nep-ban New Economics Papers
on Banking
Issue of 2017‒11‒12
33 papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. How Bad Is a Bad Loan? Distinguishing Inherent Credit Risk from Inefficient Lending (Does the Capital Market Price This Difference?) By Joseph Hughes; Choon-Geol Moon
  2. Behavioral Banking: A Theory of the Banking Firm with Time-Inconsistent Depositors By Carolina Laureti; Ariane Szafarz
  3. The Impact of Japanese Monetary Policy Crisis Management on the Japanese Banking Sector By Juliane Gerstenberger; Gunther Schnabl
  4. Strategic Default Among Private Student Loan Debtors: Evidence from Bankruptcy Reform By Darolia, Rajeev; Ritter, Dubravka
  5. Cross-country spillovers from macroprudential regulation: Reciprocity and leakage By Margarita Rubio
  6. Supervisory and statistical granular data modelling at the Croatian National Bank By Bašić, Ines
  7. Design of Macro-prudential Stress Tests By Orlov, Dmitry; Zryumov, Pavel; Skrzypacz, Andrzej
  8. Do Professional Norms in the Banking Industry Favor Risk-taking? By Alain Cohn; Ernst Fehr; Michel André Maréchal
  9. The Mortgage Rate Conundrum By Justiniano, Alejandro; Primiceri, Giorgio E.; Tambalotti, Andrea
  10. Bank capital allocation under multiple constraints By Tirupam Goel; Ulf Lewrick; Agnė Nikola Tarashev
  11. Competition and credit procyclicality in European banking By Aurélien Leroy; Yannick Lucotte
  12. Macroprudential Measures and Irish Mortgage Lending: Insights from H1 2017 By Kinghan, Christina; Lyons, Paul; McCarthy, Yvonne
  13. Asymmetric Information and Imperfect Competition in Lending Markets By Gregory S. Crawford; Nicola Pavanini; Fabiano Schivardi
  14. Bargaining power and outside options in the interbank lending market By Abbassi, Puriya; Bräuning, Falk; Schulze, Niels
  15. Cross-border effects of regulatory spillovers: evidence from Mexico By Tripathy, Jagdish
  16. Equilibrium Theory of Banks' Capital Structure By Douglas Gale; Piero Gottardi
  17. Financial Crises, Bank Lending, and Trade Credit:Evidence from Chinese Enterprises By Yajing Liu; Kenya Fujiwara
  18. Effect of Banking Sector Resolution on Competition and Stability By Anna Kruglova; Yulia Ushakova
  19. The Effect of Bank Credit and the Trade Patterns of Colombian Exporters By Roa Mónica; Molina Danielken
  20. Choosing Stress Scenarios for Systemic Risk Through Dimension Reduction By Pritsker, Matthew
  21. Bondholder Reorganization of Systemically Important Financial Institutions By Steven Gjerstad
  22. Retirement in the Shadow (Banking) By Guillermo Ordoñez; Facundo Piguillem
  23. The Intersection of U.S. Money Market Mutual Fund Reforms, Bank Liquidity Requirements, and the Federal Home Loan Bank System By Anadu, Ken; Baklanova, Viktoria
  24. The Cost of Distorted Financial Advice - Evidence from the Mortgage Market By Leonardo Gambacorta; Luigi Guiso; Paolo Mistrulli; Andrea Pozzi; Anton Tsoy
  25. Determinants of bank closures : Do changes of CAMEL variables matter? By Mäkinen, Mikko; Solanko, Laura
  26. U. S. monetary policy and emerging market credit cycles By Brauning, Falk; Ivashina, Victoria
  27. Banking Systems in an Economy Dominated by Cryptocurrencies By Hegadekatti, Kartik; S G, Yatish
  28. Risk-taking Behavior in Cooperative Financial Institutions and Financial Stability in Japan: Lessons from the Global Financial Crisis (Japanese) By OHKUMA Masanori
  30. Trading Offshore: Evidence on Banks' Tax Avoidance By Dominika Langenmayr; Franz Reiter
  31. Debt Collateralization, Structured Finance, and the CDS Basis By Gong Feixue; Gregory Phelan
  32. Assessing Competition With the Panzar-Rosse Model: An empirical analysis of European Union banking industry By Suzana Cristina Silva Andrade
  33. Analysis of the Cost-Efficiency of Microfinance Institutions in the West African Economic Monetary Union Area By Leadaut Edith Prisca Togba

  1. By: Joseph Hughes (Rutgers University); Choon-Geol Moon (Hanyang University)
    Abstract: We develop a novel technique to decompose banks’ ratio of nonperforming loans to total loans into two components: first, a minimum ratio that represents best-practice lending given the volume and composition of a bank’s loans, the average contractual interest rate charged on these loans, and market conditions such as the average GDP growth rate and market concentration; and, second, a ratio, the difference between the bank’s observed ratio of nonperforming loans and the best-practice minimum ratio, that represents the bank’s proficiency at loan making. The best-practice ratio of nonperforming loans, the ratio a bank would experience if it were fully efficient at credit-risk evaluation and loan