nep-ban New Economics Papers
on Banking
Issue of 2017‒11‒26
ten papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Bank Restructuring, Competition, and Lending Supply: Evidence from the Spanish Banking Sector By P. Giannoccolo; J. M. Mansilla-Fernández
  2. The mortgage rate conundrum By Justiniano, Alejandro; Primiceri, Giorgio E.; Tambalotti, Andrea
  3. Regulations of Banks? Capital and Liquidity according to Basel III: Problems and Experience from Eastern Europe Countries By Natalia Konovalova
  4. A structural model to study the bail-out process in a bank and its macro-prudential policy implications By Correia, Ricardo; Dubiel-Teleszynski, Tomasz Piotr; Población García, Francisco Javier
  5. The Bank of England as Lender of Last Resort: New historical evidence from daily transactional data By Mike Anson; David Bholat Author-Name-First: David; Miao Kang; Ryland Thomas
  6. A Dual Early Warning Model of Bank Distress By Nikolaos I. Papanikolaou
  7. CoCo Issuance and Bank Fragility By Stefan Avdjiev; Bilyana Bogdanova; Patrick Bolton; Wei Jiang; Anastasia Kartasheva
  8. International expansion and riskiness of Banks By Faia, Ester; Ottaviano, Gianmarco I. P.; Sanchez Arjona, Irene
  9. The Macroeconomic Impact of Money Market Freezes By Marie Hoerova; Harald Uhlig; Fiorella De Fiore
  10. The international bank lending channel of unconventional monetary policy By Gräb, Johannes; Żochowski, Dawid

  1. By: P. Giannoccolo; J. M. Mansilla-Fernández
    Abstract: This article analyses the effects of the bank restructuring process performed in Spain between 2010 and 2016. First, we create a unique dataset by combining information from Bankscope and the Table of Public Financial Assistance released by the Bank of Spain. Second, we investigate whether these reforms affected (i) the stability, (ii) the degree of competition, and (iii) lending and liquidity supply of the Spanish banking industry. The main results suggest that the restructuring process reduced the degree of competition but increased financial stability in the Spanish banking industry. In particular, we find that two divergent forces affected the Spanish financial stability. On the one hand, the bail out dampened financial instability. On the other hand, the increasing bank market power fostered financial stability (i.e., lower risk-taking behaviour). Furthermore, we demonstrate that the restructuring process: (i) increased the Lerner index, (ii) did not increase the collusion among banks (iii) diminished the gap in cost efficiency between weak and healthy banks. Finally, we find that there are not improvements in lending and liquidity supply.
    JEL: G21 G28 G32 G34
    Date: 2017–11
  2. By: Justiniano, Alejandro (Federal Reserve Bank of Chicago); Primiceri, Giorgio E. (Northwestern University, CEPR, and NBER); 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’s 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 data set 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; securitization; private label; subprime
    JEL: E32 E44 G21
    Date: 2017–11–01
  3. By: Natalia Konovalova (RISEBA University)
    Abstract: Abstract Transition towards regulation of banking activity based on Basel III requirements was caused by consequences of global financial and economic crisis 2007 ? 2009 that endangered the financial system stability in many countries. The banks were forced to form a large volume of accumulations to cover bad debts and could not deal with absorption of losses. It means that the system of banking regulation and supervision existing at that time did not fully reflect the banking sector risks during the periods of economic and financial shocks. The purpose of the study is to identify the influence of Basel III nonmonetary regulation methods on the banking system stability and economic growth. The study has been carried out based on financial accounting of banks in countries of East Europe. The article gives an assessment of banking activity regulation based on the implementation of Basel III requirements, which have become a response of supervisory bodies to the prevention of crisis events. It was reflected in the toughening of requirements for the capital and liquidity, which in turn required the revision of banking activity management methods. Results of the research. Bank regulation based on Basel III requirements may have both positive and adverse aspects and consequences. Positive: Growing requirements for the capital and liquidity will increase the borrowing power and solvency of banks and, therewith, the sustainability of the entire banking sector. Banking system and economy in general will be more resistant to financial shocks. Regulation based on Basel III will also contribute to reduction in systemic risk and prevention of systemic crises in future. Negative: Increase in the capital of banks as well as improvement of its structure and quality will lead to growing expenditures of banks, which in turn can entail growth in credit rates and reduction of banking activity. As a result, economic growth will slow. Reduction of banking activity will have adverse impact on profitability of banking business.
