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on Banking |
| By: | Carroll, James (Trinity College Dublin); McCann, Fergal (Central Bank of Ireland) |
| Abstract: | We explore two motives in a bank’s use of collateral: an ex-ante stock-of-risk effect, whereby banks secure observably riskier loans to reduce future losses; an ex-post flow-of-risk effect, whereby banks use collateral to lower the probability of reduced borrower effort. Using loan-level data on Irish enterprise lending, we explore these two mechanisms. We confirm the stock-of-risk hypothesis while finding no evidence that collateral reduces the ex-post flow-of-risk. We also highlight the importance of loan size by showing that banks secure almost all loans in the top quintile of loan size regardless of risk rating, whereas among smaller loans, collateralisation is higher for riskier loans. |
| Keywords: | SME, Collateral, Risk, Moral Hazard |
| Date: | 2017–04 |
| URL: | http://d.repec.org/n?u=RePEc:cbi:wpaper:06/rt/17&r=ban |
| By: | Kinghan, Christina (Central Bank of Ireland); Lyons, Paul (Central Bank of Ireland); McCarthy, Yvonne (Central Bank of Ireland); O'Toole, Conor |
| Abstract: | This Economic Letter provides an overview of residential mortgage lending in Ireland in 2016 for the five credit institutions reporting loan-level data to the Central Bank of Ireland as part of their compliance with loan-to-value (LTV) and loan-to-income (LTI) macroprudential Regulations. A total of €5.7 billion of mortgage lending was originated by these banks in 2016. The majority of new lending was for the purchase of primary dwelling homes (PDHs); within this group, first-time buyers (FTBs) accounted for 51 per cent of new lending and second and subsequent borrowers (SSBs) for the remaining 49 per cent. The average LTV and LTI ratios of FTBs and SSBs in-scope of the Regulations in 2016 were similar to those observed in 2015. Across the five institutions, 12 per cent of the value of PDH lending exceeded the LTV limit and 13 per cent exceeded the LTI limit for that group. We observe differences in the characteristics of borrowers with and without an allowance to exceed the limits of the Regulations. Specifically, a larger share of SSBs, couples, higher income and Dublin-based borrowers presented among the PDH group with an LTV allowance, relative to those without; SSBs accounted for 61 per cent of that group. In contrast, a larger share of FTBs, single persons, lower income and Dublin-based borrowers presented among the PDH group with an LTI allowance; 70 per cent of that group were FTBs. We find that approximately 66 per cent of FTBs and SSBs in 2016 originated a mortgage with an LTV that was below their regulatory limit. Among FTBs with an allowance to exceed the LTV limit set by the Regulations, the majority had an LTV at or below 90 per cent. This pattern is also evident among SSBs with an allowance to exceed the regulatory LTV limit. |
| Date: | 2017–05 |
| URL: | http://d.repec.org/n?u=RePEc:cbi:ecolet:06/el/17&r=ban |
| By: | Altunbas, Yener; Binici, Mahir; Gambacorta, Leonardo |
| 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: | bank risk; effectiveness; macroprudential policies |
| JEL: | E43 E58 G18 G28 |
| Date: | 2017–07 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:12138&r=ban |
| By: | Russell Wong (Federal Reserve Bank of Richmond); Cathy Zhang (Purdue University); Guillaume Rocheteau (University of California, Irvine) |
| Abstract: | This paper develops a dynamic model of lending relationships and monetary policy. Entrepreneurs can finance idiosyncratic investment opportunities through external finance -- by forming lending relationships with banks -- or internal finance -- by accumulating partially liquid assets. We study the dynamic response of lending rates, inflation, and investment to a banking crisis that severs lending relationships. We characterize optimal monetary policy in the aftermath of a crisis and show it involves a positive nominal interest rate that trades off the need to reduce the cost of self insurance by unbanked entrepreneurs and the need to promote the creation of lending relationships with banks. We calibrate the model to the U.S. economy and study quantitatively the optimal policy problem in and out of steady state, with and without commitment by the policymaker. |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed017:152&r=ban |
| By: | Steven Ongena (University of Lousanne); Ibolya Schindele (Magyar Nemzeti Bank (Central Bank of Hungary)); Dzsamila Vonnák (Magyar Nemzeti Bank (Central Bank of Hungary)) |
