nep-ban New Economics Papers
on Banking
Issue of 2017‒09‒24
thirteen papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Credit crunches from occasionally binding bank borrowing constraints By Holden, Tom D.; Levine, Paul; Swarbrick, Jonathan M.
  2. Do highly liquid banks insulate their lending behavior? By Supriya Kapoor
  3. Who Defaults on Their Mortgage, and Why? Policy Implications for Reducing Mortgage Default By Ohanian, Lee E.
  4. Bank Acquisitiveness and Financial Crisis Vulnerability By Saqib Aziz; Michael Dowling; Jean-Jacques Lilti
  5. Global Banking and the Conduct of Macroprudential Policy in a Monetary Union By Poutineau, Jean-Christophe; Vermandel, Gauthier
  6. Identifying the provisioning policies of Belgian banks By Emrah Arbak
  7. The Mortgage Rate Conundrum By Alejandro Justiniano; Giorgio E. Primiceri; Andrea Tambalotti
  8. Did QE Lead Banks to Relax Their Lending Standards? Evidence from the Federal Reserve's LSAPs By Robert J. Kurtzman; Stephan Luck; Thomas Zimmermann
  9. Women Empowerment in Bangladesh: Household Decisions under Development of Non-Farm Sectors and Microfinance Institutions By Mahmud Minhaj; Otsuka Keijiro; Sawada Yasuyuki; Tanaka Mari; Tanaka Tomomi
  10. Non-performing assets in Indian Banks: This time it is different By Sengupta, Rajeswari; Vardhan, Harsh
  11. Sequential Banking: Direct and Externality Effects on Delinquency By De Giorgi, Giacomo; Drenik, Andres; Seira, Enrique
  12. The Rise of Non-Regulated Financial Intermediaries in the Housing Sector and its Macroeconomic Implications By Hélène Desgagnés
  13. Structural Changes in the Russian Outward Banking Foreign Direct Investment By Victor Gorshkov

  1. By: Holden, Tom D.; Levine, Paul; Swarbrick, Jonathan M.
    Abstract: We present a model in which banks and other financial intermediaries face both occasionally binding borrowing constraints, and costs of equity issuance. Near the steady state, these intermediaries can raise equity finance at no cost through retained earnings. However, even moderately large shocks cause their borrowing constraints to bind, leading to contractions in credit offered to firms, and requiring the intermediaries to raise further funds by paying the cost to issue equity. This leads to the occasional sharp increases in interest spreads and the counter-cyclical, positively skewed equity issuance that are characteristic of the credit crunches observed in the data.
    Keywords: Occasionally binding constraints,Credit crunches,Financial crises,Spreads,Dividends,Equity,Banking
    JEL: E22 E32 E51 G2
    Date: 2017
  2. By: Supriya Kapoor (UCD Geary Institute for Public Policy)
    Abstract: The role of banks in the transmission of monetary policy has been of significance lately. We aim to analyse the bank lending behaviour during changes in monetary policy. We test for loan supply shifts by segregating banks based on their liquidity along with size and capital ratio. This paper employs uninsured, non-reservable liabilities such as time deposits and investigates whether banks are able to insulate themselves during a monetary policy change. We find that the loan supply shock can be neutralized post monetary policy changes. Furthermore, the less liquid and small banks are unable to carry out such operations and are more affected by monetary shocks. This has important implication in the working of commercial banks and effects of monetary policy.
    Keywords: bank lending channel, time deposits, monetary policy, liquidity
    JEL: E52 G21 E50
    Date: 2017–11–09
  3. By: Ohanian, Lee E. (Federal Reserve Bank of Minneapolis)
    Abstract: To design mortgage modification policies that successfully stem default and allow borrowers to keep their homes, policymakers need to understand why borrowers default. Is it because they’re truly unable to pay, or are they able to pay but have negative equity? {{p}} New research finds that both motives were important during the Great Recession, but that ability to pay plays the greater role, accounting for over 60 percent of defaults. Moreover, the analysis—which matches borrowers’ income, employment, and assets with their mortgage characteristics and payment status—shows that cash-strapped borrowers are more than seven times as likely to default as borrowers with strong ability to pay. {{p}} These findings indicate that when borrowers suffer an income reduction, mortgage modification policies that reduce monthly payments to an affordable range are likely to be effective in preventing future defaults.
