nep-ban New Economics Papers
on Banking
Issue of 2018‒01‒01
eighteen papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Syndicated loans and CDS positioning By Iñaki Aldasoro; Andreas Barth
  2. When Losses Turn Into Loans: The Cost of Undercapitalized Banks By Laura Blattner; Luisa Farinha; Francisca Rebelo
  3. Capturing macroprudential regulation effectiveness: A DSGE approach with shadow intermediaries By Federico Lubello; Abdelaziz Rouabah
  4. Capital and liquidity buffers and the resilience of the banking system in the euro area By Budnik, Katarzyna; Bochmann, Paul
  5. A macro approach to international bank resolution By Dirk Schoenmaker
  6. Understanding the Trembles of Nature: How Do Disaster Experiences Shape Bank Risk Taking? By Bos, Jaap; Li, Runliang
  7. Robust estimation of cost efficiency in non-parametric frontier models By Galina Besstremyannaya; Jaak Simm; Sergei Golovan
  8. Bank Capital and Lending: An Extended Framework and Evidence of Nonlinearity By Mario Catalan; Alexander W. Hoffmaister; Cicilia Anggadewi Harun
  9. Why are banks not recapitalized during crises? By Matteo Crosignani
  10. Does banks' systemic importance affect their capital structure and balance sheet adjustment processes? By Yassine Bakkar; Olivier De Jonghe; Amine Tarazi
  11. To Be Bailed Out or To Be Left to Fail? A Dynamic Competing Risks Hazard Analysis By Nikolaos I. Papanikolaou
  12. Bank-based versus market-based financing: implications for systemic risk By Joost Bats; Aerdt Houben
  13. Liquidity holdings, diversification, and aggregate shocks By Chavaz, Matthieu
  14. Explaining the Historic Rise in Financial Profits in the US Economy By Costas Lapavitsas; Ivan Mendieta-MuÃ’oz
  15. Will Bank Transparency really Help Financial Markets and Regulators? By Karima Bouaiss; Catherine Refait-Alexandre; Hervé Alexandre
  16. Is CAViaR model really so good in Value at Risk forecasting? Evidence from evaluation of a quality of Value-at-Risk forecasts obtained based on the: GARCH(1,1), GARCH-t(1,1), GARCH-st(1,1), QML-GARCH(1,1), CAViaR and the historical simulation models depending on the stability of financial markets By Mateusz Buczyński; Marcin Chlebus
  17. A Macroeconomic Model with Financial Panics By Gertler, Mark; Kiyotaki, Nobuhiro; Prestipino, Andrea
  18. Modelling Crypto-Currencies Financial Time-Series By Leopoldo Catania; Stefano Grassi

  1. By: Iñaki Aldasoro; Andreas Barth
    Abstract: This paper analyzes banks’ usage of CDS. Combining bank-firm syndicated loan data with a unique EU-wide dataset on bilateral CDS positions, we find that stronger banks in terms of capital, funding and profitability tend to hedge more. We find no evidence of banks using the CDS market for capital relief. Banks are more likely to hedge exposures to relatively riskier borrowers and less likely to sell CDS protection on domestic firms. Lead arrangers tend to buy more protection, potentially exacerbating asymmetric information problems. Dealer banks seem insensitive to firm risk, and hedge more than non-dealers when they are more profitable. These results allow for a better understanding of banks’ credit risk management. JEL Classification: G21, G28
    Keywords: syndicated loans, CDS, speculation, capital regulation, EMIR, cross-border lending, asymmetric information
    Date: 2017–11
  2. By: Laura Blattner; Luisa Farinha; Francisca Rebelo
    Abstract: We provide evidence that a weak banking sector has contributed to low productivity growth in the aftermath of the European sovereign debt crisis. An unexpected increase in capital requirements for a subset of Portuguese banks in 2011 provides a natural experiment to study the effects of reduced bank capital adequacy on productivity. Using detailed administrative data from the Bank of Portugal, we show that affected banks respond not only by cutting back on lending but also by increasing their underreporting of loan losses, which inflates reported capital, and by reallocating credit to firms in financial distress with prior underreported losses. To establish these results, we develop a method to detect the underreporting of losses using detailed loan-level data. We argue that this credit reallocation is consistent with distorted lending incentives arising either from the attempt to avoid the recognition of underreported losses, or from gambling on risky firms in response to an expected government bailout. We then show that the credit reallocation affects firm-level investment and employment. Finally, we translate the firm-level changes into aggregate productivity. This partial equilibrium exercise suggests that the credit reallocation driven by the regulatory intervention accounts for 20% of the decline in productivity in Portugal in 2012.