| Abstract: | We study the impact of monetary policy on the supply of bank credit when bank lending is also denominated in foreign currencies. Accessing a comprehensive supervisory dataset from Hungary, we find that the supply of bank credit in a foreign currency is less sensitive to changes in domestic monetary conditions than the equivalent supply in the domestic currency. Changes in foreign monetary conditions similarly affect bank lending more in the foreign than in the domestic currency. Hence when banks lend in multiple currencies the domestic bank lending channel is weakened and international bank lending channels become operational. |
| Keywords: | Bank balance-sheet channel, monetary policy, foreign currency lending |
| JEL: | E51 F3 G21 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:mnb:wpaper:2017/6&r=ban |
| By: | Robert N. McCauley (Bank for International Settlements); Agustín S. Bénétrix (Department of Economics, Trinity College Dublin); Patrick M. McGuire (Bank for International Settlements); Goetz von Peter (Bank for International Settlements) |
| 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: | 2017–07 |
| URL: | http://d.repec.org/n?u=RePEc:tcd:tcduee:tep1717&r=ban |
| By: | Jacob Bikker; Tobias Vervliet |
| Abstract: | The aim of this paper is to investigate the impact of the unusually low interest rate environment on the soundness of the US banking sector in terms of profitability and risk-taking. Using both dynamic and static modeling approaches and various estimation techniques, we find that the low interest rate environment indeed impairs bank performance and compresses net interest margins. Nonetheless, banks have been able to maintain their overall level of profits, due to lower provisioning, which in turn may endanger financial stability. Banks did not compensate for their lower interest income by expanding operations to include trading activities with a higher risk exposure. |
| Keywords: | profitability; risk-taking; low interest rate environment; (dynamic) panel data models |
| JEL: | G21 |
| Date: | 2017–07 |
| URL: | http://d.repec.org/n?u=RePEc:dnb:dnbwpp:560&r=ban |
| By: | Stella Xiuhua Huangfu (University of Sydney); Hongfei Sun (Queen's University); Chenggang Zhou (University of Waterloo); Mei Dong (University of Melbourne) |
| Abstract: | We study the behavior and economic impact of oligopolistic banks in a tractable macro environment with solid micro-foundations for money and banking. Our model has three key features: (i) banks as oligopolists; (ii) liquidity constraint for banks that arises from mismatched timing of payments; and (iii) search frictions in credit, labor and goods markets. Our main ndings are: First, both bank prot and welfare react non-monotonically to the number of banks in equilibrium. Strategic interaction among banks may improve welfare as in standard Cournot competition. Nevertheless, competition among oligopolistic banks does not always improve welfare. As the number of banks rises, each bank has stronger marginal incentives to issue loans, yet each receives a smaller share of the aggregate demand deposit used to make loans. When the number is su¢ ciently high, banks become liquidity constrained in that the amount they lend is limited by the amount of deposits they can gather. In this case, welfare is dampened as banks are forced to reduce lending, which leads to fewer rms getting funded, higher unemployment, and thus ultimately lower output. Second, with entry to the banking sector, there may exist at most three equilibria of the following types: one is stable and Pareto dominates, another is unstable and ranks second in welfare, and the third is stable yet Pareto inferior. The number of banks is the lowest in the equilibrium that Pareto dominates. Finally, ination can change the nature of the equilibrium. Low ination promotes a unique good equilibrium, high ination cultivates a unique bad equilibrium, but medium ination can induce all three equilibria of the aforementioned types. |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed017:191&r=ban |
| By: | Chowdhury, Biplob (Tasmanian School of Business & Economics, University of Tasmania); Jeyasreedharan, Nagaratnam (Tasmanian School of Business & Economics, University of Tasmania); Dungey, Mardi (Tasmanian School of Business & Economics, University of Tasmania) |