    Date: 2017–09–13
  4. By: Saqib Aziz (ESC Rennes School of Business - ESC Rennes School of Business); Michael Dowling (ESC Rennes School of Business - ESC Rennes School of Business); Jean-Jacques Lilti (CREM - Centre de Recherche en Economie et Management - UNICAEN - Université Caen Normandie - UR1 - Université de Rennes 1 - CNRS - Centre National de la Recherche Scientifique)
    Abstract: We investigate the relation between European bank acquisitiveness during the period 1990-2006 and the vulnerability of banks to the financial crisis. Our main tests use distance to default and Z-score ratios to estimate banks impact from the financial crisis in terms of bankruptcy risk and solvency. The findings shed new light on whether bank acquisitions really did contribute towards weakness; and suggest that only acquisitions of investment banking assets increased risk, while acquisition of retail banking assets actually lowered solvency risk.
    Keywords: Financial Crisis, Mergers and Acquisitions, Probability of Default, Solvency, Investment Banking
    Date: 2016–07
  5. By: Poutineau, Jean-Christophe; Vermandel, Gauthier
    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
    JEL: E58 F34 F4 F42
    Date: 2016–11–01
  6. By: Emrah Arbak (European Commission, Directorate-General for Financial Stability, Financial Services and Capital Markets Union, FISMA E.2)
    Abstract: Loan loss reserves make up an essential part of a bank’s soundness and more generally its viability. An under-provisioned reserve account implies that capital ratios may overstate a bank’s ability to absorb future losses. For this reason, both supervisory authorities and investors regularly assess the adequacy of the loan loss provisions alongside the more popular capital ratios. The aim of the paper is to identify what motivates the loss provisioning policies employed by Belgian banks, especially whether banks use provisioning to inter-temporally smooth their earnings or capital positions. Owing to the relatively long data series, the paper also investigates whether the introduction of the IAS-39 "incurred loss" accounting standards or the onset of the financial crisis in 2008/9 had any impact on the provisioning decisions. The results show that provisioning practices of Belgian banks have been rather tightly linked to future losses, although the relationship has weakened considerably after the introduction of the IAS-39 standards and, to a lesser extent, after the financial crisis. There is also evidence that Belgian banks might have used provisioning decisions to manage their current earnings and to some extent to signal future profitability, although the latter motive also appears to have weakened after the introduction of IAS-39 standards.
    Keywords: Belgian credit institutions; loan loss provisioning; event-based provisioning; forwardlooking provisioning; earnings-smoothing; cyclical provisioning; implementation of international accounting standards.
    JEL: C23 G14 G21 G28 M41
    Date: 2017–08
  7. By: Alejandro Justiniano; Giorgio E. Primiceri; Andrea Tambalotti
    Abstract: We document the emergence of a disconnect between mortgage and Treasury interest rates in the summer of 2003. Following the end of the Federal Reserve expansionary cycle in June 2003, mortgage rates failed to rise according to their historical relationship with Treasury yields, leading to significantly and persistently easier mortgage credit conditions. We uncover this phenomenon by analyzing a large dataset with millions of loan-level observations, which allows us to control for the impact of varying loan, borrower and geographic characteristics. These detailed data also reveal that delinquency rates started to rise for loans originated after mid 2003, exactly when mortgage rates disconnected from Treasury yields and credit became relatively cheaper.
    JEL: E32 E44 E52
    Date: 2017–09
  8. By: Robert J. Kurtzman; Stephan Luck; Thomas Zimmermann
    Abstract: Using confidential loan officer survey data on lending standards and internal risk ratings on loans, we document an effect of large-scale asset purchase programs (LSAPs) on lending standards and risk-taking. We exploit cross-sectional variation in banks’ holdings of mortgage-backed securities to show that the first and third round of quantitative easing (QE1 and QE3) significantly lowered lending standards and increased loan risk characteristics. The magnitude of the effects is about the same in QE1 and QE3, and is comparable to the effect of a one percentage point decrease in the Fed funds target rate.
    Keywords: Banks ; QE ; Risk ; SLOOS ; STBL
    JEL: E43 E52 G21
    Date: 2017–09–06
  9. By: Mahmud Minhaj; Otsuka Keijiro; Sawada Yasuyuki; Tanaka Mari; Tanaka Tomomi
    Abstract: We analyze the factors and dynamics that contributed to the empowerment of women in Bangladesh. We first investigate the role of non-farm sector growth in facilitating female labor force participation and educational attainment, and then we explore how women’s decision-making roles in a household have improved over the same time period. Our results indicate that the proportion of village non-farm labor force participation is positively associated with female school enrollment as well as other indicators of women empowerment. Moreover, microcredit participation is found to be associated with larger roles for females in making household decisions particularly on non-farm activities.