    JEL: G21 G38 E51 D24 O47
    Date: 2017–12–04
  3. By: Federico Lubello; Abdelaziz Rouabah
    Abstract: Shadow intermediaries activities have registered a spectacular increase during the last decades. Recently, their market shares have rapidly been gaining momentum partially due to “regulatory arbitrage". Although their centrality to the credit boom in the early 2000s and to the collapse during the financial crisis of 2007-2009 is widely documented, the number of contributions studying the implications on the real economy and the underlying transmission mechanisms is surprisingly limited. We contribute to filling this gap and devise a new DSGE model whose productive sector captures key characteristics of the European economy by accounting for small and large firms vertically linked in a production chain. The adopted framework includes commercial banks and shadow financial intermediaries directly interconnected in the interbank market with specific and differentiated channels of financing to the real economy. The framework also incorporates moral hazard for commercial banks which, together with regulatory arbitrage, might bring further incentives for banks to securitize part of their assets. An attempt to incorporate macroprudential policy is considered through the implementation of capital requirements and caps to securitization in the traditional banking sector. The results show that the complementarity of such tools devised by a macroprudential authority can be effective in dampening aggregate volatility and safeguarding financial stability.
    Keywords: DSGE models, Macroprudential Policy, Shadow Banking, SMEs
    JEL: C32 E32 E44 E5 G21 G23
    Date: 2017–10
  4. By: Budnik, Katarzyna; Bochmann, Paul
    Abstract: How do capital and liquidity buffers affect the evolution of bank loans in periods of financial and economic distress? To answer this question we study the responses of 219 individual banks to aggregate demand, standard and unconventional monetary policy shocks in the euro area between 2007 and 2015. Banks’ responses are derived from a factor-augmented VAR, which relates macroeconomic aggregates to individual bank balance sheet items and interest rates. We find that banks with high capital and liquidity buffers show a more muted response in their lending to adverse real economy shocks. Capital and liquidity buffers also affect bank responses to monetary policy shocks. High bank capitalisation reduces the degree to which banks increase the average duration of loans to the non-financial corporate sector, while high bank liquidity strengthens the positive response to policy easing of both longand short-term loans to the non-financial corporate sector. The latter findings substantiate the relevance of interactions between prudential controls and monetary policy. JEL Classification: E51, E52, G21
    Keywords: capital requirements, liquidity requirements, macroprudential policy, monetary policy
    Date: 2017–12
  5. By: Dirk Schoenmaker
    Abstract: In the aftermath of the Great Financial Crisis, regulators have rushed to strengthen banking supervision and implement bank resolution regimes. While such resolution regimes are welcome to reintroduce market discipline and reduce the reliance on taxpayer-funded bailouts, the effects on the wider banking system have not been properly considered. This paper proposes a macro approach to resolution, which should consider (i) the contagion effects of bail-in, and (ii) the continuing need for a fiscal backstop to the financial system. For bail-in to work, it is important that bail-inable bank bonds are largely held outside the banking sector, which is currently not the case. Stricter capital requirements could push them out of the banking system. The organisation of the fiscal backstop is crucial for the stability of the global banking system. Single-point-of-entry resolution of international banks is only possible for the very largest countries or for countries working together, including in terms of sharing the burden of a potential bank bailout. The euro area has adopted the latter approach in its Banking Union. Other countries have taken a stand-alone approach, which leads to multiple-point-of-entry resolution of international banks and contributes to fragmentation of the global banking system.Creation-Date: 2017-10 JEL Classification: G01, G21, G28
    Keywords: bank resolution, international banking, single point of entry, multiple point of trilemma, banking union
    Date: 2017–11
  6. By: Bos, Jaap (Finance); Li, Runliang (Finance)
    Abstract: This paper examines the impact of natural disaster experiences on banks’ business practices. Using earthquake and banking data for California, we find that banks that have had stronger earthquake experiences change their practices, both as a result of the natural disasters’ effects on local deposit supply and through changes in banks’ risk perceptions. These banks have a smaller exposure to real estate, maintain higher equity levels, and are more likely to lend to high-income borrowers. This paper confirms, therefore, that institutional memory exists in the banking sector and that banks and communities adapt to natural disasters interactively.