    Keywords: Key words: Capital adequacy, Bank?s liquidity, Capital safety margin, Financial leverage, Economic growth, Economic stability
    JEL: G21
    Date: 2017–10
  4. By: Correia, Ricardo; Dubiel-Teleszynski, Tomasz Piotr; Población García, Francisco Javier
    Abstract: In this paper, we construct a structural model to determine the costs of a bank rescue considering bail-outs and bail-ins. In our model, a government assumes the equity stake under unlimited liability upon abandonment of the original equity holders. The model determines an abandonment trigger such that if total income drops below this trigger, private shareholders abandon the bank. Given this trigger, the model also determines the bank rescue costs, the expected time to the bank rescue and the bank rescue probabilities. A static analysis of our model produces several empirically testable hypotheses. The model was explored in a sample of southern European countries considering alternative assumptions regarding parameter estimates and the behavior of operational costs. The model results regarding the rescue costs are reasonable, but the model also predicts bank rescues, estimates equity values, performs welfare analyses and estimates the impact of different macro- and micro-prudential policies. The empirical exercise we present, highlights the importance of the assumptions made regarding the behavior of the operational costs by showing dramatic differences in results in a sample of countries that otherwise appear to share important cultural and geographical proximities. JEL Classification: G21, G28, H81
    Keywords: abandonment trigger, bank bail-out, macro-prudential policies, structural model
    Date: 2017–11
  5. By: Mike Anson; David Bholat Author-Name-First: David; Miao Kang; Ryland Thomas (Bank of England)
    Abstract: We use daily transactional ledger data from the Bank of EnglandÕs Archive to test whether and to what extent the Bank of England during the mid-nineteenth century adhered to Walter BagehotÕs rule that a central bank in a financial crisis should lend cash freely at a high interest rate in exchange for ÔgoodÕ securities. The archival data we use provides granular, loan-level insight on the price and quantity of credit, and information on its distribution to particular counterparties. We find that the BankÕs behaviour during this period broadly conforms to BagehotÕs rule, though with variation across the crises of 1847, 1857 and 1866. Using a new, higher frequency series on the BankÕs balance sheet, we find that the Bank did lend freely, with the number of discounts and advances increasing during crises. These loans were typically granted at a rate above pre-crisis levels and, in 1857 and 1866, typically at a spread above Bank Rate, though we also find some instances in the daily discount ledgers where individual loans were made below Bank rate in 1847. Another set of customer ledgers shows that the securities the Bank purchased were debts owed by a geographically and industrially diverse set of debtors. And using new data on the BankÕs income and dividends, we find the Bank and its shareholders profited from lender of last resort operations. We conclude our paper by relating our findings to contemporary debates including those regarding the provision of emergency liquidity to shadow banks.
    Keywords: Bank of England, lender of last resort, financial crises, financial history, central banking
    JEL: E58 G01 G18 G20 H12 N2 N4 N8
    Date: 2017–11
  6. By: Nikolaos I. Papanikolaou (Bournemouth University)
    Abstract: We contribute to the better understanding of the key factors related to the operation of the banking system that led to the global financial crisis through the development of a dual earning warning model that explores the joint determination of the probability of a distressed bank to face a licence withdrawal or to be bailed out. The underlying patterns of distress are analysed based upon a wide spectrum of bank-specific and environmental factors. We obtain precise parameter estimates and superior in- and out-of-sample forecasts. Our results show that the determinants of failures and those of bailouts differ to a considerable extent, revealing that authorities treat a distressed bank differently in their decision to let it fail or to bail it out. Overall, we provide a reliable mechanism for preventing welfare losses due to bank distress.
