nep-ban New Economics Papers
on Banking
Issue of 2017‒10‒22
twelve papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Securitization, bank vigilance, leverage and sudden stops By Patir, Assaf
  2. The Transmission Mechanism of Credit Support Policies in the Euro Area By Jef Boeckx; Maite De Sola Perea; Gert Peersman
  3. Monetary policy and bank profitability in a low interest rate environment By Altavilla, Carlo; Boucinha, Miguel; Peydró, José-Luis
  4. The Macroeconomic Effects of Banking Crises: Evidence from the United Kingdom, 1750-1938 By Kenny, Seán; Lennard, Jason; Turner, John D.
  5. Bank stability and the allocation of liquidity in the banking system By Hakenes, Hendrik; Schiephake, Eva
  6. Do we want these two to tango? On zombie firms and stressed banks in Europe By Storz, Manuela; Koetter, Michael; Setzer, Ralph; Westphal, Andreas
  7. Spillover Effects of Institutions on Cooperative Behavior, Preferences, and Beliefs By Florian Engl; Arno Riedl; Roberto A. Weber
  8. Explaining the Historic Rise in Financial Profits in the U.S. Economy JEL Classification: E11, E44, G20 By Ivan Mendieta-Muñoz
  9. Non-performing assets in Indian Banks: This time it is different By Rajeswari Sengupta; Harsh Vardhan
  10. What is a fair profit for social enterprise? Insights from microfinance By Marek Hudon; Marc Labie; Patrick Reichert
  11. The Corridor’s Width as a Monetary Policy Tool By Guillaume A. Khayat
  12. Capital Requirements for Government Bonds - Implications for Financial Stability By Sterzel, André; Neyer, Ulrike

  1. By: Patir, Assaf
    Abstract: Accounts of the recent financial crisis claim that the practice of securitizing bank loans had led banks to be less vigilant in their lending habits. Securitization, the argument goes, gives the originators of the loans worse incentives to screen potential borrowers and monitor them as compared to traditional direct lending. But, unless investors are pricing securities irrationally, wouldn't contract theory suggest that banks should always prefer the contract that allows them to commit to higher vigilance? This paper addresses this problem by introducing a model in which securitization leads to laxer lending standards, even though it is chosen optimally by banks and investors. I construct a model where investment is performed through intermediaries (banks) that choose the volume of lending and a variable level of effort in screening potential borrowers, set the lending standards, and can finance their activities either by eliciting deposits or selling securities. Securitization allows the banks to credibly communicate to investors information about the borrowers, which depositors cannot access. Securitization has two effects: at fixed leverage, securitization gives banks better incentives to screen borrowers and leads to higher lending standards; however, it also allows banks to choose a higher level of leverage, which in turn degrades the screening effort. In equilibrium, securitization leads to lower vigilance, but is still preferred because it allows the banks to intermediate more funds. Paradoxically, the method of finance that allows banks to better communicate information about borrowers leads in equilibrium to less information being produced. The model also provides a natural explanation for why securitization is not observed below a strict credit rating cutoff (FICO 620), and why securitization activity can discontinuously stop as a continuous function of overall economic conditions.
    Keywords: securitization, leverage, banks, SPV, MBS, sudden stops
    JEL: E22 G14 G18 G21
    Date: 2017–10–12
  2. By: Jef Boeckx; Maite De Sola Perea; Gert Peersman
    Abstract: We use an original monthly dataset of 131 individual euro area banks to examine the effectiveness and transmission mechanism of the Eurosystem’s credit support policies since the start of the crisis. First, we show that these policies have indeed been succesful in stimulating the credit flow of banks to the private sector. Second, we find support for the “bank lending view†of monetary transmission. Specifically, the policies have had a greater impact on loan supply of banks that are more constrained to obtain unsecured external funding, i.e. small banks (size effect), banks with less liquid balance sheets (liquidity effect), banks that depend more on wholesale funding (retail effect) and low-capitalized banks (capital effect). The role of bank capital is, however, ambiguous. Besides the above favorable direct effect on loan supply, lower levels of bank capitalization at the same time mitigate the size, retail and liquidity effects of the policies. The drag on the other channels has even been dominant during the sample period, i.e. better capitalized banks have on average responded more to the credit support policies of the Eurosystem as a result of more favourable size, retail and liquidity effects.