    Keywords: environmental economics, Financial Economics and Financial Manageemnt
    JEL: D53 D83 G11 G21 Q54
    Date: 2017–12–14
  7. By: Galina Besstremyannaya (CEFIR at New Economic School); Jaak Simm (University of Leuven); Sergei Golovan (New Economic School)
    Abstract: The paper proposes a bootstrap methodology for robust estimation of cost efficiency in data envelopment analysis. Our algorithm re-samples "naive" input-oriented efficiency scores, rescales original inputs to bring them to the frontier, and then re-estimates cost efficiency scores for the rescaled inputs. We consider the cases with absence and presence of environmental variables. Simulation analyses with multi-input multi-output production function demonstrate consistency of the new algorithm in terms of the coverage of the confidence intervals for true cost efficiency. Finally, we offer real data estimates for Japanese banking industry. Using the nationwide sample of Japanese banks in 2009, we show that the bias of cost efficiency scores may be linked to the bank charter and the presence of the environmental variables in the model. A package `rDEA', developed in the R language, is available from the GitHub and CRAN repository.
    Keywords: data envelopment analysis, cost efficiency, bias, bootstrap, banking
    JEL: C44 C61 G21
    Date: 2017–12
  8. By: Mario Catalan; Alexander W. Hoffmaister; Cicilia Anggadewi Harun
    Abstract: This paper studies the transmission of bank capital shocks to loan supply in Indonesia. A series of theoretically founded dynamic panel data models are estimated and find nonlinear effects of capital on loan growth: the response of weaker banks to changes in their capital positions is larger than that of stronger banks. This non-linearity implies that not only the level of capital but also its distribution across banks in the financial system affects the transmission of shocks to aggregate lending. Likewise, the effects of bank recapitalization on loan growth depend on banks’ starting capital positions and the size of capital injections.
    Date: 2017–11–16
  9. By: Matteo Crosignani
    Abstract: I develop a model where the sovereign debt capacity depends on the capitalization of domestic banks. Low-capital banks optimally tilt their government bond portfolio toward domestic securities, linking their destiny to that of the sovereign. If the sovereign risk is sufficiently high, low-capital banks reduce private lending to further increase their holdings of domestic government bonds, lowering sovereign yields and supporting the home sovereign debt capacity. The model rationalizes, in the context of the eurozone periphery, the increase in domestic government bond holdings, the reduction of bank credit supply, and the prolonged fragility of the financial sector. JEL Classification: E44, F33, G21, G28
    Keywords: Bank Capital, Sovereign Crises, Risk-Shifting, Government Bonds, Bank Credit
    Date: 2017–11
  10. By: Yassine Bakkar (LAPE - Laboratoire d'Analyse et de Prospective Economique - UNILIM - Université de Limoges - IR SHS UNILIM - Institut Sciences de l'Homme et de la Société); Olivier De Jonghe (European Banking Center, Tilburg University and National Bank of Belgium. - Tilburg University and National Bank of Belgium); Amine Tarazi (LAPE - Laboratoire d'Analyse et de Prospective Economique - UNILIM - Université de Limoges - IR SHS UNILIM - Institut Sciences de l'Homme et de la Société)
    Abstract: Frictions prevent banks to immediately adjust their capital ratio towards their desired and/or imposed level. This paper analyzes (i) whether or not these frictions are larger for regulatory capital ratios vis-à-vis a plain leverage ratio; (ii) which adjustment channels banks use to adjust their capital ratio; and (iii) how the speed of adjustment and adjustment channels differ between large, systemic and complex banks versus small banks. Our results, obtained using a sample of listed banks across OECD countries for the 2001-2012 period, bear critical policy implications for the implementation of new (systemic risk-based) capital requirements and their impact on banks' balance sheets, specifically lending, and hence the real economy.
