nep-ban New Economics Papers
on Banking
Issue of 2017‒10‒08
thirteen papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. An integrated shortfall measure for Basel III By Torchiani, Ingo; Heidorn, Thomas; Schmaltz, Christian
  2. Should unconventional monetary policies become conventional? By Quint, Dominic; Rabanal, Pau
  3. The real effects of relationship lending By Ryan Banerjee; Enrico Sette; Leonardo Gambacorta
  4. Credit misallocation during the European financial crisis By Fabiano Schivardi; Enrico Sette; Guido Tabellini
  5. Cross-border transmission of emergency liquidity By Kick, Thomas; Koetter, Michael; Storz, Manuela
  6. The Computational Complexity of Clearing Financial Networks with Credit Default Swaps By Steffen Schuldenzucker; Sven Seuken; Stefano Battiston
  7. Countercyclical prudential tools in an estimated DSGE model By Serafín Frache; Jorge Ponce; Javier Garcia Cicco
  8. Product Network Connectivity and Information for Loan Pricing By Jiangtao Fu; Yoshiaki Ogura
  9. Do all new brooms sweep clean? Evidence for outside bank appointments By Kick, Thomas; Nehring, Inge; Schertler, Andrea
  10. Banking Panics and Liquidity in a Monetary Economy By Tarishi Matsuoka; Makoto Watanabe
  11. Can Micro Credit Schemes Be Introduced by Formal Banking Sector? By Mamoon, Dawood
  12. U.S. Savings Banks' Demutualization and Depositor Welfare By Mattia Girotti; Richard Meade
  13. Leverage and deepening business cycle skewness By Henrik Jensen; Ivan Petrella; Søren Hove Ravn; Emiliano Santoro

  1. By: Torchiani, Ingo; Heidorn, Thomas; Schmaltz, Christian
    Abstract: We propose a new method for measuring how far away banks are from complying with a multi-ratio regulatory framework. We suggest measuring the efforts a bank has to make to reach compliance as an additional portfolio which is derived from a microeconomic banking model. This compliance portfolio provides an integrated measure of the shortfalls resulting from a new regulatory framework. Our method complements the descriptive reporting of individual shortfalls per ratio when monitoring banks' progress toward compliance with a new regulatory framework. We apply our concept to a sample of 46 German banks in order to quantify the effects of the interdependencies of the Basel III capital and liquidity requirements. Comparing our portfolio approach to the shortfalls reported in the Basel III monitoring, we find that the reported shortfalls tend to underestimate the required capital and to overestimate of the required stable funding. However, compared to the overall level of the reported shortfalls, the effects resulting from the interdepen- dencies of the Basel III ratios are found to be rather small.
    Keywords: Basel III,linear programming,impact studies,integrated shortfall
    JEL: G21 C61
    Date: 2017
  2. By: Quint, Dominic; Rabanal, Pau
    Abstract: The large recession that followed the Global Financial Crisis of 2008-09 triggered unprecedented monetary policy easing around the world. Most central banks in advanced economies deployed new instruments to affect credit conditions and to provide liquidity on a large scale after short-term policy rates had reached their effective lower bound. In this paper, we study if this new set of tools, commonly labeled as unconventional monetary policies (UMP), should continue to be used once economic conditions and interest rates have normalized. In particular, we study the optimality of asset purchase programs by using an estimated non-linear DSGE model with a banking sector and long-term private and public debt for the United States. We find that the benefits of using such UMP in normal times are substantial, equivalent to 1.45 percent of consumption. However, the benefits of using UMP are shock-dependent and mostly arise when the economy is hit by financial shocks. By contrast, when more traditional business cycle shocks (such as supply and demand shocks) hit the economy, the benefits of using UMP are negligible or zero.
    Keywords: Unconventional Monetary Policy,Banking,Optimal Rules
    JEL: C32 E32 E52
    Date: 2017
  3. By: Ryan Banerjee (BIS); Enrico Sette (Bank of Italy); Leonardo Gambacorta (BIS)
    Abstract: This paper studies the real consequences of relationship lending on firm activity in Italy following Lehman Brothers’ default shock and Europe’s sovereign debt crisis. We use a large data set that merges the comprehensive Italian Credit and Firm Registers. We find that following Lehman’s default, banks offered more favourable continuation lending terms to firms with which they had stronger relationships. Such favourable conditions enabled firms to maintain higher levels of investment and employment. The insulation effects of tighter bank-firm relationships was still present during the European sovereign debt crisis, especially for firms tied to well capitalised banks.
