nep-ban New Economics Papers
on Banking
Issue of 2017‒10‒15
thirteen papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Modelling Systemic Risk in the South African Banking Sector Using CoVar By Mathias Manguzvane; John W. Muteba Mwamba
  2. Undermined market discipline: The role of bank rescues and bailout expectations By Hett, Florian; Kasinger, Johannes
  3. Changes in the Cost of Bank Equity and the Supply of Bank Credit By Kick, Thomas; Celerier, Claire; Ongena, Steven
  4. The role of foreign banks in trade By Claessens, Stijn; Hassib, Omar; van Horen, Neeltje
  5. Risk-Taking Channel of Unconventional Monetary Policies in Bank Lending By Kiyotaka Nakashima; Masahiko Shibamoto; Koji Takahashi
  6. Contingent Convertibles: Can The Market Handle Them? By Sweder (S.J.G.) van Wijnbergen; Gera Kiewiet; Iman (I.P.P.) van Lelyveld
  7. ICT, Information Asymmetry and Market Power in the African Banking Industry By Asongu, Simplice; Biekpe, Nicholas
  8. International credit supply shocks By Cesa-Bianchi, Ambrogio; Ferrero, Andrea; Rebucci, Alessandro
  9. The Loan Covenant Channel: How Bank Health Transmits to the Real Economy By Gabriel Chodorow-Reich; Antonio Falato
  10. Schumpeterian Banks: Credit Reallocation and Capital Requirements By Kogler, Michael; Keuschnigg, Christian
  11. Does going easy on distressed banks help economic growth? By Hundtofte , Sean
  12. Safe Collateral, Arm’s-Length Credit: Evidence from the Commercial Real Estate Market By Black, Lamont K.; Krainer, John; Nichols, Joseph B.
  13. The Decline in Lending to Lower-Income Borrowers by the Biggest Banks By Neil Bhutta; Steven Laufer; Daniel R. Ringo

  1. By: Mathias Manguzvane; John W. Muteba Mwamba
    Abstract: In this paper we model systemic risk by making use of the conditional quantile regression to identify the most systemically important and vulnerable banks in the South Africa (SA) banking sector. We measure the marginal contributions of each bank to systemic risk by computing the delta Conditional Value at Risk which measures the difference between system risk of individual banks when they are in a normal state and when they are in distress state. Using daily stock market closing prices of six South African banking banks from 19 June 2007 to 11 April 2016; our back tested systemic risk measures suggest that the contribution of South African banks to systemic risk tends to significantly increase during periods of financial crises. The two largest banks namely First Rand Bank and Standard Bank are found to be the highest contributors to systemic risk while the smallest bank namely African Bank is found to be the least contributor to the overall systemic risk in South African banking sector. Based on the delta Conditional Value at Risk; we show that there is a need to go beyond micro prudential regulation in order to sustain stability in the South African banking sector.
    Keywords: conditional quantile, systemic risk, conditional value at risk and banking sector
    JEL: C13 C22 C58 G01 G21
    Date: 2017–09
  2. By: Hett, Florian; Kasinger, Johannes
    Abstract: Effective market discipline incentivizes financial institutions to limit their risk-taking behavior, making it a key element for financial regulation. However, without adequate incentives to monitor and control the risk-taking behavior of financial institutions market discipline erodes. As a consequence, bailing out financial institutions, as happened unprecedentedly during the recent financial crisis, may impose indirect costs to financial stability if bailout expectations of investors change. Analyzing US data covering the period between 2004 and 2014, Hett und Schmidt (2017) find that market participants adjusted their bailout expectations in response to government interventions, undermining market discipline mechanisms. Given these findings, policymakers need to take into account the potential effects on market discipline when deciding about public support to troubled financial institutions in the future. Considering the parallelism of events and public responses during the financial crisis as well as the recent developments of Italian banks, these results not only concern the US, but also have important implications for European financial markets and policy makers.
    Keywords: bailout,market discipline,financial institutions,financial crisis,banks
    Date: 2017
  3. By: Kick, Thomas; Celerier, Claire; Ongena, Steven
    Abstract: We explore the effect of tax reforms in Italy and Belgium, respectively that decrease the cost of equity on bank lending. Because local firms were also affected by these reforms, we em-ploy loan level data from the German credit register, to identify the differential impact on lending by banks that were 'treated'. We find that the decrease in the cost of equity leads banks to raise their equity ratio, and to expand their balance sheet by increasing the amount of credit supplied in Germany.
