nep-ban New Economics Papers
on Banking
Issue of 2017‒08‒27
sixteen papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Cross-Border Bank Flows and Monetary Policy: Implications for Canada By Ricardo Correa; Teodora Paligorova; Horacio Sapriza; Andrei Zlate
  2. Managing Counterparty Risk in OTC Markets By Christoph Frei; Agostino Capponi; Celso Brunetti
  3. Credit Growth and the Financial Crisis: A New Narrative By Albanesi, Stefania; De Giorgi, Giacomo; Nosal, Jaromir
  4. Concentration of Control Rights in Leveraged Loan Syndicates By Berlin, Mitchell; Nini, Gregory P.; Yu, Edison
  5. The impact of sectoral macroprudential capital requirements on mortgage lending: evidence from the Belgian risk weight add-on By Ferrari, Stijn; Pirovano, Mara; Rovira Kaltwasser, Pablo
  6. The Time-Varying Price of Financial Intermediation in the Mortgage Market By Andreas Fuster; Stephanie H. Lo; Paul S. Willen
  7. Macroprudential Policy and Financing Behaviour in Dual Banking System: Bank-Level Evidence from Indonesia By Zulkhibri, Muhamed; Sakti, Muhammad Rizky Prima
  8. International financial integration, crises, and monetary policy: evidence from the euro area interbank crises By Abbassi, Puriya; Brauning, Falk; Fecht, Falko; Peydro, Jose Luis
  9. Money, banking and financial markets By David Andolfatto; Aleksander Berentsen; Fernando M. Martin
  10. Drivers behind the changes in European banks’ capital ratios: a descriptive analysis By Heynderickx, Wouter; Cariboni, Jessica; Petracco Giudici, Marco
  11. What drives local lending by global banks? By Uluc Aysun; Stefan Avdjiev; Ralf Hepp
  12. Panel Estimation of the Impact of Foreign Banks Presence on Selected Banking Indicators in Macedonia By Ana Mitreska; Sultanija Bojcheva – Terzijan
  13. Improving the forecasts of European regional banks' profitability with machine learning algorithms By Haskamp, Ulrich
  14. Banks in Tax Havens: First Evidence based on Country-by-Country Reporting By Bouvatier, Vincent; Capelle-blancard, Gunther; Delatte, Anne-Laure
  15. Financial Regulation and Shadow Banking: A Small-Scale DSGE Perspective By Fève, Patrick; Pierrard, Olivier
  16. The Decline in Bank-Led Corporate Restructuring in Japan: 1981-2010 By Takeo Hoshi; Satoshi Koibuchi; Ulrike Schaede

  1. By: Ricardo Correa; Teodora Paligorova; Horacio Sapriza; Andrei Zlate
    Abstract: Using the Bank for International Settlements (BIS) Locational Banking Statistics data on bilateral bank claims from 1995 to 2014, we analyze the impact of monetary policy on cross-border bank flows. We find that monetary policy in a source country is an important determinant of cross-border bank flows. In addition, we find evidence in favor of a cross-border portfolio channel that works in parallel with the traditional bank lending channel. As tighter monetary conditions in source countries erode the net worth and collateral values of domestic borrowers, banks reallocate credit away from relatively risky domestic borrowers toward safer foreign counterparties. The cross-border reallocation of credit is more pronounced for source countries with weaker financial sectors that are likely more risk averse. Also, the reallocation is directed toward borrowers in advanced economies, or those in economies with investment-grade sovereign rating. In particular, source countries with tighter monetary policy increase cross-border credit to Canada. Our study highlights the spillovers of domestic monetary policy on foreign credit, which enhances the understanding of the international monetary transmission mechanism through global banks.
    Keywords: Financial Institutions, Monetary Policy
    JEL: F34 F36 G01
    Date: 2017
  2. By: Christoph Frei; Agostino Capponi; Celso Brunetti
    Abstract: We study how banks manage their default risk before bilaterally negotiating the quantities and prices of over-the-counter (OTC) contracts resembling credit default swaps (CDSs). We show that the costly actions exerted by banks to reduce their default probabilities are not socially optimal. Depending on the imposed trade size limits, risk-management costs and sellers' bargaining power, banks may switch from choosing default risk levels above the social optimum to reducing them even below the social optimum. We use a unique and comprehensive data set of bilateral exposures from the CDS market to test the main model implications on the OTC market structure: (i) intermediation is done by low-risk banks with medium credit exposure; (ii) all banks with high credit exposures are net buyers of CDSs, and low-risk banks with low credit exposures are the main net sellers; and (iii) heterogeneity in post-trade credit exposures is higher for riskier banks and smaller for safer banks.
