nep-ban New Economics Papers
on Banking
Issue of 2017‒09‒17
23 papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Market Discipline Through Credit Ratings and Too-Big-To-Fail in Banking? By Sascha KOLARIC; Florian KIESEL; Steven ONGENA
  2. The International Bank Lending Channel of Monetary Policy Rates and QE: Credit Supply, Reach-for-Yield, and Real Effects By Morais Bernardo; Peydró José-Luis; Roldán-Peña Jessica; Ruiz Claudia
  3. The financial market effects of the ECB's asset purchase programs By Lewis, Vivien; Roth, Markus
  4. Did quantitative easing boost bank lending? The Slovak experience By Adriana Lojschova
  5. The impact of de-tiering in the United Kingdom’s large-value payment system By Benos, Evangelos; Ferrara, Gerardo; Gurrola-Perez, Pedro
  6. Euro area banks' interest rate risk exposure to level, slope and curvature swings in the yield curve By Foos, Daniel; Lütkebohmert, Eva; Markovych, Mariia; Pliszka, Kamil
  7. Re-use of Collateral: Leverage, Volatility, and Welfare By Michael Grill; Karl Schmedders; Felix Kubler; Johannes Brumm
  8. Average Pay in Banks: Do Agency Problems and Bank Performance Matter? By Harkin, Sean M.; Mare, Davide S.; Crook, Jonathan N.
  9. International banking conglomerates and the transmission of lending shocks across borders By Gropp, Reint E.; Radev, Deyan
  10. Have currency-based capital flow management measures curbed international banking flows? By Annamaria de Crescenzio; Marta Golin
  11. Do negative interest rates make banks less safe? By Nucera, Federico; Lucas, André; Schaumburg, Julia; Schwaab, Bernd
  12. Democracy and Credit “Democracy Doesn`t Come Cheap” But At Least Credit to Its Corporations Will Be By Manthos D. DELIS; Iftekhar HASAN; Steven ONGENA
  13. Foreign banks as shock absorbers in the financial crisis ? By Giorgia Barboni
  14. Does Branch Network Size Influence Positively the Management Performance of Japanese Regional Banks? By Kondo, Kazumine
  15. Does Financial Tranquility Call for More Stringent Regulation? By Basak, Deepal; Murray, Alexander; Zhao, Yunhui
  16. The derivatives through the lens of the financial accounts: measurement and analysis By Luigi Infante; Bianca Sorvillo
  17. Socially Disadvantaged Groups and Microfinance in India By Jean-Marie Baland; Rohini Somanathan; Lore Vandewalle
  18. When Prime Depositors Run on the Banks: A Behavioral Approach By Natanael Waraney Gerald Massie; Chaikal Nuryakin
  19. How do Credit Supply Shocks Affect the Real Economy? Evidence from the United States in the 1980s By Atif Mian; Amir Sufi; Emil Verner
  20. Significant ties: Identifying relationship lending in temporal interbank networks By Teruyoshi Kobayashi; Taro Takaguchi
  21. U.S. Savings Banks' Demutualization and Depositor Welfare By Mattia Girotti; Richard Meade
  22. Determinants of Financial Inclusion in Africa: A Dynamic Panel Data Approach By Evans, Olaniyi
  23. Banks in Tax Havens: First Evidence based on Country-by-Country Reporting By Vincent Bouvatier; Gunther Capelle-Blancard; Anne-Laure Delatte

  1. By: Sascha KOLARIC (Technische Universität Darmstadt); Florian KIESEL (Technische Universität Darmstadt); Steven ONGENA (University of Zurich and Swiss Finance Institute)
    Abstract: We assess whether credit ratings help enforce market discipline on banks. We nd that rating downgrades for internal reasons, such as adverse changes in the operating performance or capital structure of the banks, are associated with a significant CDS spread widening, but only for banks that are not perceived to be Too-Big-to-Fail. Our findings question the reliability of credit ratings as a tool to discipline large banks and suggests regulatory monitoring should remain the main mechanism for disciplining these banks.
    Keywords: Credit Ratings, CDS, Too-Big-To-Fail
    JEL: G21 G13 G14
    Date: 2017–03
  2. By: Morais Bernardo; Peydró José-Luis; Roldán-Peña Jessica; Ruiz Claudia
    Abstract: We identify the international credit channel of monetary policy by analyzing the universe of corporate loans in Mexico matched with firm and bank data, and by exploiting foreign monetary policy shocks in a country with a large presence of European and U.S. banks. The robust results show that a softening of foreign monetary policy increases the supply of credit of foreign banks to Mexican firms. Each regional policy shock mainly affects supply via their respective banks, in turn implying strong real effects, with lower elasticities from QE. The impact of low foreign monetary policy rates and expansive QE is stronger on local borrowers with higher ex-ante loan rates -reach-for-yield- and with higher ex-post loan defaults, thus suggesting an international risk-taking channel of monetary policy. All in all, the results suggest spillovers of core-countries´ monetary policies on emerging markets, both in the foreign monetary softening and tightening part.
