nep-ban New Economics Papers
on Banking
Issue of 2017‒09‒10
sixteen papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Credit Growth and the Financial Crisis: A New Narrative By Stefania Albanesi; Giacomo DeGiorgi; Jaromir Nosal
  2. The Distance Effect in Banking and Trade By Michael Brei; Goetz von Peter
  3. Global banking and the conduct of macroprudential policy in a monetary union By Jean-Christophe Poutineau; Gauthier Vermandel
  4. Determinants of Microfinance institutions' access to bank credit in Senegal By François-Seck Fall
  5. Finance and Inequality : The Distributional Impacts of Bank Credit Rationing By M. Ali Choudhary; Anil K. Jain
  6. Fines for misconduct in the banking sector: What is the situation in the EU? By Götz, Martin R.; Tröger, Tobias H.
  7. Credit from the Monopoly Bank By Yvan Lengwiler; Kumar Rishabh
  8. Competition and prudential regulation By Fisher, Paul; Grout, Paul
  9. Counterparty Credit Risk in OTC Derivatives under Basel III By Mabelle Sayah
  10. Bank consolidation and financial stability revisited: Evidence from Indonesia By Inka Yusgiantoro; Wahyoe Soedarmono; Amine Tarazi
  11. External Liabilities, Domestic Institutions and Banking Crises in Developing Economies By Boukef Jlassi, Nabila; Hamdi, Helmi; Joyce, Joseph
  12. Capital Requirements and Bailouts By Perri, Fabrizio; Stefanidis, Georgios
  13. Bail-ins and Bail-outs: Incentives, Connectivity, and Systemic Stability By Benjamin Bernard; Agostino Capponi; Joseph E. Stiglitz
  14. The Complexity of Bank Holding Companies: A Topological Approach By Mark D. Flood; Dror Y. Kenett; Robin L. Lumsdaine; Jonathan K. Simon
  15. How Have Banks Been Managing the Composition of High-Quality Liquid Assets? By Jane E. Ihrig; Edward Kim; Ashish Kumbhat; Cindy M. Vojtech; Gretchen C. Weinbach
  16. Diversification benefits under multivariate second order regular variation By Bikramjit Das; Marie Kratz

  1. By: Stefania Albanesi (University of Pittsburgh); Giacomo DeGiorgi (GSEM-University of Geneva); Jaromir Nosal (Boston College)
    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.
    Keywords: subprime debt, housing boom, housing crisis
    JEL: D14 E21 G21
    Date: 2017–08
  2. By: Michael Brei; Goetz von Peter
    Abstract: The empirical gravity literature finds geographical distance to be a large and growing obstacle to trade, contradicting the popular notion that globalization heralds "the end of geography". This distance puzzle disappears, however, when measuring the effect of cross-border distance relative to that of domestic distance (Yotov, 2012). We uncover the same result for banking when comparing cross-border positions with domestic credit, using the most extensive dataset on global bank linkages between countries. The role of distance remains substantial for trade as well as for banking where transport cost is immaterial - pointing to the role of information frictions as a common driver. A second contribution is to show that the forces of globalization are also evident in other, less prominent, parts of the gravity framework.
    Keywords: globalization, gravity framework, distance, international trade, international banking
    JEL: F14 F34 G21
    Date: 2017–08
  3. By: Jean-Christophe Poutineau (CREM - Centre de Recherche en Economie et Management - UNICAEN - Université Caen Normandie - UR1 - Université de Rennes 1 - CNRS - Centre National de la Recherche Scientifique); Gauthier Vermandel (LEDa - Laboratoire d'Economie de Dauphine - Université Paris-Dauphine)
    Abstract: This paper questions the role of cross-border lending in the definition of national macroprudential policies in the European Monetary Union. We build and estimate a two-country DSGE model with corporate and interbank cross-border loans, Core-Periphery diverging financial cycles and a national implementation of coordinated macroprudential measures based on Countercyclical Capital Buffers. We get three main results. First, targeting a national credit-to-GDP ratio should be favored to federal averages as this rule induces better stabilizing performances in front of important divergences in credit cycles between core and peripheral countries. Second, policies reacting to the evolution of national credit supply should be favored as the transmission channel of macroprudential policy directly impacts the marginal cost of loan production and, by so, financial intermediaries. Third, the interest of lifting up macroprudential policymaking to the supra-national level remains questionable for admissible value of international lending between Eurozone countries. Indeed, national capital buffers reacting to the union-wide loan-to-GDP ratio only lead to the same stabilization results than the one obtained under the national reaction if cross-border lending reaches 45%. However, even if cross-border linkages are high enough to justify the implementation of a federal adjusted solution, the reaction to national lending conditions remains remarkably optimal.
