nep-ban New Economics Papers
on Banking
Issue of 2017‒08‒06
twenty-one papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. The interplay between quantitative easing and risk: the case of the Japanese banking By Emmanuel C. Mamatzakis; Anh N. Vu
  2. Back to the Future: Backtesting Systemic Risk Measures during Historical Bank Runs and the Great Depression By Brownlees, Christian; Chabot, Ben; Ghysels, Eric; Kurz, Christopher
  3. Making Money: Commercial Banks, Liquidity Transformation and the Payment System By Christine Parlour
  4. Contagion During the Initial Banking Panic of the Great Depression By Erik Heitfield; Gary Richardson; Shirley Wang
  5. Specialization in Bank Lending: Evidence from Exporting Firms By Daniel Paravisini; Veronica Rappoport; Philipp Schnabl
  6. Multiple lending, credit lines and financial contagion By Cappelletti, Giuseppe; Mistrulli, Paolo Emilio
  7. Equilibrium Theory of Banks' Capital Structure By Piero Gottardi; Douglas Gale
  8. Financial Repression in the European Sovereign Debt Crisis By Becker, Bo; Ivashina, Victoria
  9. Implications for banking stability and welfare under capital shocks and countercyclical requirements By BEKIROS, Stelios; NILAVONGSE, Rachatar; UDDIN, Gazi Salah
  10. A top-down stress testing framework for the Dutch banking sector By Tijmen Daniëls; Patty Duijm; Franka Liedorp; Dimitris Mokas
  11. Measuring Competition in the Banking Sector of Pakistan: An Application of Boone Indicator By Mahmood ul Hasan Khan; Muhammad Nadim Hanif
  12. Fiscal policy effects on non-performing loan formation By Vasilis Siakoulis
  13. A Formal Test of Competition in the Banking Sector of Pakistan: An Application of PR-H Statistic By Mahmood ul Hasan Khan; Muhammad Nadim Hanif
  14. When to Lean Against the Wind By Richter, Björn; Schularick, Moritz; Wachtel, Paul
  15. Competition and Bank Fragility By Marsh, Blake; Sengupta, Rajdeep
  16. Banks' Liquidity Management and Systemic Risk By E. Panetti; LG Deidda
  17. Regulating Household Leverage By Stephanie Johnson; John Mondragon; Anthony DeFusco
  18. Bank Consolidation and Efficiency: an Empirical Study from India By Kollapuri M
  19. Determinants of Repo Haircuts and Bankruptcy By Jean-Marc Bottazzi; Mario Pascoa; Guillermo Ramirez
  20. Capital Controls, Macroprudential Regulation, and the Bank Balance Sheet Channel By Shigeto Kitano; Kenya Takaku
  21. The Transactions Demand for Paper and Digital Currencies By Koichiro Kamada

  1. By: Emmanuel C. Mamatzakis (University of Sussex); Anh N. Vu (University of Sussex)
    Abstract: The Japanese banking industry is an interesting one, given chronic problems related to notorious non-performing loans, originated back in the 1990s, but also due to an unprecedented monetary expansion. In this paper, we focus on the impact of quantitative easing on bank level risk, while controlling for bank competition. We opt for a measure of bank specific risk-taking based on a new data set of bankrupt and restructured loans. Given issues related to endogeneity among the main variables, we adopt dynamic panel threshold and panel vector autoregression analyses that address such criticism. Results demonstrate that quantitative easing reduces bankrupt and restructured loan ratios, though we do not observe a similar impact on bank stability. Given the adoption of negative rates in January 2016 by the Bank of Japan, our study comes is timely and provides insightful implications for future research.
    Keywords: Quantitative easing; bank risk-taking; Japan
    JEL: G21 C23 E52
    Date: 2017–05
  2. By: Brownlees, Christian; Chabot, Ben; Ghysels, Eric; Kurz, Christopher
    Abstract: We evaluate the performance of two popular systemic risk measures, CoVaR and SRISK, during eight financial panics in the era before FDIC insurance. Bank stock price and balance sheet data were not readily available for this time period. We rectify this shortcoming by constructing a novel dataset for the New York banking system before 1933. Our evaluation exercise focuses on assessing whether systemic risk measures were able to detect systemically important financial institutions and to provide early warning signals of aggregate financial sector turbulence. The predictive ability of CoVaR and SRISK is measured controlling for a set of commonly employed market risk measures and bank ratios. We find that CoVaR and SRISK help identifying systemic institutions in periods of distress beyond what is explained by standard risk measures up to six months prior to the panic events. Increases in aggregate CoVaR and SRISK precede worsening conditions in the financial system; however, the evidence of predictability is weaker.