    Keywords: capital structure,speed of adjustment,systemic risk,systemic size,bank regulation,lending,balance sheet composition
    Date: 2017–11–16
  11. By: Nikolaos I. Papanikolaou (Bournemouth University)
    Abstract: During the late 2000s financial crisis, a large number of banks either failed or received financial aid thus inflicting substantial losses on the system. We contribute to the early warning literature by developing a dynamic competing risks hazard 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 on a broad range of bank-level and environmental factors. We find that institutions with inadequate capital, illiquid and risky assets, poor management, low levels of earnings and high sensitivity to market conditions have a higher probability to go bankrupt. Bailed out banks, on the other hand, face both capital and liquidity shortages, experience low earnings, and are highly exposed to market products; however, neither managerial expertise, nor the quality of assets are relevant to the odds of bailout. We further document that large and complex banks are less likely to fail and more likely to be bailed out and that authorities are more prone to provide support to a distressed bank, which is well-connected with politicians and political parties and less prone to let it go bankrupt. Importantly, our model outperforms the commonly used logit model in terms of forecasting accuracy in all the in- and out-of-sample tests we conduct.
    Keywords: Financial crisis; Bailout; Failure; Dynamic competing risks hazard model; Forecasting
    JEL: C13 C53 D02 G01 G21
    Date: 2017–12
  12. By: Joost Bats; Aerdt Houben
    Abstract: Against the background of the great financial crisis, this paper assesses the merits of bank-based versus market-based financing by exploring the relationship between financial structure and systemic risk. A fixed effects regression model is estimated over a panel of 22 OECD countries. The results show that bank-based financing generates systemic risk while market-based debt and especially market-based stock financing reduce systemic risk. A threshold regression model estimated over the same panel suggests that banks no longer contribute to systemic risk when there is little bank-based financing. In the case of relatively market-based financial structures, the influence of banks on systemic risk is low. The findings indicate that countries can increase their resilience to systemic risk by reducing the share of bank-based financing and increasing the share of market-based financing.
    Keywords: financial structure; systemic risk; bank-based financing; market-based financing
    JEL: E44 G10 G21 O16
    Date: 2017–12
  13. By: Chavaz, Matthieu (Bank of England)
    Abstract: This paper shows that US banks’ increased geographic diversification is an important explanation for the decline of their liquidity buffers from 1976 to the 2008 crisis. Diversified banks also hold more illiquid small business loans, less liquid mortgages, and have higher net liquidity creation. During the crisis, however, better diversified banks hoard more liquidity. These results suggest that diversification increases liquidity risk-taking capacity in normal times, and that exploiting this advantage leaves banks more exposed to aggregate shocks.
    Keywords: Liquidity; diversification; crises; regulation
    JEL: G21 G28 G32
    Date: 2017–12–01
  14. By: Costas Lapavitsas; Ivan Mendieta-MuÃ’oz (Department of Economics, SOAS, University of London, UK)
    Abstract: The ratio of financial to non-financial profits in the US economy has increased sharply since the 1970s, the period that is often called the financialisation of capitalism. By developing a two-sector theoretical model the ratio of financial to non-financial profits is shown to depend positively on the net interest margin and the non-interest income of banks, while it depends negatively on the general rate of profit, the non-interest expenses of banks, and the ratio of the capital stock to interest-earning assets. The model was estimated empirically for the post-war period and the results indicate that the ratio has varied mainly with respect to the net interest margin, although non-interest income has also played a significant role. The results confirm that in the course of financialisation the US financial sector has been able to extract rising profits through interest differentials and non-interest income, while the general rate of profit has remained broadly constant.
