nep-ban New Economics Papers
on Banking
Issue of 2017‒12‒18
eleven papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Housing Bust, Bank Lending & Employment : Evidence from Multimarket Banks By David P. Glancy
  2. Why are Banks Exposed to Monetary Policy? By Sebastian Di Tella; Pablo Kurlat
  3. Network Reactions to Banking Regulations By Guillermo Ordonez; Selman Erol
  4. Is this adverse selection or something else to determine the non-performing loans? Dynamic panel evidence from South Asian countries By Md. Shahidul Islam; Shin-Ichi Nishiyama
  5. Contagion via Financial Intermediaries in Pre-1914 Sovereign Debt Markets By Sasha Indarte
  6. International Spillovers and Local Credit Cycles By mehmet ulu; Sebnem Kalemli-Ozcan; Julian di Giovanni; Yusuf Soner Baskaya
  7. Financial Fragility and Over-the-counter Markets By Bruno Sultanum
  8. On the effectiveness of loan-to-value regulation in a multiconstraint framework By Grodecka, Anna
  9. Do creditor rights and information sharing affect the performance of foreign banks? By Emmanuel C. Mamatzakis; Antonios Kalyvas
  10. A Tale of Fire-Sales and Liquidity Hoarding By Aleksander Berentsen; Benjamin Müller
  11. Liquidity, Credit and Output: A Regime Change Model and Empirical Estimations By Willi Semmler; Levent Koçkesen

  1. By: David P. Glancy
    Abstract: I use geographic variation in bank lending to study how bank real estate losses impacted the supply of credit and employment during the Great Recession. Banks exposed to distressed housing markets cut mortgage and small business lending relative to other banks in the same county. This lending contraction had real effects, as counties whose banks were exposed to adverse shocks in other markets suffered employment declines, especially in young firms. This finding is robust to instrumenting for bank exposure to housing shocks using shocks in distant markets, exposure based on historical lending, or exposure to markets with inelastic housing supply.
    Keywords: Bank lending ; Employment ; Financial crisis ; Residential real estate
    JEL: E24 E44 G21
    Date: 2017–12–01
  2. By: Sebastian Di Tella; Pablo Kurlat
    Abstract: We propose a model of banks’ exposure to movements in interest rates and their role in the transmission of monetary shocks. Since bank deposits provide liquidity, higher interest rates allow banks to earn larger spreads on deposits. Therefore, if risk aversion is higher than one, banks' optimal dynamic hedging strategy is to take losses when interest rates rise. This risk exposure can be achieved by a traditional maturity-mismatched balance sheet, and amplifies the effects of monetary shocks on the cost of liquidity. The model can match the level, time pattern, and cross-sectional pattern of banks’ maturity mismatch.
    JEL: E41 E43 E44 E51
    Date: 2017–11
  3. By: Guillermo Ordonez (University of Pennsylvania); Selman Erol (MIT, CMU)
    Abstract: Optimal regulatory restrictions on banks have to solve a delicate balance. Tighter regulations reduce the likelihood of banks’ distress. Looser regulations foster the allocation of funds towards productive investments. With multiple banks, optimal regulation becomes even more challenging. Banks form partnerships in the interbank lending market to face liquidity needs and meet investment possibilities. We show that the interbank network may suddenly collapse once regulations are pushed above a critical level, with a discontinuous increase in systemic risk as banks’ cross-insurance collapses.
    Date: 2017
  4. By: Md. Shahidul Islam (Department of Banking and Insurance, University of Dhaka); Shin-Ichi Nishiyama (Graduate School of Economics, Kobe University)
    Abstract: In the South Asian region, one of the major causes of higher non-performing loans (NPL) is the adverse selection of borrowers by the banks. Using the GMM estimator, we empirically studied the bank-specific, industry specific and macroeconomic specific determinants of non-performing loans of banks in the South Asian countries (Bangladesh, India, Nepal and Pakistan) for the period of 1997-2012 and found that the adverse selection hypothesis of Stiglitz and Weiss (1981) still effective. We found evidence for the bad luck, bad management, skimping and moral hazard hypotheses of Berger and DeYoung (1997) and their effect on the credit risk determination. Bank size, industry concentration, inflation and GDP growth rate all significantly affect the sample countries’ non-performing loans. Empirical results show a moderate degree of persistence of NPL and a late-hit of the global financial crisis in the banking sector of the region.