    Keywords: Macroprudential policy, Global banking, International business cycles, Euro area
    Date: 2017
  4. By: François-Seck Fall (LEREPS - Laboratoire d'Etude et de Recherche sur l'Economie, les Politiques et les Systèmes Sociaux - UT1 - Université Toulouse 1 Capitole - UT2 - Université Toulouse 2 - Institut d'Études Politiques [IEP] - Toulouse - ENFA - École Nationale de Formation Agronomique - Toulouse-Auzeville)
    Abstract: The financial relationship between banks and microfinance institutions (MFIs) is a key element of the debate on establishing accessible financial systems in sub-Saharan countries. Today, MFIs face strong and growing pressure in terms of resources, especially due to an increasing demand for funding, both in number and volumes. However, there is virtually no academic literature on refinancing between banks and MFIs. Also, the existing empirical literature on microfinance access to external funding has to some extend neglected the importance of bank financing funds, focusing more on international external funds. The purpose of this paper is to analyze the access of MFIs to external funds from the local banking system. Specifically, we examine the link between an MFI's access to Banks funding and its maturity and performance. From a panel of 156 Senegalese MFIs, we have created a fixed-effects model to help explain the influence of key variables (MFI size, profitability, risk, etc.) on an MFI's ability to raise funds from the local banking system. The results show that bank financing generally benefit large MFIs, those with significant tangible assets and with a high quality portfolio. Profitability does not seem to be a key determinant of MFI's access to bank funding. However, the funds deposited by microfinance organizations in banks act as a financing guarantee and strongly help MFIs to raise funds from local commercial banks.
    Keywords: Banking,Microfinance,Refinancing,Financial Cooperation,Panel model,Senegal
    Date: 2017–06–11
  5. By: M. Ali Choudhary; Anil K. Jain
    Abstract: We analyze reductions in bank credit using a natural experiment where unprecedented flooding differentially affected banks that were more exposed to flooded regions in Pakistan. Using a unique dataset that covers the universe of consumer loans in Pakistan and this exogenous shock to bank funding, we find two key results. First, banks disproportionately reduce credit to new and less-educated borrowers, following an increase in their funding costs. Second, the credit reduction is not compensated by relatively more lending by less-affected banks. The empirical evidence suggests that adverse selection is the primary cause for banks disproportionately reducing credit to new borrowers.
    Keywords: Credit markets ; Capital ; Liquidity ; Financial stability ; Inequality ; Adverse selection ; Relationships
    JEL: G21 G28 O16
    Date: 2017–08–31
  6. By: Götz, Martin R.; Tröger, Tobias H.
    Abstract: Bank regulators have the discretion to discipline banks by executing enforcement actions to ensure that banks correct deficiencies regarding safe and sound banking principles. We highlight the trade-offs regarding the execution of enforcement actions for financial stability. Following this we provide an overview of the differences in the legal framework governing supervisors' execution of enforcement actions in the Banking Union and the United States. After discussing work on the effect of enforcement action on bank behaviour and the real economy, we present data on the evolution of enforcement actions and monetary penalties by U.S. regulators. We conclude by noting the importance of supervisors to levy efficient monetary penalties and stressing that a division of competences among different regulators should not lead to a loss of efficiency regarding the execution of enforcement actions.
    Keywords: financial stability,banking supervision,banking regulation,bank sanctions,monetary penalties
    Date: 2017
  7. By: Yvan Lengwiler; Kumar Rishabh (University of Basel)
    Abstract: We establish that a monopoly bank never uses collateral as a screening device. A pooling equilibrium always exists in which all borrowers pay the same interest rate and put zero collateral. Absence of screening leads to socially inefficient lending in the sense that some socially productive firms are denied credit due to excessively high interest rate.
    Keywords: Monopoly bank, credit, contracts, screening, pooling, collateral
    JEL: G21 D82 L12 D00
    Date: 2017
  8. By: Fisher, Paul (PRA); Grout, Paul (Bank of England)
    Abstract: In 2014 the Prudential Regulation Authority, Bank of England, was given a new secondary objective to facilitate effective competition when it advances its primary objectives related to safety and soundness and policyholder protection. Given the concerns around conflict between competition and stability, there has been considerable interest in the new objective. After discussing the precise form of the competition objective and its background, we consider how best it should be interpreted and implemented. Amongst other points we argue that (i) secondary objectives should be seen as mechanisms for forcing, or at least encouraging, co-ordination across agencies and therefore such objectives have a significant role to play in this context, (ii) that time and proportionality are the key dimensions that provide discretion to pursue primary and secondary objectives, (iii) that there is nothing overtly special about competition as a second best tool when it comes to mitigating risk in the absence of good prudential regulation, and (iv) if prudential regulation is set at the same time that the competition objective is ‘in play’, then the conflict between stability and competition tends to disappear, although some ‘tension’ remains at the margins.