| Abstract: | Using high frequency financial data and associated risk decomposition and quantile regression techniques we characterise some stylised facts and relationship(s) between standard betas, diffusion betas and jump betas of individual stocks and portfolios in Japanese market. We then investigate whether the beta in the conventional CAPM is the weighted average of the jump beta and diffusion beta in the jump-diffusion model and how these different betas behave across different banks. Our empirical findings indicate that jump betas are cross-sectionally more dispersed than diffusion and standard betas. We find that the relationship(s) between the three betas are non-linear. We also find that standard betas are influenced more by diffusion betas than the jump betas, although the actual magnitude of the weights differ significantly across the quantile. This relationship holds for both individual stocks and portfolios. Empirical studies have shown that betas vary systematically across large and small firm equities. For large equity portfolios, the jump beta-diffusion beta ratios are lower that the jump betadiffusion beta ratios of the small equity portfolios. Empirically, we further find that the standard CAPM beta is composed of two-components, i.e. it is the weighted average of the diffusion component and the jump component. |
| Keywords: | diffusion beta; jump beta; jump-diffusion beta ratio; quantile regression, Japanese banks |
| JEL: | G12 G19 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:tas:wpaper:23638&r=ban |
| By: | Ivo Krznar; Troy D Matheson |
| Abstract: | Macro-feedback effects have been identified as a key missing element for more effective macro-prudential stress testing. To fill this gap, this paper develops a framework that facilitates the analysis of both the direct effects of macroeconomic shocks on the solvency of individual banks and feedback effects that allow for the amplification and propagation of shocks that can result from bank deleveraging and credit crunches. The framework ensures consistency in the key relationships between macroeconomic and financial variables, and banks’ balance sheets. This is accomplished by embedding a standard stress-testing framework based on individual banks’ data in a semi-structural macroeconomic model. The framework has numerous applications that can strengthen stress testing and macro financial analysis. Moreover, it provides an avenue for many extensions that address the challenges of incorporating other second-round effects important for comprehensive systemic risk analysis, such as interactions between solvency, liquidity and contagion risks. To this end, the paper presents some preliminary simulations of feedback effects arising from the link between the liquidity and solvency risk. |
| Date: | 2017–06–30 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:17/149&r=ban |
| By: | Baranova, Yuliya (Bank of England); Liu, Zijun (Bank of England); Shakir, Tamarah (Bank of England) |
| Abstract: | We develop a model of dealer intermediation in bond markets that takes account of how changing regulatory requirements for banks since the financial crisis, in particular, the introduction of minimum leverage ratio requirements, affect the cost and ability of dealer banks to provide intermediation services. The framework considers two distinct dealer functions: that of provider of repo financing (to prospective bond market participants) and that of market-maker. The cost and ability of dealers to provide these services under different regulatory constraints determines the price impact of a given trade on the market — or the level of ‘market liquidity premia’. In the model the impact on market liquidity varies for different levels of market volatility or ‘stress’. We find that under normal market conditions estimates of corporate bond liquidity risk premia are higher under the new regulations, but also that corporate bond market liquidity is more resilient due to better-capitalised dealers continuing to intermediate markets under higher levels of market stress than pre-crisis. Mapping these changes in liquidity premia to GDP, via their impact on the cost of borrowing for corporates in the real economy, the results of the model suggest that under normal market conditions there may be a greater cost of regulation via corporate bond markets than incorporated in earlier studies. However, once offset against the benefits of greater dealer resilience, including the benefits to market functioning, there remain net benefits to new regulations. |
| Keywords: | Regulation; market liquidity; dealer intermediation; corporate bonds; cost-benefit analysis |
| JEL: | G12 G23 G24 G29 |
| Date: | 2017–07–14 |
| URL: | http://d.repec.org/n?u=RePEc:boe:boeewp:0665&r=ban |
| By: | Link, Thomas; Neyer, Ulrike |