    Keywords: NPL, cost inefficiency, moral hazard, adverse selection
    JEL: G21 C23
    Date: 2017–12
  5. By: Sasha Indarte (Northwestern University)
    Abstract: This paper uses new data on the timing of sovereign defaults during 1869-1914 to quantify an informational channel of contagion via shared financial intermediaries. Concerns over reputation incentivized Britain’s merchant banks to monitor, advise, and occasionally bail out sovereigns. Default signaled to investors that a merchant bank was not as willing or able to write and support quality issues, suggesting that its other bonds may underperform in the future. In support of this channel, I find that during a debt crisis, a 5% fall in the defaulting bond’s price leads to a 2.19% fall in prices of bonds sharing the defaulter’s bank. This is substantial compared to the 0.24% price drop among bonds with different banks. Information revelation about financial intermediaries can be a powerful source of contagion unrelated to a borrower’s fundamentals. In modern financial markets, third parties such as credit rating agencies, the IMF, or the ECB could similarly spread contagion if news about their actions reveals information about their willingness to monitor risky borrowers or intervene in crises.
    Date: 2017
  6. By: mehmet ulu (Turkish Central Bank); Sebnem Kalemli-Ozcan (University of Maryland); Julian di Giovanni (Universitat Pompeu Fabra); Yusuf Soner Baskaya (Bilkent University)
    Abstract: We show that capital in ows are important drivers of domestic credit cycles using a rm-bank-loan level dataset for a representative emerging market. Instrumenting in ows by changes in global risk appetite (VIX), we nd that a fall in VIX leads to a large decline in real borrowing rates and an expansion in credit supply. Estimates explain 40% of observed cyclical corporate credit growth. The OLS-elasticity of interest rates vis-a-vis capital in ows is smaller than the IV-elasticity. Banks with higher noncore funding oer relatively lower rates to low net worth rms, but do not extend more credit to them given collateral constraints
    Date: 2017
  7. By: Bruno Sultanum (Federal Reserve Bank of Richmond)
    Abstract: This paper studies the interaction between financial fragility and over-the-counter markets. In the model, the financial sector is composed of a large number of investors divided into different groups, which are interpreted as financial institutions, and a large number of dealers. Financial institutions and dealers trade assets in an over-the-counter market à la Duffie et al. (2005) and Lagos and Rocheteau (2009). Investors are subject to privately observed preference shocks, and financial institutions use the balanced team mechanism, proposed by Athey and Segal (2013), to implement an efficient risk-sharing arrangement among its investors. I show that when the market is more liquid, in the sense that the search friction is mild, the economy is more likely to have a unique equilibrium and, therefore, is not fragile. However, when the search friction is severe, I provide examples with run equilibria—where investors announce low valuation of assets because they believe everyone else in their financial institution is doing the same. In terms of welfare, I find that, conditional on bank runs existing, the welfare impact of the search friction is ambiguous. The reason is that, during runs, trade is inefficient and, as a result, a friction that reduces trade during runs has the potential to improve welfare. This result is in sharp contrast with the existing literature which suggests that search friction has a negative impact on welfare.