    Keywords: Monetary policy;financial globalization;quantitative easing (QE);credit supply;risk-taking;foreign banks
    JEL: E52 E58 G01 G21 G28
    Date: 2017–09
  3. By: Lewis, Vivien; Roth, Markus
    Abstract: The European Central Bank's asset purchase programs, while intended to stabilize the economy, may have unintended side effects on financial stability. This paper aims at gauging the effects on financial markets, the banking sector, and lending to non-financial firms. Using a structural vector autoregression analysis, we find both in the euro area and in Germany a positive effect on output, while prices do not respond significantly. Asset purchases reduce financial stress, but this beneficial effect is overturned in the medium run. In Germany, implicit firm default rates rise, while loan write-offs by banks decrease. This could point to an avoidance of balance sheet repair in the financial sector.
    Keywords: asset purchase programs,balance sheet,monetary policy,central bank,shock identification,VAR
    JEL: C32 E44 E52 E58
    Date: 2017
  4. By: Adriana Lojschova (National Bank of Slovakia)
    Abstract: We find evidence that households in Slovakia do benefit from the ECB asset purchase programme. On the individual banklevel data of 26 financial institutions (full representation of the banking sector) we establish and confirm a traditional relationship between bank lending and changes to deposit ratio. We find the long-run relationship to be twice as strong in the household sector as in the sector of non-financial corporations. Controlling for interest rate changes and other factors, we also introduce asset purchases into the model. We document some, although limited, evidence of the presence of the bank lending channel of asset purchases in the household sector.
    Keywords: Bank lending channel, quantitative easing, panel data
    JEL: E52 G21
    Date: 2017–06
  5. By: Benos, Evangelos (Bank of England); Ferrara, Gerardo (Bank of England); Gurrola-Perez, Pedro (Bank of England)
    Abstract: Large-value payment systems (LVPS) often have a tiered structure where only a limited number of banks have direct access to these systems and every other institution accesses the system through agency arrangements with the direct participants. As such, a high degree of tiering is often perceived as being associated with credit and operational risks. In this paper we use data around five recent de-tiering events in the United Kingdom’s LVPS(CHAPS), to assess the impact of de-tiering on these risks as well as on liquidity usage. We find that the impact of de-tiering is largest on credit risk, where average intraday exposures between first and second-tier banks drop by anywhere between £0.3 billion and £1.5 billion per bank, while the cost of insuring against losses arising from these exposures drops by about £4 million to £19 million per bank, per year. On the other hand, the impact of these de-tiering events on operational risk and liquidity usage appears to be economically small.
    Keywords: Payment systems; tiering
    JEL: E42 G23
    Date: 2017–09–08
  6. By: Foos, Daniel; Lütkebohmert, Eva; Markovych, Mariia; Pliszka, Kamil
    Abstract: This paper investigates interest rate risk exposures of listed euro area banks which fall under the Single Supervisory Mechanism (SSM). We analyze the period 2005 to 2014, as it includes times of very low interest rates in which banks may have pursued a more risky maturity transformation strategy. First, we use the Bayesian DCC M-GARCH model to assess banks' stock price sensitivities to principal components of changes in the yield curve describing shifts in its level, slope and curvature. Second, we investigate how these sensitivities vary depending on bank-level characteristics (e.g., balance sheet composition, reliance on interest income). Our findings reveal that, on average, banks benefit from positive level shifts and steepening yield curves. Curvature changes affect banks' share prices as well, particularly in times of crises. Further, these sensitivities change in time and depend heavily on the bank's business model and balance sheet composition. Our analysis reveals that banks with larger balance sheets, higher capital ratios, higher parts of customer loans and lower parts of deposits are particularly sensitive to interest rate movements.
