nep-ban New Economics Papers
on Banking
Issue of 2017‒10‒29
39 papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Banks in Colombia: how homogeneous are they? By Carlos León
  2. Shadow Banking and the Four Pillars of Traditional Financial Intermediation By Farhi, Emmanuel; Tirole, Jean
  3. Sovereign risk and deposit dynamics:evidence from Europe By David Grigorian; Vlad Manole
  4. Asset encumbrance, bank funding and fragility By Toni Ahnert; Kartik AnandAuthor-Name: Prasanna Gai; James Chapman
  5. Bank Capital Redux: Solvency, Liquidity, and Crisis By Moritz Schularick; Bjorn Richter; Alan Taylor; Oscar Jorda
  6. What Drives Systemic Bank Risk in Europe: the balance sheet effect By Wosser, Michael
  7. Do Bank Shocks Hamper Firms’ Innovation? By Mariana Spatareanu; Vlad Manole; Ali Kabiri
  8. Equity versus bail-in debt in banking: an agency perspective By Caterina Mendicino; Kalin NikolovAuthor-Name: Javier Suarez
  9. Contingent Convertibles: Can the Market handle them? By Kiewiet, Gera; van Lelyveld, Iman Paul Dieter; van Wijnbergen, Sweder
  10. The real effects of bank capital requirements By Henri Fraisse; Mathias LéAuthor-Name: David Thesmar
  11. The Increased Role of the Federal Home Loan Bank System in Funding Markets, Part 1 : Background By Stefan Gissler; Borghan N. Narajabad
  12. Banking integration and house price comovement By Augustin Landier; David SraerAuthor-Name: David Thesmar
  13. Wholesale funding dry-ups By Christophe Pérignon; David ThesmarAuthor-Name: Guillaume Vuillemey
  14. Systematic Monetary Policy and the Macroeconomic Effects of Shifts in Loan-to-Value Ratios By Ruediger Bachmann; Sebastian Rüth
  15. Financial Stability in Europe: Banking and Sovereign Risk By Jan Bruha; Evžen Kocenda
  16. How Costly is Social Screening? Evidence from the Banking Industry By Simon Cornee; Panu Kalmi; Ariane Szafarz
  17. Solvency and wholesale funding cost interactions at UK banks By Dent, Kieran; Hacioglu Hoke, Sinem; Panagiotopoulos, Apostolos
  18. Dirty money coming home: Capital flows into and out of tax havens By Miethe, Jakob; Menkhoff, Lukas
  19. Interest rates and house prices in the United States and around the world By Gregory Sutton; Dubravko Mihaljek; Agnė Subelytė
  20. Family firms and access to credit. Is family ownership beneficial? By Pierluigi Murro; Valentina Peruzzi
  21. Bank Capital Regulation in a Model of Modern Banking Crises By Zhang, Xue; Poeschl, Johannes
  22. The international transmission of monetary policy through financial centres: evidence from the United Kingdom and Hong Kong. By Hills, Robert; Ho, Kelvin; Reinhardt, Dennis; Sowerbutts, Rhiannon; Wong, Eric; Wu, Gabriel
  23. Natural disasters and bank stability: Evidence from the U.S. financial system By Noth, Felix; Schüwer, Ulrich
  24. Debt giveth and debt taketh away: mortgage debt burdens in Ireland By McIndoe-Calder, Tara
  25. Avoiding Taxes: Banks' Use of Internal Debt By Reiter, Franz
  26. Corporate Debt Structure and Economic Recoveries By T. Grjebine; U. Szczerbowicz; F. Tripier
  27. The Increased Role of the Federal Home Loan Bank System in Funding Markets, Part 3 : Implications for Financial Stability By Stefan Gissler; Borghan N. Narajabad
  28. Households Debt Restructuring: The Re-default Effect of a Debt Suspension By Fraisse, Henri
  29. Bank Distress and Firm Performance during the Great Recession - Evidence from Ireland By Mariana Spatareanu; Vlad Manole; Ali Kabiri
  30. The Increased Role of the Federal Home Loan Bank System in Funding Markets, Part 2 : Recent Trends and Potential Drivers By Stefan Gissler; Borghan N. Narajabad
  31. Simulating fire-sales in a banking and shadow banking system By Susanna Calimani; Grzegorz Hałaj; Dawid Żochowski
  32. Why Some Times Are Different: Macroeconomic Policy and the Aftermath of Financial Crises By Christina D. Romer; David H. Romer
  33. Intermediation Markups and Monetary Policy Passthrough By Andreas Schrimpf; Semyon Malamud
  34. International Tax Evasion, State Purchases of Confidential Bank Data and Voluntary Disclosures By Bethmann, Dirk; Kvasnicka, Michael
  35. Building Credit Histories with Competing Lenders By Igor Livshits; Ariel Zetlin-Jones; Natalia Kovrijnykh
  36. Long-run Money Demand in Switzerland By Gerlach, Stefan
  37. What Drives the Sovereign-Bank Nexus? By Schnabel, Isabel; Schüwer, Ulrich
  38. Towards an understanding of credit cycles: do all credit booms cause crises? By R. Barrell; D. Karim; Corrado Macchiarelli
  39. The Future of Money: Liquidity co-movement between financial institutions and real estate firms: evidence from China By Sheng Huang; Jonathan Williams; Ru Xie

  1. By: Carlos León (Banco de la República de Colombia)