    Keywords: Rise in financial profits, financialisation, U.S. economy
    JEL: E11 E44 G20
    Date: 2017–10
  15. By: Karima Bouaiss (Université de Tours - Université de Tours); Catherine Refait-Alexandre (CRESE - UFC - Université de Franche-Comté); Hervé Alexandre (DRM - Dauphine Recherches en Management - Université Paris-Dauphine - CNRS - Centre National de la Recherche Scientifique)
    Abstract: The transparency of credit institutions is currently an issue of crucial importance not only with regard to the adaptation of regulatory tools (Basle II, IAS-IFRS international norms etc.)but also to the banking, financial and economic consequences. The current crisis places the importance of information about all banking activities centre stage in any debate. At a time when banks are controlled more than ever before, it is surprising to see them being swamped with criticism about their opaqueness and their reluctance to communicate, especially about the risks they are taking. This paper therefore, presents state of the art works on disclosure and bank transparency.It deals with questioning whether it is beneficial or not to increase disclosure levels in order to improve the discipline that the regulators and the markets exert on the banks.
    Keywords: Market discipline,Banking crises,Bank transparency
    Date: 2017–11–18
  16. By: Mateusz Buczyński (Faculty of Economic Sciences, University of Warsaw); Marcin Chlebus (Faculty of Economic Sciences, University of Warsaw)
    Abstract: In the literature, there is no consensus which Value-at-Risk forecasting model is the best for measuring a market risk in banks. In the study an analysis of Value-at-Risk forecasting models quality over varying economic stability periods for main indices from stock exchanges was conducted. The VaR forecasts from GARCH(1,1), GARCH-t(1,1), GARCH-st(1,1), QML-GARCH(1,1), CAViaR and historical simulation models in periods with contrasting volatility trends (increasing, constantly high and decreasing) for countries economically developed (the USA – S&P 500, Germany - DAX and Japan – Nikkei 225) and economically developing (China – SSE COMP, Poland – WIG20 and Turkey – XU100) were compared. The data samples used in the analysis were selected from period 01.01.1999 – 24.03.2017. To assess the VaR forecasts quality: excess ratio, Basel traffic light test, coverage tests (Kupiec test, Christoffersen test), Dynamic Quantile test, cost functions and Diebold-Marino test were used. Obtained results shows that the quality of Value-at-Risk forecasts for the models varies depending on a volatility trend. However, GARCH-st (1,1) and QML-GARCH(1,1) were found as the most robust models to the different volatility periods. The results shows, as well that the CAViaR model forecasts were less appropriate in the increasing volatility period. Moreover, no significant differences for the VaR forecasts quality were found for the developed and developing countries.
    Keywords: risk management, value at risk, GARCH, CAViaR, historical simulation, quality of model assessment
    JEL: G32 C52 C53 C58
    Date: 2017
  17. By: Gertler, Mark; Kiyotaki, Nobuhiro; Prestipino, Andrea
    Abstract: This paper incorporates banks and banking panics within a conventional macroeconomic framework to analyze the dynamics of a financial crisis of the kind recently experienced. We are particularly interested in characterizing the sudden and discrete nature of the banking panics as well as the circumstances that makes an economy vulnerable to such panics in some instances but not in others. Having a conventional macroeconomic model allows us to study the channels by which the crisis affects real activity and the effects of policies in containing crises.
    Keywords: Bank Runs; Financial Crisis; New Keynesian DSGE
    JEL: E23 E32 E44 G01 G21 G33
    Date: 2017–12–15
  18. By: Leopoldo Catania (DEF, University of Rome "Tor Vergata"); Stefano Grassi (DEF, University of Rome "Tor Vergata")
    Abstract: This paper studies the behaviour of crypto{currencies financial time{series of which Bitcoin is the most prominent example. The dynamic of those series is quite complex displaying extreme observations, asymmetries and several nonlinear characteristics which are difficult to model. We develop a new dynamic model able to account for long{memory and asymmetries in the volatility process as well as for the presence of time{varying skewness and kurtosis. The empirical application, carried out on a large set of crypto{currencies, shows evidence of long memory and leverage effect that has a substantial contribution in the volatility dynamic. Going forward, as this new and unexplored market will develop, our results will be important for investment and risk management purposes.
    Keywords: Crypto-currency; Bitcoin, Score{Driven model; Leverage effect; Long memory; Higher Order Moments
    JEL: C01 C22 C51 C58
    Date: 2017–12–11

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