nep-ban New Economics Papers
on Banking
Issue of 2017‒07‒02
nineteen papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Estimating the impact of shocks to bank capital in the euro area By Kanngiesser, Derrick; Martin, Reiner; Maurin, Laurent; Moccero, Diego
  2. On the relationship between bank market concentration and stability of financial institutions: Evidence from the Italian banking sector By Barra, Cristian; Zotti, Roberto
  3. Bank Stability and Competition: Evidence from Albanian Banking Market By Shijaku, Gerti
  4. The shift in bank credit allocation: new data and new findings By Dirk Bezemer; Anna Samarina; Lu Zhang
  5. The leverage ratio, risk-taking and bank stability By Smith, Jonathan Acosta; Grill, Michael; Lang, Jan Hannes
  6. Supply- and Demand-side Factors in Global Banking By Mary Amiti; Patrick McGuire; David E. Weinstein
  7. Subprime Mortgages and Banking in a DSGE Model By Martino, Ricci; Patrizio, Tirelli
  8. Banks' search for yield in the low interest rate environment: a tale of regulatory adaptation By Wang, J. Christina
  9. Uncertainty and the Cost of Bank vs. Bond Finance By Grimme, Christian
  10. Information Contagion and Systemic Risk By Toni Ahnertand; Co-Pierre Georg
  11. Destabilizing effects of bank overleveraging on real activity - an analysis based on a threshold MCS-GVAR By Gross, Marco; Henry, Jérôme; Semmler, Willi
  12. Accounting for debt service: the painful legacy of credit booms By Mathias Drehmann; Mikael Juselius; Anton Korinek
  13. Identification of Credit Risk Based on Cluster Analysis of Account Behaviours By Maha Bakoben; Tony Bellotti; Niall Adams
  14. Systemic risk for financial institutions of major petroleum-based economies: The role of oil By Khalifa, Ahmed; Caporin, Massimiliano; Costola, Michele; Hammoudeh, Shawkat
  15. Macroprudential policy and bank risk By Yener Altunbas; Mahir Binici; Leonardo Gambacorta
  16. Equity versus Bail-in Debt in Banking: An Agency Perspective By Mendicino, Caterina; Nikolov, Kalin; Suarez, Javier
  17. Financial stability in a low interest rate environment: remarks at De Nederlandsche Bank & Sveriges Riksbank Macroprudential Conference Series, Amsterdam, The Netherlands, June 20, 2017 By Rosengren, Eric S.
  18. The International Dimensions of Macroprudential Policies By Agénor, Pierre-Richard; Gambacorta, Leonardo; Kharroubi, Enisse; Lombardo, Giovanni; Pereira da Silva, Luiz A.
  19. Panel remarks at Bank for International Settlements' annual general meeting, Basel, Switzerland By Dudley, William

  1. By: Kanngiesser, Derrick; Martin, Reiner; Maurin, Laurent; Moccero, Diego
    Abstract: We contribute to the empirical literature on the impact of shocks to bank capital in the euro area by estimating a Bayesian VAR model identied with sign restrictions. The variables included in the VAR are those typically used in monetary policy analysis, extended to include aggregate banking sector variables. We estimate two shocks affecting the euro area economy, namely a demand shock and a shock to bank capital. The main findings of the paper are as follows: i) Impulse-response analysis shows that in response to a shock to bank capital, banks boost capital ratios by reducing their relative exposure to riskier assets and by adjusting lending to a larger extent than they increase the level of capital and reserves per se; ii) Historical shock decomposition analysis shows that bank capital shocks have contributed to increasing capital ratios since the crisis, impairing bank lending growth and contributing to widen bank lending spreads; and iii) counterfactual analysis shows that higher capital ratios pre-crisis would have helped dampening the euro area credit and business cycle. This suggests that going forward the use of capital-based macroprudential policy instruments may be helpful to avoid a repetition of the events seen since the start of the global financial crisis. JEL Classification: G21, C32, C11
    Keywords: bank balance sheet adjustment, Bayesian VAR, capital ratio, euro area, macroprudential policy, sign restrictions
    Date: 2017–06
  2. By: Barra, Cristian; Zotti, Roberto
    Abstract: This paper explores the relationship between bank market concentration and financial stability of financial institutions relying on highly territorially disaggregated data taken at municipality level in Italy between 2001 and 2012. Firstly, we test the existence of a U-shaped relationship between market concentration and financial stability. Secondly, we estimate the impact of the level of concentration of the banking system and other explanatory variables, such as size, level of capitalization and credit insolvency of financial institutions, on a proxy of risk taking behavior such as the banking ‘‘stability inefficiency’’ derived simultaneously from the estimation of a stability stochastic frontier. The paper concludes that the inefficiency of financial stability is U-shaped relationship with respect to the measure of market concentration. Boosting market power increases bank failure in very concentrated markets while leads to higher financial stability in already competitive markets. Bank size is an essential factor in explaining this relationship as the effect of size on the inefficiency of stability is an inverse U-shaped as a function of the market share indicator; results also suggest that high, low and average concentration levels do not change the positive effects that the level of capitalization has on the stability inefficiency.