    Abstract: In complex systems, homogeneity (i.e. lack of diversity) has been documented as a source of fragility. Likewise, financial sector’s homogeneity has been documented as a contributing factor for systemic risk. We assess homogeneity in the Colombian case by measuring how similar banks are regarding the structure of their overall financial statements, and their lending, investment, and funding portfolios. Distances among banks and an agglomerative clustering method yield the hierarchical structure of the banking system, which exhibits how banks are related to each other based on their financial structure. The Colombian banking sector displays homogeneous features, especially among the largest banks. Results enable to study to what extent the banking sector is homogeneous, and to identify banking firms that have a (n) (un) common financial structure. Yet, as we neither examine Colombian banking system complexity nor banks’ soundness nor higher dimensions of diversity, conclusive inferences about systemic risk and financial stability are pending. Classification JEL: G21, C38, L22, L25
    Keywords: Clustering, banks, diversity, systemic risk, machine learning
    Date: 2017–10
  2. By: Farhi, Emmanuel; Tirole, Jean
    Abstract: Traditional banking is built on four pillars: SME lending, access to public liquidity, deposit insurance, and prudential supervision. This vision has been shattered by repeated bailouts of shadow financial institutions. This paper puts "special depositors and borrowers'" at the core of the analysis, provides a rationale for the covariation yielding the quadrilogy, and analyzes how prudential regulation must adjust to the possibility of migration toward less regulated spheres. Ring fencing between regulated and shadow banking and the sharing of liquidity in centralized platforms are motivated by the supervision of syphoning and financial contagion.
    Keywords: CCPs.; deposit insurance; lender of last resort; migration; Retail and shadow banks; ring fencing; Supervision
    JEL: E44 E58 G21 G28
    Date: 2017–10
  3. By: David Grigorian; Vlad Manole
    Abstract: The unprecedented expansion of sovereign balance sheets since the beginning of the global crisis has given a new meaning to the term sovereign risk. Developments in Europe since early 2010 revealed new challenges for the functioning of private banks in an environment of heightened sovereign risk and may have contributed to deleveraging. The paper uses an innovative way of measuring the perception of sovereign risk and its impact. Using an extension of a common market discipline framework, it shows that exposure to sovereign risk may have limited the ability of banks in Europe to collect deposits. Potential identification issues between deposits and bank efficiency are controlled by using Data Envelopment Analysis. The results are robust to inclusion of conventional measures of bank performance and the sector-wide holdings of foreign sovereign debt.
    Keywords: Sovereign risk, market discipline, bank deposits, European crisis
    JEL: E44 G21 G28
    Date: 2016–03
  4. By: Toni Ahnert; Kartik AnandAuthor-Name: Prasanna Gai; James Chapman
    Abstract: We propose a model of asset encumbrance by banks subject to rollover risk and study the consequences for fragility, funding costs, and prudential regulation. A bank’s choice of encumbrance trades off the benefit of expanding profitable investment funded by cheap long-term secured debt against the cost of greater fragility due to unsecured debt runs. We derive several testable implications about privately optimal encumbrance ratios. Deposit insurance or wholesale funding guarantees induce excessive encumbrance and exacerbate fragility. We show how regulations such as explicit limits on encumbrance ratios and revenueneutral Pigouvian taxes can mitigate the risk-shifting incentives of banks.JEL Classification: G01, G21, G28
    Keywords: asset encumbrance, rollover risk, wholesale funding, fragility, runs, secured debt, unsecured debt, encumbrance limits, encumbrance surcharges
    Date: 2017–07
  5. By: Moritz Schularick (University of Bonn); Bjorn Richter (University of Bonn); Alan Taylor (Department of Economics & Graduate School of Management); Oscar Jorda (Federal Reserve Bank of San Francisco an)
    Abstract: Higher capital ratios are unlikely to prevent the next financial crisis. This is empirically true both for the pre-WW2 and the post-WW2 periods, and holds both within and between countries. We reach this startling conclusion using newly collected data on the liability side of banks’ balance sheets. Data coverage extends to 17 advanced economies from 1870 to 2013. A solvency indicator, the capital ratio has no value as a crisis predictor; but we find that liquidity indicators such as the loan-to-deposit ratio and the share of non-deposit funding do signal financial fragility, although they add little predictive power relative to that of credit growth on the asset side of the balance sheet. However, higher capital buffers have social benefits in terms of macro-stability: recoveries from financial crisis recessions are much quicker with higher bank capital.
