09 crisis, we find that when bond value deteriorates, bond illiquidity increases, consistent with an adverse selection model of the information sensitivity of debt contracts. While we show that the adverse-selection model of debt liquidity explains a large portion of the rise in illiquidity, we find little support for the hypothesis that opinion dispersion explains illiquidity in financial crises. |
| JEL: | G01 G12 G21 |
| Date: | 2017–06 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:23512&r=ban |
| By: | Noth, Felix; Busch, Matias Ossandon |
| Abstract: | This paper estimates the effect of a foreign funding shock to banks in Brazil after the collapse of Lehman Brothers in September 2008. Our robust results show that bank-specic shocks to Brazilian parent banks negatively affected lending by their individual branches and trigger real economic consequences in Brazilian municipalities: More affected regions face restrictions in aggregated credit and show weaker labor market performance in the aftermath which documents the transmission mechanism of the global financial crisis to local labor markets in emerging countries. The results represent relevant information for regulators concerned with the real effects of cross-border liquidity shocks. |
| JEL: | E24 E44 G01 G21 |
| Date: | 2017–06–14 |
| URL: | http://d.repec.org/n?u=RePEc:bof:bofitp:2017_011&r=ban |
| By: | Peter L. Rousseau (Vanderbilt University); Paul Wachtel (New York University, Stern School of Business) |
| Abstract: | One strand of the economics literature addresses financial deepening as a precursor to economic growth. Another views it as a cause of financial crises. We examine historical data for 17 economies from 1870 to 1929 to distinguish episodes of growth induced by financial deepening from crises induced by credit booms. Cross-country panel regressions with five-year averages indicate that deepening episodes, defined as increases of more than thirty percent (and alternatively more than twenty percentage points) in the ratio of M2 to GDP over a ten year period, significantly enhanced the standard finance-growth dynamic, while deepening associated with financial crises sharply hindered it. We then describe some specific episodes of financial deepening in our sample. |
| Keywords: | finance-growth nexus, Atlantic economies, financial deepening, financial crisis |
| JEL: | E5 N1 |
| Date: | 2017–06–16 |
| URL: | http://d.repec.org/n?u=RePEc:van:wpaper:vuecon-sub-17-00009&r=ban |