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

  1. Bank Failures, Capital Buffers, and Exposure to the Housing Market Bubble By Gazi Kara; Cindy M. Vojtech
  2. Credit Rationing and the Relationship Between Family Businesses and Banks in Italy By Giovanni Ferri; Pierluigi Murro; Marco Pini
  3. What Does Matched Bank-Firm Lending Data Tell Us about the Relative Riskiness of State-Owned Banks in India? By Gopalakrishnan, Balagopal
  4. Capital requirements for government bonds: Implications for bank behaviour and financial stability By Neyer, Ulrike; Sterzel, André
  5. Alternative classifications of Italian banks:Do different grouping rules mislead results on the risk profile of banks? By Ivana Catturani; Erika Dalpiaz
  6. Provisioning policies for non-performing loans: How to best ensure a "clean balance sheet"? By Wahrenburg, Mark
  7. Motivating the Use of Different Macro-prudential Instruments: the Countercyclical Capital Buffer vs. Borrower-Based Measures By O'Brien, Eoin; Ryan, Ellen
  8. CoCo issuance and bank fragility By Stefan Avdjiev; Bilyana Bogdanova; Patrick Bolton; Wei Jiang; Anastasia Kartasheva
  9. The Welfare Costs of Self-Fulfilling Bank Runs By Elena Mattana; Ettore Panetti
  10. Banks' Capital Surplus and the Impact of Additional Capital Requirements By Simona Malovana
  11. Macroeconomic implications of financial imperfections: a survey By Stijn Claessens; M Ayhan Kose