    Date: 2017
  6. By: Wosser, Michael (Central Bank of Ireland)
    Abstract: Since the 2008 global financial crisis (GFC) several systemic risk measures (SRMs) have gained traction in the literature. This paper examines whether Delta-CoVaR (?CoVaR) is relevant in the context of European banks and compares risk rankings against those found using marginal expected shortfall (MES). The analysis reveals that a cluster of large banks, operating in one particular country, is the principal contributor to financial system risk, if measured by ?CoVaR. When the direction of risk flow is reversed, i.e. from the system to the institution (via MES), a second cluster of banks, headquartered in a different jurisdiction, would be most affected by a large and systemic financial shock. The analysis reveals that future realisations of systemic risk is strongly associated with institution size, maturity mismatch, non-performing loans and non-interest-to-interest-income ratios. However, in certain cases, the relationship depends upon the systemic risk measure used. For example, forward bank leverage appears correlated with MES but not with ?CoVaR.
    Keywords: Systemic banking crisis, Systemic risk measurement, ?CoVaR, MES, Bank Balance Sheet, Macroprudential policy
    JEL: G01 G21 G28
    Date: 2017–10
  7. By: Mariana Spatareanu; Vlad Manole; Ali Kabiri
    Abstract: Using a unique matched bank-firm-innovation data for the UK, this paper finds that bank shocks negatively affected firms’ innovations during the recent crises. After carefully controlling for several potential biases in estimation we find that firms whose relationship banks were distressed patented less, and those patents were of lower technological value, less original and of lower quality. The impact is larger in the case of small and medium enterprises (SMEs). We also show that banks’ specialization in financing innovation mitigates the impact of bank distress on firms’ innovation. The results highlight the significantly negative impact of distress in the banking sector on firm’s innovation and potential future economic growth.
    Keywords: innovation, bank distress, crisis, UK
    JEL: G21 G34 O16 O30
    Date: 2017–09
  8. By: Caterina Mendicino; Kalin NikolovAuthor-Name: Javier Suarez
    Abstract: We examine the optimal size and composition of banks’ total loss absorbing capacity (TLAC). Optimal size is driven by the trade-off between providing liquidity services through deposits and minimizing deadweight default costs. Optimal composition (equity vs. bail-in debt) is driven by the relative importance of two incentive problems: risk shifting (mitigated by equity) and private benefit taking (mitigated by debt). Our quantitative results suggest that TLAC size in line with current regulation is appropriate. However, an important fraction of it should consist of bail-in debt because such buffer size makes the costs of risk-shifting relatively less important at the margin. JEL Classification: G21, G28, G32
    Keywords: bail-in debt, loss absorbing capacity, risk shifting, agency problems, bank regulation
    Date: 2017–07
  9. By: Kiewiet, Gera; van Lelyveld, Iman Paul Dieter; van Wijnbergen, Sweder
    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
  10. By: Henri Fraisse; Mathias LéAuthor-Name: David Thesmar
    Abstract: We measure the impact of bank capital requirements on corporate borrowing and investment using loanE level data. The Basel II regulatory framework makes capital requirements vary across both banks and across firms, which allows us to control for firm level credit demand shocks and bankE level credit supply shocks. We find that a 1 percentage point increase in capital requirements reduces lending by 10%. Firms can attenuate this reduction by substituting borrowing across banks, but only partially. The resulting reduction in borrowing capacity impacts investment, but not working capital: Fixed assets are reduced by 2.6%, but lending to customers is unaffected. JEL Classification: E51, G21, G28
    Keywords: bank capital ratios, bank regulation, credit supply
    Date: 2017–06
  11. By: Stefan Gissler; Borghan N. Narajabad
    Abstract: The Federal Home Loan Bank (FHLB) system was founded in 1932 to support mortgage lending by thrifts and insurance companies. Over time, the system has grown into a provider of funding for a larger range of financial institutions, including commercial banks and insurance companies. Part 1 of this note provides an overview of the FHLB system. Part 2 highlights some of the recent developments in the FHLB system. And part 3 discusses the implications of these developments for financial stability.