monitoring, represents the inherent credit risk of the loan portfolio and is estimated by stochastic frontier techniques. We apply the technique to 2013 data on top-tier U.S. bank holding companies. We divide them into five size groups. The largest banks with consolidated assets exceeding $250 billion experience the highest ratio of nonperformance among the five groups. Moreover, the inherent credit risk of their lending is the highest among the five groups. On the other hand, their inefficiency at lending is one of the lowest among the five. Thus, the high ratio of nonperformance of the largest financial institutions appears to result from lending to riskier borrowers, not inefficiency at lending. Small community banks under $1 billion also exhibit higher inherent credit risk than all other size groups except the largest banks. In contrast, their loan-making inefficiency is highest among the five size groups. Restricting the sample to publicly traded bank holding companies and gauging financial performance by market value, we find the ratio of nonperforming loans to total loans is on average negatively related to financial performance except at the largest banks. When nonperformance is decomposed into inherent credit risk and lending inefficiency, taking more inherent credit risk enhances market value at many more large banks while lending inefficiency is negatively related to market value at all banks. Market discipline appears to reward riskier lending at large banks and discourage lending inefficiency at all banks.
    Keywords: commercial banking, credit risk, nonperforming loans, lending efficiency
    JEL: G21 L25 C58
    Date: 2017–10–30
  2. By: Carolina Laureti; Ariane Szafarz
    Abstract: Time-consistent savers require compensation for holding savings accounts that are illiquid rather than liquid. In equilibrium, banks subject to reserve requirements for liquidity management are keen to offer that compensation. Yet the presence of time-inconsistent agents, who value illiquidity as a commitment device to discipline their future selves, reshuffles the deck. Our model determines the equilibrium liquidity premium––the interest spread between illiquid and liquid deposits––offered by a bank to a pool comprising known proportions of time-consistent and time-inconsistent savers, under the assumption that individual time consistency or inconsistency is private information. We characterize pooling and separating equilibria, and uncover two asymmetric externalities: time-inconsistent agents obtain a higher premium than they would request ex ante for holding illiquid accounts, while time-inconsistent agents make it harder for their time-consistent counterparts to get illiquid accounts. We also deliver insights on reserve requirements for banking regulation.
    Keywords: Behavioral economics; banking; savings account; liquidity premium; time inconsistency; commitment; quasi-hyperbolic discounting.
    JEL: G21 E21 D53 D91 G28
    Date: 2017–10–26
  3. By: Juliane Gerstenberger; Gunther Schnabl
    Abstract: The paper analyses the impact of Japanese monetary policy crisis management on the Japanese banking sector since the 1998 Japanese financial crisis. It shows how low-cost liquidity provision as a means to stabilize banks has created a growing gap between deposits above lending and has compressed interest margins as the traditional source of bank’s income. Efficiency scores are compiled to estimate the impact of monetary policy crisis management on the efficiency of banks. The estimation results provide evidence that the Japanese monetary policy crisis management has contributed to declining efficiency in the banking sector despite or because of growing concentration.
    Keywords: Japan, monetary policy, crisis management, banking sector, city banks, regional banks, shinkin banks, concentration
    JEL: E52 E58 F42 E63
    Date: 2017
  4. By: Darolia, Rajeev (Federal Reserve Bank of Philadelphia); Ritter, Dubravka (Federal Reserve Bank of Philadelphia)
    Abstract: Bankruptcy reform in 2005 restricted debtors’ ability to discharge private student loan debt. The reform was motivated by the perceived incentive of some borrowers to file bankruptcy under Chapter 7 even if they had, or expected to have, sufficient income to service their debt. Using a national sample of credit bureau files, we examine whether private student loan borrowers distinctly adjusted their Chapter 7 bankruptcy filing behavior in response to the reform. We do not find evidence to indicate that the moral hazard associated with dischargeability appreciably affected the behavior of private student loan debtors prior to the policy.