    Keywords: unconventional monetary policy, bank lending, monetary transmission mechanism
    JEL: E51 E52 E58 G01 G21
    Date: 2017
  3. By: Altavilla, Carlo; Boucinha, Miguel; Peydró, José-Luis
    Abstract: We analyse the impact of standard and non-standard monetary policy measures on bank profitability. For empirical identification, the analysis focuses on the euro area, thereby exploiting substantial bank and country heterogeneity within a monetary union where the central bank has implemented a broad range of unconventional policies, including quantitative easing and negative interest rates. We use both proprietary and commercial data on individual bank balance sheets and financial market prices. Our results show that monetary policy easing – a decrease in short-term interest rates and/or a flattening of the yield curve – is not associated with lower bank profits once we control for the endogeneity of the policy measures to expected macroeconomic and financial conditions. Importantly, our analysis indicates that the main components of bank profitability are asymmetrically affected by accommodative monetary conditions, with a positive impact on loan loss provisions and non-interest income largely offsetting the negative one on net interest income. We also find that a protracted period of low interest rates might have a negative effect on profits that, however, only materialises after a long period of time and tends to be counterbalanced by improved macroeconomic conditions. In addition, while more operationally efficient banks benefit more from monetary policy easing, banks engaging more extensively in maturity transformation experience a higher increase in profitability after a steepening of the yield curve. Finally, we assess the impact of unconventional monetary policies on market-based measures of expected bank profitability and credit risk, by employing an event study analysis using high frequency data, and find that accommodative monetary policies tend to increase bank stock returns and reduce credit risk. JEL Classification: E52, E43, G01, G21, G28
    Keywords: bank profitability, lower bound, monetary policy, negative rates, quantitative easing
    Date: 2017–10
  4. By: Kenny, Seán (Department of Economic History, Lund University); Lennard, Jason (Department of Economic History, Lund University); Turner, John D. (Queen's University Belfast)
    Abstract: This paper investigates the macroeconomic effects of UK banking crises over the period 1750 to 1938. We construct a new annual banking crisis series using bank failure rate data, which suggests that the incidence of banking crises was every 32 years. Using our new series and a narrative approach to identify exogenous banking crises, we find that industrial production contracts by 8.2 per cent in the year following a crisis. This finding is robust to a battery of checks, including different VAR specifications, different thresholds for the crisis indicator, and the use of a capital-weighted bank failure rate.
    Keywords: banking crisis; bank failures; narrative approach; macroeconomy; United Kingdom
    JEL: E32 E44 G21 N13 N23 N24
    Date: 2017–10–11
  5. By: Hakenes, Hendrik; Schiephake, Eva
    Abstract: The fragility of financial institutions to panic runs depends on their liquidity base: the short term funds available to banks for investment regardless of the withdrawal option available to customers. Institutions that are able to offer higher yield curves are able to lure the liquidity base away from their competitors. Using the standard global games approach, we show that banks that attract a high liquidity base are less prone to panic runs, but the stability of the residual banks decreases.
    JEL: G21 G28 H23
    Date: 2017
  6. By: Storz, Manuela; Koetter, Michael; Setzer, Ralph; Westphal, Andreas
    Abstract: We show that the speed and type of corporate deleveraging depends on the interaction between corporate and financial sector health. Based on granular bank-firm data pertaining to small and medium-sized enterprises (SME) from five stressed and two non-stressed euro area economies, we show that “zombie” firms generally continued to lever up during the 2010–2014 period. Whereas relationships with stressed banks reduce SME leverage on average, we also show that zombie firms that are tied to weak banks in euro area periphery countries increase their indebtedness even further. Sustainable economic recovery therefore requires both: deleveraging of banks and firms. JEL Classification: E44, G21, G32
    Keywords: bank stress, debt overhang, zombie lending
    Date: 2017–10
  7. By: Florian Engl; Arno Riedl; Roberto A. Weber
    Abstract: Institutions are an important means for fostering prosocial behaviors, but in many contexts their scope is limited and they govern only a subset of all socially desirable acts. We use a laboratory experiment to study how the presence and nature of an institution that enforces prosocial behavior in one domain affects behavior in another domain and whether it also alters prosocial preferences and beliefs about others’ behavior. Groups play two identical public good games. We vary whether, for only one game, there is an institution enforcing cooperation and vary also whether the institution is imposed exogenously or arises endogenously through voting. Our results show that the presence of an institution in one game generally enhances cooperation in the other game thus documenting a positive spillover effect. These spillover effects are economically substantial amounting up to 30 to 40 percent of the direct effect of institutions. When the institution is determined endogenously spillover effects get stronger over time, whereas they do not show a trend when it is imposed exogenously. Additional treatments indicate that the main driver of this result is not the endogeneity but the temporal trend of the implemented institution. We also find that institutions of either type enhance prosocial preferences and beliefs about others’ prosocial behavior, even toward strangers, suggesting that both factors are drivers of the observed spillover effects.