    Date: 2017–10–18
  12. By: Augustin Landier; David SraerAuthor-Name: David Thesmar
    Abstract: The correlation across US states in house price growth increased steadily between 1976 and 2000. This paper shows that the contemporaneous geographic integration of the US banking market, via the emergence of large banks, was a primary driver of this phenomenon. To this end, we first theoretically derive an appropriate measure of banking integration across state pairs and document that house price growth correlation is strongly related to this measure of financial integration. Our IV estimates suggest that banking integration can explain up to one fourth of the rise in house price correlation over this period. JEL Classification: G21, F65, R30
    Keywords: financial integration, comovement, house prices
    Date: 2017–06
  13. By: Christophe Pérignon; David ThesmarAuthor-Name: Guillaume Vuillemey
    Abstract: We empirically explore the fragility of wholesale funding of banks, using transaction level data on short-term, unsecured certificates of deposits in the European market. We do not observe any market-wide freeze during the 2008-2014 period. Yet, many banks suddenly experience funding dry-ups. Dry-ups predict, but do not cause, future deterioration of bank performance. Furthermore, in periods of market stress, banks with high future performance tend to increase reliance on wholesale funding. Thus, we fail to find evidence consistent with classical adverse selection models of funding market freezes. Our evidence is in line with theories highlighting heterogeneity between informed and uninformed lenders. JEL Classification: G21
    Keywords: wholesale bank funding, market freezes, asymmetric information
    Date: 2017–07
  14. By: Ruediger Bachmann; Sebastian Rüth
    Abstract: What are the macroeconomic consequences of changing aggregate lending standards in residential mortgage markets, as measured by loan-to-value (LTV) ratios? In a structural VAR, GDP and business investment increase following an expansionary LTV shock. Residential investment, by contrast, falls, a result that depends on the systematic reaction of monetary policy. We show that, historically, the Fed tended to respond directly to expansionary LTV shocks by raising the monetary policy instrument, and, as a result, mortgage rates increase and residential investment declines. The monetary policy reaction function in the US appears to include lending standards in residential markets, a finding we confirm in Taylor rule estimations. Without the endogenous monetary policy reaction residential investment increases. House prices and household (mortgage) debt behave in a similar way. This suggests that an exogenous loosening of LTV ratios is unlikely to explain booms in residential investment and house prices, or run ups in household leverage, at least in times of conventional monetary policy.
    Keywords: loan-to-value ratios, monetary policy, residential investment, structural VAR, Cholesky identification, Taylor rules
    JEL: E30 E32 E44 E52
    Date: 2017
  15. By: Jan Bruha; Evžen Kocenda
    Abstract: We analyze the link between banking sector quality and sovereign risk in the whole European Union over 1999–2014. We employ four different indicators of sovereign risk (including market- and opinion-based assessments), a rich set of theoretically and empirically motivated banking sector characteristics, and a Bayesian inference in panel estimation as a methodology. We show that a higher proportion of non-performing loans is the single most influential sector-specific variable that is associated with increased sovereign risk. The sector’s depth provides mixed results. The stability (capital adequacy ratio) and size (TBA) of the industry are linked to lower sovereign risk in general. Foreign bank penetration and competition (a more diversified structure of the industry) are linked to lower sovereign risk. Our results also support the wake-up call hypothesis in that markets re-appraised a number of banking sector-related issues in the pricing of sovereign risk after the onset of the sovereign crisis in Europe.
    Keywords: sovereign default risk, banking sector, global financial crisis, financial stability, European Union
    JEL: E58 F15 G21 G28 H63
    Date: 2017
  16. By: Simon Cornee; Panu Kalmi; Ariane Szafarz
    Abstract: Social banks screen loan applicants by using both social and financial criteria, and social screening implies an extra workload. To check the costs involved in this type of screening we use balance-sheet information on European banks, and compare the operating costs of social banks with those of other banks. Surprisingly, our first results suggest that social banks’ costs are not significantly higher than those of their mainstream counterparts. Next, we uncover that the extra costs of social screening are offset by a cheaper workforce. Despite their need for specific screening, social banks are financially sustainable in a market dominated by for-profit institutions.
    Keywords: Social Screening; Social Banks; Screening Costs; Warm Glow
    JEL: G20 L33 J32 L31 D63 D82 G21
    Date: 2017–10–23
  17. By: Dent, Kieran (Bank of England); Hacioglu Hoke, Sinem (Bank of England); Panagiotopoulos, Apostolos (Bank of England)
    Abstract: We study the interaction between solvency and funding costs at UK banks. We use the market-based leverage ratio as a proxy for market participants’ perceptions of bank solvency. We investigate the impact that changes in this ratio have on banks’ CDS premia, which are a proxy for their marginal cost of wholesale funding. We find that a negative shock to market participants’ perception of banks’ solvency leads to an increase in banks’ marginal cost of wholesale funding. We find evidence that this negative relationship is nonlinear, ie the responsiveness of funding costs to a shock to solvency is greater at lower initial levels of solvency.