    Keywords: Over-the-counter markets ; Counterparty risk ; Credit default swaps ; Search
    JEL: G11 G12 G21
    Date: 2017–08–15
  3. By: Albanesi, Stefania; De Giorgi, Giacomo; Nosal, Jaromir
    Abstract: A broadly accepted view contends that the 2007-09 financial crisis in the U.S. was caused by an expansion in the supply of credit to subprime borrowers during the 2001- 2006 credit boom, leading to the spike in defaults and foreclosures that sparked the crisis. We use a large administrative panel of credit file data to examine the evolution of household debt and defaults between 1999 and 2013. Our findings suggest an alternative narrative that challenges the large role of subprime credit in the crisis. We show that credit growth between 2001 and 2007 was concentrated in the prime segment, and debt to high risk borrowers was virtually constant for all debt categories during this period. The rise in mortgage defaults during the crisis was concentrated in the middle of the credit score distribution, and mostly attributable to real estate investors. We argue that previous analyses confounded life cycle debt demand of borrowers who were young at the start of the boom with an expansion in credit supply over that period. Moreover, a positive correlation between the concentration of subprime borrowers and the severity of the 2007-09 recession found in previous research may be driven by the high prevalence of young, low education, minority individuals in zip codes with large subprime population.
    Keywords: subprime debt; credit boom; housing crisis; financial crisis
    JEL: D14 E01 E21 G01 G1 G18 G20 G21
    Date: 2017–08
  4. By: Berlin, Mitchell (Federal Reserve Bank of Philadelphia); Nini, Gregory P. (LeBow College of Business, Drexel University;); Yu, Edison (Federal Reserve Bank of Philadelphia)
    Abstract: Corporate loan contracts frequently concentrate control rights with a subset of lenders. In a large fraction of leveraged loans, which typically include a revolving line of credit and a term loan, the revolving lenders have the exclusive right and ability to monitor and renegotiate the financial covenants in the governing credit agreements. Concentration is more common in loans that include nonbank institutional lenders and in loans originated subsequent to the financial crisis, when recognition of bargaining frictions increased. We conclude that concentrated control rights maintain the benefits of lender monitoring and minimize the costs of renegotiation associated with larger and more diverse lending syndicates.
    Keywords: corporate loans; credit agreements; line of credit
    Date: 2017–07–31
  5. By: Ferrari, Stijn; Pirovano, Mara; Rovira Kaltwasser, Pablo
    Abstract: In December 2013 the National Bank of Belgium introduced a sectoral capital requirement aimed at strengthening the resilience of Belgian banks against adverse developments in the real estate market. This paper assesses the impact of this macroprudential measure on mortgage lending. Our results indicate that the sectoral capital requirement on average did not affect IRB banks’ mortgage rates and mortgage loan growth. However, the findings do indicate that IRB banks may have reacted heterogeneously to the introduction of the measure: capital-constrained banks with more exposures to the segment targeted by the additional requirement tended to respond stronger in terms of mortgage lending.
    Keywords: Systemic risk, macroprudential policy, bank capital requirements, real estate.
    JEL: E44 E58 G21 G28
    Date: 2017–08
  6. By: Andreas Fuster; Stephanie H. Lo; Paul S. Willen
    Abstract: The U.S. mortgage market links homeowners with savers all over the world. In this paper, we ask how much of the flow of money from savers to borrowers goes to the intermediaries that facilitate these transactions. Based on a new methodology and a new administrative dataset, we find that the price of intermediation, measured as a fraction of the loan amount at origination, is large—142 basis points on average over the 2008–2014 period. At daily frequencies, intermediaries pass on price changes in the secondary market to borrowers in the primary market almost completely. At monthly frequencies, the price of intermediation fluctuates significantly and is highly sensitive to volume, likely reflecting capacity constraints: a one standard deviation increase in applications for new mortgages leads to a 30–35 basis point increase in the price of intermediation. Additionally, over 2008–2014, the price of intermediation increased about 30 basis points per year, potentially reflecting higher mortgage servicing costs and an increased legal and regulatory burden. Taken together, the sensitivity to volume and the positive trend led to an implicit total cost to borrowers of about $135 billion over this period. Finally, increases in application volume associated with “quantitative easing” (QE) led to substantial increases in the price of intermediation, which attenuated the benefits of QE to borrowers.