    Date: 2017
  8. By: Grodecka, Anna (Financial Stability Department, Central Bank of Sweden)
    Abstract: Models in the infinite horizon macro-housing literature often assume that borrowers are constrained exclusively by the loan-to-value (LTV) ratio. Motivated by the Swedish micro-data, I explore an alternative arrangement where borrowers are constrained by the feasibility of repayment, but choose a house of maximum permissible size conditional on the LTV restriction. While stricter LTV limits are often considered as a measure to tackle the rise in household indebtedness, I find that policy designed to lower the maximum permissible LTV ratio may actually leave the debt-to-GDP ratio unchanged and increase housing prices in equilibrium if borrowers are bound by two constraints at the same time. In a model with occasionally binding constraints, I show that also for the analysis of the short-run effects of different policies, the consideration of multiple constraints, possibly binding at the same time, is important. The effectiveness of LTV as a measure to tackle the rise in indebtedness has to be reassessed and is likely lower than previously shown.
    Keywords: borrowing constraints; household indebtedness; macroprudential policy; housing prices; loan-to-value ratio; debt-service-to-income ratio
    JEL: E32 E44 E58 R21
    Date: 2017–11–01
  9. By: Emmanuel C. Mamatzakis (University of Sussex); Antonios Kalyvas (University of Sussex)
    Abstract: This paper examines the effect of host economy creditor rights and information sharing on the profit performance of foreign banks vis-a-vis domestic banks for a global sample of commercial banks over the 2005-2009 period. To this end, we employ the recent foreign bank ownership dataset of Claessens and Van Horen (2014) and measure performance as profit efficiency using the alternative profit function. Results from the Battese and Coelli (1995) stochastic frontier analysis model show that creditor rights exert a positive effect on efficiency that strengthens for foreign banks. On the other hand, information sharing exerts a negative effect on profit efficiency which strengthens for foreign banks. The results for information sharing show some variability across different levels of development of the host economy. Moreover, the transparency of the host economy moderates the effect of creditor rights and information sharing on foreign bank efficiency. We also examine the effect of “institutional distance” in creditor rights and information sharing between the home and host economy on foreign bank efficiency. The effect of creditor rights “institutional distance” on foreign bank efficiency is negative, while it turns positive for information sharing. These findings highlight the importance of strong creditor rights for foreign bank performance and are useful for both regulators in host economies and foreign bank managers.
    Keywords: Foreign Banks; Liability of Foreignness; Profit Efficiency; Creditor Rights, Information Sharing
    JEL: F21 F23 G21 G28
    Date: 2017–07
  10. By: Aleksander Berentsen; Benjamin Müller
    Abstract: We extend the analysis of the theoretical interbank market model of Gale and Yorulmazer (2013) by introducing randomized trading (lotteries). In contrast to Gale and Yorulmazer, we find that fire-sale asset prices are efficient and that no liquidity hoarding occurs in equilibrium with lotteries. While Gale and Yorulmazer find that the market provides insufficient liquidity, we find that it provides too much liquidity when introducing lotteries. We also show how to decentralize the efficient lottery mechanism.
    Keywords: Fire-sales, lotteries, liquidity hoarding, interbank markets, indivisibility
    JEL: G12 G21 G33
    Date: 2017
  11. By: Willi Semmler (Department of Economics, New School for Social Research); Levent Koçkesen (Department of Economics, Columbia University)
    Abstract: There is a long tradition which maintains that liquidity and credit impact aggregate economic activity. Recent events seem to give fresh support to this line of research. Economic theory on credit and financial markets is in search of mechanisms that might explain the strong propagation effect of real, monetary and financial shocks. We employ a simple macrodynamic model of threshold and regime change type to provide such a propagation mechanism. We estimate the model by transforming our continuous time form into an estimable discrete time form using the Euler approximation and a method proposed by Ozaki. We also approximate the model by employing the discrete time Smooth Transition Regression (STR) methodology. Our estimation procedures are applied to U.S. time series data. We find essential nonlinearities and regime changes in the data. The change of the dynamic properties of the estimated model occur as the variables pass through certain thresholds. Locally unstable but globally bounded fluctuations as well as asymmetric responses to shocks are detected.
    Keywords: Regime change models, Smooth Transition Regression models, financial-real interaction, thresholds, asymmetry in business cycles
    JEL: C32 E32 E44
    Date: 2017–12

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