    Keywords: Financial crises; Risk Measures; systemic risk
    JEL: G01 G21 G28 N21
    Date: 2017–07
  3. By: Christine Parlour (UC Berkeley)
    Abstract: We consider the interaction between the roles of a bank as a facilitator of payments in the economy and as a lender. In our model, banks make loans by issuing digital claims to an entrepreneur, who then uses them to pay for inputs. Issuing digital claims has two effects on a bank’s liquidity. First, some of these claims used as payment are cashed in before the project is over, necessitating transfers in the inter-bank market to meet these intermediate liquidity needs. Second, the lending bank must transfer reserves to the other banks when the project is done to settle its claims. Each of these transfers has a cost; the endogenous interest rate in the inter-bank market and a settlement cost for final transfers. These costs, in turn, are frictions that affect bank lending. Banks in our model are strategic. If productivity is similar, a high cost of final transfers leads to a coordination friction and multiple equilibria, with each bank trying to match the average number of digital claims issued by other banks. We consider the effects of financial innovations (i.e., FinTech) on the payments system and show that a reduction in the need for intermediate liquidity can lead to an increase in the inter-bank interest rate, because it also induces each bank to increase its lending. We also show that innovations may shift investments from more productive to less productive regions.
    Date: 2017
  4. By: Erik Heitfield; Gary Richardson; Shirley Wang
    Abstract: The initial banking crisis of the Great Depression has been the subject of debate. Some scholars believe a contagious panic spread among financial institutions. Others argue that suspensions surged because fundamentals, such as losses on loans, drove banks out of business. This paper nests those hypotheses in a single econometric framework, a Bayesian hazard rate model with spatial and network effects. New data on correspondent networks and bank locations enables us to determine which hypothesis fits the data best. The best fitting models are ones incorporating network and geographic effects. The results are consistent with the description of events by depression-era bankers, regulators, and newspapers. Contagion - both interbank and spatial - propelled a panic which healthy banks survived but which forced illiquid and insolvent banks out of operations.
    JEL: C11 C23 C41 E02 N1 N12 N2 N22
    Date: 2017–07
  5. By: Daniel Paravisini; Veronica Rappoport; Philipp Schnabl
    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
    JEL: F14 F34 G21
    Date: 2017–07
  6. By: Cappelletti, Giuseppe; Mistrulli, Paolo Emilio
    Abstract: Multiple lending has been widely investigated from both an empirical and a theoretical perspective. Nevertheless, the implications of multiple lending for the stability of the banking system still need to be understood. By lending to a common set of borrowers, banks are interconnected and then exposed to financial contagion phenomena, even if not directly. In this paper, we investigate a specific type of externality that originates from those borrowers that obtain liquidity from more than one bank. In this case, contagion may occur if a bank hit by a liquidity shock calls in some loans and borrowers then pay them back by drawing money from other banks. We show that, under certain circumstances that make other sources of liquidity unavailable or too costly, multiple lending might be responsible for a large liquidity shortage. JEL Classification: G21, G28
    Keywords: credit lines, financial contagion, interbank market, multiple lending, systemic risk
    Date: 2017–07
  7. By: Piero Gottardi (European University Institute); Douglas Gale (New York University)
    Abstract: We study an environment where the capital structure of banks and firms are jointly determined in equilibrium, so as to balance the benefits of the provision of liquidity services by bank deposits with the costs of bankruptcy. The risk in the assets held by firms and banks is determined by the technology choices by firms and the portfolio diversification choices by banks. We show competitive equilibria are efficient and the equilibrium level of leverage in banks and firms depend on the nature of the shocks affecting firm productivities. When these shocks are co-monotonic, banks optimally choose a zero level of equity. Thus all equity should be in firms, where it does “double duty,†protecting both firms and banks from default. On the other hand, if productivity shocks have an idiosyncratic component, portfolio diversification by banks may be a more effective buffer against these shocks and, in these cases, it may be optimal for banks, as well as firms, to issue equity.