    JEL: E44 E52 G21
    Date: 2017–08
  7. By: Zulkhibri, Muhamed (The Islamic Research and Teaching Institute (IRTI)); Sakti, Muhammad Rizky Prima (Islamic Economic Forum for Indonesian Development (ISEFID), Indonesia.)
    Abstract: The loan-to-funding ratio based reserve-requirement (called as RR-LFR) is a macroprudential instrument used by Bank Indonesia to maintain the stability of Indonesian financial system by considering the bank liquidity condition. This paper examines the impact of RR-LFR on financing behaviour in Indonesian dual banking system. The paper uses generalized method of moment estimation (GMM) technique to address the endogeneity of explanatory variables and reduce the possible biases from residual correlation. Using a bank-level data for both Islamic and conventional banks covering the period 2001-2015, we analyze the reaction of bank financing behavior toward RR-LFR policy. The findings indicate that RRLFR is observed to be effective in curtailing financing behaviour of banking institutions. Further, we show that RR-LFR exerts more impacts in managing credit expansion of conventional banks as compared to Islamic banks.
    Keywords: Macroprudential; Dual Banking System; Financing Behaviour; Indonesia; GMM
    JEL: E59 E69 G29
    Date: 2017–03–01
  8. By: Abbassi, Puriya (Deutsche Bundesbank); Brauning, Falk (Federal Reserve Bank of Boston); Fecht, Falko (Frankfurt School of Finance & Management); Peydro, Jose Luis (Universitat Pompeu Fabra)
    Abstract: We analyze how financial crises affect international financial integration, exploiting euro area proprietary interbank data, crisis and monetary policy shocks, and variation in loan terms to the same borrower on the same day by domestic versus foreign lenders. Crisis shocks reduce the supply of crossborder liquidity, with stronger volume effects than pricing effects, thereby impairing international financial integration. On the extensive margin, there is flight to home — but this is independent of quality. On the intensive margin, however, GIPS-headquartered debtor banks suffer in the Lehman crisis, but effects are stronger in the sovereign-debt crisis, especially for riskier banks. Nonstandard monetary policy improves interbank liquidity, but without fostering strong cross-border financial reintegration.
    Keywords: financial integration; financial crises; cross-border lending; monetary policy; euro area sovereign crisis; liquidity
    JEL: E58 F30 G01 G21 G28
    Date: 2017–07–01
  9. By: David Andolfatto; Aleksander Berentsen; Fernando M. Martin
    Abstract: The fact that money, banking, and financial markets interact in important ways seems self-evident. The theoretical nature of this interaction, however, has not been fully explored. To this end, we integrate the Diamond (1997) model of banking and financial markets with the Lagos and Wright (2005) dynamic model of monetary exchange – a union that bears a framework in which fractional reserve banks emerge in equilibrium, where bank assets are funded with liabilities made demandable for government money, where the terms of bank deposit contracts are constrained by the liquidity insurance available in financial markets, where banks are subject to runs, and where a central bank has a meaningful role to play, both in terms of inflation policy and as a lender of last resort. The model provides a rationale for nominal deposit contracts combined with a central bank lender-of-last-resort facility to promote efficient liquidity insurance and a panic-free banking system.
    Keywords: Money, banking, financial markets, monetary policy
    JEL: E50 E60 D53 D02 G21
    Date: 2017–08
  10. By: Heynderickx, Wouter (European Commission – JRC); Cariboni, Jessica (European Commission – JRC); Petracco Giudici, Marco (European Commission – JRC)
    Abstract: After the financial crisis financial regulators increased banks’ capital adequacy ratios (CET1/RWA) requirements in order to make the financial system more resilient. The new capital requirements could be achieved through different channels, some of which might affect bank’s ability to finance the real economy. We perform a decomposition of the changes in capital adequacy ratios into seven factors to check whether banks adjusted their capital ratio by increasing equity, by reducing loans or securities, or by reducing the riskiness of their assets’ portfolio. We employ consolidated balance sheet data of 257 European banking groups including M&A operations and state aid and covering the 2005-2014 period, and find that the main driver alters over time. Our decomposition shows that during the financial crisis the augmentation was mainly driven by new share issuances and government recapitalizations, while during the sovereign crisis a reduction in the RWA-density (RWA/TA) is found. In the post crisis period, we observe a large income effect and a reduction in total assets. Decompositions are also performed at country and major banking group level, showing high heterogeneity in responses to achieve the new requirements.