    Keywords: Management; local banks; market structure; financial stability
    JEL: C14 D21 G21 G28
    Date: 2017–06
  3. By: Shijaku, Gerti
    Abstract: This paper analyses the inter-temporal competition – stability nexus after the global financial crises. For this reason, the empirical estimation approach follows a five – step procedure. First, we utilise quarterly macroeconomic and balance sheet and income statement data for 16 banks operating in the Albanian banking sector over the period 2008 – 2015. Second, we calculate a new composite index as a measure of bank stability conditions, which includes a wide set of information rather than focusing only on one aspect of risk. Then, we construct a proxy for bank competition such as the Boone indicator. Empirical estimations are based on the General Method of Moments approach. A set of robustness checks include also the use of other alternative proxy of competition such as the Lerner index and the efficient-adjusted Lerner index, profit elasticity and the Herfindahl index. Empirical results strongly support the “competition – stability” view after the global financial crises - that higher degree of competition boosts further bank stability conditions. Results further indicate that greater concentration has also a negative impact on bank stability. Results imply also that bank stability is positively linked with macroeconomic conditions and capital ratio and inverse with operational efficiency. Finally, we do not find a non-linear relationship between competition and stability.
    Keywords: Bank stability, Competition, Boone indicator, Panel Data, GMM.
    JEL: C26 E32 E43 G21
    Date: 2017–06
  4. By: Dirk Bezemer; Anna Samarina; Lu Zhang
    Abstract: In this paper we present a new data set on bank credit in four categories: home mortgages, consumer credit, bank loans to non-bank financials, and loans to non- financial business, for 74 economies over 1990-2013. We offer a full description of sources and methods of data collection and construction and comparisons with adjacent data sets. We document key trends including the shift in bank credit allocation away from traditional business lending. The literature suggests substantial consequences of this 'debt shift' for growth, income distribution and macroeconomic resilience, which motivated this data construction. A second contribution is to analyze drivers of debt shift in fixed-effects and system-GMM regressions for the full sample and separately for advanced and emerging economies. We find that debt shift is larger in advanced economies with a stronger presence of foreign banks and higher trade. Financial deregulation strongly correlates with debt shift.
    Keywords: credit allocation; business lending; household mortgage
    JEL: E44 E51 G21
    Date: 2017–06
  5. By: Smith, Jonathan Acosta; Grill, Michael; Lang, Jan Hannes
    Abstract: This paper addresses the trade-off between additional loss-absorbing capacity and potentially higher bank risk-taking associated with the introduction of the Basel III Leverage Ratio. This is addressed in both a theoretical and empirical setting. Using a theoretical micro model, we show that a leverage ratio requirement can incentivise banks that are bound by it to increase their risk-taking. This increase in risk-taking however, should be more than outweighed by the benefits of higher capital and therefore increased loss-absorbing capacity, thereby leading to more stable banks. These theoretical predictions are tested and confirmed in an empirical analysis on a large sample of EU banks. Our baseline empirical model suggests that a leverage ratio requirement would lead to a significant decline in the distress probability of highly leveraged banks. JEL Classification: G01, G21, G28
    Keywords: bank capital, Basel III, leverage ratio, risk-taking
    Date: 2017–06
  6. By: Mary Amiti; Patrick McGuire; David E. Weinstein
    Abstract: What is the role for 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 period 2000-2016. 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, 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.
    JEL: F34 G01 G21
    Date: 2017–06
  7. By: Martino, Ricci; Patrizio, Tirelli
    Abstract: Can a DSGE model replicate the financial crisis effects without assuming unprecedented and implausibly large shocks? Starting from the assumption that the subprime crisis triggered the financial crisis, we introduce balance-sheet effects for housing market borrowers and for commercial banks in an otherwise standard DSGE model. Our crisis experiment is initiated by a shock to subprime lending risk, which is calibrated to match the observed increase in subprime delinquency rates. Due to contagion of prime borrowers and to the ensuing adverse effect on banks balance sheets, this apparently small shock is sufficient to trigger a decline in housing investment comparable to what was observed during the financial crisis. The adverse effect of subprimers risk on commercial banks' agency problem is a crucial driver of our results.