    Keywords: student loans; bankruptcy; bankruptcy reform
    JEL: D14 G21 I22 K35
    Date: 2017–11–02
  5. By: Margarita Rubio
    Abstract: In a globally interconnected banking system, there can be spillovers from domestic macroprudential policies to foreign banks and vice versa, for example, through the presence of foreign branches in the domestic economy. The lack of reciprocity of some macroprudential instruments may result in an increase in bank flows to those banks with lower regulatory levels, a phenomenon known as "leakage." This may decrease the effectiveness of macroprudential policies in the pursuit of financial stability. To explore this topic, I consider a two-country DSGE model with housing and credit constraints. Borrowers can choose whether to borrow from domestic and foreign banks. Macroprudential policies are conducted at a national level and are represented by a countercyclical rule on the loan-to-value ratio. Results show that when there are some sort of reciprocity agreements on macroprudential policies across countries, financial stability and welfare gains are larger than in a situation of non reciprocity. An optimal policy analysis shows that, in order to enhance the effectiveness of macroprudential policies, reciprocity mechanisms are desirable although the foreign macroprudential rule does not need to be as aggressive as the domestic one.
    Keywords: Macroprudential Policies, Spillovers, Banking Regulation, Foreign
    Date: 2017
  6. By: Bašić, Ines
    Abstract: As the European Reporting Framework (ERF): Key facts and information 1 report has recognised, some countries have already implemented integrated “statistical” and supervisory reporting requirements at a granular level. Croatia is one of these countries. Moreover, Croatia has been able to produce a local “AnaCredit” system on a loanby-loan basis for legal entities and non-residents (see the ECB MFI list 2 or Annex 4 of the Banks’ Integrated Reporting Dictionary of the Croatian National Bank 3), and at an aggregate level for households, other non-residents and small businesses, using the same underlying data as for statistical and prudential reporting. A Croatian granular data system at a counterparty level for legal entities/nonresidents on the list and at an aggregate level for households, other non-residents and small businesses was developed in 2007/2008 following a series of workshops held among colleagues from Supervision, Statistics and IT at the Croatian National Bank (CNB) and credit institutions. One of the most important deliverables of the project was the CNB Banks’ Integrated Reporting Dictionary, a document in which all attributes collected by the system are listed, organised into categories, described and explained, and where examples and the methodologies used are provided. In Croatia, the CNB Banks’ Integrated Reporting Dictionary is mandatory for all credit institutions, and it has been enforced on the financial market following a decision of the Croatian National Bank Governor. This article discusses granular data modelling for the purpose of statistical, supervisory and European Central Bank reporting and analysis. JEL Classification: E58, C81, G28
    Keywords: Croatian National Bank, data warehouse, granular data, metadata, modelling
    Date: 2017–11
  7. By: Orlov, Dmitry (University of Rochester); Zryumov, Pavel (University of PA); Skrzypacz, Andrzej (Stanford University)
    Abstract: We study the design of macro-prudential stress tests and capital requirements. The tests provide information about correlation in banks portfolios. The regulator chooses contingent capital requirements that create a liquidity buffer in case of a fire sale. The optimal stress test discloses information partially: when systemic risk is low, capital requirements reflect full information. When systemic risk is high, the regulator pools information and requires all banks to hold precautionary liquidity. With heterogeneous banks, weak banks determine level of transparency and strong banks are often required to hold excess capital when systemic risk is high. Moreover, dynamic disclosure and capital adjustments can improve welfare.
    Date: 2017–05
  8. By: Alain Cohn; Ernst Fehr; Michel André Maréchal
    Abstract: In recent years, the banking industry has witnessed several cases of excessive risk-taking that frequently have been attributed to problematic professional norms. We conduct experiments with employees from several banks in which we manipulate the saliency of their professional identity and subsequently measure their risk aversion in a real stakes investment task. If bank employees are exposed to professional norms that favor risk-taking, they should become more willing to take risks when their professional identity is salient. We find, however, that subjects take significantly less risk, challenging the view that the professional norms generally increase bank employees’ willingness to take risks.
    Keywords: risk culture, banking industry, experiment
    JEL: G02 M14 C93
    Date: 2017
  9. By: Justiniano, Alejandro (Federal Reserve Bank of Chicago); Primiceri, Giorgio E. (Northwestern University); Tambalotti, Andrea (Federal Reserve Bank of New York)
    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.
    Keywords: Credit boom; housing boom; mortgage loans; securitization; private label; subprime
    JEL: G21 H81 O18
    Date: 2017–08–01
  10. By: Tirupam Goel; Ulf Lewrick; Agnė Nikola Tarashev
    Abstract: Banks allocate capital across business units while facing multiple constraints that may bind contemporaneously or only in future states. When risks rise or risk management strengthens, a bank reallocates capital to the more efficient unit. This unit would have generated higher constraint- and risk-adjusted returns while satisfying a tightened constraint at the old capital allocation. Calibrated to US data, our model reveals that, when credit or market risk increases, market-making attracts capital and lending shrinks. Leverage constraints affect banks only when measured risks are low. At low credit risk, tighter leverage constraints may reduce market-making but support lending.