| Abstract: | This paper proposes rules for the control of interbank rate volatility under different interest corridor systems when volatility stems from interbank market frictions. Friction-induced volatility will occur if there is heterogeneity in two dimensions (across banks and time) with respect to the degree to which frictions change the relative attractiveness of banks' outside options to using the interbank market. Under a "floor" or "ceiling operating system" (asymmetric scheme), friction-induced volatility can be controlled by implementing a relatively wide interest corridor - which is the inversion of the traditional principle. Under a "standard corridor system" (symmetric scheme), the systematic control of friction-induced interbank rate volatility can never be achieved through corridor width adjustments but requires a switch to an asymmetric corridor scheme. |
| Keywords: | interbank market,monetary policy implementation,interest corridor,floor operating system,transaction costs,excess reserves |
| JEL: | E52 E58 G21 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:dicedp:259&r=ban |
| By: | Miho Sunaga (Graduate School of Economics, Osaka University) |
| Abstract: | I introduce nancial market friction into a neoclassical growth model. I consider a moral hazard problem between bankers and workers in the macroeconomic model. Using the model, this study analyzes how capital adequacy requirements for banks affect the economy. I show that strengthening capital adequacy requirements is desirable for an economy whose nancial market has not developed sufficiently. Regulatory authorities should pull up the minimum capital adequacy ratio in a country whose nancial market has not developed sufficiently. Moreover, there is no need to change the minimum cap- ital adequacy ratio in a country whose nancial market has developed sufficiently even if the economy experiences a recession. |
| Keywords: | Capital adequacy requirements; Economic Growth; Financial Intermedi- aries; Macro-prudential policies |
| JEL: | E44 G21 G28 |
| Date: | 2017–07 |
| URL: | http://d.repec.org/n?u=RePEc:osk:wpaper:1721&r=ban |
| By: | Sebastian Di Tella |
| Abstract: | I characterize the optimal financial regulation policy in an economy where financial intermediaries trade capital assets on behalf of households, but must retain an equity stake to align incentives. Financial regulation is necessary because intermediaries cannot be excluded from privately trading in capital markets. They don’t internalize that high asset prices force everyone to bear more risk. The socially optimal allocation can be implemented with a tax on asset holdings. I derive a sufficient statistic for the externality/optimal policy in terms of observable variables, valid for heterogenous intermediaries and asset classes, and arbitrary aggregate shocks. I use market data on leverage and volatility of intermediaries’ equity to measure the externality, which co-moves with the business cycle. |
| JEL: | E44 G01 |
| Date: | 2017–07 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:23586&r=ban |
| By: | Andrea Attar (DEF & CEIS, Università di Roma Tor Vergata and Toulouse School of Economics (CRM, IDEI)); Catherine Casamatta (Toulouse School of Economics (CRM, IDEI)); Arnold Chassagnon (Université de Tours and Paris School of Economics); Jean Paul Décamps (Toulouse School of Economics (CRM, IDEI)) |
| Abstract: | We study a capital market in which multiple lenders sequentially attempt at financing a single borrower under moral hazard. We show that restricting lenders to post take-it-or-leave-it offers involves a severe loss of generality: none of the equilibrium outcomes arising in this scenario survives if lenders offer menus of contracts. This result challenges the approach followed in standard models of multiple lending. From a theoretical perspective, we offer new insights on equilibrium robustness in sequential common agency games. |
| Keywords: | Multiple Lending, Menus, Strategic Default, Common Agency, Bank Competition |
| JEL: | D43 D82 G33 |
| Date: | 2017–07–11 |
| URL: | http://d.repec.org/n?u=RePEc:rtv:ceisrp:409&r=ban |
| By: | Garcia, Alfredo Daniel; Szybisz, Martin Andres |
| Abstract: | We consider a developed economy banking system, that, when surpass certain size, may destabilize and even enter in chaos. Taking Deposits (D_t), Reserves (R_t), Loans (L_t), the ratio of (R_t) to (D_t) and a parameter γ that weights endogenously the system memory, we analyse stability and the possibility of chaos. Using data for the U.S. between 1960 and 2012 we found that a maximum instability state is verified in 2008 when the crisis hits the U.S. banking system core carrying to a public bailout. A larger system does not necessarily lead to robustness but can expand to greater fragility. A proposed banking system stability indicator is also analysed. |
| Keywords: | Banking System, Financial Crises, Instability, Systemic Risk |
| JEL: | G01 |
| Date: | 2017–06–15 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:80195&r=ban |