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on Banking |
| By: | Alan Morrison; Michalis Vasios; Mungo Wilson; Filip Zikes |
| Abstract: | We present the first micro-level evidence of the transmission of shocks through financial networks. Using the network of credit default swap (CDS) transactions between banks, we identify bank CDS returns attributable to counterparty losses. A bank's own CDS spread increases whenever counterparties from whom it has purchased default protection themselves experience losses. We find no such effect from losses of non-counterparties, nor from counterparties to whom the bank has sold protection. The effect on bank CDS returns through this counterparty loss channel is large relative to the direct effect on a bank's CDS returns from its own trading losses. |
| Keywords: | Contagion ; Counterparty risk ; Credit default swaps ; Networks |
| JEL: | G21 G23 L14 |
| Date: | 2017–08–15 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2017-82&r=ban |
| By: | Massimiliano Caporin (University of Padova); Gisle J. Natvik (BI Norwegian Business School); Francesco Ravazzolo (Free University of Bozen-Bolzano and BI Norwegian Business School); Paolo Santucci de Magistris (Aarhus University and CREATES) |
| Abstract: | We explore the interplay between sovereign and bank credit risk in a setting where Danish authorities first let two Danish banks default rather than bail them out and then left the country's largest bank, Danske Bank, to recapitalize privately. We find that the correlation between bank and sovereign credit default swap (CDS) rates changed with these events, indicating that the non-bailout decisions and recapitalization helped to curb the feedback loop between bank and sovereign risk. Following the non-bailout events, the sensitivity to external shocks declined both for Danske Bank and for Danish sovereign debt, as measured by their CDS connection with CDS rates on the European banking sector. After Danske Bank was recapitalized, its exposure to the European banking sector reappeared, while that did not happen for Danish sovereign debt. This decoupling between CDS rates on sovereign and private bank debt indicates that the non-bailout policies succeeded in breaking the vicious circle generated by the risks on the bank and sovereign debts. Our results are reinforced by the use of an indirect testing approach and by focusing on CDS-quantiles. |
| Keywords: | Bailout expectation, risk, CDS, spillover, quantile regression |
| JEL: | C21 G12 G21 G28 |
| Date: | 2017–07–18 |
| URL: | http://d.repec.org/n?u=RePEc:aah:create:2017-25&r=ban |
| By: | Madaschi, Christophe; Nuevo, Irene Pablos |
| Abstract: | This paper looks at how the profitability of banks in Sweden and Denmark has evolved in the context of negative interest rates. Overall, it finds that profitability has continued to improve, even with negative monetary policy rates. Data and modelbased evidence confirm that the monetary policy transmission to bank lending rates has so far not been impaired, though they point to a downward stickiness in the bank deposit rate. Swedish and Danish banks rely mainly on wholesale funding to finance their activities, and the fall in wholesale funding costs has led to a significant decline in interest expenses, thereby bolstering the resilience of the net interest income margin. All in all, this has created the prerequisites for positive credit supply developments, and possible unintended consequences of negative monetary policy rates, such as a reduction in credit supply, have not materialised. However, according to Sveriges Riksbank and Danmarks Nationalbank, the prevailing low level of interest rates has aggravated financial stability risks stemming from the large exposure of the banking sector to the housing market in both economies, in a context of rapidly rising housing prices and the resultant growing indebtedness of the household sector. JEL Classification: E58 |
| Keywords: | banks’ profitability, monetary policy pass-through |
| Date: | 2017–08 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbops:2017195&r=ban |
| By: | Deli, Yota D.; Hasan, Iftekhar |
| Abstract: | We examine the effect of the full set of bank capital regulations (capital stringency) on loan growth, using bank-level data for a maximum of 125 countries over the period 1998-2011. Contrary to standard theoretical considerations, we find that overall capital stringency only has a weak negative effect on loan growth. In fact, this effect is completely offset if banks hold moderately high levels of capital. Interestingly, the components of capital stringency that have the strongest negative effect on loan growth are those related to the prevention of banks to use as capital borrowed funds and assets other than cash or government securities. In contrast, compliance with Basel guidelines in using Basel- and credit-risk weights has a much less potent effect on loan growth. |
| JEL: | G21 G28 E6 O4 |
| Date: | 2017–08–12 |
| URL: | http://d.repec.org/n?u=RePEc:bof:bofrdp:2017_023&r=ban |
| By: | Thiago Christiano Silva; Michel Alexandre da Silva; Benjamin Miranda Tabak |
| Abstract: | We develop an innovative framework to estimate systemic risk that accounts for feedback effects between the real and financial sectors. We model the feedback effects through successive deterioration of borrowers’ creditworthiness and illiquidity spreading, thus giving rise to a micro-level financial accelerator between firms and banks. We demonstrate that the model converges to a unique fixed point and the key role that centrality plays in shaping the level of amplification of shocks. We also provide a mathematical framework to explain systemic risk variations in time as a function of the network characteristics of economic agents. Finally, we supply empirical evidence on the economic significance of the feedback effects on comprehensive loan-level data of the Brazilian credit register. Our results corroborate the importance of incorporating new contagion channels besides the traditional interbank market in systemic risk models. Our model sheds light on the policy issue regarding risk-weighting of assets that also internalizes the costs of systemic risk |
| Date: | 2017–08 |
| URL: | http://d.repec.org/n?u=RePEc:bcb:wpaper:461&r=ban |
| By: | Gropp, Reint; Radev, Deyan |
