nep-ban New Economics Papers
on Banking
Issue of 2017‒11‒19
eleven papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Financial Regulation in a Quantitative Model of the Modern Banking System By Begenau, Juliane; Landvoigt, Tim
  2. Leverage and Risk Weighted Capital Requirements By Sudipto Karmakar; Leonardo Gambacorta
  3. Bank Panics and Fire Sales, Insolvency and Illiquidity By T. R. Hurd
  4. Portfolio Sales and Signaling By Spiros Bougheas; Tim Worrall
  5. House Prices, Home Equity, and Personal Debt Composition By Li, Jieying; Zhang, Xin
  6. Efficient Simulation for Portfolio Credit Risk in Normal Mixture Copula Models By Cheng-Der Fuh; Chuan-Ju Wang
  7. A Theory of Repurchase Agreements, Collateral Re-use, and Repo Intermediation By Piero Gottardi; Vincent Maurin; Cyril Monnet
  8. Diving in the deep end of domestic deposits By Jed Armstrong; Nicholas Mulligan
  9. ICT, Conflicts in Financial Intermediation and Financial Access: Evidence of Synergy and Threshold Effects By Simplice Asongu; Paul Acha-Anyi
  10. A new IV approach for estimating the efficacy of macroprudential measures By Gadatsch, Niklas; Mann, Lukas; Schnabel, Isabel
  11. Profit efficiency of banks in Colombia with undesirable output: A directional distance function approach By Almanza Ramírez, Camilo; Mora, Jhon James; Cendales, Andrés

  1. By: Begenau, Juliane (Harvard University); Landvoigt, Tim (University of TX)
    Abstract: How does the shadow banking system respond to changes in the capital regulation of commercial banks? We propose a tractable, quantitative general equilibrium model with regulated and unregulated banks to study the unintended consequences of regulatory policy. Tightening the capital requirement from the status quo creates a safer banking system despite more shadow banking activity. A reduction in aggregate liquidity provision decreases the funding costs of all banks, raising profits and reducing risk-taking incentives. Calibrating the model to data on financial institutions in the U.S., we find the optimal capital requirement is around 15%.
    Date: 2017–04
  2. By: Sudipto Karmakar; Leonardo Gambacorta
    Abstract: The global financial crisis has highlighted the limitations of risk-sensitive bank capital ratios. To tackle this problem, the Basel III regulatory framework has introduced a minimum leverage ratio, defined as a banks Tier 1 capital over an exposure measure, which is independent of risk assessment. Using a medium sized DSGE model that features a banking sector, financial frictions and various economic agents with differing degrees of creditworthiness, we seek to answer three questions: 1) How does the leverage ratio behave over the cycle compared with the risk-weighted asset ratio? 2) What are the costs and the benefits of introducing a leverage ratio, in terms of the levels and volatilities of some key macro variables of interest? 3) What can we learn about the interaction of the two regulatory ratios in the long run? The main answers are the following: 1) The leverage ratio acts as a backstop to the risk-sensitive capital requirement: it is a tight constraint during a boom and a soft constraint in a bust; 2) the net benefits of introducing the leverage ratio could be substantial; 3) the steady state value of the regulatory minima for the two ratios strongly depends on the riskiness and the composition of bank lending portfolios
    Keywords: Bank Capital Buffers, Regulation, Risk-Weighted Assets, Leverage
    JEL: G21 G28 G32
    Date: 2017–10
  3. By: T. R. Hurd
    Abstract: Banking system crises are complex events that in a short span of time can inflict extensive damage to banks themselves and to the external economy. The crisis literature has so far identified a number of distinct effects or channels that can propagate distress contagiously both directly within the banking network itself and indirectly, between the network and the external economy. These contagious effects, and the potential events that trigger these effects, can explain most aspects of past crises, and are thought to be likely to dominate future financial crises. Since the current international financial regulatory regime based on the Basel III Accord does a good job of ensuring that banks are resilient to such contagion effects taken one at a time, systemic risk theorists increasingly understand that future crises are likely to be dominated by the spillovers between distinct contagion channels. The present paper aims to provide a model for systemic risk that is comprehensive enough to include the important contagion channels identified in the literature. In such a model one can hope to understand the dangerous spillover effects that are expected to dominate future crises. To rein in the number and complexity of the modelling assumptions, two requirements are imposed, neither of which is yet well-known or established in the main stream of systemic risk research. The first, called stock-flow consistency, demands that the financial system follows a rigorous set of rules based on accounting principles. The second requirement, called Asset-Liability symmetry, implies that every proposed contagion channel has a dual channel obtained by interchanging assets and liabilities, and that these dual channel pairs have a symmetric mathematical representation.