    Keywords: Solvency; funding cost; leverage ratio; CDS premia; panel threshold model; panel smooth transition model
    JEL: C33 G21
    Date: 2017–10–13
  18. By: Miethe, Jakob; Menkhoff, Lukas
    Abstract: We use recently released bilateral locational banking statistics of the BIS to show the full circle of international tax evasion via tax havens. White-washed money from tax havens is withdrawn from banks in non-havens if an information treaty is signed. This complements the stylized fact of such a reaction on outbound flows into tax havens. We find different time lags and other plausible structures in these reactions and a puzzling decline of the effect of treaties on capital flows over time.
    JEL: G21 H26
    Date: 2017
  19. By: Gregory Sutton; Dubravko Mihaljek; Agnė Subelytė
    Abstract: This paper estimates the response of house prices to changes in short- and long-term interest rates in 47 advanced and emerging market economies. We use data that statistical authorities selected as their best house price series, covering almost half a century of quarterly observations for the United States and over 1,000 annual observations for the rest of the sample. We find a surprisingly important role for short-term interest rates as a driver of house prices, especially outside the United States. Our interpretation is that this reflects the importance of the bank lending channel of monetary policy in house price fluctuations, especially in countries where securitisation of home mortgages is less prevalent. In addition, we document substantial inertia in house prices and find that changes in interest rates and other determinants affect house prices gradually rather than on impact. This suggests that modest cuts in policy rates are not likely to rapidly fuel house price increases. Finally, we find that US interest rates seem to affect house prices outside the United States.
    Keywords: interest rates, house prices, monetary policy, bank lending channel, random walk, house price bubble, United States, advanced economies, emerging market economies
    JEL: E39 E43 E58 G12 R31 R32
    Date: 2017–10
  20. By: Pierluigi Murro (LUMSA University); Valentina Peruzzi (Università Politecnica delle Marche)
    Abstract: This paper investigates the effect of family ownership on credit rationing using a rich sample of Italian manufacturing firms. We find that family ownership increases the probability of credit rationing. Conflicts between large and minority shareholders, family firms’ lack of competencies and conservatism appear to be the main determinants of this result. By contrast, family owners’ long-termism, risk aversion, and relationship lending mitigate the adverse impact of family ownership on firms’ credit availability. Finally, we find that family businesses are more likely to be rationed in provinces with high level of social capital and judicial efficiency, suggesting that delegation problems are mitigated by personal relationships in areas where cooperation mechanisms are weaker.
    Keywords: Family firms, credit rationing, agency conflicts, relationship lending
    JEL: D22 G21 G32
    Date: 2017–10
  21. By: Zhang, Xue; Poeschl, Johannes
    Abstract: We study the macroeconomic effects of retail bank capital regulation in an economy with a retail and a shadow banking sector. The financial instability takes the form of bank runs on the shadow banking sector. Retail bank capital regulation reduces the frequency of bank runs by mitigating the drops in capital price during fire sales. The aggregate capital stock decreases as a result of capital misallocation. The cost of bank capital requirement outweighs its benefit of fewer bank runs.
    JEL: E44
    Date: 2017
  22. By: Hills, Robert (Bank of England); Ho, Kelvin (Hong Kong Monetary Authority); Reinhardt, Dennis (Bank of England); Sowerbutts, Rhiannon (Bank of England); Wong, Eric (Hong Kong Monetary Authority); Wu, Gabriel (Hong Kong Monetary Authority)
    Abstract: This paper explores the cross-border transmission of monetary policy by comparing and contrasting the results for two major international financial centres: Hong Kong and the United Kingdom. We examine the effect of monetary policy in the US, euro area and Japan, on UK and Hong Kong-resident banks’ domestic lending behaviour, using individual bank-level data. Focusing on financial interconnections and other balance sheet characteristics as a transmission mechanism, we find that both of these factors play an important role in the transmission of foreign monetary policy. We are able to establish evidence for both a bank funding and bank portfolio channel of monetary policy, for both Hong Kong and the United Kingdom. There are important differences between the two countries; in particular, the currency denomination of lending appears to play a major role only in the United Kingdom, which probably reflects Hong Kong’s linked exchange rate system by which the HK dollar is pegged with the US dollar. These results contrast to the largely inconclusive results from previous studies, whose aggregate nature may have masked offsetting individual bank effects.