    Keywords: internal capital market, Value-at-Risk, leverage ratio, risk-adjusted return on capital
    JEL: G21 G28 G3
    Date: 2017–10
  11. By: Aurélien Leroy; Yannick Lucotte
    Abstract: This paper empirically assesses the effects of competition in the financial sector on credit procyclicality by estimating both an interacted panel VAR (IPVAR) model using macroeconomic data and a single-equation model with bank-level European banking data. The findings of these two empirical approaches highlight that an exogenous deviation of actual GDP from potential GDP leads to greater credit fluctuation in economies where both competition among banks and competition from non-bank financial institutions or direct finance (proxied by the fi- nancial structure) are weak. According to the financial accelerator theory, if lower competition strengthens the cyclical behavior of financial intermediaries, it follows that these "endogenous developments in credit markets work to amplify and propagate shocks to the macroeconomy" (Bernanke et al., 1999). Furthermore, since credit booms are closely associated with future financial crises (Laeven and Valencia, 2012), our results can also be read as evidence that greater competition in the financial sphere reduces financial instability, which is in line with the competition-stability view denying the existence of a trade-off between competition and stability
    Keywords: credit cycle, business cycle, bank competition, interacted panel VAR
    JEL: E32 E51 G20 D40 C33
    Date: 2017–11–09
  12. By: Kinghan, Christina (Central Bank of Ireland); Lyons, Paul (Central Bank of Ireland); McCarthy, Yvonne (Central Bank of Ireland)
    Abstract: This Economic Letter provides an overview of residential mortgage lending in Ireland in H1 2017 for the five credit institutions reporting loan-level data to the Central Bank of Ireland as part of their compliance with loan-to-value (LTV) and loan-to-income (LTI) macroprudential Regulations. H1 2017 represented the first half year of lending that incorporated the changes announced following the 2016 Review of the Regulations. In total, 14,997 loans were originated totaling €3.05 billion, an increase of 33 (22) per cent on the corresponding value (volume) of lending in H1 2016. Average LTV and LTI ratios rose slightly over the period for both First Time Buyers (FTBs) and Second and Subsequent Buyers (SSBs). Only a limited number (30 loans in total) of FTBs had an allowance to exceed the FTB LTV limit of 90 per cent LTV in H1 2017. In contrast, 20 per cent of the aggregate value of SSB lending in H1 2017 exceeded the 80 per cent LTV limit for that group. Regarding the LTI ratio, 18 per cent of the aggregate lending to both FTBs and SSBs exceeded the limit of 3.5, which represents an increase on the 12 per cent figure recorded in H1 2016. The characteristics of loans and borrowers with LTI allowances in H1 2017 were similar to those observed in H1 2016. Notably, FTBs accounted for the largest share of LTI allowances in H1 2017. On average borrowers with an LTI allowance had a lower income and were younger than borrowers without an LTI allowance. There was also a higher proportion of single borrowers in the ‘with allowance’ group.
    Date: 2017–10
  13. By: Gregory S. Crawford (University of Zürich, CEPR and CAGE); Nicola Pavanini (Tilburg University and CEPR); Fabiano Schivardi (LUISS University, EIEF and CEPR)
    Abstract: We study the effects of asymmetric information and imperfect competition in the market for small business lines of credit. We estimate a structural model of credit demand, loan use, pricing, and firm default using matched firm-bank data from Italy. We find evidence of adverse selection in the form of a positive correlation between the unobserved determinants of demand for credit and default. Our counterfactual experiments show that while increases in adverse selection increase prices and defaults on average, reducing credit supply, banks’ market power can mitigate these negative effects.
    Date: 2017
  14. By: Abbassi, Puriya; Bräuning, Falk; Schulze, Niels
    Abstract: We study the role of bargaining power and outside options for the pricing of over-the-counter interbank loans using a bilateral Nash bargaining model and test the model predictions with detailed transaction-level data from the euro-area interbank market. We find that lender banks with greater bargaining power over their borrowers charge higher interest rates, while the lack of alternative investment opportunities for lenders reduces bilateral interest rates. Moreover, we find that lenders that are not eligible to earn interest on excess reserves (IOER) lend funds below the IOER rate to borrowers with access to the IOER facility, which in turn put these funds in their reserve accounts to earn the spread. Our findings highlight that this persistent arbitrage opportunity is not a result of the mere lack of alternative outside options of some lenders, but it crucially depends on their limited bilateral bargaining power, leading to a persistent segmentation of prices in the euro interbank market. We examine the implications of these findings for the transmission of euro-area monetary policy.
