nep-ban New Economics Papers
on Banking
Issue of 2017‒07‒30
seventeen papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Fintech Lending: Financial Inclusion, Risk Pricing, and Alternative Information By Jagtiani, Julapa; Lemieux, Catharine
  2. European Banks Straddling Borders: Risky or Rewarding? By Duijm, Patty; Schoenmaker, Dirk
  3. Specialization in Bank Lending: Evidence from Exporting Firms By Paravisini, Daniel; Philipp, Schnabl; Rappoport, Veronica
  4. The use of large denomination banknotes in Switzerland By Assenmacher, Katrin; Seitz, Franz; Tenhofen, Jörn
  5. Changes in the Cost of Bank Equity and the Supply of Bank Credit By Célérier, Claire; Kick, Thomas; Ongena, Steven
  6. Monetary policy and global banking By Brauning, Falk; Ivashina, Victoria
  7. Retrieving Implied Financial Networks from Bank Balance-Sheet and Market Data By Jose Fique
  8. The Financing of Local Government in China: Stimulus Loan Wanes and Shadow Banking Waxes By Zhuo Chen; Zhiguo He; Chun Liu
  9. Financial Development and Monetary Policy: Loan Applications, Rates, and Real Effects By Abuka, Charles; Alinda, Ronnie; Minoiu, Camelia; Peydró, José Luis; Presbitero, Andrea
  10. Bank Panics with Scale Economies By David Andolfatto
  11. Essays in financial intermediation and political economy By Luo, Mancy
  12. Information Contagion and Systemic Risk By Toni Ahnert; Co-Pierre Georg
  13. Benefits of the retail payments card market: Evidence from Russian merchants By Egor Krivosheya; Andrew Korolev
  14. Using Monetisation Strategy for Share Collateral Management By David Chui
  15. Numeracy and the quality of on-the-job decisions: Evidence from loan officers By Brown, Martin; Kirschenmann, Karolin; Spycher, Thomas
  16. Choice of payment instrument for low-value transactions in Japan By Fujiki, Hiroshi; Tanaka, Migiwa
  17. Asset encumbrance and bank risk: First evidence from public disclosures in Europe By Banal-Estanol, Albert; Benito, Enrique; Khametshin, Dmitry

  1. By: Jagtiani, Julapa (Federal Reserve Bank of Philadelphia); Lemieux, Catharine (Federal Reserve Bank of Chicago)
    Abstract: Fintech has been playing an increasing role in shaping financial and banking landscapes. Banks have been concerned about the uneven playing field because fintech lenders are not subject to the same rigorous oversight. There have also been concerns about the use of alternative data sources by fintech lenders and the impact on financial inclusion. In this paper, we explore the advantages/disadvantages of loans made by a large fintech lender and similar loans that were originated through traditional banking channels. Specifically, we use account-level data from the Lending Club and Y-14M bank stress test data. We find that Lending Club’s consumer lending activities have penetrated areas that could benefit from additional credit supply, such as areas that lose bank branches and those in highly concentrated banking markets. We also find a high correlation with interest rate spreads, Lending Club rating grades, and loan performance. However, the rating grades have a decreasing correlation with FICO scores and debt to income ratios, indicating that alternative data is being used and performing well so far. Lending Club borrowers are, on average, more risky than traditional borrowers given the same FICO scores. The use of alternative information sources has allowed some borrowers who would be classified as subprime by traditional criteria to be slotted into “better” loan grades and therefore get lower priced credit. Also, for the same risk of default, consumers pay smaller spreads on loans from the Lending Club than from traditional lending channels.
    Keywords: fintech; Lending Club; marketplace lending; banking competition; shadow banking; credit spreads; credit performance; P2P lending; peer-to-peer lending
    JEL: G18 G21 G28 L21
    Date: 2017–07–18
  2. By: Duijm, Patty; Schoenmaker, Dirk
    Abstract: Theory suggests that cross-border banking is beneficial as long as there is a non-perfect correlation across country-specific risks. Using a unique hand-collected dataset with cross-border loans for the 61 largest European banks, we find that cross-border banking in general decreases bank risk, and that the beneficial impact from cross-border banking increases when banks diversify more into countries with dissimilar economic and financial conditions. However, we find that banks do not fully utilize these diversification opportunities as banks mainly invest in countries that are economically more similar to their home country.