    Keywords: non-farm labor force participation, Bangladesh, female schooling, marriage, fertility
    Date: 2017–06
  10. By: Sengupta, Rajeswari; Vardhan, Harsh
    Abstract: Growing non-performing assets is a recurrent problem in the Indian banking sector. Over the past two decades, there have been two such episodes when the banking sector was severely impaired by balance sheet problems. In this paper we do a comparative analysis of the two banking crisis episodes-the one in the late 1990s and one that started in the aftermath of the 2008 Global Financial Crisis and is yet to be resolved. We describe the macroeconomic and banking environment preceding the episodes, the degree and nature of the crises and also discuss the policy responses that have been undertaken. We conclude by drawing policy lessons from this discussion and suggest some measures that can be adopted to better deal with a future balance sheet related crisis in the banking sector such that the impact on the real economy is minimal.
    Keywords: Non-performing assets, Public-sector banks, Capital adequacy, Bank recapitalisation, Balance-sheet crisis.
    JEL: E44 G21 G28
    Date: 2017–03–01
  11. By: De Giorgi, Giacomo; Drenik, Andres; Seira, Enrique
    Abstract: The ability to borrow sequentially from multiple lenders might generate sizable externalities in delinquencies. We provide evidence on the existence and "large" size of such effects. We first document that loan approval causes a persistent difference in the number of loans between initially approved and non-approved. We then show that while loan approval leads to no default for high credit score applicants, it causes a large 7pp increase in default on previously existing loans for lower score applicants. That is, a 1,000 MXN (60 USD) extra loan is associated with an increase in the probability of default of 1.5pp for the lower credit score group. This produces average losses close to 18% of total debt, an important externality on previous lenders. This shows that the financial inclusion of clients with lower credit scores is hard due to higher default, and that sequential banking may lead to high default equilibria.
    Date: 2017–09
  12. By: Hélène Desgagnés
    Abstract: I examine the impact of non-regulated lenders in the mortgage market using a dynamic stochastic general equilibrium (DSGE) model. My model features two types of financial intermediaries that differ in three ways: (i) only regulated intermediaries face a capital requirement, (ii) non-regulated intermediaries finance themselves by selling securities and cannot accept deposits, and (iii) non-regulated intermediaries face a more elastic demand. This last assumption is based on empirical evidence for Canada revealing that non-regulated intermediaries issue loans at a lower interest rate. My results suggest that the non-regulated sector contributes to stabilize the economy by providing an alternative source of capital when the regulated sector in unable to fulfill the demand for credit. As a result, an economy with a large non-regulated sector experiences a smaller downturn after an adverse financial shock.
    Keywords: Business fluctuations and cycles, Economic models, Financial system regulation and policies, Housing
    JEL: E32 E44 E47 E60 G21 G23 G28
    Date: 2017
  13. By: Victor Gorshkov (Faculty of International Liberal Arts, Kaichi International University)
    Abstract: Following recent government initiatives, such as the shift (turn) to the East and the possibility of establishing new economic and investment cooperation with the Asia-Pacific region and other regions, proposed in conditions of financial and economic sanctions imposed towards Russia by the West, the study aims to evaluate whether any significant structural changes in the Russian outward banking foreign direct investment emerged in 2013-17 as the result of the proposed initiatives. By analyzing both the macro-picture of outward banking foreign direct investment and behavioral patterns of Russian banks since 1990s, the study found that only a marginal number of Russian banks, comprising of large state-owned banks, banks closely related to the natural resource-type Russian multinational corporations, and large private banks, have the capacity to expand their operations abroad. While the increasing presence of the natural resource-type Russian multinational corporations in the Asian and African regions is slowly luring Russian banks into these markets, drastic structural changes in the outward banking foreign direct investment are unachievable in the short-term. The geographical distribution of Russian banks remains unchanged with offshore financial centers, Europe, and the Commonwealth of Independent States being the traditional destinations of Russian outward banking foreign direct investment.
    JEL: F23 F30 G20 G21 P29 P33
    Date: 2017–09

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