    Keywords: banks; capital ratio; decomposition; regulation; Basel III
    JEL: G21 G28
    Date: 2016–12
  11. By: Uluc Aysun (University of Central Florida, Orlando, FL); Stefan Avdjiev (Bank for International Settlements, Basel, Switzerland); Ralf Hepp (Fordham University, New York, NY)
    Abstract: We find that the lending behavior of large global banks’ subsidiaries throughout the world is more closely related to local macroeconomic conditions and their financial structure than to their owner-specific counterparts. This inference is drawn from a panel dataset populated with bank-level observations from the Bankscope database. Using this database, we identify ownership structures and incorporate them into a unique methodology that identifies and compares the owner and subsidiary-specific determinants of lending. A distinctive feature of our analysis is that we use multi- dimensional country-level data from the BIS international banking statistics to account for exchange rate fluctuations and cross-border lending
    Keywords: Bankscope; G-SIB; bank-level data; global banks; BIS international banking statistics
    JEL: E44 F32 G15 G21
    Date: 2017–08
  12. By: Ana Mitreska (National Bank of the Republic of Macedonia); Sultanija Bojcheva – Terzijan (National Bank of the Republic of Macedonia)
    Abstract: The latest global financial and economic crisis reignited the debate on the costs and benefits of foreign bank presence. While discussions on the optimal financing model of foreign owned banks are ongoing, the consensus on the benefits of foreign banks presence is not a matter of dispute. Given the large and enduring foreign presence in the Macedonian banking system, we try to empirically test some of the traditional channels of the foreign banks impact on the banking system behaviour. We employ panel estimation method with a pooled mean group estimator. The results do confirm the thesis that foreign banks presence in Macedonia supports the competition in the banking system in the long run, visible through the narrowing of some of the profitability indicators. Yet, what they also suggest is that it happens via rise in the operational costs - commonly result of the new investments of foreign owners in knowledge and technology. On the other hand, the interest income component is positively affected by the change in the foreign banks presence. The findings suggest that the observed trend of falling share of interest income in interest earning assets and falling operational costs, on a long run can be explained by other fundamental factors, rather than the actual dynamics of foreign bank presence. The availability of bank funding is one of those fundamentals, which can explain the adjustment in the interest income, in particular.
    Keywords: foreign banks presence, banking indicators, international investment, panel estimates, pooled mean group estimator
    JEL: C23 F21 G21
    Date: 2017
  13. By: Haskamp, Ulrich
    Abstract: Regional banks as savings and cooperative banks are widespread in continental Europe. In the aftermath of the financial crisis, however, they had problems keeping their profitability which is an important quantitative indicator for the health of a bank and the banking sector overall. We use a large data set of bank-level balance sheet items and regional economic variables to forecast protability for about 2,000 regional banks. Machine learning algorithms are able to beat traditional estimators as ordinary least squares as well as autoregressive models in forecasting performance.
    Keywords: profitability,regional banking,forecasting,machine learning
    JEL: C53 G21
    Date: 2017
  14. By: Bouvatier, Vincent; Capelle-blancard, Gunther; Delatte, Anne-Laure
    Abstract: Since the Great Financial Crisis, several scandals have exposed a pervasive light on banks' presence in tax havens. Taking advantage of a new database, this paper provides a quantitative assessment of the importance of tax havens in international banking activity. Using comprehensive individual country-by-country reporting from the largest banks in the European Union, we provide several new insights: 1) The average effect of being a tax haven is an extra presence of foreign affiliates by 168%; 2) For EU banks, the main tax havens are located within Europe: Luxembourg, Isle of Man and Guernsey rank at the top; 3) Attractive tax rates are not sufficient to drive extra activity; 4) But lenient regulatory environment attract extra commercial presence; 4) Banks avoid the most opaque countries with weak governance; 5) The tax savings for EU banks is estimated between Euro 1 billion and Euro 3.6 billion.
    Keywords: Tax evasion; International banking; Tax havens; Country-by-country reporting
    JEL: F23 G21 H22 H32
    Date: 2017–08
  15. By: Fève, Patrick; Pierrard, Olivier
    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
  16. By: Takeo Hoshi; Satoshi Koibuchi; Ulrike Schaede
    Abstract: Using a unique dataset on all major corporate restructuring events in Japan between 1981 and 2010, we examine how bank-led rescue operations in Japan have changed over time. The incidence of restructuring by distressed firms has become less frequent after the 1990s. When firms undergo restructuring, they adopt real adjustments in terms of labor, assets and finance, but the intensity of these adjustments has also declined over time. In line with existing research, we interpret these findings as strong indicators of changing corporate governance in Japan, in particular in terms of the decline in corporate monitoring functions of main banks.
    JEL: G21 G34
    Date: 2017–08

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