    Keywords: Bank Regulation; Financial Stability; Geographical Diversification; International Banking; Risk
    JEL: E44 G21 G28
    Date: 2017–07
  3. By: Paravisini, Daniel; Philipp, Schnabl; Rappoport, Veronica
    Abstract: We develop an empirical approach for identifying specialization in bank lending using granular data on borrower activities. We illustrate the approach by characterizing bank specialization by export market, combining bank, loan, and export data for all firms in Peru. We find that all banks specialize in at least one export market, that specialization affects a firm's choice of new lenders and how to finance exports, and that credit supply shocks disproportionately affect a firm's exports to markets where the lender specializes in. Thus, bank market-specific specialization makes credit difficult to substitute, with consequences for competition in credit markets and the transmission of credit shocks to the economy.
    Keywords: Banking; Export Finance; specialization
    Date: 2017–07
  4. By: Assenmacher, Katrin; Seitz, Franz; Tenhofen, Jörn
    Abstract: We study the demand for Swiss banknotes over the period from 1956 to 2015 and present stylized facts on different banknote denominations since the inception of the Swiss National Bank (SNB) in 1907. Employing the so-called seasonal method, we focus on the demand for banknotes used as a store of value (“hoarding”), which can be expected to be particularly relevant for Switzerland against the backdrop of its status as a safe-haven country, its currently and historically low level of interest rates, and a banknote denomination with the largest value among advanced countries. Due to the pronounced seasonal pattern of CHF 1000 banknotes, which might not be related to transactions, we cannot rely on seasonal ranges including the December peak. Instead, we employ other peak dates as well as a method to correct for the excess seasonality, using institutional features of the tax system. The latter approach is not sufficient to eliminate the excess seasonality and thus does not lead to plausible estimates for the hoarding share of CHF 1000 banknotes. Employing other peak dates, however, indicates that since the turn of the millennium the share of CHF 1000 banknotes that is hoarded increased steadily from around 30% in the mid-1990s to over 70% in recent years.
    Keywords: currency in circulation,banknotes,hoarding
    JEL: E41 E52 E58
    Date: 2017
  5. By: Célérier, Claire; Kick, Thomas; Ongena, Steven
    Abstract: Does the relative cost of equity determine the composition of bank balance sheets and credit supply? To answer this question, we exploit the staggered introduction of tax reforms in Europe from 2000 to 2012 as exogenous sources of changes in the cost of equity. We investigate the effect on credit supply using loan-level data in a country where firms are not affected by these reforms, and where foreign banks affected by the reforms are lending actively: Germany. We find that the relative decrease in the cost of equity leads banks to rely more on equity financing and to increase lending to firms while decreasing security and interbank asset holdings. Overall, we show that taxation can be an effective tool to contain bank leverage while maintaining credit supply.
    Keywords: bank capital; credit; regulation
    JEL: E51 E58 G21 G28
    Date: 2017–07
  6. By: Brauning, Falk (Federal Reserve Bank of Boston); Ivashina, Victoria (Harvard Business School)
    Abstract: Global banks use their global balance sheets to respond to local monetary policy. However, sources and uses of funds are often denominated in different currencies. This leads to a foreign exchange (FX) exposure that banks need to hedge. If cross‐currency flows are large, the hedging cost increases, diminishing the return on lending in foreign currency. We show that, in response to domestic monetary policy easing, global banks increase their foreign reserves in currency areas with the highest interest rate, while decreasing lending in these markets. We also find an increase in FX hedging activity and its rising cost, as manifested in violations of covered interest rate parity.
    Keywords: global banks; monetary policy transmission; cross‐border lending
    JEL: E44 E52 F36 G15 G21 G28
    Date: 2016–12–23
  7. By: Jose Fique
    Abstract: In complex and interconnected banking systems, counterparty risk does not depend only on the risk of the immediate counterparty but also on the risk of others in the network of exposures. However, frequently, market participants do not observe the actual network of exposures. I propose an approach that incorporates this network of exposures, among other factors, in a valuation model of credit default swaps. The model-implied spreads are then used to retrieve the set of networks that are consistent with market spreads. The approach is illustrated with an application to the UK banking system.