    Date: 2017
  8. By: Becker, Bo; Ivashina, Victoria
    Abstract: At the end of 2013, the share of government debt held by the domestic banking sectors of Eurozone countries was more than twice the amount held in 2007. We show that increased domestic government bond holdings generated a crowding out of corporate lending. We find that loan supply was depressed by these domestic sovereign bonds only during the crisis period (2010-11). The pattern also holds across firms with different relationship banks within a given countries. These findings suggest that sovereign bond holdings negatively impact private capital formation. We show that direct government ownership, as well as government influence through banks' boards of directors, are among the channels used to influence banks.
    Keywords: Credit cycles; financial repression; Sovereign debt
    JEL: G21 G28 G30
    Date: 2017–07
  9. By: BEKIROS, Stelios; NILAVONGSE, Rachatar; UDDIN, Gazi Salah
    Abstract: This paper incorporates anticipated and unexpected shocks to bank capital into a DSGE model with a banking sector. We apply this model to study Basel III countercyclical capital requirements and their implications for banking stability and household welfare. We introduce three different countercyclical capital rules. The first countercyclical capital rule responds to credit to output ratio. The second countercyclical rule reacts to deviations of credit to its steady state, and the third rule reacts to credit growth. The second rule proves to be the most effective tool in dampening credit supply, housing demand, household debt and output fluctuations as well as in enhancing the banking stability by ensuring that banks have higher bank capital and capital to asset ratio. After conducting a welfare analysis we find that the second rule outranks the other ones followed by the first rule, the baseline and the third rule respectively in terms of welfare accumulation.
    Keywords: Banking stability, Basel III, Capital requirements, News shocks, Welfare analysis
    JEL: E32 E44 E52
    Date: 2017
  10. By: Tijmen Daniëls; Patty Duijm; Franka Liedorp; Dimitris Mokas
    Abstract: Stress tests have become an increasingly important tool for macroprudential policy makers and micro-prudential supervisors. DNB has developed an extensive top-down stress test framework to support its macro- and micro-prudential responsibilities. It is used to quantify financial stability assessments, to challenge calculations that banks provide in supervisory stress tests and to reinforce the link between macro risk assessment and micro-prudential actions. This paper explains DNB's topdown stress test framework with a focus on the characteristics of the Dutch banking sector.
    Date: 2017–07
  11. By: Mahmood ul Hasan Khan (State Bank of Pakistan); Muhammad Nadim Hanif (State Bank of Pakistan)
    Abstract: The banking sector of Pakistan has witnessed a notable transformation in its structure and business activities following the implementation of financial sector reforms since the early 1990s. Specifically, the reforms helped transform a repressed financial sector into a market oriented and sound financial sector, predominantly owned and managed by the private sector. How these developments have impacted competition among the banks is still an open question. This study attempts to answer this question with the application of a new approach to measure competition: Boone Indicator of competitiveness. This measure postulates that inefficient firms (banks) in a competitive environment are punished harshly, and there is an output reallocation from inefficient to efficient firms/banks. We have estimated elasticity of market share to marginal costs for 24 banks in Pakistan, using a balanced panel of bank level (annual) data for the year 1996 to 2015. Marginal costs are obtained indirectly by first estimating a translog cost function using earning assets as an output, and cost of financial capital, physical capital and labor as inputs. The estimated Boone Indicator value of negative 0.31 is significant and suggests that inefficient banks have been losing their market share to efficient banks over the estimation period: a reflection of underlying competitive environment. Increasing value of Boone Indicator (in absolute terms) over the period of study suggests that competition among the banks in Pakistan has increased over time.
