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on Banking |
| By: | De-Ramon, sebastian (Bank of England); Straughan, Michael (Bank of England) |
| Abstract: | The Basel III/CRD IV reforms to the banking system following the financial crisis of 2008–09 required banks to raise significantly both the quality and quantity of capital on their balance sheets. This econometric study provides evidence of both the long and short-term implications for ongoing activity in the UK economy of a change in the aggregate proportion of bank capital funding. We find that, in response to changes in their capital funding, banks change credit spreads applied to private non-financial corporate borrowers to a greater extent than for household borrowers in the short term, but equalise these changes in the longer term. The short-term impact reflects banks’ desire to adjust their capital ratios through changes to the value of their risk-weighted assets by restricting the flow of lending to higher-risk sectors to a greater extent than to lower-risk sectors. We also find that after recent regulatory reforms banks may have modified their price-setting behaviour somewhat. We develop a vector error correction model of these effects with an innovative non-standard estimation of the short-term coefficients. Using this approach, we are able to: (i) test hypotheses about the short-term and long-term responses to changes in the aggregate mix of bank capital funding; (ii) test hypotheses about the responses of the non-financial corporate and household sectors; and (iii) enhance the accuracy of the short-term dynamics and the accuracy of the macroeconomic simulations of the effect of increasing bank capital. |
| Keywords: | Capital requirements; DSGE models; UK economy; bank competition |
| JEL: | D22 D53 E27 G21 |
| Date: | 2017–06–30 |
| URL: | http://d.repec.org/n?u=RePEc:boe:boeewp:0663&r=ban |
| By: | ; Georg Junge; Peter Kugler (University of Basel) |
| Abstract: | This paper extends the analysis of Junge and Kugler (2013) on the effects of increased capital requirements on Swiss GDP and obtains the following main results: First the Modigliani-Miller effect is robust with respect to a substantial extension of the data base and yields an offset of capital cost of 46 percent. Second, the Translog production function estimate results in a time-varying elasticity of production with respect to the price of capital between 0.34 and 0.27, which is substantially lower than the value of 0.43 found in the earlier CES framework. Third the unweighted capital (leverage) ratio for Swiss G-SIBs is approximately 6 percent for Basel III Tier1 and 4.3 percent for CET1. This corresponds to risk-weighted capital ratios of 17 to 20 percent and 13 to 15 percent, respectively. The estimates show that the recently revised Swiss Too-Big-To-Fail capital ratios for G-SIBs are about 30 percent smaller than the optimal levels. However, the oft-debated proposal to raise the equity-to-asset ratio to 20 to 30 percent is not warranted by our analysis. |
| Keywords: | Financial regulation, Bank equity capital requirements, Capital structure, Elasticity of substitution, Translog production function |
| JEL: | G21 G28 E20 E22 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:bsl:wpaper:2017/11&r=ban |
| By: | Gregory E. Elliehausen; Simona Hannon |
| Abstract: | The Credit Card Accountability and Disclosure Act (CARD Act) of 2009 restricted several risk management practices of credit card issuers. Using a quasi-experimental design with credit bureau data on consumer lending, we find evidence consistent with the hypothesis that the act’s restrictions on risk management practices contributed to a large decline in bank card holding by higher risk, nonprime consumers but had little effect on prime consumers. Looking at consumer finance loans, historically a source of credit for higher risk consumers, we find greater reliance on such loans by nonprime consumers in states with high consumer finance rate ceilings following the CARD Act than by nonprime consumers in states with low rate ceilings or by prime consumers. That nonprime consumers in states with high consumer finance rate ceilings relied more heavily on consumer finance loans suggests that consumer finance loans were a substitute for subprime credit cards for risky consum ers when rate ceilings permit such loans to be profitable. Consumer finance loans would not be available to many higher risk, nonprime consumers in low rate states because such loans would be unprofitable, and prime consumers would not need consumer finance loans because other, less expensive types of credit would generally be available to them. |
| Keywords: | CARD Act ; Consumer credit ; Credit cards ; Credit supply ; Household finance ; Personal loans ; Subprime credit |
| JEL: | G21 G23 G28 |
| Date: | 2017–06–29 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2017-72&r=ban |
| By: | Correa, Ricardo (Board of Governors of the Federal Reserve System); Sapriza, Horacio (Board of Governors of the Federal Reserve System); Zlate, Andrei (Federal Reserve Bank of Boston) |