| Abstract: | We investigate how solvency and wholesale funding shocks to 84 OECD parent banks affect the lending of 375 foreign subsidiaries. We find that parent solvency shocks are more important than wholesale funding shocks for subsidiary lending. Furthermore, we find that parent undercapitalization does not affect the transmission of shocks, while wholesale shocks transmit to foreign subsidiaries of parents that rely primarily on wholesale funding. We also find that transmission is affected by the strategic role of the subsidiary for the parent and follows a locational, rather than an organizational pecking order. Surprisingly, liquidity regulation exacerbates the transmission of adverse wholesale shocks. We further document that parent banks tend to use their own capital and liquidity buffers first, before transmitting. Finally, we show that solvency shocks have higher impact on large subsidiary banks with low growth opportunities in mature markets. |
| Keywords: | commercial banks,global banks,wholesale shocks,solvency shocks,transmission,internal capital markets |
| JEL: | G01 G21 G28 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:safewp:175&r=ban |
| By: | Matteo Crosignani |
| Abstract: | I develop a model where the sovereign debt capacity depends on the capitalization of domestic banks. Low-capital banks optimally tilt their government bond portfolio toward domestic securities, linking their destiny to that of the sovereign. If the sovereign risk is sufficiently high, low-capital banks reduce private lending to further increase their holdings of domestic government bonds, lowering sovereign yields and supporting the home sovereign debt capacity. The model rationalizes, in the context of the eurozone periphery, the increase in domestic government bond holdings, the reduction of bank credit supply, and the prolonged fragility of the financial sector. |
| Keywords: | Bank Capital ; Bank Credit ; Government Bonds ; Risk-Shifting ; Sovereign Crises |
| JEL: | E44 F33 G21 G28 |
| Date: | 2017–08–16 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2017-84&r=ban |
| By: | Patrick Fève; Olivier Pierrard |
| Abstract: | In this paper, we revisit the role of regulation in a small-scale dynamic stochastic general equilibrium (DSGE) model with interacting traditional and shadow banks. We estimate the model on US data and we show that shadow banking interferes with macro-prudential policies. More precisely, asymmetric regulation causes a leak towards shadow banking which weakens the expected stabilizing effect. A counterfactual experiment shows that a regulation of the whole banking sector would have reduced investment fluctuations by 10% between 2005 and 2015. Our results therefore suggest to base regulation on the economic functions of financial institutions rather than on their legal forms. |
| Keywords: | Shadow Banking, DSGE models, Macro-prudential Policy |
| JEL: | C32 E32 |
| Date: | 2017–07 |
| URL: | http://d.repec.org/n?u=RePEc:bcl:bclwop:bclwp111&r=ban |
| By: | Delis, Manthos D.; Hasan, Iftekhar; Mylonidis, Nikolaos |
| Abstract: | To study the presence of a risk-taking channel in the US, we build a comprehensive dataset from the syndicated corporate loan market and measure monetary policy using different measures, most notably Taylor (1993) and Romer and Romer (2004) residuals. We identify a negative relation between monetary policy rates and bank risk-taking, especially in the run up to the 2007 financial crisis. However, this effect is purely supply-side driven only when using Taylor residuals and an ex ante measure of bank risk-taking. Our results highlight the sensitivity of the potency of the risk-taking channel to the measures of monetary policy innovations. |
| JEL: | G21 G01 E43 E52 |
| Date: | 2017–08–07 |
| URL: | http://d.repec.org/n?u=RePEc:bof:bofrdp:2017_018&r=ban |
| By: | Kazuki Ikeda |
| Abstract: | A decentralized online quantum cash system, called qBitcoin, is given. We design the system which has great benefits of quantization in the following sense. Firstly, quantum teleportation technology is used for coin transaction, which prevents an owner of a coin from keeping the original coin data after sending the coin to another. This was a main problem in systems using classical information and a blockchain was introduced to solve this issue. In qBitcoin, the double-spending problem never happens and its security is guaranteed theoretically by virtue of quantum information theory. Making a bock is time consuming and the system of qBitcoin is based on a quantum chain, instead of blocks. Therefore a payment can be completed much faster than Bitcoin. Moreover we employ quantum digital signature so that it naturally inherits properties of peer-to-peer (P2P) cash system as originally proposed in Bitcoin. |
| Date: | 2017–08 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1708.04955&r=ban |
| By: | Potter, Simon M. (Federal Reserve Bank of New York) |
| Abstract: | Remarks to the Assembly of Governors of the Association of African Central Banks, South African Reserve Bank, Pretoria, South Africa. |
| Keywords: | cross border capital flows; cooperative training arrangements; U.S. dollar correspondent accounts; custody accounts; cross-border payments; fraudulent payment instructions; cybersecurity; Customer Security Program (CSP); SWIFT; BIS Committee on Payments and Market Infrastructures (CPMI) |
| Date: | 2017–08–16 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsp:253&r=ban |
| By: | Gropp, Reint; Radev, Deyan |
| Abstract: | We introduce an innovative approach to measure bank integration, based on the corporate culture of multinational banking conglomerates. The new measure, the Power Index, assesses the prevalence of a language of power and authority in the financial reports of global banks. We employ a two-step approach: as a first step, we investigate whether parent-bank or parent-country characteristics are more important for bank integration. In a second step, we analyze whether bank integration affects the transmission of shocks across borders. We find that the level of integration of global banks is determined by parent-bank-specific factors, as well as by the social centralization in the parent's country: ethnically diverse and linguistically homogenous countries nurture decentralized corporate structures. Political and economic factors, such as corruption, political rights and economic development also affect bank integration. Furthermore, we find that organizational integration affects the transmission of exogenous shocks from parent banks to their subsidiaries: the more centralized a global bank is, the lower the lending of its subsidiaries after a solvency shock. Wholesale shocks do not appear to be transmitted through this channel. Also, past experience with solvency shocks reduces the integration between parents and subsidiaries. |
| Keywords: | global banks,social centralization,bank integration,shocks,transmission |
| JEL: | G01 G21 G28 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:safewp:174&r=ban |