    Keywords: Competition; stability; prudential regulation
    JEL: G02 G28
    Date: 2017–09–01
  9. By: Mabelle Sayah (Université Claude Bernard Lyon 1, UCBL, Faculte des Sciences - Universite Saint Joseph - USJ - Université Saint-Joseph de Beyrouth)
    Abstract: Recent financial crises were the root of many changes in regulatory implementations in the banking sector. Basel previously covered the default capital charge for counterparty exposures however, the crisis showed that more than two third of the losses related to this risk emerged from the exposure to the movement of the counterparty's credit quality and not its actual default therefore, Basel III divided the required counterparty risk capital into two categories: The traditional default capital charge and an additional counter-party credit valuation adjustment (CVA) capital charge. In this article, we explain the new methodologies to compute these capital charges on the OTC market: The standardized approach for default capital charge (SA-CCR) and the basic approach for CVA (BA-CVA). Based on historical calibration and future estimations, we built internal models in order to compare them with the amended standardized approach. Up till June 2015, interest rate and FX derivatives constituted more than 90% of the traded total OTC notional amount; we constructed our application on such portfolios containing and computed their total counterparty capital charge. The analysis reflected different impacts of the netting and collateral agreements on the regulatory capital depending on the instruments' typologies. Moreover, results showed an important increase in the capital charge due to the CVA addition doubling it in some cases.
    Keywords: Basel III,Counterparty Credit Risk,SA-CCR,CVA,OTC Derivatives
    Date: 2016–12–30
  10. By: Inka Yusgiantoro (Otoritas Jasa Keuangan (Indonesia Financial Services Authority)); Wahyoe Soedarmono (Faculty of Business - Sampoerna University); Amine Tarazi (LAPE - Laboratoire d'Analyse et de Prospective Economique - UNILIM - Université de Limoges - IR SHS UNILIM - Institut Sciences de l'Homme et de la Société)
    Abstract: This paper extends prior literature on the link between consolidation and stability in banking using a single country setting. From a sample of Indonesian commercial banks over the 2010-2015 time span, we construct the Lerner index as a measure of bank market power due to consolidation. Our empirical results document that higher bank market power tends to reduce insolvency risk and increase capital ratios. A deeper analysis however reveals that higher market power is detrimental for financial stability in state-owned banks and small private-owned banks. We therefore highlight that although consolidation among state-owned banks reduces cost inefficiency as in Hadad et al. (2013), further efforts to reduce state-owned banks' market power are necessary after consolidation. This paper also suggests that strengthening market power in large private-owned banks, but encouraging competition in small private-owned banks to reduce market power, are of particular importance for financial stability.
    Keywords: Indonesian banking,size,financial stability,Consolidation,ownership type
    Date: 2017
  11. By: Boukef Jlassi, Nabila; Hamdi, Helmi; Joyce, Joseph
    Abstract: We investigate the impact of foreign equity and debt on the occurrence of banking crises in 61 lower-income and middle-income economies during the 1984-2010 period. We also focus on the effects of domestic institutions on banking crises and whether they mitigate or exacerbate the impact of the external liabilities. We find that FDI liabilities lower the probability of a crisis, while debt liabilities increase their incidence. However, institutions that lower financial or political risk partially offset the impact of debt liabilities, as does government stability. A decrease in investment risk directly reduces the incidence of banking crises.
    Keywords: banking crises, FDI, portfolio, debt, institutions
    JEL: F32 F34 G15 G21
    Date: 2016–05–24
  12. By: Perri, Fabrizio (Federal Reserve Bank of Minneapolis); Stefanidis, Georgios (Federal Reserve Bank of Minneapolis)
    Abstract: We use balance sheet data and stock market data for the major U.S. banking institutions during and after the 2007-8 financial crisis to estimate the magnitude of the losses experienced by these institutions because of the crisis. We then use these estimates to assess the impact of the crisis under alternative, and higher, capital requirements. We find that substantially higher capital requirements (in the 20% to 30% range) would have substantially reduced the vulnerability of these financial institutions, and consequently they would have significantly reduced the need of a public bailout.