    Keywords: public goods, institutions, spillover effect, social preferences, beliefs
    JEL: C92 D02 D72 H41
    Date: 2017
  8. By: Ivan Mendieta-Muñoz
    Abstract: The ratio of financial to non-financial profits in the US economy has increased sharply since the 1970s, the period that is often called the financialisation of capitalism. By developing a two-sector theoretical model the ratio of financial to non-financial profits is shown to depend positively on the net interest margin and the non-interest income of banks, while it depends negatively on the general rate of profit, the non-interest expenses of banks, and the ratio of the capital stock to interest-earning assets. The model was estimated empirically for the post-war period and the results indicate that the ratio has varied mainly with respect to the net interest margin, although non-interest income has also played a significant role. The results confirm that in the course of financialisation the US financial sector has been able to extract rising profits through interest differentials and non-interest income, while the general rate of profit has remained broadly constant.
    Date: 2017
  9. By: Rajeswari Sengupta (Indira Gandhi Institute of Development Research); Harsh Vardhan (Bain and Company)
    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: G21 G28 E44
    Date: 2017–09
  10. By: Marek Hudon; Marc Labie; Patrick Reichert
    Abstract: Although microfinance organizations have typically been considered as inherently ethical, recent events have challenged the legitimacy of the sector. High interest rates and the exorbitant profitability of some market leaders have raised the question of what can be considered a fair, or ethical, level of profit for social enterprise. In this article, we construct a fair profit framework for social enterprise based on four dimensions: the level of profitability, the extent to which the organization adheres to its social mission, the pricing and the surplus distribution. We then apply this framework using an empirical sample of 496 microfinance institutions. Results indicate that satisfying all four dimensions is a difficult, although not impossible, task. Based on our framework, 13 MFIs emerge as true double-bottom-line organizations and tend to be relatively young, large MFIs from South Asia. Using our framework, we argue that excessive profits can be better understood relative to pricing, the outreach of the MFI and the organizational commitment to clients in the form of reduced interest rates.
    Keywords: Microfinance; Development Ethics; Exploitation; Institutional Logic
    JEL: F35 G21 G28 L31 M14
    Date: 2017–10–12
  11. By: Guillaume A. Khayat (Aix-Marseille Univ. (Aix-Marseille School of Economics), CNRS, EHESS and Centrale Marseille)
    Abstract: Credit institutions borrow liquidity from the central bank’s lending facility and deposit (excess) reserves at its deposit facility. The central bank directly controls the corridor: the non-market interest rates of its lending and deposit facilities. Modifying the corridor changes the conditions on the interbank market and allows the central bank to set the short-term interest rate in the economy. This paper assesses the use of the corridor’s width as an additional tool for monetary policy. Results indicate that a symmetric widening of the corridor boosts output and welfare while addressing the central bank’s concerns over higher risk-taking in the economy.
    Keywords: Monetary policy, interbank market, heterogeneous interbank frictions, the corridor, excess reserves, financial intermediation
    JEL: E52 E58 E44
    Date: 2017–10
  12. By: Sterzel, André; Neyer, Ulrike
    Abstract: Banks hold relatively large amounts of government bonds. Large sovereign exposures reinforce possible financial contagion effects from sovereigns to banks and are a risk for financial stability. Using a theoretical model, we find that the introduction of capital requirements for government bonds induce banks to decrease their investment in government bonds and to increase their investment in high yield assets. This implies that banks' balance sheets become more resilient.
    JEL: G28 G21 G01
    Date: 2017

This nep-ban issue is ©2017 by Christian Calmès. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
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