    Keywords: relationship banking, real effects of credit, credit supply
    JEL: E44 G21
    Date: 2017–09
  4. By: Fabiano Schivardi (EIEF, LUISS); Enrico Sette (Bank of Italy); Guido Tabellini (Bocconi)
    Abstract: Do banks with low capital extend excessive credit to weak firms, and does this matter for aggregate efficiency? Using a unique dataset that covers almost all bank-firm relationships in Italy in the period 2004-2013, we find that during the Eurozone financial crisis (i) under-capitalized banks were less likely to cut credit to non-viable firms; (ii) credit misallocation increased the failure rate of healthy firms and reduced the failure rate of non-viable firms; and (iii) nevertheless, the adverse effects of credit misallocation on the growth rate of healthier firms were negligible, as were the effects on TFP dispersion. This goes against previous influential findings, which, we argue, face serious identification problems. Thus, while banks with low capital can be an important source of aggregate inefficiency in the long run, their contribution to the severity of the great recession via capital misallocation was modest.
    Keywords: Bank capitalization, zombie lending, capital misallocation
    JEL: D23 E24 G21
    Date: 2017–09
  5. By: Kick, Thomas; Koetter, Michael; Storz, Manuela
    Abstract: We show that emergency liquidity provision by the Federal Reserve transmitted to non-U.S. banking markets. Based on manually collected holding company structures of international banks, we can identify banks in Germany with access to U.S. facilities via internal capital markets. Using proprietary interest rate data reported to the German central bank, we compare lending and borrowing rates of banks with and without such access. U.S. liquidity shocks cause a significant decrease in the short-term funding costs of German banks with access. Short-term loan rates charged to German corporates also decline, albeit with lags between two and four months. These spillover effects of U.S. monetary policy are confined to short-term rates.
    Keywords: Monetary policy transmission,emergency liquidity,internal capital markets,interest rates
    JEL: E52 E58 F23 G01 G21
    Date: 2017
  6. By: Steffen Schuldenzucker; Sven Seuken; Stefano Battiston
    Abstract: We consider the problem of clearing a system of interconnected banks. Prior work has shown that when banks can only enter into simple debt contracts with each other, then a clearing vector of payments can be computed in polynomial time. In this work, we show that the computational complexity of the clearing problem drastically increases when banks can also enter into credit default swaps (CDSs), i.e., financial derivative contracts that depend on the default of another bank. We first show that many important decision problems are NP-hard once CDSs are allowed. This includes deciding if a specific bank is at risk of default and deciding if a clearing vector exists in the first place. Second, we show that computing an approximate solution to the clearing problem with sufficiently small constant error is PPAD-complete. To prove our results, we demonstrate how financial networks with debt and CDSs can encode Boolean and arithmetic operations. Our results have practical importance for network stress tests and they reveal computational complexity as a new concern regarding the stability of the financial system.
    Date: 2017–10
  7. By: Serafín Frache (Banco Central del Uruguay); Jorge Ponce; Javier Garcia Cicco
    Abstract: We develop a DSGE model for a small, open economy with a banking sector and endogenous default in order to perform a realistic assessment of macroprudential tools: countercyclical capital buffer (CCB) and dynamic provisions (DP). The model is estimated with data for Uruguay, where dynamic provisioning is in place since early 2000s. We find that (i) the source of the shock affecting the financial system matters, to select the appropriate indicator variable under the CCB rule, and to calibrate the size of the DP. Given a positive external shock, CCB (ii) generates buffers without major real effects; (iii) GDP as an indicator variable has quicker and stronger effects over bank capital; and (iv) the ratio of credit to GDP decreases, which discourages its use as an indicator variable. DP (v) generates buffers with real effects, and (vi) seems to outperform the CCB in terms of smoothing the cycle.