| Abstract: | This paper documents a new type of cross-border bank lending channel using a novel dataset on the balance sheets of U.S. branches of foreign banks and their syndicated loans. We show that: (1) The U.S. branches of euro-area banks suffered a liquidity shock in the form of reduced access to large time deposits during the European sovereign debt crisis in 2011. The shock was related to their euro-area affiliation rather than to country- or bank-specific characteristics. (2) The affected branches received additional funding from their parent banks, but not enough to offset the lost deposits. (3) The liquidity shock prompted branches to cut lending to U.S. firms, which occurred mostly along the extensive margin. In turn, the affected U.S. firms suffered reduced access to syndicated loans, which prompted them to cut investment and built up their cash reserves. |
| Keywords: | Sovereign risk; international banking; money market funds; liquidity management. |
| JEL: | F34 G15 G21 |
| Date: | 2016–09–30 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedbqu:rpa16-4&r=ban |
| By: | Adrian, Tobias (International Monetary Fund); de Fontnouvelle, Patrick (Federal Reserve Bank of Boston); Yang, Emily (Federal Reserve Bank of New York); Zlate, Andrei (Federal Reserve Bank of Boston) |
| Abstract: | Since the global financial crisis of 2007-09, policy makers and academics around the world have advocated the use of prudential tools for macroprudential purposes. This paper presents a macroprudential tabletop exercise that aimed at confronting Federal Reserve Bank presidents with a plausible, albeit hypothetical, macro-financial scenario that would lend itself to macroprudential considerations. In the tabletop exercise, the primary macroprudential objective was to reduce the likelihood and severity of possible future financial disruptions associated with the hypothetical overheating scenario. The scenario provided a path for key macroeconomic and financial variables, which were assumed to be observed through 2016:Q4, as well as the corresponding hypothetical projections for the interval from 2017:Q1 to 2018:Q4. Prudential tools under consideration included capital-based tools such as leverage ratios, countercyclical capital buffers, and sectoral capital requirements; liquidity-based tools such as liquidity coverage and net stable funding ratios; credit-based tools such as caps on loan-to-value ratios and margins; capital and liquidity stress testing; as well as supervisory guidance and moral suasion. In addition, participants were asked to consider using monetary policy tools for financial stability purposes. Under the hypothetical scenario, participants found many prudential tools less attractive due to implementation lags and limited scope of application and favored those deemed to pose fewer implementation challenges, such as stress testing, margins on repo funding, and guidance. Also, monetary policy came more quickly to the fore as a financial stability tool than might have been thought before the exercise. The tabletop exercise abstracted from governance issues within the Federal Reserve System, focusing instead on economic mechanisms of alternative tools. |
| Keywords: | Financial stability; macroprudential policy; monetary policy; financial overheating; tabletop exercise |
| JEL: | E58 G01 G18 |
| Date: | 2015–09–30 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedbqu:rpa15-1&r=ban |
| By: | Gündüz, Yalin; Ongena, Steven; Tümer-Alkan, Günseli; Yu, Yuejuan |
| Abstract: | Does hedging motivate CDS trading and does that affect the availability of credit? To answer these questions we couple comprehensive bank-firm level CDS trading data from the Depository Trust and Clearing Corporation with the German credit register containing bilateral bank-firm credit exposures. We find that following the Small Bang in the European CDS market, extant credit relationships with riskier firms increase banks' CDS trading and hedging of these firms. Properly hedged banks holding more CDS contracts of riskier firms supply relatively more credit to these firms. Our results are overall stronger for firm CDSs experiencing larger improvements in liquidity. |
| Keywords: | credit default swaps,credit exposure,hedging,bank lending,Depository Trust and Clearing Corporation (DTCC) |
| JEL: | G21 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubdps:162017&r=ban |
| By: | Avdjiev, Stefan (Bank for International Settlements); Gambacorta, Leonardo (Bank for International Settlements); Goldberg, Linda S. (Federal Reserve Bank of New York); Schiaffi, Stefano (Bocconi University) |