    Keywords: Housing, Mortgage default, subprime risk, DSGE
    JEL: E32 E44 G01 R31
    Date: 2017–06–22
  8. By: Wang, J. Christina (Federal Reserve Bank of Boston)
    Abstract: This paper examines whether the low interest rate environment that has prevailed since the Great Recession has compelled banks to reach for yield. It is important to recognize that banks can take on a variety of risks that offer higher yields today but incur different forms of future losses. Some losses, such as mark-to-market losses due to yield increases, can be avoided with accounting treatments whereas others, chiefly credit losses, cannot. A simple model shows that a bank’s incentive to take on risks for which potential future losses can be managed, such as interest rate risk, is countercyclical, especially if a bank is capital constrained. This study thus focuses on a bank’s exposure to interest rate risk through a maturity mismatch between its assets and liabilities. It finds evidence that the banks that faced less enhanced regulation after the financial crisis, especially those institutions used to having a higher net interest margin before the crisis, took on assets with longer maturities or prepayment risk, even while their source of funding shifted toward more transaction and saving deposits as a result of the near zero short-term interest rates. In contrast, those banks designated as systematically important and thus subjected to expanded post-crisis regulations have substantially shortened the average maturity of their assets since the crisis. There is some evidence that greater maturity mismatch is slightly more associated with a higher net interest margin during the post-crisis years. After the taper tantrum in 2013, these two groups of banks also adjusted their securities holdings in different ways, consistent with the differential regulatory accounting treatment.
    Keywords: banks; reaching for yield; maturity mismatch; regulation; zero lower bound
    JEL: E41 E52 G11 G18 G21
    Date: 2017–06–01
  9. By: Grimme, Christian
    Abstract: How does heightened uncertainty affect the costs of raising finance through the bond market and through bank loans? Empirically, I find that a rise in uncertainty is accompanied by an increase in corporate bond yields and a decrease in bank lending rates. This new stylized fact can be explained in a model with costly state verification and a special informational role for banks. In contrast to bond investors, banks acquire additional costly information about borrowers in times of uncertainty in order to reduce uncertainty. Having this information, the lending relationship becomes more valuable to the bank, resulting in a lower lending rate so that the relationship is not put at risk. The cost of bond finance increases because bond investors demand to be compensated for the increased risk of firm default. These findings suggest that the adverse effects of uncertainty are mitigated for firms that rely on bank finance as long as banks are highly capitalized.
    Keywords: Uncertainty Shocks, Financial Frictions, Relationship Banking, Bank Loan Rate Setting, Information Acquisition
    JEL: E32 E43 E44 G21
    Date: 2017–06–23
  10. By: Toni Ahnertand; Co-Pierre Georg
    Abstract: We examine the effect of ex-post information contagion on the ex-ante optimal portfolio choices of banks and the welfare losses due to joint default. Because of counterparty risk and common exposures, bad news about one bank reveals valuable information about another bank, thereby triggering information contagion. Systemic risk is defined as the ex-ante probability of joint bank default ex post. We find that information contagion increases systemic risk when banks are subject to common exposures since portfolio adjustments are small. In contrast, when banks are subject to counterparty risk, information contagion induces a large shift toward more prudential portfolios and therefore reduces systemic risk.
    Keywords: information contagion, counterparty risk, common exposure, systemic risk
    JEL: G01 G21
    Date: 2017–06
  11. By: Gross, Marco; Henry, Jérôme; Semmler, Willi
    Abstract: We investigate the consequences of overleveraging and the potential for destabilizing effects from financial- and real-sector interactions. In a theoretical framework, we model overleveraging and indicate how a highly leveraged banking system can lead to unstable dynamics and downward spirals. Inspired by Brunnermeier and Sannikov (2014) and Stein (2012), we empirically measure the deviation-from-optimal-leverage for 40 large EU banks. We then use this measure to condition the joint dynamics of credit flows and macroeconomic activity in a large-scale regime change model: A Threshold Mixed-Cross-Section Global Vector Autoregressive (T-MCS-GVAR) model. The regime-switching component of the model aims to make the relationship between credit and real activity dependent on the extent to which the banking system is overleveraged. We find significant nonlinearities as a function of overleverage. When leverage is standing above its equilibrium level, the effect of a deleveraging shocks on credit supply and economic activity are visibly more detrimental than at times of underleveraging. JEL Classification: E2, E6, C13, G6
    Keywords: credit supply, macro-financial linkages, overleveraging
    Date: 2017–06
  12. By: Mathias Drehmann; Mikael Juselius; Anton Korinek
    Abstract: When taking on new debt, borrowers commit to a pre-specified path of future debt service. This implies a predictable lag between credit booms and peaks in debt service which, in a panel of household debt in 17 countries, is four years on average. The lag is driven by two key features of the data: (i) new borrowing is strongly auto-correlated and (ii) debt contracts are long term. The delayed increase in debt service following an impulse to new borrowing largely explains why credit booms are associated with lower future output growth and higher probability of crisis. This provides a systematic transmission channel whereby credit expansions can have long-lasting adverse real effects.