    Keywords: International financial linkages; monetary policy transmission; bank lending
    JEL: E52 F42 G21
    Date: 2017–10–16
  23. By: Noth, Felix; Schüwer, Ulrich
    Abstract: We document that natural disasters significantly weaken the stability of banks with business activities in affected regions. This is reflected, among others, in higher probabilities of default and foreclosure ratios. The effects are economically relevant and suggest that insurance payments and public aid programs do not sufficiently protect bank borrowers against financial difficulties. We also find that the adverse effects dissolve after some years if no further disasters occur in the meantime.
    JEL: G21 Q54
    Date: 2017
  24. By: McIndoe-Calder, Tara (Central Bank of Ireland)
    Abstract: Households reduced their debt levels by a fifth between 2008 and 2014. This pattern of deleveraging differs markedly across the age distribution. Young borrowers (born after 1970) reduced their debt levels by 13% compared to 35% for Older borrowers (born before 1960). The difference arises because Young borrowers have larger mortgages - and longer remaining loan durations, and therefore a greater share of repayments is an interest payment. Mortgage repayments for the typical tracker borrower have fallen by 34% since 2008. SVR borrowers’ repayments have fallen by just 9%. Relative to Older borrowers, Young borrowers are more likely to be on a tracker rate, reflecting the mortgage products available at loan origination. However, Young borrowers continue to face a heavy debt-burden and are at risk of higher interest rates in the future.
    Date: 2017–10
  25. By: Reiter, Franz
    Abstract: This paper investigates how banks use internal debt to shift profits to lower taxed affiliates. Using regulatory data on German multinational banks I find that banks employ the debt shifting channel more aggressively than non-banks do. This becomes even clearer when I correct for conduit entities in internal debt financing: A ten percentage points higher corporate tax rate increases the internal net leverage by 5.63 percentage points, corresponding to an 18% increase at the mean.
    JEL: H25 G21 F21
    Date: 2017
  26. By: T. Grjebine; U. Szczerbowicz; F. Tripier
    Abstract: This paper analyzes the business cycle behavior of the corporate debt structure and its interaction with economic recovery. The debt structure is measured as the share of bonds in the total credit to non-financial corporations for a quarterly panel of countries over the period 1989-2013. We first show that the substitution of loans for bonds in recoveries is a regular property of business cycles. Secondly, we provide evidence that economies with high bond share and important bond-loan substitution recover from the recessions faster. This identified link between corporate debt structure and business cycles is robust to the inclusion of traditional factors which shape recessions and recovery such as the size and the quality of financial markets, the occurrence of bank crisis, the dynamics of credit, and the distribution of firm size.
    Keywords: Corporate Debt; Bonds Markets; Banking; Business Cycles; Recovery; Financial Frictions.
    JEL: E3 E4 G1 G2
    Date: 2017
  27. By: Stefan Gissler; Borghan N. Narajabad
    Abstract: This note is the third part in a three part series. Part 1 provides some historical background and discusses key institutional characteristics of the Federal Home Loan Banks (FHLB) System. Part 2 highlights some of the recent trends in the FHLB system and potential drivers of those trends. This note discusses the implication of these developments for financial stability.
    Date: 2017–10–18
  28. By: Fraisse, Henri (Bank of France)
    Abstract: When facing financial distress, French households can file a case to a "households' over-indebtedness commission" (HDC). The HDC can order an immediate repayment or grant a debt suspension. Exploiting the random assignment of bankruptcy filings to managers, we show that a debt suspension has a very significant and negative effect on the likelihood to re-default but that this impact is only short-lived. The effect depends not only on the characteristics of the households but also on the nature of their indebtedness. Our results imply that rather than focusing on a specific debt profile, above all a deeper restructuring of the expenditure side is necessary to make the plan sustainable. They also single out specific banks lending to particular fragile households. They indicate the importance of policy actions on budget counseling, as well as the importance of regulation of credit distribution to avoid both entering into bankruptcy and re-filing for bankruptcy.
    Keywords: bankruptcy, household finance, default, debt restructuring
    JEL: D G2 K35
    Date: 2017–09
  29. By: Mariana Spatareanu; Vlad Manole; Ali Kabiri
    Abstract: This paper investigates the impact of bank distress on firms’ performance using unique data during the Great Recession for Ireland. The results show that bank distress, measured as banks’ credit default swap spreads (CDS) has negatively and statistically significantly affected firms’ investment expenditures. Interestingly, firms with access to alternative sources of external finance are not impacted by bank distress. The results are robust to accounting for external finance dependence, demand and trade sensitivities, which affect firm performance and the demand for credit.