| 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 flows to U.S. monetary policy rose substantially in the immediate aftermath of the global financial crisis, peaked around the time of the 2013 Federal Reserve “taper tantrum,” and then partially reverted toward pre-crisis levels. Conversely, the responsiveness of international bank lending to global risk conditions declined considerably after the crisis and became similar to that of international debt securities. The increased sensitivity of international bank flows to U.S. monetary policy has been driven mainly by post-crisis changes in the behavior of national banking systems, especially those that ex ante had banks that were less well capitalized. By contrast, the post-crisis fall in the sensitivity of international bank lending to global risk was mainly owing to a compositional effect, driven by increases in the lending market shares of national banking systems that were better capitalized. The post-2013 reversal in the sensitivities to U.S. monetary policy partially reflects the expected divergence in the monetary policies of the United States 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: | global liquidity; international bank lending; international bond flows; capital flows |
| JEL: | F34 G10 G21 |
| Date: | 2017–06–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:819&r=ban |
| By: | Simplice Asongu (Yaoundé/Cameroun); Nicholas Biekpe (Cape Town, South Africa.) |
| Abstract: | This study assesses how market power in the African banking industry is affected by the complementarity between information sharing offices and information and communication technology (ICT). The empirical evidence is based on a panel of 162 banks consisting of 42 countries for the period 2001-2011. Four estimation techniques are employed, namely: (i) instrumental variable Fixed effects to control for the unobserved heterogeneity; (ii) Tobit regressions to control for the limited range in the dependent variable; and (iii) Instrumental Quantile Regressions (QR) to account for initial levels of market power. Whereas results from Fixed effects and Tobit regressions are not significant, with QR: (i) the interaction between internet penetration and public credit registries reduces market power in the 75th quartile and (ii) the interaction between mobile phone penetration and private credit bureaus increases market power in the top quintiles. Fortunately, the positive net effects are associated with negative marginal effects from the interaction between private credit bureaus and mobile phone penetration. This implies that mobile phones could complement private credit bureaus to decrease market power when certain thresholds of mobile phone penetration are attained. These thresholds are computed and discussed. |
| Keywords: | Financial access; Information asymmetry; ICT |
| JEL: | G20 G29 L96 O40 O55 |
| Date: | 2017–05 |
| URL: | http://d.repec.org/n?u=RePEc:agd:wpaper:17/022&r=ban |
| By: | Robert Neil McCauley; Agustín S Bénétrix; Patrick McGuire; Goetz von Peter |
| Abstract: | This paper argues that the decline in cross-border banking since 2007 does not amount to a broad-based retreat in international lending ("financial deglobalisation"). We show that BIS international banking data organised by the nationality of ownership ("consolidated view") provide a clearer picture of international financial integration than the traditional balance-of-payments measure. On the consolidated view, what appears to be a global shrinkage of international banking is confined to European banks, which uniquely responded to credit losses after 2007 by shedding assets abroad - in particular, reducing lending - to restore capital ratios. Other banking systems' global footprint, notably those of Japanese, Canadian and even US banks, has expanded since 2007. Using a global dataset of banks' affiliates (branches and subsidiaries), we demonstrate that the who (nationality) accounts for more of the peak-to-trough shrinkage of foreign claims than does the where (locational factors). These findings suggest that the contraction in global lending can be interpreted as cyclical deleveraging of European banks' large overseas operations, rather than broad-based financial deglobalisation. |
| Keywords: | Financial globalisation, international banking, consolidation, ownership |
| JEL: | F36 F4 G21 |
| Date: | 2017–06 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:650&r=ban |
| By: | Kahn, Charles M.; Wagner, Wolf |
| Abstract: | We investigate a model of liquidity sources that incorporates a general equilibrium feature of liquidity: when banks hold more liquidity, other sectors of the economy hold less of it and will consequently supply less in times of crisis. The private allocation of liquidity is inefficient and optimal liquidity regulation depends on the source of liquidity to which it is applied. Our model also identifies a limited role for public provision of liquidity, arising only when there is a general liquidity shortage in the economy but not if the shortage materializes solely in the banking system. |
| Keywords: | liquidity regulation; liquidity sources; public liquidity |
| JEL: | G21 G28 |
| Date: | 2017–06 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:12116&r=ban |
| By: | Tente, Natalia; von Westernhagen, Natalja; Slopek, Ulf |