    Keywords: bargaining power,over-the-counter market,monetary policy,money market segmentation
    JEL: E4 E58 G21
    Date: 2017
  15. By: Tripathy, Jagdish (Bank of England)
    Abstract: I study the spillover of a macroprudential regulation in Spain to the Mexican financial system via Mexican subsidiaries of Spanish banks. The spillover caused a drop in the supply of household credit in Mexico. Municipalities with a higher exposure to Spanish subsidiaries experienced a larger contraction in household credit. These localized contractions caused a drop in macroeconomic activity in the local non-tradable sector. Estimates of the elasticity of loan-demand by the non-tradable sector to changes in household credit supply range from 1.6–3.5. These results emphasize the potential for cross-border effects of regulations in the presence of global banks.
    Keywords: Regulatory spillovers; capital shock; household credit
    JEL: F36 F42 G21
    Date: 2017–10–20
  16. By: Douglas Gale; Piero Gottardi
    Abstract: We study an environment where the capital structure of banks and firms are jointly determined in equilibrium, so as to balance the benefits of the provision of liquidity services by bank deposits with the costs of bankruptcy. The risk in the assets held by firms and banks is determined by the technology choices by firms and the portfolio diversification choices by banks. We show competitive equilibria are efficient and the equilibrium level of leverage in banks and firms depend on the nature of the shocks affecting firm productivities. When these shocks are co-monotonic, banks optimally choose a zero level of equity. Thus all equity should be in firms, where it does “double duty†.protecting both firms and banks from default. On the other hand, if productivity shocks have an idiosyncratic component, portfolio diversification by banks may be a more effective buffer against these shocks and, in these cases, it may be optimal for banks, as well as firms, to issue equity.
    Keywords: capital structure, banks, bankruptcy
    JEL: G33
    Date: 2017
  17. By: Yajing Liu (Graduate School of Economics, Kobe University); Kenya Fujiwara (Graduate School of Business Administration, Kobe University)
    Abstract: Using Chinese firm-level data from 2006~2014?which includes the period of the recent financial crisis?we test whether firms, particularly small and medium enterprises (SMEs) that are financially constrained, are more likely to use or depend on trade credit. We also compare enterprises by ownership structure to determine which type of enterprises use trade credit more than bank loans. We then study the effect of the financial crisis of 2008 to observe whether firms increased their use of trade credit right after the crisis. We expect SMEs that are financially constrained to depend more on trade credit during the financial crisis. This may suggest the existence of a substitution relationship between bank loans and trade credit in conditions where enterprises are highly constrained financially or during periods of financial crisis.
    Keywords: Financial Crises, trade credit, bank loans, Chinese industrial enterprises, SMEs
    Date: 2017–10
  18. By: Anna Kruglova (Bank of Russia, Russian Federation); Yulia Ushakova (Bank of Russia, Russian Federation)
    Abstract: We assess the effect of the banking sector resolution policy conducted by the Bank of Russia on competition and stability in the banking sector. We use the rate spread to measure competition and volatility in loan portfolio growth, set against volatility in growth of the banking sector’s aggregate loan portfolio, to measure the system’s stability. Our findings are as follows: After the launch of the banking sector resolution, a significant break in competition, as measured by the rate spread, was observed only in household deposits maturing in one to three years and household and corporate loans maturing in more than three years. This kind of structural break, however, is associated with macroeconomic factors rather than the Bank of Russia’s banking sector resolution. Other banking markets failed to see any significant change in competition after the launch of the banking sector resolution. After the launch of the Bank of Russia’s banking sector resolution, growth in corporate and retail lending showed a decline in volatility. This decline was observed both in a cluster of banks characterised by relatively low overdue debt, and in banks characterised by relatively high levels. Thereby, the reduction in the number of banks resulting from the Bank of Russia’s banking sector resolution had no considerable negative effect of competition in the period under review. At the same time, lower volatility in lending growth boosted banking system stability. We estimate that banking sector stability has grown by 4% in retail lending and 41% in corporate lending
    Keywords: Russian banking sector, banking licence, banking sector resolution, competition, banking sector stability
    JEL: G28 G21 E43
    Date: 2017–07
  19. By: Roa Mónica; Molina Danielken
    Abstract: In this paper we use manufacturing data on Colombian exports and bank financing to estimate the credit elasticity of exports. The data allows us to construct a supply side instrumental variable for the credit of manufacturers that we use to address a possible reverse causality problem. We find that access to credit produces a significant increase in the revenue of exporters, explained by the positive effect of credit on the trade margins. Likewise, we find that across manufacturers, the impact of credit on the margins varies by firm size. Medium-sized manufacturers use credit to increase their market reach, market penetration and product mix. The largest manufacturers use credit to increase their market reach, while the smallest manufacturers use it to expand their product mix.