    Keywords: Boone Indicator, Translog Cost Function, Competition in Banking Sector
    JEL: D40 E50
    Date: 2017–07
  12. By: Vasilis Siakoulis (Bank of Greece)
    Abstract: The fiscal situation in an economy may have a significant impact on the evolution of Non-Performing loans (NPLs). Austerity measures limit the loan servicing capacity of households and businesses (Perotti, 1996) whereas public borrowing accelerates markedly ahead of sovereign debt and banking crisis (Reinhart and Rogof, 2010). We empirically approach the effects of fiscal policy on NPLs employing a global data set for 31 countries covering a fifteen year period. We control also for other macroeconomic factors so as to quantify effects stemming from fiscal policy measures. We employ panel data methodologies since they provide us the means to deal with unobserved country heterogeneity when examining the determinants of asset quality. We also examine the one period ahead forecasting performance of our models in line with the cross sample panel data validating suggestions of Granger and Huang (1997). Our findings imply that, on a global level, when accounting for variables linked to macroeconomic performance such as GDP growth and the unemployment rate, fiscal pressure imposed on the economy, as measured by changes in the cyclically adjusted primary surplus, constitute important determinants of Non-Performing loan formation. Also our specifications provide efficient out-of-sample one-step ahead forecasts combining effectively unobserved country heterogeneity with observed macro and fiscal determinants. Our analysis could be of great interest to policymakers since the assessment of credit risk in the banking sector is a crucial element of macro-prudential policy. In this framework, besides strict macroeconomic performance metrics one should also take into account the fiscal framework when trying to explain the key drivers behind NPL evolution.
    Keywords: Non-Performing Loans; Fiscal Policy; Panel Data
    JEL: C22 C41 G01 G12 G14
    Date: 2017–05
  13. By: Mahmood ul Hasan Khan (State Bank of Pakistan); Muhammad Nadim Hanif (State Bank of Pakistan)
    Abstract: This study explores competition in the banking sector of Pakistan in the context of transformation in its structure and business environment since the implementation of financial sector reforms in the country. Instead of relying on the changes in the market structure indicators (like concentration ratio), we employ widely used Panzar and Rosse H statistic as a formal test of competition. PR-H statistic is estimated by using a balanced panel data comprising 24 commercial banks operating in Pakistan from the year 1996 to 2015. The results suggest that the banking sector of Pakistan exhibits the characteristics of monopolistic and perfectly competitive market structures.
    Keywords: Competition, Banking Market Structure, Panzar and Rosse H statistic
    JEL: C12 D40 E50 G20
    Date: 2017–07
  14. By: Richter, Björn; Schularick, Moritz; Wachtel, Paul
    Abstract: This paper shows that policy-makers can distinguish between good and bad credit booms with high accuracy and they can do so in real time. Evidence from 17 countries over nearly 150 years of modern financial history shows that credit booms that are accompanied by house price booms and a rising loan-to-deposit-ratio are much more likely to end in a systemic banking crisis. We evaluate the predictive accuracy for different classification models and show that the characteristics of the credit boom contain valuable information for sorting the data into good and bad booms. Importantly, we demonstrate that policy-makers have the ability to spot dangerous credit booms on the basis of data available in real time. We also show that these results are robust across alternative specifications and time-periods.
    Keywords: Banking Crisis; Credit Booms; crisis prediction; macroprudential policy
    JEL: E32 E52 G01
    Date: 2017–07
  15. By: Marsh, Blake (Federal Reserve Bank of Kansas City); Sengupta, Rajdeep (Federal Reserve Bank of Kansas City)
    Keywords: Bank lending; Bank regulation; Commercial real estate
    JEL: E44 G21 G28
    Date: 2017–06–01
  16. By: E. Panetti; LG Deidda
    Abstract: We study a novel mechanism to explain the interaction between banks' liquidity management and the emergence of systemic financial crises, in the form of self-fulfilling runs. To this end, we develop an environment where banks offer insurance to their depositors against both idiosyncratic and aggregate real shocks, by holding a portfolio of liquidity and illiquid productive assets. Moreover, banks' asset portfolios and the probability of a depositors' self-fulfilling run are jointly determined via a "global game". We characterize the sufficient conditions under which there exists a unique threshold recovery rate, associated with the early liquidation of the productive assets, below which the banks first employ liquidity and then liquidate, in order to finance depositors' early withdrawals. Ex ante, the banks hold more liquidity than in a full-information economy, where there are no self-fulfilling runs and risk is only due to idiosyncratic and aggregate real shocks.