    JEL: E51 E58 G21 G28
    Date: 2017
  4. By: Claessens, Stijn (Bank of England); Hassib, Omar (Bank of England); van Horen, Neeltje (Bank of England)
    Abstract: This paper provides new insights into how financial globalization relates to international trade. Exploiting unique, time-varying, bilateral data on foreign bank ownership for many countries, we show that, for emerging markets, greater local foreign bank presence, especially from the importing country, is associated with higher exports in sectors more dependent on external finance. The association does not arise for advanced countries and is stronger when institutions are weaker. The presence of a bank from the importing country is also associated with higher exports in sectors with more opaque products. Results are robust to controlling for domestic financial development and a full set of fixed effects. An event study confirms findings and shows impacts to be more pronounced when a foreign bank enters through an M&A. Imports also increase after entry, but less so. Overall, results suggest that foreign banks facilitate trade in emerging markets by increasing the availability of external finance and helping overcome information asymmetries.
    Keywords: Foreign banks; international trade; credit constraints; financial development
    JEL: F14 F15 F21 F36 G21
    Date: 2017–04–10
  5. By: Kiyotaka Nakashima (Faculty of Economics, Konan University, Japan); Masahiko Shibamoto (Research Institute for Economics & Business Administration (RIEB), Kobe University, Japan); Koji Takahashi (Department of Economics, University of California, San Diego, USA)
    Abstract: We investigate the effects of unconventional monetary policy on bank lending, using a bank-firm matched dataset in Japan from 1999 to 2015 by disentangling conventional and unconventional monetary policy shocks employed by the Bank of Japan over the past 15 years. We find that a rise in the share of the unconventional assets held by the Bank of Japan boosts lending to firms with a lower distance-to-default ratio from banks with a lower liquid assets ratio and higher risk appetite. In contrast to the composition shock, the monetary base shock of increasing the Bank of Japan’s balance sheet size does not have heterogeneous effects on bank lending. Furthermore, we find that interest rate cuts stimulate lending to risky firms from banks with a higher leverage ratio.
    Keywords: Unconventional monetary policy; Quantitative and qualitative monetary easing; Matched lender-borrower data; Risk-taking channel; News shock
    JEL: E44 E52 G21
    Date: 2017–09
  6. By: Sweder (S.J.G.) van Wijnbergen (UvA, DNB; Tinbergen Institute, The Netherlands); Gera Kiewiet (DNB); Iman (I.P.P.) van Lelyveld (DNB)
    Abstract: The recent financial crisis has led to the introduction of contingent convertible instruments (CoCos) in the capital framework for banks. Although CoCos can provide benefits, such as automatic recapitalization of troubled banks, their inherent risks raise questions about whether they increase the safety of the banking system. We show that concerns about CoCos in just a single bank can result in the decline of an entire market, with investors apparently unable to distinguish safe from risky bonds. In times of market-panic, investors tend to rely on credit ratings instead of estimating the real risks of missing coupon payments. We provide several recommendations to improve the capital requirements regime for banks.
    Keywords: Contagion; Contingent Convertible Capital; Systemic Risk
    JEL: G01 G21 G32
    Date: 2017–10–06
  7. By: Asongu, Simplice; Biekpe, Nicholas
    Abstract: This study assesses how market power in the African banking industry is affected by the complementarity between information sharing offices and information and communication technology (ICT). The empirical evidence is based on a panel of 162 banks consisting of 42 countries for the period 2001-2011. Three estimation techniques are employed, namely: (i) instrumental variable Fixed effects to control for the unobserved heterogeneity; (ii) Tobit regressions to control for the limited range in the dependent variable; and (iii) Instrumental Quantile Regressions (QR) to account for initial levels of market power. Whereas results from Fixed effects and Tobit regressions are not significant, with QR: (i) the interaction between internet penetration and public credit registries reduces market power in the 75th quartile and (ii) the interaction between mobile phone penetration and private credit bureaus increases market power in the top quintiles. Fortunately, the positive net effects are associated with negative marginal effects from the interaction between private credit bureaus and mobile phone penetration. This implies that mobile phones could complement private credit bureaus to decrease market power when certain thresholds of mobile phone penetration are attained. These thresholds are computed and discussed.