    Keywords: International Trade;Export Margins and Bank Financing
    JEL: F14 G21
    Date: 2017–10
  20. By: Pritsker, Matthew (Federal Reserve Bank of Boston)
    Abstract: Regulatory stress-testing is an important tool for ensuring banking system health in many countries around the world. Current methodologies ensure banks are well capitalized against the scenarios in the test, but it is unclear how resilient banks will be to other plausible scenarios. This paper proposes a new methodology for choosing scenarios that uses a measure of systemic risk with Correlation Pursuit variable selection, and Sliced Inverse Regression factor analysis, to select variables and create factors based on their ability to explain variation in the systemic risk measure. The main result is under appropriate regularity conditions, when the banking system is well capitalized against stress-scenarios based on movements in the factors, then an approximation of systemic risk is low, i.e. the banking system will be well capitalized against the other plausible scenarios that could affect it with high probability. The paper also shows there are circumstances when several scenarios may be required to achieve systemic risk objectives. The methodology should be useful for regulatory stress-testing of banks. Although not done in this paper, the methodology can potentially be adapted for stress-testing of other financial firms including insurance companies and central counterparties.
    Keywords: Stress Testing; financial stability; banking
    JEL: G21 G28
    Date: 2017–09–05
  21. By: Steven Gjerstad (Economic Science Institute, Chapman University)
    Abstract: Paper presented at conference on Systemic Risk and the Organization of the Financial System, Chapman University, May 13, 2017. This paper describes a resolution process for faltering financial firms that quickly allocates losses to bondholders and transfers ownership of the firm to them. This process overcomes the most serious flaws in resolution plans submitted by banks under Dodd-Frank Title I and in the FDIC receivership procedure in Dodd-Frank Title II by restoring the balance sheet of a failing financial institution and immediately replacing the management and board of directors who allowed its demise. In almost all bank failures, this process would eliminate the need for government involvement beyond court certification of the reorganization. The procedure overcomes the serious incentive distortions and inefficiencies that result from bailouts, and avoids the destruction of value and financial market turmoil that would result from the bankruptcies and liquidations that Dodd-Frank requires for distressed and failing banks.
    Date: 2017
  22. By: Guillermo Ordoñez (University of Pennsylvania and NBER); Facundo Piguillem (EIEF and CEPR)
    Abstract: The U.S.economy has recently experienced a large increase in life expectancy and in shadow banking activities. We argue these two phenomena are intimately related. Agents resort on financial intermediaries to buy insurance against an uncertain life span after retirement. When they expect to live longer they are more prone to rely on financial intermediaries that are riskier but offer better terms for insurance – shadow banks. We calibrate the model to replicate the level of financial intermediation in 1980, introduce the observed change in life expectancy and show that the demographic transition is critical to account for the boom both of shadow banking and credit that preceded the recent U.S. financial crisis. We construct a counterfactual without shadow banks and show that they may have contributed 0.5 GDP, which is larger than the cost of the crisis of around 0.2 GDP.
    Date: 2017
  23. By: Anadu, Ken (Federal Reserve Bank of Boston); Baklanova, Viktoria (Office of Financial Research)
    Abstract: The most recent changes to money market fund regulations have had a strong impact on the money fund industry. In the months leading up to the compliance date of the core provisions of the amended regulations, assets in prime money market funds declined significantly, while those in government funds increased contemporaneously. This reallocation from prime to government funds has contributed to the latter's increased demand for debt issued by the U.S. government and government-sponsored enterprises. The Federal Home Loan Bank (FHLBank) System played a key role in meeting this heightened demand for U.S. government-related assets with increased issuance of short-term debt. The FHLBank System uses the funding obtained from money market funds to provide general liquidity to its members, including the largest U.S. banks. Large U.S. banks' increased borrowings from the FHLBank System are motivated, in large part, by other post-crisis regulations, specifically the liquidity coverage ratio (LCR). The intersection of money market mutual fund reforms and the LCR have contributed to the FHLBanks' increased reliance on short-term funding to finance relatively longer-term assets, primarily collateralized loans to its largest members. This funding model could be vulnerable to "runs" and impact financial markets and financial institutions in ways that are difficult to predict. While a funding run seems unlikely, it is often the violation of commonly held conventions that tend to pose financial stability risks. Indeed, runs on leveraged financial intermediaries engaged in maturity transformation have produced systemic risks issues in the past and are worthy of investigation and continuous monitoring.