    Date: 2017–11
  4. By: Spiros Bougheas; Tim Worrall
    Abstract: A common practice of banks has been to pool assets of different qualities and then sell a fraction of the newly created portfolios to investors. We extend the signaling model for single sales of risky assets to portfolio sales. We identify conditions under which signaling at the portfolio level dominates signaling at the single asset level. In particular, when banks have better information about loan types on their books, and some commitment power to sales, can profit by pooling assets whilst retaining a skin in the game.
    Keywords: securitization, skin in the game, signaling, tranching
    JEL: D82 G21 G23
    Date: 2017
  5. By: Li, Jieying (Financial Stability Department, Central Bank of Sweden); Zhang, Xin (Research Department, Central Bank of Sweden)
    Abstract: Using a monthly panel dataset of individuals' debt composition including mortgage and non-mortgage consumer credit, we show that house price changes can explain a significant fraction of personal debt composition dynamics. We exploit the variation in local house price growth as shocks to homeowners' housing wealth to study the consequential adjustment of personal debt composition. To account for local demand shocks and disentangle the housing collateral channel from the wealth effect, we use renters and non-equity-withdrawal homeowners in the same region as control groups. We present direct evidence that homeowners reoptimize their debt structure by using withdrawn home equity to pay down comparatively expensive short-term non-mortgage debt during a housing boom, unsecured consumer loans in particular. We also find that homeowners withdraw home equity to finance their entrepreneurial activities. Our study sheds new light on the dynamics of personal debt composition in response to changes in house prices.
    Keywords: Household Decision; Personal Debt Management; Credit Constraint; Cash-out Re nancing; Entrepreneurship
    JEL: D14 G21 L26 R31
    Date: 2017–10–01
  6. By: Cheng-Der Fuh; Chuan-Ju Wang
    Abstract: This paper considers the problem of measuring the credit risk in portfolios of loans, bonds, and other instruments subject to possible default. One such performance measure of interest is the probability that the portfolio incurs large losses over a fixed time horizon. To capture the extremal dependence among obligors, we study a multi-factor model with a normal mixture copula that allows the multivariate defaults to have an asymmetric distribution. Due to the amount of the portfolio, the heterogeneous effect of obligors, and the phenomena that default events are rare and mutually dependent, it is difficult to calculate portfolio credit risk either by means of direct analysis or crude Monte Carlo simulation. That motivates this study on efficient simulation. To this end, we first propose a general account of an importance sampling algorithm based on a two-parameter exponential embedding. Note that this innovative tilting device is more suitable for the multivariate normal mixture model and is of independent interest. Next, by utilizing a fast computational method for how the rare event occurs and the proposed importance sampling method, we provide an efficient simulation algorithm to estimate the probability that the portfolio incurs large losses under the normal mixture copula. Here our proposed simulation device is based on importance sampling for a joint probability other than the conditional probability used in previous studies. Theoretical investigations and simulation studies are given to illustrate the method.
    Date: 2017–11
  7. By: Piero Gottardi; Vincent Maurin; Cyril Monnet
    Abstract: We show that repurchase agreements (repos) arise as the instrument of choice to borrow in a competitive model with limited commitment. The repo contract traded in equilibrium provides insurance against fluctuations in the asset price in states where collateral value is high and maximizes borrowing capacity when it is low. Haircuts increase both with counterparty risk and asset risk. In equilibrium, lenders choose to re-use collateral. This increases the circulation of the asset and generates a "collateral multiplier" effect. Finally, we show that intermediation by dealers may endogenously arise in equilibrium, with chains of repos among traders.