| Abstract: | M-PRESS-CreditRisk is a new top-down macro stress testing framework that can help supervisors gauge banks' capital adequacy related to credit risk. For the first time, it combines calibration of microprudential capital requirements and macroprudential buffers in a unified, coherent framework. Its core element is an advanced credit portfolio model - SystemicCreditRisk - built upon a rich, non-linear dependence structure for interconnected bank portfolios. Incorporating numerous sector/country-specific systematic factors, the model focuses on credit default concentration risk as a major source of large losses that may have systemic impact. A test run using a sample of 12 systemically important German banks provides measures for systemic credit risk and the banks' contributions to it in both baseline and stress scenarios. Capital requirements calibrated to the results combine elements of Pillar 1 and Pillar 2, whereas macroprudential buffers can internalize the system's tail risk. The maximum model-based combined requirements range between 6.3% and 27.2% of credit RWA depending on the bank. A comparison with the reported capital figures suggests that there appears to be enough capital in the banking system, but its distribution might be suboptimal from a systemic point of view as the capital level of a number of banks might need improvement. |
| Keywords: | Systemic Credit Risk,Tail Risk,Stress Testing,Microprudential Capital Requirements,Systemic Risk Buffer,O-SII Buffer,Hierarchical Archimedean Copula |
| JEL: | C15 C23 C63 G21 G28 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubdps:152017&r=ban |
| By: | Bardoscia, Marco (Bank of England); Barucca, Paolo (University of Zurich, London Institute for Mathematical Science, IMT Lucca); Brinley Codd, Adam (Bank of England); Hill, John (Bank of England) |
| Abstract: | We study solvency contagion risk in the UK banking system from 2008 to 2015. We develop a model that not only accounts for losses transmitted after banks default, but also for losses due to the fact that creditors revalue their exposures when probabilities of default of their counterparties change. We apply our model to a unique data set of real UK interbank exposures. We show that risks due to solvency contagion decrease markedly from the peak of the crisis to the present, to the point of becoming negligible. By decomposing the change in losses into two main contributions — the increase in banks’ capital and the decrease in interbank exposures — we are able to pinpoint the main driver in each year. In some cases we observe that an increase in aggregate capital is associated with a positive contribution to losses. This suggests that the distribution of capital among banks is also important. |
| Keywords: | Financial networks; systemic risk; financial contagion; macroprudential policy; stress testing |
| JEL: | D85 G01 G12 G21 G28 G33 G38 |
| Date: | 2017–06–30 |
| URL: | http://d.repec.org/n?u=RePEc:boe:boeewp:0662&r=ban |
| By: | Drehmann, Mathias; Juselius, Mikael; Korinek, Anton |
| 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 adverse long-lasting real effects. |
| JEL: | E17 E44 G01 D14 |
| Date: | 2017–06–27 |
| URL: | http://d.repec.org/n?u=RePEc:bof:bofrdp:2017_012&r=ban |
| By: | ; Junge Georg; Peter Kugler (University of Basel) |
| Abstract: | A VAR analysis of Swiss data from 1987 to 2015 provides no evidence for significant long and short run influence of leverage on GDP, credit and the interest rate spread. Increasing capital requirements for banks should therefore have no strong negative macroeconomic effects. |
| Keywords: | GDP, credit, leverage interest spread, long and short run impact VAR |
| JEL: | G21 G28 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:bsl:wpaper:2017/10&r=ban |
| By: | Jinglun Yao; Maxime Levy-Chapira; Mamikon Margaryan |
| Abstract: | The existence of asymmetric information has always been a major concern for financial institutions. Financial intermediaries such as commercial banks need to study the quality of potential borrowers in order to make their decision on corporate loans. Classical methods model the default probability by financial ratios using the logistic regression. As one of the major commercial banks in France, we have access to the the account activities of corporate clients. We show that this transactional data outperforms classical financial ratios in predicting the default event. As the new data reflects the real time status of cash flow, this result confirms our intuition that liquidity plays an important role in the phenomenon of default. Moreover, the two data sets are supplementary to each other to a certain extent: the merged data has a better prediction power than each individual data. We have adopted some advanced machine learning methods and analyzed their characteristics. The correct use of these methods helps us to acquire a deeper understanding of the role of central factors in the phenomenon of default, such as credit line violations and cash inflows. |
| Date: | 2017–07 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1707.00757&r=ban |
| By: | Kowalik, Michal (Federal Reserve Bank of Boston) |
| Date: | 2016–09–15 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedbqu:rpa16-2&r=ban |