    Keywords: Financial Institutions, Financial stability
    JEL: C63 D85 G21
    Date: 2017
  8. By: Zhuo Chen; Zhiguo He; Chun Liu
    Abstract: China’s four-trillion-yuan stimulus package fueled by bank loans in 2009 has led to the rapid growth of shadow banking activities in China after 2012. The local governments in China financed the stimulus plan mainly through bank loans in 2009, and resorted to non-bank debt financing after 2012 given the mounting rollover pressure from bank debt coming due, a manifestation of the stimulus-loan-hangover effect. Cross-sectionally, provinces with abnormally greater bank loan growth in 2009 experienced more Municipal Corporate Bonds issuance during 2012-2015, as well as more shadow banking activities including Entrusted loans and Wealth Management Products. We highlight the market forces behind the regulation changes on local government debt post 2012, together with the expedited reform on interest rate liberalization during that period.
    JEL: F62 F63 G23 O16 O17 O53
    Date: 2017–07
  9. By: Abuka, Charles; Alinda, Ronnie; Minoiu, Camelia; Peydró, José Luis; Presbitero, Andrea
    Abstract: The finance-growth literature argues that institutional constraints in developing countries impede financial intermediation and monetary policy transmission. Recent studies using aggregate data document a weak bank lending channel. For identification, we instead exploit Uganda's super- visory credit register, with loan applications and rates, and unanticipated variation in monetary policy. A monetary tightening strongly reduces credit supply - increasing loan application rejections and tightening volume and rates - especially for banks with more leverage and sovereign debt exposure (even within the same borrower-period). There are spillovers on inflation and eco- nomic activity, especially in more financially-developed areas, including on commercial building, trade, and social unrest.
    Keywords: Bank credit; bank lending channel; developing countries; Financial Development; monetary policy; Real effects
    JEL: E42 E44 E52 E58 G21 G28
    Date: 2017–07
  10. By: David Andolfatto (Federal Reserve Bank of St. Louis)
    Abstract: A bank panic is an expectation-driven mass redemption event that results in a self-fulfilling prophecy of losses on demand deposits. We replace sequential service in the Green and Lin (2003) version of the Diamond and Dybvig (1983) model with scale economies in investment opportunities: higher risk-adjusted returns are available for investments that require larger fixed costs. We demonstrate how scale economies and private information are both necessary to generate a bank panic equilibrium. Floating net asset valuation methods---which recent regulations have imposed on some money mutual funds---do not eliminate panics. However, restrictions that resemble redemption gates and fees---also imposed on some money mutual funds---can eliminate panics, albeit at the cost of reduced risk-sharing. The expected cost of eliminating panics, however, falls as banks become larger or more interconnected. Finally, we discuss how our theory is consistent with the notion that a low-interest rate policy induces a reach-for-yield behavior that potentially manifests itself as a less stable financial system.
    Date: 2017
  11. By: Luo, Mancy (Tilburg University, School of Economics and Management)
    Abstract: This thesis consists of three chapters in financial intermediation and political economy. The first chapter studies how investors’ preference for local stocks affects global mutual funds’ investment behaviors, and shows that mutual funds overweight stocks from their client countries (i.e., where funds are sold) to attract investors. The second chapter analyzes the investors’ reaction to political bias in the financial media, and the third chapter investigates the drivers for consolidations in global mutual fund industry.
    Date: 2017
  12. By: Toni Ahnert; Co-Pierre Georg
    Abstract: We examine the effect of ex-post information contagion on the ex-ante level of systemic risk defined as the probability of joint bank default. Because of counterparty risk or common exposures, bad news about one bank reveals valuable information about another bank, triggering information contagion. When banks are subject to common exposures, information contagion induces small adjustments to bank portfolios and therefore increases overall systemic risk. When banks are subject to counterparty risk, by contrast, information contagion induces a large shift toward more prudential portfolios, thereby reducing systemic risk.