    Keywords: repos, collateral multiplier, limited commitment, intermediation
    JEL: G19
    Date: 2017
  8. By: Jed Armstrong; Nicholas Mulligan (Reserve Bank of New Zealand)
    Abstract: Deposits are an important part of the New Zealand financial system. Deposits play a large role in funding bank lending – banks try to attract deposits in order to build up funds to lend out to borrowers. Over the past couple of years, lending has been growing faster than deposits, requiring banks to source funding from offshore wholesale funding markets. External funding can increase risks in the financial sector, as deposits are typically a more stable (“core”) source of funding than offshore wholesale funding. This paper explores deposit growth in New Zealand in order to answer two questions: 1.What factors drive deposit growth in New Zealand, particularly in the past few years? 2.Can banks increase deposits by increasing interest rates? We use two models to explore the dynamics of household deposits in New Zealand’s banking system in order to answer these questions. The first model uses bank-specific data from New Zealand’s four largest banks, while the second uses aggregate data for the entire banking system. The paper highlights that the rate of domestic deposit growth has varied significantly since the Global Financial Crisis, and sharply slowed over 2016. We provide evidence that a range of supply and demand factors influence deposit growth, and that the recent slowing was largely driven by a reduction in supply (that is, households wanting to allocate less money to deposit products). We also find that banks increased their demand for deposits in late 2016 in an effort to close the gap between deposit growth and lending We also consider the degree to which banks are able to increase deposit growth materially by raising interest rates. We find that a 1 percentage point increase in the six-month deposit rate can increase the level of household deposits by about 1 percent after four quarters, and by 1.3 percent in the long-run. As we find that deposits are not strongly responsive to interest rates, if banks wish to maintain robust funding profiles by not becoming too reliant on offshore wholesale funding, they may need moderate credit growth or use a combination of approaches to bring deposit growth in line with credit growth.
    Date: 2017–05
  9. By: Simplice Asongu (Yaoundé/Cameroun); Paul Acha-Anyi (Pretoria, South Africa)
    Abstract: In this study we investigate the role of information and communication technology (ICT) in conflicts of financial intermediation for financial access. The empirical evidence is based on contemporary (or current values) and non-contemporary (or lagged by a year) quantile regressions in 53 African countries for the period 2004-2011. The main findings are: First, the net effect of ICT in formalization for financial activity in the banking system is consistently beneficial with positive thresholds. The fact that corresponding, unconditional and conditional effects are persistently positive is evidence of synergy or complementary effects. Second, the net effect of ICT in financial informalization for financial activity in the financial system is negative with a consistent negative threshold. Hence, the positive (negative) complementarity of ICT and financial formalization (informalization) is an increasing (decreasing) function of financial activity. Policy measures on how to leverage the synergy or complementarity between ICT and financial formalization in order to enhance financial access are discussed.
    Keywords: Allocation efficiency; financial sector development; ICT
    JEL: G20 G29 L96 O40 O55
    Date: 2017–01
  10. By: Gadatsch, Niklas; Mann, Lukas; Schnabel, Isabel
    Abstract: We propose a new identification strategy to assess the efficacy of macroprudential measures. We propose a novel instrumental variable that is based on the idea that a politically sensitive macroprudential measure is more likely to be implemented if a politically independent institution, such as a central bank, is in charge. Our results show that borrower-based macroprudential measures have had a strong and statistically significant dampening effect on credit growth in the European Union.
    Date: 2017
  11. By: Almanza Ramírez, Camilo; Mora, Jhon James; Cendales, Andrés
    Abstract: This study investigates the sources of bank efficiency in Colombia over the period 2000-2011. To perform this research, the authors propose a score of bank efficiency using the directional distance function, which was estimated using data envelopment analysis. Additionally, they use an ordered probit panel regression to explore the effects of some market-related and bank-specific factors on efficiency. The authors' results show that the non-inclusion of non-performing loans (NPLs) leads to higher bank inefficiency indicators, which are significantly different from those obtained when NPLs are included. Further, the authors find that economic growth, capital risk, foreign and national banks, and account liquidity risk explain, in part, the efficiency of Colombian banks.
    Keywords: data envelopment analysis,Colombia,directional distance function,nonperforming loans,ordered probit panel models
    JEL: D22 G21
    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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