    Keywords: Banking regulation, minimum capital requirement, countercyclical capital buffer, reserve requirement, dynamic loan loss provision, endogenous default, Basel III, DSGE, Uruguay
    JEL: G21 G28
    Date: 2017
  8. By: Jiangtao Fu (Graduate School of Economics, Waseda University); Yoshiaki Ogura (School of Political Science and Economics, Waseda University)
    Abstract: A theory predicts that loan pricing is less sensitive to public information, such as a credit score provided by a credit information vendor, if the lender obtains more accurate private information about the credit quality of borrowers. We find that loan pricing is less sensitive to public information when a borrower is more connected with other borrowers of the lender through a supply network by using a unique database of inter-firm relationships and bank-firm relationships. This effect is significant statistically and economically after controlling for the bank-firm or inter-firm relationship characteristics and other firm characteristics. This finding provides evidence that banks make use of private information observed from their borrowers’ network in their loan pricing.
    Keywords: inter-firm network, loan pricing, information production, relationship banking
    JEL: G21 L14
  9. By: Kick, Thomas; Nehring, Inge; Schertler, Andrea
    Abstract: Banks in bad financial shape are more likely to appoint executive directors from the outside than those in good shape. It is, however, not clear whether all of these appointments necessarily lead to the desired turnaround. We analyze the performance effects of new board members with external boardroom experience (outsiders) by distinguishing between good and bad managerial abilities of executives based on either ROA or risk-return effciency of their previous employers. Our results show that banks appointing bad outsiders underperform other banks while those appointing good outsiders do so to a lesser extent. The performance differentials are highly pronounced in high-risk banks and in the post-crisis period.
    Keywords: executive directors,outside appointments,bank performance,managerial ability
    JEL: G21 G32 G34 C23
    Date: 2017
  10. By: Tarishi Matsuoka (Tokyo Metropolitan University); Makoto Watanabe (VU Amsterdam; Tinbergen Institute, The Netherlands)
    Abstract: This paper studies banks' liquidity provision in the Lagos and Wright model of monetary exchanges. With aggregate uncertainty we show that banks sometimes exhaust their cash reserves and fail to satisfy their depositors' need of consumption smoothing. The banking panics can be eliminated by the zero-interest policy for the perfect risk sharing, but the first best can be achieved only at the Friedman rule. In our monetary equilibrium, the probability of banking panics is endogenous and increases with inflation, as is consistent with empirical evidence. The model derives a rich array of non-trivial effects of inflation on the equilibrium deposit and the bank's portfolio.
    Keywords: Money Search; Monetary Equilibrium; Banking panics; Liquidity
    JEL: E40
    Date: 2017–09–22
  11. By: Mamoon, Dawood
    Abstract: The paper explains the supply side dynamics of micro credit that is about the sustainability of Micro Finance Institutions. The study suggests that formal banking sector framework should be applied to micro credit schemes to analyse their efficiency. This may help us provide a methodology unconventional to micro credit literature that can provide guidelines for successful micro credit endeavors by formal financial institutions.
    Keywords: Financial Institutions, Micro Credit, Poverty
    JEL: G21
    Date: 2017–10–02
  12. By: Mattia Girotti (Banque de France); Richard Meade (Auckland University of Technology and Cognitus Economic Insight)
    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 coecients 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 demutualize savings banks oered 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
    Date: 2017–08
  13. By: Henrik Jensen (University Of Copenhagen and CEPR); Ivan Petrella (University of Warwick and CEPR); Søren Hove Ravn (University of Copenhagen); Emiliano Santoro (University of Copenhagen)
    Abstract: We document that the U.S. economy has been characterized by an increasingly negative business cycle asymmetry over the last three decades. This fi nding can be explained by the concurrent increase in the fi nancial leverage of households and fi rms. To support this view, we devise and estimate a dynamic general equilibrium model with collateralized borrowing and occasionally binding credit constraints. Higher leverage increases the likelihood that constraints become slack in the face of expansionary shocks, while contractionary shocks are further amplifi ed due to binding constraints. As a result, booms become progressively smoother and more prolonged than busts. We are therefore able to reconcile a more negatively skewed business cycle with the Great Moderation in cyclical volatility. Finally, in line with recent empirical evidence, fi nancially-driven expansions lead to deeper contractions, as compared with equally-sized non-fi nancial expansions.
    Keywords: credit constraints, business cycles, skewness, deleveraging
    JEL: E32 E44
    Date: 2017–09

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