  1. By: Gazi Kara; Cindy M. Vojtech
    Abstract: We empirically document that banks with greater exposure to high home price-to-income ratio regions in 2005 and 2006 have higher mortgage delinquency and charge-off rates and significantly higher probabilities of failure during the last financial crisis even after controlling for capital, liquidity, and other standard bank performance measures. While high price-to-income ratios present a greater likelihood of house price correction, we find no evidence that banks managed this risk by building stronger capital buffers. Our results suggest that there is scope for improved measures of mortgage loan risk that could be considered for regulatory and risk management applications.
    Keywords: Bank failure ; Credit risk ; Mortgage risk ; Residential real estate
    JEL: G01 G21 G28 R31
    Date: 2017–11–29
  2. By: Giovanni Ferri (LUMSA University); Pierluigi Murro (LUMSA University); Marco Pini (Unioncamere)
    Abstract: We investigate whether family businesses (FBs) suffer stiffer credit rationing in the post-crisis Italian economy. FBs are, in fact, typically more opaque than other firms, possibly deterring bank lending to them. Moreover, regulatory changes may lead many banks to abandon relationship lending, weakening their ability to evaluate opaque firms. Using detailed firm data, our estimates reach nuanced conclusions. First, credit rationing is not more intense at FBs. However, it systematically intensifies if FBs engage in firm-bank arrangements less able to overcome information asymmetries either coupling with a main bank that uses transactional lending or diluting relationships across various banking partners.
    Keywords: Family firms, Firm-bank relationship, Bank lending technologies, Credit Rationing
    JEL: D22 G32
    Date: 2017–12
  3. By: Gopalakrishnan, Balagopal
    Abstract: In this study, we examine the lending decisions of public sector banks (PSBs) in India using a novel bank-firm level data. We use the firm-level short term bank borrowings and incremental long term bank borrowings data, which is available since 2011 given the improved disclosure norms as per the revised Schedule VI of the Companies Act 1956 notified on March 1st, 2011, to identify the private non-financial firms that have borrowed in each year and have exclusive relationship with PSBs. The analysis of the lending decisions based on the ex-ante external credit ratings of firms indicate that the PSBs are more likely to lend to observably less creditworthy firms relative to the private banks (PBs). We also find that smaller sized firms have a higher likelihood of obtaining credit exclusively from PSBs, possibly, consistent with the social objectives and directed lending programs of the government. Further, we find that the relative likelihood of riskier firms to borrow exclusively from PSBs is significantly higher if we exclude firms that have a relationship with Domestic Systemically Important Banks (D-SIBs) from the sample. Finally, we find weak evidence that firms which are likely to have a higher degree of political influence, determined based on an election period event study methodology, have a higher likelihood of an exclusive borrowing relationship with PSBs. The study contributes to the contemporary debates on the role of market discipline, disclosures, and moral hazard in banking.
    Date: 2017–11–11
  4. By: Neyer, Ulrike; Sterzel, André
    Abstract: This paper analyses whether the introduction of capital requirements for bank government bond holdings increases financial stability by making the banking sector more resilient to sovereign debt crises. Using a theoretical model, we show that a sudden increase in sovereign default risk may lead to liquidity issues in the banking sector. Our model reveals that in combination with a central bank acting as a lender of last resort, capital requirements for government bonds increase the shock-absorbing capacity of the banking sector and thus the financial stability. The driving force is a regulation-induced change in bank investment behaviour.
    Keywords: bank capital regulation,government bonds,sovereign risk,financial contagion,lender of last resort.
    JEL: G28 G21 G01
    Date: 2017
  5. By: Ivana Catturani; Erika Dalpiaz
    Abstract: The Italian banking system is under the scrutiny of both the monitoring authority and public opinion after the bankruptcy of some important banks. Among other reasons, analysts underline the riskier attitude of specific types of banks (e.g., cooperative banks). Cooperative banks represent the largest proportion of banks under the commissioner. The label "cooperative banks" includes both banche popolari and credit cooperative banks, which might be similar from the ownership point of view but differ in many other aspects. As a result, the list of intermediaries facing financial distress includes local, cooperatively owned and small banks. However, the regulator intervention functions under the institutional classification, not the banks’ actual behaviour. This paper tests whether banks are adequately classified through their usual institutional tags (i.e., banche di credito cooperativo, banche popolari, commercial or savings banks) or whether other features provide a better description of banks’ attitude towards risks. For this reason, alternative classifications are introduced and compared. The main finding is that more than the institutional classification, the ownership and the de facto operating pattern are the aspects that characterise the risk behaviour of Italian banks.
    Keywords: financial stability, z - score, cooperative banks
    JEL: G20 G21 G28
    Date: 2017
  6. By: Wahrenburg, Mark
    Abstract: New provisioning rules introduced by IFRS 9 are expected to reduce the procyclicality of provisioning. Heterogeneity among banks in the procyclicality of provisioning may not only reflect the formal accounting rules, but also variation in discretionary provisioning policies. This paper presents empirical evidence on the heterogeneity of provisioning procyclicality among significant banks that are directly supervised by the ECB. In particular, this paper finds that provisioning is relatively procyclical at banks that have i) high loans-to-assets ratios, ii) high shares of non-interest income in total operating income, iii) low capitalization rates, and iv) low total assets. Supervisory guidance provided to banks on how to implement IFRS 9 has mostly been of a qualitative nature, and may prove inadequate to prevent an undesirably wide future variation in provisioning among EU banks.
    Keywords: IFRS 9,provisioning rules,EU banks
    Date: 2017
  7. By: O'Brien, Eoin (Central Bank of Ireland); Ryan, Ellen (Central Bank of Ireland)
    Abstract: In the implementation of macro-prudential policy, macro-prudential authorities such as the Central Bank of Ireland face policy choices as to how best to mitigate systemic risk(s). This Letter focuses on one such policy choice. The Letter conceptually assesses a capital-based tool (the countercyclical capital buffer) compared with borrower-based instruments (e.g. loan-to-value and loan-to-income restrictions). The Letter also briefly reviews the implementation of these tools across Europe. It is found that at a high level the countercyclical capital buffer tends to be viewed as best suited, although not limited, to enhancing the resilience of the banking system. Borrower-based measures, then, provide a tool that can be used to target the resilience of households or impact directly on the flow of mortgage lending. These instruments are flexible however and policymakers can tailor their implementation, either individually or in combination, to ensure an appropriate macro-prudential policy stance with respect to the prevailing systemic risk environment.
    Date: 2017–11
  8. 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.
    Keywords: CoCos, Contingent Convertible Capital, Bank Capital Regulation, Basel III
    JEL: G01 G21 G28 G32
    Date: 2017–11
  9. By: Elena Mattana; Ettore Panetti
    Abstract: We study the welfare implications of self-fulfilling bank runs and liquidity require-ments, in a neoclassical growth model where banks, facing long-lasting possible runs, can choose in any period a run-proof asset portfolio. In this framework, runs distort banks’insurance provision against idiosyncratic liquidity shocks, and liquidity requirements re-solve this distortion by forcing a credit tightening. Quantitatively, the welfare costs of self-fulfilling bank runs are equivalent to a constant consumption loss of up to 2.5 percent of U.S. GDP. Depending on fundamentals, liquidity requirements might generate small welfare gains, but also increase the welfare costs by up to 1.8 percent.
    Keywords: financial intermediation, bank runs, regulation, welfare
    JEL: E21 E44 G01 G20
    Date: 2017–11
  10. By: Simona Malovana
    Abstract: Banks in the Czech Republic maintain their regulatory capital ratios well above the level required by their regulator. This paper discusses the main reasons for this capital surplus and analyses the impact of additional capital requirements stemming from capital buffers and Pillar 2 add-ons on the capital ratios of banks holding such extra capital. The results provide evidence that banks shrink their capital surplus in response to higher capital requirements. A substantial portion of this adjustment seems to be delivered through changes in average risk weights. For this and other reasons, it is desirable to regularly assess whether the evolution and current level of risk weights give rise to any risk of underestimating the necessary level of capital.
    Keywords: Banks, capital requirements, capital surplus, panel data, partial adjustment model
    JEL: G21 G28 G32
    Date: 2017–11
  11. By: Stijn Claessens; M Ayhan Kose
    Abstract: This paper surveys the theoretical and empirical literature on the macroeconomic implications of financial imperfections. It focuses on two major channels through which financial imperfections can affect macroeconomic outcomes. The first channel, which operates through the demand side of finance and is captured by financial accelerator-type mechanisms, describes how changes in borrowers' balance sheets can affect their access to finance and thereby amplify and propagate economic and financial shocks. The second channel, which is associated with the supply side of finance, emphasises the implications of changes in financial intermediaries' balance sheets for the supply of credit, liquidity and asset prices, and, consequently, for macroeconomic outcomes. These channels have been shown to be important in explaining the linkages between the real economy and the financial sector. That said, many questions remain.
    Keywords: asset prices, balance sheets, credit, financial accelerator, financial intermediation, financial linkages, international linkages, leverage, liquidity, macrofinancial linkages, output, real-financial linkages
    JEL: D53 E21 E32 E44 E51 F36 F44 G01 G10 G12 G14 G15 G21
    Date: 2017–11

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.