    Keywords: firm performance, bank distress, crisis
    JEL: E44 E50 G20
    Date: 2016–01
  30. By: Stefan Gissler; Borghan N. Narajabad
    Abstract: This note is the second part in a three part series. Part 1 provides some historical background and discusses key institutional characteristics of the Federal Home Loan Banks (FHLB) System. This note discusses recent trends in the FHLB system and potential drivers of those trends.
    Date: 2017–10–18
  31. By: Susanna Calimani; Grzegorz Hałaj; Dawid Żochowski
    Abstract: We develop an agent based model of traditional banks and asset managers. Our aim is to investigate the channels of contagion of shocks to asset prices within and between the two financial sectors, including the effects of fire sales and their impact on financial institutions’ balance sheets. We take a structural approach to the price formation mechanism as in Bluhm, Faia and Kranen (2014) and introduce a clearing mechanism with an endogenous formation of asset prices. Both types of institutions hold liquid and illiquid assets and are funded via equity and deposits. Traditional banks are interconnected in the money market via mutual interbank claims, where the rate of return is endogenously determined through a tatonnement process. We show how in such a set-up an initial exogenous liquidity shock may lead to a fire-sale spiral. Banks, which are subject to capital and liquidity requirements, may be forced to sell an illiquid security, which impacts its, endogenously determined, market price. As the price of the security decreases, both agents update their equity and adjust their balance sheets by making decisions on whether to sell or buy the security. This endogenous process may trigger a cascade of sales leading to a fire-sale. We find that, first, mixed portfolios banks act as plague-spreader in a context of financial distress. Second, higher bank capital requirements may aggravate contagion since they may incentivise banks to hold similar assets, and choose mixed portfolios business model which is also characterized by lower levels of voluntary capital buffer. Third, asset managers absorb small liquidity shocks but they exacerbate contagion when liquid buffers are fully utilised. JEL Classification: C63, D85, G21, G23
    Keywords: fire sales, contagion, systemic risk, asset managers, agent based model
    Date: 2017–06
  32. By: Christina D. Romer; David H. Romer
    Abstract: Analysis based on a new measure of financial distress for 24 advanced economies in the postwar period shows substantial variation in the aftermath of financial crises. This paper examines the role that macroeconomic policy plays in explaining this variation. We find that the degree of monetary and fiscal policy space prior to financial distress—that is, whether the policy interest rate is above the zero lower bound and whether the debt-to-GDP ratio is relatively low—greatly affects the aftermath of crises. The decline in output following a crisis is less than 1 percent when a country possesses both types of policy space, but almost 10 percent when it has neither. The difference is highly statistically significant and robust to the measures of policy space and the sample. We also consider the mechanisms by which policy space matters. We find that monetary and fiscal policy are used more aggressively when policy space is ample. Financial distress itself is also less persistent when there is policy space. The findings may have implications for policy during both normal times and periods of acute financial distress.
    JEL: E32 E52 E62 G01 N10
    Date: 2017–10
  33. By: Andreas Schrimpf (Bank for International Settlements); Semyon Malamud (Ecole Polytechnique Federale de Lausanne)
    Abstract: We introduce intermediation frictions into the classical monetary model with fully flexible prices. Trade in financial assets happens through intermediaries who bargain over a full set of state-contingent claims with their customers. Monetary policy is redistributive and affects intermediaries' ability to extract rents; this opens up a new channel for transmission of monetary shocks into rates in the wider economy, which may be labelled the markup channel of monetary policy. Passthrough efficiency depends crucially on the anticipated sensitivity of future monetary policy to future stock market returns (the ``Central Bank Put"). The strength of this put determines the room for maneuver of monetary policy: when it is strong, monetary policy is destabilizing and may lead to market tantrums where deteriorating risk premia, illiquidity and markups mutually reinforce each other; when the put is too strong, passthrough becomes fully inefficient and a surprise easing even begets a rise in real rates.
    Date: 2017
  34. By: Bethmann, Dirk; Kvasnicka, Michael
    Abstract: State purchases of bank data on suspected tax evaders from international tax havens constitute a potential tool to combat international tax evasion. Using self-compiled data for North-Rhine Westphalia on the timing and content of such data acquisitions from whistleblowers and on monthly voluntary disclosures of international tax evasion involving Swiss banks, we show that purchases of data by tax authorities on potential tax evaders have a positive and sizeable effect on voluntary disclosures.