    Keywords: Bayesian DCC M-GARCH model,interest rate risk,maturity transformation,swings in the yield curve
    JEL: C11 C51
    Date: 2017
  7. By: Michael Grill (European Central Bank); Karl Schmedders (University of Zurich); Felix Kubler (University of Zurich); Johannes Brumm (University of Zurich)
    Abstract: We assess the quantitative implications of the re-use of collateral on financial market leverage, volatility, and welfare within an infinite-horizon asset-pricing model with heterogeneous agents. In our model, the ability of agents to re-use frees up collateral that can be used to back more transactions. Re-use thus contributes to the build-up of leverage and significantly increases volatility in financial markets. When introducing limits on re-use, we find that volatility is strictly decreasing as these limits become tighter, yet the impact on welfare is non-monotone. In the model, allowing for some re-use can improve welfare as it enables agents to share risk more effectively. Allowing re-use beyond intermediate levels, however, can lead to excessive leverage and lower welfare. So the analysis in this paper provides a rationale for limiting, yet not banning, re-use in financial markets.
    Date: 2017
  8. By: Harkin, Sean M.; Mare, Davide S.; Crook, Jonathan N.
    Abstract: We study the determinants of average pay across all levels of staff seniority for UK banks between 2003 and 2012. We show that pay is affected by agency problems but not by bank operating performance. Average pay does not depend on accounting outcomes at the bank level. By contrast, average pay is positively affected by the presence of a Remuneration Committee and the proportion of Non-Executives on the Board. These findings indicate that bank pay is determined by agency issues, not bank accounting performance. Our results have practical implications for bank shareholders and regulators, suggesting the need for greater transparency in governance of bank pay.
    Keywords: Corporate Governance, Remuneration, Bank Performance, Agency Problems.
    JEL: G21 G34 G35 M52
    Date: 2017–09–01
  9. By: Gropp, Reint E.; 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 undercapitalisation 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 organisational 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
  10. By: Annamaria de Crescenzio; Marta Golin
    Abstract: This paper analyses the impact of a specific type of banking regulation on operations in foreign currency, defined as currency-based capital flow management measures (CB-CFMs), on cross-border banking flows in a sample of 18 countries over the period 2005 to 2013. The results show that the introduction and tightening of these measures in the post-crisis period contributed to a reduction of the external debt of banks, controlling for capital flow management measures, domestic macro-prudential regulation, and a large set of push and pull factors. The examination of external debt by maturity and instruments suggests that these measures are more effective in curbing short-term debt and interbank borrowing, which are also the components that contracted more sharply in the aftermath of the 2008 crisis. Further analysis could look at the benefits these measures bring in terms of financial stability, and evaluate the costs of capital account openness against the risks that CB-CFMs aim to address.
    Keywords: banking debt, capital flow management measures, currency-based measures, external debt, macro-prudential policies
    JEL: E58 F3 G28
    Date: 2017–09–14
  11. By: Nucera, Federico; Lucas, André; Schaumburg, Julia; Schwaab, Bernd
    Abstract: We study the impact of increasingly negative central bank policy rates on banks’ propensity to become undercapitalized in a financial crisis (‘SRisk’). We find that the risk impact of negative rates is moderate, and depends on banks’ business models: Banks with diversified income streams are perceived by the market as less risky, while banks that rely predominantly on deposit funding are perceived as more risky. Policy rate cuts below zero trigger different SRisk responses than an earlier cut to zero. JEL Classification: G20, G21
    Keywords: bank business model, negative interest rates, systemic risk, unconventional monetary policy measures
    Date: 2017–09
  12. By: Manthos D. DELIS (University of Surrey); Iftekhar HASAN (Fordham University and Bank of Finland); Steven ONGENA (University of Zurich, Swiss Finance Institute, KU Leuven, and CEPR)
    Abstract: Does democratization reduce the cost of credit? Using global syndicated loan data from 1984 to 2014, we show that democratization has a sizeable negative effect on loan spreads: a one point increase in the zero-to-ten Polity IV index of democracy shaves on average 21 basis points off spreads. Reversals to autocracy hike spreads more strongly. Our results are robust to the comprehensive inclusion of relevant controls, to the instrumentation with regional waves of democratization, and to a battery of sensitivity tests. We thus highlight the lower cost of loans as one relevant mechanism through which democratization may affect economic development.
    Keywords: Loan pricing; Loan spreads; Democratic institutions; Reversals
    JEL: G21 G30 P16 P26 P27 P47
    Date: 2017–05
  13. By: Giorgia Barboni (Trinity College Dublin)
    Abstract: This paper finds that foreign banks can act as a buffer against negative credit supply shocks, in contexts where the domestic credit market is heavily hit by a country-specific adverse shock. A new dataset is constructed, which combines Belgian Credit Register data with firms and banks’ balance sheets. After 2008, Belgian firms borrowing from domestic banks experienced a stronger credit contraction (minus 1.8 percentage points) than firms borrowing from foreign banks. Also, foreign banks “cherry-picked” new relationships with more profitable firms to a higher extent during the crisis, and turned down existing relationships more frequently than domestic banks. Results from this paper suggest that foreign banks can mitigate negative financial shocks in countries where domestic financial intermediaries unexpectedly experienced the consequences of the financial crisis to a higher extent.