    Keywords: Financial crises; Too big to fail
    JEL: G01 G21
    Date: 2017–08–31
  13. By: Benjamin Bernard; Agostino Capponi; Joseph E. Stiglitz
    Abstract: This paper develops a framework to analyze the consequences of alternative designs for interbank networks, in which a failure of one bank may lead to others. Earlier work had suggested that, provided shocks were not too large (or too correlated), denser networks were preferred to more sparsely connected networks because they were better able to absorb shocks. With large shocks, especially when systems are non-conservative, the likelihood of costly bankruptcy cascades increases with dense networks. Governments, worried about the cost of bailouts, have proposed bail-ins, where banks contribute. We analyze the conditions under which governments can credibly implement a bail-in strategy, showing that this depends on the network structure as well. With bail-ins, government intervention becomes desirable even for relatively small shocks, but the critical shock size above which sparser networks perform better is decreased; with sparser networks, a bail-in strategy is more credible.
    JEL: D85 E44 G21 G28 L14
    Date: 2017–08
  14. By: Mark D. Flood; Dror Y. Kenett; Robin L. Lumsdaine; Jonathan K. Simon
    Abstract: Large bank holding companies (BHCs) are structured into intricate ownership hierarchies involving hundreds or even thousands of legal entities. Each subsidiary in these hierarchies has its own legal form, assets, liabilities, managerial goals, and supervisory authorities. In the event of BHC default or insolvency, regulators may need to resolve the BHC and its constituent entities. Each entity individually will require some mix of cash infusion, outside purchase, consolidation with other subsidiaries, legal guarantees, and outright dissolution. The subsidiaries are not resolved in isolation, of course, but in the context of resolving the consolidated BHC at the top of the hierarchy. The number, diversity, and distribution of subsidiaries within the hierarchy can therefore significantly ease or complicate the resolution process. We propose a set of related metrics intended to assess the complexity of the BHC ownership graph. These proposed metrics focus on the graph quotient relative to certain well identified partitions on the set of subsidiaries, such as charter type and regulatory jurisdiction. The intended measures are mathematically grounded, intuitively sensible, and easy to implement. We illustrate the process with a case study of one large U.S. BHC.
    JEL: C02 C81 D85 G21 G28 G3 L22
    Date: 2017–08
  15. By: Jane E. Ihrig; Edward Kim; Ashish Kumbhat; Cindy M. Vojtech; Gretchen C. Weinbach
    Abstract: Leading up to 2014, banks generally increased their holdings of excess reserves as they moved to become compliant with the liquidity coverage ratio (LCR) requirement. However, once the LCR requirement was met, some banks shifted the compositions of their high-quality liquid assets (HQLA), reducing shares of reserves and increasing shares of Treasury securities and certain mortgage-backed securities (MBS). This raises the question: For a given stock of HQLA, what is its optimal composition? We use standard optimal portfolio theory to benchmark the ideal composition of a given stock of HQLA and find that a range of "optimal" HQLA portfolios is plausible depending on banks' tolerance for risk. A bank that is highly risk averse (inclined) prefers a relatively large share of reserves (MBS). Of course, the LCR is not the only constraint on banks' operations. We discuss how other factors interact with the LCR, and then examine the data for individual BHCs to show that they are currently employing a range of approaches to managing the compositions of their HQLA. In addition, we find that the pattern of dispersion in the daily variance of banks' HQLA shares supports the view that such factors are important drivers of banks' management of HQLA. Finally, we discuss possible policy implications of our results regarding the Federal Reserve's longer-run implementation of monetary policy.
    Keywords: CAPM ; HQLA ; LCR ; Bank balance sheets ; Liquid assets ; Liquidity management ; Reserve balances
    JEL: E51 E58 G21 G28
    Date: 2017–08–30
  16. By: Bikramjit Das (Singapore University of Technology and Design - parent); Marie Kratz (ESSEC Business School - Essec Business School)
    Abstract: We analyze risk diversifi cation in a portfolio of heavy-tailed risk factors under the assumption of second order multivariate regular variation. Asymptotic limits for a measure of diversifi cation benefi t are obtained when considering, for instance, the value-at-risk . The asymptotic limits are computed in a few examples exhibiting a variety of different assumptions made on marginal or joint distributions. This study ties up existing related results available in the literature under a broader umbrella.
    Keywords: asymptotic theory,diversi cation bene t,heavy tail,risk concentration,second order regular variation,value-at-risk
    Date: 2017–04

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