    Keywords: Financial access; Information asymmetry; ICT
    JEL: G20 G29 L96 O40 O55
    Date: 2017–05
  8. By: Cesa-Bianchi, Ambrogio (Bank of England); Ferrero, Andrea (University of Oxford); Rebucci, Alessandro (John Hopkins University Carey Business School)
    Abstract: House prices and exchange rates can potentially amplify the expansionary effect of capital inflows by inflating the value of collateral. We first set up a model of collateralized borrowing in domestic and foreign currency with international financial intermediation in which a change in leverage of global intermediaries leads to an international credit supply increase. In this environment, we illustrate how house price increases and exchange rates appreciations contribute to fuelling the boom by inflating the value of collateral. We then document empirically, in a Panel VAR model for 50 advanced and emerging countries estimated with quarterly data from 1985 to 2012, that an increase in the leverage of US Broker-Dealers also leads to an increase in cross-border credit flows, a house price and consumption boom, a real exchange rate appreciation and a current account deterioration consistent with the transmission in the model. Finally, we study the sensitivity of the consumption and asset price response to such a shock and show that country differences are associated with the level of the maximum loan-to-value ratio and the share of foreign currency denominated credit.
    Keywords: Cross-border claims; capital flows; credit supply shock; leverage; exchange rates; house prices; international financial intermediation
    JEL: C32 E44 F44
    Date: 2017–10–06
  9. By: Gabriel Chodorow-Reich; Antonio Falato
    Abstract: We document the importance of covenant violations in transmitting bank health to nonfinancial firms using a new supervisory data set of bank loans. More than one-third of loans in our data breach a covenant during the 2008-09 period, providing lenders the opportunity to force a renegotiation of loan terms or to accelerate repayment of otherwise long-term credit. Lenders in worse health are less likely to grant a waiver and more likely to force a reduction in the loan commitment following a violation. Quantitatively, the reduction in credit to borrowers with long-term credit but who violate a covenant accounts for an 11% decline in the volume of loans and commitments outstanding during the 2008-09 crisis, a similar magnitude to the total contraction in credit during that period. We conclude that the transmission of bank health to nonfinancial firms occurs largely through the loan covenant channel.
    JEL: E44 G21 G32
    Date: 2017–09
  10. By: Kogler, Michael; Keuschnigg, Christian
    Abstract: Capital reallocation from unprofitable to profitable firms is a key source of productivity gain in an innovative economy. We present a model of credit reallocation and focus on the role of banks: Weakly capitalized banks hesitate to write off non-performing loans to avoid a violation of regulatory requirements. This results in insufficient credit reallocation across sectors and a distorted capital allocation. Reducing the cost of equity and tightening capital requirements can mitigate distortions.
    JEL: D92 G21 G28 G33
    Date: 2017
  11. By: Hundtofte , Sean (Federal Reserve Bank of New York)
    Abstract: During banking crises, regulators often relax their normal requirements and refrain from closing financially troubled banks. I estimate the real effects of such regulatory forbearance by comparing differences in state-level economic outcomes by the amount of forbearance extended during the U.S. savings and loan crisis. To instrument for forbearance, I use historical variation in deposit insurance—and hence supervision—of similar financial intermediaries (thrifts) and exploit fixed differences between regional supervisors of the same regulator. The evidence suggests a policy-induced increase in high-risk loans during the official forbearance period (1982-89), followed by a broader bust in house prices and real GDP.
    Keywords: financial crises; regulatory policy
    JEL: G01 G2 H12
    Date: 2017–10–01
  12. By: Black, Lamont K. (DePaul University); Krainer, John (Federal Reserve Bank of San Francisco); Nichols, Joseph B. (Federal Reserve Board of Governors)
    Abstract: There are two main creditors in commercial real estate: arm’s-length investors and banks. We model commercial mortgage-backed securities (CMBS) as the less informed source of credit. In equilibrium, these investors fund properties with a low probability of distress and banks fund properties that may require renegotiation. We test the model using the 2007-2009 collapse of the CMBS market as a natural experiment, when banks funded both collateral types. Our results show that properties likely to have been securitized were less likely to default or be renegotiated, consistent with the model. This suggests that securitization in this market funds safe collateral.
    JEL: G21 G23 G32 R23
    Date: 2017–09–07
  13. By: Neil Bhutta; Steven Laufer; Daniel R. Ringo
    Abstract: Data collected under the Home Mortgage Disclosure Act (HMDA) reveal that the largest banks have significantly reduced their share of mortgage lending to low- and moderate-income (LMI) households in recent years.
    Date: 2017–09–28

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