    Keywords: Foreign banks, Financial Crisis, Credit Supply
    JEL: G21 G32 F34
    Date: 2017–06
  14. By: Kondo, Kazumine
    Abstract: This paper investigates whether branch network expansions by Japanese regional banks influence their management performances positively at a time when management environments surrounding regional financial institutions have become increasingly severe due to the population decreases and shrinkage of regional economies. Specifically, the effects of numbers of regional bank branches on their credit businesses and profits are empirically examined. The results indicated that regional banks with more branches can increase their loans and bills discounted as well as their small and mid-sized enterprises (SME) loans and bills discounted. Thus, establishing more branches is effective in increasing the total sum of loans and bills discounted by each bank because regional banks with many branches can make contact with more customers. On the other hand, return on assets (ROA) and return on equity (ROE) of regional banks with more branches were found to be lower. Therefore, regarding the cost performance of regional banks, establishing too many branches and maintaining branch networks that are too large can have negative effects on regional banks.
    Keywords: region-based relationship banking policy, regional bank, branch, loans and bills discounted, profit ratio
    JEL: G2 G21
    Date: 2017–09–08
  15. By: Basak, Deepal; Murray, Alexander; Zhao, Yunhui
    Abstract: Consistent with the Minsky hypothesis and the “volatility paradox” (Brunnermeier and Sannikov, 2014), recent empirical evidence suggests that financial crises tend to follow prolonged periods of financial stability and investor optimism. But does financial tranquility always call for more stringent regulation? We examine this question using a simple portfolio choice model that features the interaction between learning and externality. We evaluate the potential of a macroprudential policy in the form of a capital income tax to restore efficiency, and highlight a key challenge faced by regulators: whether the stringency of prudential policy should rise or fall over time depends on the resilience of the financial system, which is difficult to know and thus may lead to inefficient regulation. Our paper provides a simple framework to shed light on the current regulation debates, such as the ongoing debates on the financial deregulation initiatives in the U.S. (as evident in the August 2017 Jackson Hole meeting), and the discussions on how to regulate the rapidly-developing online finance industry in China.
    Keywords: Financial stability, Financial regulation, Learning, Externality, Macroprudential
    JEL: G01 G18 G28
    Date: 2017–08–26
  16. By: Luigi Infante (Bank of Italy); Bianca Sorvillo (Bank of Italy)
    Abstract: This paper studies the performance of the market value of the derivatives for Italian banks by using the financial accounts and proposing an international comparison. An estimate of the market value was also obtained for the period from the first quarter of 2001 to the third quarter of 2008 by exploiting the continuity of the notional values found in the supervisory reports. Our analysis of the performance of banking derivatives in the major countries shows that their value has significantly decreased since the financial crisis. At the end of 2015, the amount of financial derivatives reported in the assets of monetary financial institutions was 4 per cent of the total financial assets in Italy, a much lower value than in the UK, Germany and France.
    Keywords: derivatives, financial accounts, banks
    JEL: C82 E01 G1 G2
    Date: 2017–09
  17. By: Jean-Marie Baland (CRED, University of Namur); Rohini Somanathan (Department of Economics, Delhi School of Economics); Lore Vandewalle (The Graduate Institute, Geneva)
    Abstract: About two-thirds of microfinance clients in India are reported to be in Self-Help Groups (SHGs). These mostly women’s groups have been promoted by nationalized banks since the early nineties to improve credit access among especially disadvantaged populations. We study the survival of members and groups and their differential access to credit using a census of SHGs created between 1998 and 2006 in 386 villages in eastern India. Households without land and those from disadvantaged castes and tribes exhibit higher attrition rates and smaller loans but we find the main predictor of differential outcomes is education rather than social identity. Members with formal education receive larger loans and have a 30 per cent lower risk of being separated from their group. Groups with no such members are also four times more likely to become inactive.
    Date: 2017–07
  18. By: Natanael Waraney Gerald Massie (University of Indonesia); Chaikal Nuryakin (Researcher, Institute for Economic and Social Research, Faculty of Economics, University of Indonesia, Jakarta)
    Abstract: This study aims to observe the relationship between withdrawal decisions and individual psychological aspects, namely time and risk preferences. Our sample is a pool of prime depositors in Indonesia, mainly due to the country’s deposit market being heavily concentrated on such depositors. We describe the elicited risk preferences of the aforementioned depositors, along with their preferences on how long they would keep their money deposited. We discuss relationships between their withdrawal decision, which in excessive amount could cause bank run situations, with risk and time preferences under idiosyncratic economic shocks. A cascade effect simulation is also included in our analysis.