    Keywords: financial crisis; bank distress; early warning model; forecasting power
    JEL: C24 C53 G01 G21 G28
    Date: 2017–11
  7. By: Stefan Avdjiev; Bilyana Bogdanova; Patrick Bolton; Wei Jiang; Anastasia Kartasheva
    Abstract: The promise of contingent convertible capital securities (CoCos) as a “bail-in” solution has been the subject of considerable theoretical analysis and debate, but little is known about their effects in practice. In this paper, we undertake the first comprehensive empirical analysis of bank CoCo issues, a market segment that comprises over 730 instruments totaling $521 billion. Four main findings emerge: 1) The propensity to issue a CoCo is higher for larger and better-capitalized banks; 2) CoCo issues result in statistically significant declines in issuers’ CDS spreads, indicating that they generate risk-reduction benefits and lower costs of debt. This is especially true for CoCos that: i) convert into equity, ii) have mechanical triggers, iii) are classified as Additional Tier 1 instruments; 3) CoCos with only discretionary triggers do not have a significant impact on CDS spreads; 4) CoCo issues have no statistically significant impact on stock prices, except for principal write-down CoCos with a high trigger level, which have a positive effect.
    JEL: G01 G21 G28 G32
    Date: 2017–11
  8. By: Faia, Ester; Ottaviano, Gianmarco I. P.; Sanchez Arjona, Irene
    Abstract: We exploit an original dataset on European G-SIBs to assess how expansion in foreign markets affects their riskiness. We find a robust negative correlation between foreign expansion and bank risk (proxied by various individual and systemic risk metrics). Given individual bank riskiness, banks’expansion reduces the average riskiness of the banks’ pool (between effect). Moreover, foreign expansion of any given bank reduces its own risk (within effect). Diversification, competition and regulation channels are all important. Expansion in destination countries with different business cycle co-movement, stricter regulations and higher competition than the origin country decreases a bank’s riskiness.
    Keywords: banks' risk; systemic risk; global expansion; competition; diversification; regulation
    JEL: G32 F3 G3
    Date: 2017–04
  9. By: Marie Hoerova (European Central Bank); Harald Uhlig (University of Chicago); Fiorella De Fiore (European Central Bank)
    Abstract: We build a general equilibrium model featuring unsecured and secured interbank markets, and collateralized central bank funding. The model accounts for some key facts about the European money markets since 2008: i) the decline in the ratio of interbank liabilities in total bank assets since the onset of the global financial crisis; ii) the reduced ability of banks to access the unsecured market during the sovereign crisis, and their shift to secured market funding; iii) the increased reliance on central bank funding, particularly for banks in countries with a vulnerable sovereign. Using the calibrated model, we find that a decline in the share of unsecured to secured interbank market transactions, as observed during the crisis, generates a sizeable macroeconomic impact.
    Date: 2017
  10. By: Gräb, Johannes; Żochowski, Dawid
    Abstract: We use a confidential euro area bank-level data set of close to 250 banks to assess outward and inward spillovers of unconventional monetary policies on bank lending. We find that euro area banks increase lending to the rest of the world in response to non-standard ECB monetary policy accommodation. We also find strong evidence that euro area banks increase lending to the domestic non-financial private sector in response to accommodative unconventional monetary policy measures in the US. Inward and outward spillovers are substantially stronger for euro area banks which are liquidity constrained and which rely more on internal capital markets. This suggests that bank-specific supply effects, stemming from banks’ increased ability to lend following a central bank balance sheet expansion, are a major driver of monetary policy spillovers, providing strong support to the existence of an international bank lending channel that prevails at the effective lower bound. JEL Classification: E44, E52, G01
    Keywords: cross-border spillovers, international bank lending channel, monetary policy, quantitative easing
    Date: 2017–11

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