    Keywords: Federal Home Loan Banks; liquidity coverage ratio; Money Market Mutual Funds; short-term funding markets; systemic risk
    JEL: E50 G23 G28
    Date: 2017–10–31
  24. By: Leonardo Gambacorta (Bank of International Settlements and CEPR); Luigi Guiso (EIEF and CEPR); Paolo Mistrulli (Bank of Italy); Andrea Pozzi (EIEF and CEPR); Anton Tsoy (EIEF)
    Abstract: Many households lack the sophistication required to make complex financial decisions and risk being exploited when seeking advice from intermediaries. We build a model of financial advice, in which banks attain their optimal mortgage portfolio by setting rates and providing advice to their clientele. “Sophisticated” households know which mortgage type is best for them; “naive” are susceptible to the bank’s advice. Using data on the universe of Italian mortgages, we estimate the model and quantify the welfare implications of distorted financial advice.The average cost of the distortion is equivalent to an increase in the annual mortgage payment by 11%. However, since even distorted advice conveys information, banning advice altogether results in a loss of 998 euros per year on average. A financial literacy campaign is beneficial for naive households, but hurts sophisticated ones.
    Date: 2017
  25. By: Mäkinen, Mikko; Solanko, Laura
    Abstract: This study examines whether changes in CAMEL variables matter in explaining bank closure. Using a unique set of monthly bank-specific balance sheet data from Russia, we estimate determinants of bank license withdrawals during 2013m7-2017m7. We make two key findings. First, changes in CAMEL indicators are always significantly correlated with probability of bank closure, and the magnitude of parameter estimates decreases with the lag length. Second, while the one-month lagged levels of capital, earnings, and liquidity are significantly associated with the probability of bank closure in the subsequent month, the level of liquidity is the only significant indicator for longer lags. Our key contribution that changes in CAMEL variables matter more than levels is robust to various robustness checks.
    JEL: G01 G21 G32 G34
    Date: 2017–10–30
  26. By: Brauning, Falk (Federal Reserve Bank of Boston); Ivashina, Victoria (Harvard Business School)
    Abstract: Foreign banks’ lending to firms in emerging market economies (EMEs) is large and denominated primarily in U.S. dollars. This creates a direct connection between U.S. monetary policy and EME credit cycles. We estimate that over a typical U.S. monetary easing cycle, EME borrowers face a 32-percentage-point greater increase in the volume of loans issued by foreign banks than borrowers from developed markets face, with a similarly large effect upon reversal of the U.S. monetary policy stance. This result is robust across different geographical regions and industries, and holds for non-U.S. lenders, including those with little direct exposure to the U.S. economy. Local EME lenders do not offset the foreign bank capital flows; thus, U.S. monetary policy affects credit conditions for EME firms. We show that the spillover is stronger in higher-yielding and more financially open markets, and for firms with a higher reliance on foreign bank credit.
    Keywords: global business cycle; monetary policy; emerging markets; reaching for yield
    JEL: E44 E52 F34 F44 G21
    Date: 2017–08–29
  27. By: Hegadekatti, Kartik; S G, Yatish
    Abstract: In this paper, we analyse the workings of commercial banks in a scenario where crypto-currencies are the mainstream bills of exchange. We start by explaining the concept of cryptocurrencies (also referred to as cryptocoins in this paper). Then we discuss the concept of Regulated and Sovereign Backed Cryptocurrencies (RSBCs). Later on, we envisage a scenario where cryptocoins are the main media of exchange. The banking aspects of Paper money, Bitcoins and RSBCs are then deliberated. We analyse the interplays between Banking and various currency formats. Finally, the paper concludes as to which currency is best suited to be the mainstream bill of exchange.
    Keywords: Banking, Cryptocurrencies, Bitcoin, Blockchain
    JEL: E51 E52 E58 F33 G18 G21 O38
    Date: 2016–10–22
  28. By: OHKUMA Masanori
    Abstract: This study empirically analyzes the determinants of risk taking in regional financial institutions in Japan, with special emphasis on their ownership form and corporate governance structure. This study finds that cooperative financial institutions were more stable than regional commercial banks during the Global Financial Crisis. Moreover, regional commercial banks with more shareholder-friendly boards were less stable than they would have been otherwise. In contrast, there is no significant association between board characteristics of cooperative financial institutions and their risk exposure. These findings are consistent with theories indicating that bank risk taking increases with the comparative power of shareholders within a bank's corporate governance structure. One may anticipate that weak governance of cooperative financial institutions allows for an accumulation of excess capital at the expense of the interests of member-consumers. However, empirical evidence does not support this view.