    Keywords: systemic risk;global games;excess liquidity;bank runs
    Date: 2017
  17. By: Stephanie Johnson (Northwestern University); John Mondragon (Northwestern University); Anthony DeFusco (Northwestern University)
    Abstract: Despite the growing interest in policies that seek to constrain household leverage, there is only limited empirical evidence on how such policies affect the markets they intend to regulate. In this paper, we estimate how a central U.S. policy intended to reduce household leverage in the mortgage market—the Ability-to-Repay/Qualiï¬ ed Mortgage rule—affects the price, quantity, and anticipated performance of credit. Using a difference-in-differences strategy that exploits a policy-induced discontinuity in the legal liability associated with originating certain high-leverage mortgages, we estimate that the Ability-to-Repay/Qualiï¬ ed Mortgage rule led lenders to charge an additional 10-15 basis points per year to originate such loans. For the average affected borrower in our sample, this premium works out to roughly $1,700– 2,600 in additional interest over the typical life of a loan, or as much as $13,000–20,000 if held to maturity. By measuring the amount of bunching and missing mass near the discontinuity separating high- and low-leverage loans, we also estimate that the policy eliminated 2 percent of the affected segment of the market completely and led to a reduction in leverage for another 2.7 percent of loans. These estimates imply that when current exemptions expire and the policy is extended to the entire mortgage market, it will reduce the total volume of purchase mortgage originations by roughly $12 billion per year. Our estimates also suggest that these restrictions on leverage would have only modestly reduced the aggregate default rate during the housing crisis.
    Date: 2017
  18. By: Kollapuri M (Jawaharlal Nehru University)
    Abstract: This paper tries to examine issues of bank consolidation and efficiency for 16 major consolidation deals in India during the period 1995-2013.Using data envelopment analysis (DEA) method of input-oriented efficiency measures and non-parametric median tests and Tobit regression analysis, we find that consolidation improved efficiency in majority of the cases only when pure technical efficiency scores are considered. For overall efficiency and scale efficiency, in majority of the cases there was no significant improvement post consolidation. Further consolidation was a significant determinant for pure technical efficiency but not for overall and scale efficiency. In majority of the cases, the acquirer banks were more efficient than target banks only for pure technical efficiency but not for overall and scale efficiency. Length: 33 pages
  19. By: Jean-Marc Bottazzi (Paris School of Economics, Capula); Mario Pascoa (University of Surrey); Guillermo Ramirez (Nova School of Business and Economics)
    Abstract: Variations in repo haircuts play a crucial role in leveraging (or deleveraging) in security markets, as observed in the two major economic events that happened so far in this century, the US housing bubble that burst into the great recession and the European sovereign debts episode. Repo trades are secured but recourse loans. Default triggers insolvency. Collateral may be temporarily exempt from automatic stay but creditors' nal reimbursement depends on the bankruptcy outcome. We address existence of bankruptcy equilibria, characterize it and infer how haircuts are related to asset or counterparty risks.
    Date: 2017–07
  20. By: Shigeto Kitano (Research Institute for Economics & Business Administration (RIEB), Kobe University, Japan); Kenya Takaku (Faculty of International Studies, Hiroshima City University, Japan)
    Abstract: We develop a sticky price, small open economy model with financial frictions à la Gertler and Karadi (2011), in combination with liability dollarization. An agency problem between domestic financial intermediaries and foreign investors of emerging economies introduces financial frictions in the form of time-varying endogenous balance sheet constraints on the domestic financial intermediaries. We consider a shock that tightens the balance sheet constraint and show that capital controls, the effects of which are rigorously examined as a policy tool for the emerging economies, can be a credit policy tool to mitigate the negative shock.
    Keywords: Capital control; Macroprudential regulation; Financial frictions; Financial intermediaries; Balance sheets; Small open economy; Liability dollarization; DSGE; Welfare
    JEL: E69 F32 F41
    Date: 2017–07
  21. By: Koichiro Kamada (Deputy Director-General, Institute for Monetary and Economic Studies, Bank of Japan (E-mail:
    Abstract: This paper investigates optimal currency choice, particularly the choice between paper and digital currencies, when currency is utilized solely as a medium of exchange. The Baumol-Tobin model of transactions demand for money is extended to derive conditions under which digital currency is preferred to paper currency, taking into consideration the network externality in the choice of currencies. The model is applied to explain potential variations in currency preferences across countries, especially between advanced and developing economies. Also discussed is how the introduction of negative interest rates, currency taxes, and central bank digital currency affect optimal currency choice.
    Keywords: Digital currency, Money demand, Network externality, Negative interest rate, Currency tax
    JEL: E41 E58 E20 P44
    Date: 2017–07

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