    Keywords: Withdrawal Decision — Time Preference — Risk Preference — Bank Run — Prime Depositor
    JEL: D81 G02 G21
    Date: 2017–09
  19. By: Atif Mian; Amir Sufi; Emil Verner
    Abstract: Does an expansion in credit supply affect the economy by increasing productive capacity, or by boosting demand? We design a test to uncover which of the two channels is more dominant, and we apply it to the United States in the 1980s where the degree of banking deregulation generated differential local credit supply shocks across states. The stronger expansion in credit supply in early deregulation states primarily boosted local demand, especially by households, as opposed to improving labor productivity of firms. States with a more deregulated banking sector see a large relative increase in household debt from 1983 to 1989, which is accompanied by an increase in the price of non-tradable relative to tradable goods, an increase in wages in all sectors, an increase in non-tradable employment, and no change in tradable employment. Credit supply shocks lead to an amplified business cycle, with GDP, employment, residential investment, and house prices increasing by more in early deregulation states during the expansion, and then subsequently falling more during the recession of 1990 and 1991. The worse recession outcomes in early deregulation states appear to be related to downward nominal wage rigidity, household debt overhang, and banking sector losses.
    JEL: E3 E32 E44 E51
    Date: 2017–09
  20. By: Teruyoshi Kobayashi (Graduate School of Economics, Kobe University); Taro Takaguchi (National Institute of Information and Communication Technology)
    Abstract: Relationship lending is conventionally interpreted as a strong partnership between a lender and a borrower. Nevertheless, we still lack consensus regarding how to quantify a lending relationship while simple statistics such as the frequency and volume of loans have been frequently used. Here, we propose the concept of a significant tie to statistically evaluate the strength of a relationship. Application of the proposed method to the Italian interbank networks reveals that the percentage of relationship lending among all bilateral trades is consistently around 20%-30% and that their trading properties are distinct from those of transactional trades.
    Date: 2017–08
  21. By: Mattia Girotti; Richard Meade
    Abstract: Originally, U.S. savings banks were owned by their depositors. In recent decades, many savings banks have “demutualized”, by converting from customer to investor ownership. We examine the implications of such events for depositor welfare. We introduce a random coefficients logit model of bank account choice and estimate depositors' tastes for bank characteristics (including banks'ownership type). We then measure the effect on depositor welfare of a simulated demutualization of all customer-owned savings banks. We find that depositors' welfare would increase on average.In particular, if demutualized savings banks offered a deposit rate in line with existing demutualized banks, each depositor would gain $1.14 annually, for a total of $22 million for each state and year.
    Keywords: Banks, Deposits, Demand Estimation, Customer Ownership, Mutuals.
    JEL: D12 G21 L21 P13
    Date: 2017
  22. By: Evans, Olaniyi
    Abstract: This study documents the determinants of financial inclusion in Africa for the period 2005 to 2014, using the dynamic panel data approach. The study finds that per capita income, broad money (% of GDP), literacy, internet access and Islamic banking presence and activity are significant factors explaining the level of financial inclusion in Africa. Domestic credit provided by financial sector (% of GDP), deposit interest rates, inflation and population have insignificant impacts on financial inclusion. The findings of this study are of utmost value to African central banks, policymakers and commercial bankers as they advance innovative approaches to enhance the involvement of excluded poor people in formal finance in Africa.
    Keywords: Financial inclusion, finance, dynamic panel data, Africa
    JEL: G2 O1 O16 O17
    Date: 2016
  23. By: Vincent Bouvatier; Gunther Capelle-Blancard; Anne-Laure Delatte
    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) Tax havens attract large extra banking activity beyond the regular gravity factors (+168% according to our estimates); 2) For EU banks, the main tax havens are located within Europe: Luxembourg, Isle of Man and Guernsey rank at the top of the foreign affiliates; 3) Attractive low tax rates are not sufficient to drive extra activity; 4) High quality of governance is not a driver, but banks avoid countries with weakest governance; 5) Banks also avoid the most opaque countries; 6) The tax savings for EU banks is estimated between €1 billion and €3.6 billion, i.e. 5 and 20% of fiscal revenues.
    Keywords: Tax evasion;International banking;Tax havens;Country-by-country reporting
    JEL: F23 G21 H22 H32
    Date: 2017–09

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