    Date: 2017–10
  29. By: William Barnett (Department of Economics, The University of Kansas; Center for Financial Stability, New York City; IC2 Institute, University of Texas at Austin); Liting Su (Department of Economics, The University of Kansas;)
    Abstract: A monetary-production model of financial firms is employed to investigate supply-side monetary aggregation, augmented to include credit card transaction services. Financial firms are conceived to produce monetary and credit card transaction services as outputs through financial intermediation. While credit cards provide transactions services, credit cards have never been included into measures of the money supply. The reason is accounting conventions, which do not permit adding liabilities to assets. However, index number theory measures service flows and is based on microeconomic aggregation theory, not accounting. Barnett, Chauvet, Leiva-Leon, and Su (2016) have derived and applied the relevant aggregation theory applicable to measuring the demand for the joint services of money and credit cards. But because of the existence of required reserves and differences in taxation on the demand and supply side, there is a regulatory wedge between the demand and supply of monetary services. We derive theory needed to measure the supply of the joint services of credit cards and money, to estimate the output supply function, and to compute value added. The resulting model can be used to investigate the transmission mechanism of monetary policy. Earlier results on the monetary policy transmission mechanism based on the correlation between simple sum inside money and final targets are not likely to approximate or even be relevant to results that can be acquired by empirical implementation of this model or its extensions. Our financialfirm value-added measure and its supply function are fundamentally different from prior measures of inside money, shadow banking output, or money supply functions. The data needed for empirical implementation of our theory are available online from the Center for Financial Stability (CFS) in New York City. We show that the now discredited conventional accounting-based measures of privately produced inside money can be replaced by our measures, based on microeconomic aggregation theory, to provide the information originally contemplated in the literature on monetary theory for over a century.
    Keywords: Credit Cards, Money, Credit, Aggregation, Monetary Aggregation, Index Number Theory, Divisia Index, Risk, Euler Equations, Asset Pricing
    JEL: C43 C53 C58 E01 E3 E40 E41 E51 E52 E58 G17
    Date: 2017–10
  30. By: Dominika Langenmayr; Franz Reiter
    Abstract: Little is known about how banks shift profits to low-tax countries. Because of their specific business model, banks use profit shifting channels different from those of other firms. We propose a novel and bank-specific method of profit shifting: the strategic relocation of proprietary trading to low-tax jurisdictions. Using regulatory data from the German central bank, we show that a one percentage point lower corporate tax rate increases banks’ fixed-income trading assets by 4.0% and trading derivatives by 9.0%. This increase does not arise from a relocation of real activities (i.e. traders); instead, it stems from the relocation of book profits.
    Keywords: profit shifting, multinational banks, corporate taxation, proprietary trading
    JEL: H25 G21 F21
    Date: 2017
  31. By: Gong Feixue (MIT); Gregory Phelan (Williams College)
    Abstract: We study how the ability to use risky debt as collateral in funding markets affects the CDS basis. We use a general equilibrium model with heterogeneous agents, collateralized financial promises, and multiple states of uncertainty. We show that a positive basis emerges when risky assets and their derivative risky debt contracts can be used as collateral for additional financial promises. Additionally, because a risky asset can always serve as collateral for more promises than its derivative debt contracts can, the basis for a risky asset will always differ from the basis for its derivative risky debt.
    Keywords: collateral, securitized markets, cash-synthetic basis, credit default swaps, asset prices, credit spreads
    JEL: D52 D53 G11 G12
    Date: 2017–08
  32. By: Suzana Cristina Silva Andrade
    Abstract: The purpose of the present article is to assess the degree of competition within the enlarged European Union (EU) commercial banking system during the period ranging from 2004 to 2011 using the non-structural test developed by Panzar and Rosse (1987). Their procedure measures the competitive environment in which financial intermediaries operate employing the sum of the elasticities of the reduced-form interest revenue with respect to factor prices. The main conclusion to retain from this study is that banking industry in the region does not seem to have operated either under perfect competition or under perfect monopoly, but rather consistently with long-run monopolistic competition. Further, we also find empirical evidence of efficiency hypothesis posted by Demestz (1973) and Peltzman (1977), as opposed to conventional view that concentration impairs price competitiveness. Finally, we underline the importance of trade off between the costs and benefits of competition to support financial stability objectives.
    Keywords: Competition, Concentration, Banking industry, Panzar and Rosse Model
    JEL: G21 G28
    Date: 2017–10
  33. By: Leadaut Edith Prisca Togba
    Abstract: The cost-efficiency of microfinance institutions (MFIs) has emerged as an issue crucial to their survival and the continuity of their services. The present study uses the stochastic frontier method to analyse the levels and determinants of cost-efficiency of a sample of microfinance institutions operating from the West African Economic and Monetary Union (WAEMU) area. For the 2000–2008 period, these MFIs were found to have functioned in an ineffective way in terms of minimizing their costs. Factors influencing cost-efficiency include the age and type of MFI. The study’s results also reveal that the number of female borrowers, the MFI’s financial performance, level of capitalization, geographical location, and size were explanatory factors for the cost-efficiency of the MFIs studied.Key Words:Cost-efficiency; Microfinance; Stochastic frontier; WAEMU
    Date: 2016–09

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.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.