    Keywords: Financial Institutions, Financial stability
    JEL: G01 G11 G21
    Date: 2017
  13. By: Egor Krivosheya (Moscow school of management SKOLKOVO); Andrew Korolev (Moscow school of management SKOLKOVO)
    Abstract: This article evaluates merchants' benefits resulting from the participation in the retail payments market. Using surveys to obtain a representative sample of 800 traditional (offline) Russian merchants, the article finds significant, robust evidence in favor of positive merchant' benefits. This study further separates the benefits into direct and opportunity finding that the non-welfare improving regulatory initiatives might result from the failure to account opportunity benefits of merchants. This article also examines the factors affecting the level of merchants' benefits. Results show that factors affecting the value of benefits and the probability to accept payment cards differ. Findings imply that unbalanced intervention may be detrimental to the agents' welfare and propose a mechanism for ex-ante evaluation of the effect of shocks and interventions.
    Keywords: Retail payments; payment cards; merchant?s acceptance; benefits; financial services.
    JEL: G21 E42 D53
    Date: 2017–07
  14. By: David Chui (Hang Seng Management College)
    Abstract: Monetisation is for investors holding a substantial equity position in a listed public company who may either be unable or unwilling to sell the equity position for tax, regulatory or other restrictive reasons such as lock up agreement. As a result of the phenomenal growth in the use and sophistication of derivatives in recent decades, however, such investors now have a highly attractive alternative to a conventional sale: a ?synthetic sale? or an ?equity monetization.? This is akin to a collateralised equity financing.This paper presents a way to model share financing through the modelling of collateral management to reduce the inherent risk exposed to the lender and, by doing so, increase the lending quality at the same time. Through the use of derivatives modelling, the collateralised loan can be structured to embed an equity put option on the underlying share. This equity put serves to compensate the short fall of the loan value and, therefore, a key variable is the required number of shares to be disposed at a particular time in order to recover the loan value.
    Keywords: Share Value, Collateral, Monetisation, Derivatives, Credit Spread, Trigger Level
    Date: 2017–07
  15. By: Brown, Martin; Kirschenmann, Karolin; Spycher, Thomas
    Abstract: We examine how the numeracy level of employees influences the quality of their on-the-job decisions. Based on an administrative dataset of a retail bank we relate the performance of loan officers in a standardized math test to the accuracy of their credit assessments of small business borrowers. We find that loan officers with a high level of numeracy are more accurate in assessing the credit risk of borrowers. The effect is most pronounced during the pre-crisis credit boom period when it is arguably more difficult to pick out risky borrowers.
    Keywords: behavioral banking,numeracy,loan officers,screening
    JEL: G21 J24
    Date: 2017
  16. By: Fujiki, Hiroshi; Tanaka, Migiwa
    Abstract: In this paper, we examine the determinants of the choice of payment instrument for low-value day-to-day transactions. Using Japanese household data from 2007 to 2014, we find that three payment instruments, namely, cash, electronic money, and credit cards, comprise the major payment choices for transactions with values less than 1,000 yen (about 8.7 euros). We also find that high-income, financially sophisticated households in urban areas tend to use both electronic money and cash. Further, family households choosing electronic money and cash do not have higher cash holdings compared with family households exclusively choosing cash, holding all other variables constant. We obtain weak evidence that single-person households choosing electronic money and cash have higher cash holdings compared with single-person households exclusively choosing cash, holding all other variables constant.
    Keywords: cash demand,electronic money
    JEL: E41
    Date: 2017
  17. By: Banal-Estanol, Albert; Benito, Enrique; Khametshin, Dmitry
    Abstract: Asset encumbrance refers to the existence of bank balance sheet assets being subject to arrangements that restrict the bank's ability to freely transfer or realise them. Asset encumbrance has recently become a much discussed subject and policymakers have been actively addressing what some consider to be excessive levels of asset encumbrance. Despite its importance, the phenomenon of asset encumbrance remains poorly understood. We build a novel dataset of asset encumbrance metrics based on information provided in the banks' public disclosures for the very first time throughout 2015. We provide descriptive evidence of asset encumbrance levels by country, credit quality, and business model using different encumbrance metrics. Our empirical results point to the existence of an association between CDS premia and asset encumbrance that is negative, not positive. That is, on average encumbrance is perceived to be beneficial. Still, certain bank-level variables play a mediating role in this relationship. For banks that have high exposures to the central bank, high leverage ratio, and/or are located in southern Europe, asset encumbrance is less beneficial and could even be detrimental in absolute terms.
    Keywords: Asset encumbrance; bank risk; Collateral; credit default swaps
    JEL: G01 G21 G28
    Date: 2017–07

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