    Keywords: new borrowing, debt service, financial cycle, real-financial linkages
    JEL: E17 E44 G01 D14
    Date: 2017–06
  13. By: Maha Bakoben; Tony Bellotti; Niall Adams
    Abstract: Assessment of risk levels for existing credit accounts is important to the implementation of bank policies and offering financial products. This paper uses cluster analysis of behaviour of credit card accounts to help assess credit risk level. Account behaviour is modelled parametrically and we then implement the behavioural cluster analysis using a recently proposed dissimilarity measure of statistical model parameters. The advantage of this new measure is the explicit exploitation of uncertainty associated with parameters estimated from statistical models. Interesting clusters of real credit card behaviours data are obtained, in addition to superior prediction and forecasting of account default based on the clustering outcomes.
    Date: 2017–05
  14. By: Khalifa, Ahmed; Caporin, Massimiliano; Costola, Michele; Hammoudeh, Shawkat
    Abstract: This paper examines the relationship between systemic risk measures across 546 financial institutions in major petroleum-based economies and oil movements. In this paper, we follow two steps. In the first step, we estimate the delta conditional VaR (CoVaR) for the financial institutions and verify the interdependence between the systemic risk and oil, both on a graphical basis and by means of statistical tests. Further, we analyse the financial companies' connectedness through Granger causality-based networks, augmented with oil exposures. We observe the presence of elevated increases in the CoVaR levels, corresponding to the subprime and global crises, which are exogenous shocks to the financial institutions located in the GCC countries. In the second step, we consider the CoVaR by introducing oil returns as a state variable to detect if there is an improvement in the systemic risk measurement. The results provide evidence in favour of risk measurement improvements by accounting for oil returns in the risk functions, as monitored by coverage tests.
    Keywords: systemic risk,risk measurement,VaR,CoVaR,Oil,financial institutions,petroleum-based economies
    JEL: C22 C58 G01 G17 G20 G21 G32
    Date: 2017
  15. By: Yener Altunbas; Mahir Binici; Leonardo Gambacorta
    Abstract: This paper investigates the effects of macroprudential policies on bank risk through a large panel of banks operating in 61 advanced and emerging market economies. There are three main findings. First, there is evidence suggesting that macroprudential tools have a significant impact on bank risk. Second, the responses to changes in macroprudential tools differ among banks, depending on their specific balance sheet characteristics. In particular, banks that are small, weakly capitalised and with a higher share of wholesale funding react more strongly to changes in macroprudential tools. Third, controlling for bank-specific characteristics, macroprudential policies are more effective in a tightening than in an easing episode.
    Keywords: Macroprudential policies, effectiveness, bank risk
    JEL: E43 E58 G18 G28
    Date: 2017–06
  16. By: Mendicino, Caterina; Nikolov, Kalin; Suarez, Javier
    Abstract: We examine the optimal size and composition of banks' total loss absorbing capacity (TLAC). Optimal size is driven by the trade-off between providing liquidity services through deposits and minimizing deadweight default costs. Optimal composition (equity vs. bail-in debt) is driven by the relative importance of two incentive problems: risk shifting (mitigated by equity) and private benefit taking (mitigated by debt). Our quantitative results suggest that TLAC size in line with current regulation is appropriate. However, an important fraction of it should consist of bail-in debt because such buffer size makes the costs of risk-shifting relatively less important at the margin.
    Keywords: agency problems; bail-in debt; Bank Regulation; loss absorbing capacity; risk shifting
    JEL: G21 G28 G32
    Date: 2017–06
  17. By: Rosengren, Eric S. (Federal Reserve Bank of Boston)
    Abstract: Eric Rosengren was a discussant for one of the conference papers. Please note: only presentation figures and comments (no text) are available.
    Date: 2017–06–20
  18. By: Agénor, Pierre-Richard; Gambacorta, Leonardo; Kharroubi, Enisse; Lombardo, Giovanni; Pereira da Silva, Luiz A.
    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: Financial Frictions; international cooperation; International spillovers; macroprudential policies
    JEL: E3 E5 F3 F5 G1
    Date: 2017–06
  19. By: Dudley, William (Federal Reserve Bank of New York)
    Abstract: Remarks at the Bank for International Settlements' Annual General Meeting, Basel, Switzerland.
    Keywords: taper tantrum; unwind; Policy Normalization Principles and Plans; balance sheet policy; reinvestment policy; financial spillovers; Hélène Rey; international spillovers; financial cycles; Comprehensive Capital Analysis and Review (CCAR); bank resolution regime; emerging market economies (EMEs)
    Date: 2017–06–25

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