    JEL: H26
    Date: 2017
  35. By: Igor Livshits (University of Western Ontario); Ariel Zetlin-Jones (Carnegie Mellon University); Natalia Kovrijnykh (Arizona State University)
    Abstract: This paper models credit histories as a way of aggregating information among various potential lenders, and is the first one to explicitly model how borrowers may affect this information aggregation through sequential borrowing. We analyze a dynamic economy with multiple competing lenders, who have heterogeneous private information about a consumer’s creditworthiness. We explore how this private information is aggregated through lending that take place over multiple stages. There are two key forces at play. On the one hand, acquiring a loan at an early stage serves as a positive signal—it allows the borrower to convey to other lenders the existence of a positively informed lender (advancing that early loan)—thereby convincing other lenders to extend further credit in future stages. On the other hand, because further lending dilutes existing loans (by increasing the consumer’s probability of default), the early lender takes this into account by charging a higher interest rate on the early loan, which makes the signaling costly. We demonstrate that despite dilution making early loans costly, borrowers may choose to take on small, early loans to signal their credit-worthiness to other lenders. We interpret this mechanism as building a credit history. We also show that information asymmetries can result in inefficiently large loans (relative to the symmetric information benchmark) extended in equilibrium. Our study leads us to examine features of consumer credit related to those consumers who hold multiple balances within a given loan category, e.g. multiple credit card balances. Very little is known in general about what types of consumers hold multiple balances or what credit terms, such as limits, these consumers face. Beyond providing basic documentation of these properties of consumer credit markets using data from TransUnion, we are more specifically interested in understanding how incumbent creditors adjust their credit terms when consumers initiate credit products with new lenders. One key aspect of the data we plan to exploit is the response of exiting lenders to an individual consumer opening of a new credit line. The dilution channel implies that existing credit cards should tighten credit limits attempting to limit the dilution from the new lender. On the other hand, the information aggregation channel implies the contrary—that incumbent lenders should extend their credit limits in response to new positive information, presumably available to the new lender. Since model parameters, in particular, average credit-worthiness, determine which channel dominates in our model, we are also interested in examining how the response of incumbent lenders varies with consumers’ prior credit histories.
    Date: 2017
  36. By: Gerlach, Stefan
    Abstract: This paper studies long-run demand functions for Swiss M1 and M3, using annual data spanning the period 1907-2016. While the demand functions display plausible price and income elasticities, tests for structural breaks at unknown points in time detect instability in 1929 for real M1 and 1943 for real M3. This instability appears to arise from the way in which the opportunity cost is modelled. While using a single interest rate may be appropriate for M1, for M3 it would likely be helpful to take into consideration both the own return and the return on non-monetary assets.
    Keywords: cointegration; money demand; opportunity cost; Switzerland
    JEL: E4 E5 N1
    Date: 2017–10
  37. By: Schnabel, Isabel; Schüwer, Ulrich
    Abstract: The positive relationship between bank and sovereign credit risk in the Eurozone is seen as a major threat for the stability of the Eurozone. This paper explores potential bank-level and country-level drivers of this relationship. We find that banks' home bias in their sovereign exposures and their low equity ratios as well as countries' high debt-to-GDP ratios and low perceived government effectiveness are positively related to the sovereign-bank nexus.
    JEL: G21 G28
    Date: 2017
  38. By: R. Barrell (Brunel University London, UK); D. Karim (Brunel University London, UK); Corrado Macchiarelli (London School of Economics and Political Science, UK; The Rimini Centre for Economic Analysis)
    Abstract: Macroprudential policy is now based around a countercyclical buffer, relating capital requirements for banks to the degree of excess credit in the economy. We consider the construction of the credit to GDP gap looking at different ways of extracting the cyclical indicator for excess credit. We compare different smoothing mechanisms for the credit gap, and demonstrate that some countries require an AR(2) smoother whilst other do not. We embed these different estimates of the credit gap in Logit models of financial crises, and show that the AR(2) cycle is a much better contributor to their explanation than is the HP filter suggested by the BIS and currently in use in policy making. We show that our results are robust to changes in assumptions, and we make criticisms of current policy settings.
    Keywords: credit cycle, financial crisis, banks, macro-prudential policy, filtering
    Date: 2017–10
  39. By: Sheng Huang (Bangor University); Jonathan Williams (Bangor University); Ru Xie (Bangor University)
    Abstract: The possibility of liquidity risk interdependence between financial institutions and real estate firms raises concern over financial stability. Changes in real estate liquidity conditions reflecting credit risks could increase bank liquidity risk due to untimely loan repayment. Liquidity risks can be amplified if liquidity shortfalls are not resolved. Using data from China from 2000 to 2014, and using three liquidity indicators to measure the impact of market capacity (liquidity depth), transaction costs (liquidity tightness) and market efficiency (liquidity resilience), a first result shows commonality or a two-way loop in liquidity risks between financial institutions and real estate firms. A second result indicates a positive and long run effect of the liquidity resilience of real estate firms on financial institutions. Liquidity risk transmission becomes prominent during episodes of market distress.
    Date: 2017–09

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