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on Banking |
| By: | João Granja; Christian Leuz |
| Abstract: | An important question in banking is how strict supervision affects bank lending and in turn local business activity. Forcing banks to recognize losses could choke off lending and amplify local economic woes, especially after financial crises. But stricter supervision could also lead to changes in how banks assess loans and manage their loan portfolios. Estimating such effects is challenging. We exploit the extinction of the thrift regulator (OTS) – a large change in prudential supervision, affecting ten percent of all U.S. depository institutions. Using this event, we analyze economic links between strict supervision, bank lending and business activity. We first show that the OTS replacement indeed resulted in stricter supervision of former OTS banks. We then analyze the lending effects of this regulatory change and show that former OTS banks increase small business lending by approximately 10 percent. This increase stems primarily from well-capitalized banks and those more affected by the new regime. These findings suggest that stricter supervision operates not only through capital but can also overcome frictions in bank management, leading to more lending and a reallocation of loans. Consistent with the latter, we find increases in business entry and exit in counties with greater expose to OTS banks. |
| JEL: | E44 E51 G21 G28 G32 G38 K22 K23 L51 M41 M48 |
| Date: | 2017–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:24168&r=ban |
| By: | P. Pessarossi; J.-L. Thevenon; L. Weill |
| Abstract: | We investigate how high profitability influences the occurrence of bank distress in Europe. We utilize four indicators for ‘too high’ profitability, defined as the top quantiles of earnings, in logit models to explain bank distress with a hand-collected dataset of European bank distresses over the 2001-2014 period. We test the hypothesis that profitability can be beneficial for stability until a certain level but can turn detrimental at high level. We find that ‘too high’ profitability does not reduce the occurrence of bank distress. We obtain limited evidence that the top quantiles of the profitability distribution can lead to enhance such occurrence through a time horizon of about 3 years. With the hindsight of the Great Financial Crisis, our findings therefore qualify the view that bank profitability only should be promoted to favor bank stability. |
| Keywords: | Bank profitability, financial distress, financial stability. |
| JEL: | G21 G33 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:bfr:decfin:31&r=ban |
| By: | D'Avino, Carmela |
| Abstract: | This paper proposes a novel measure of universal banking constructed using the relative contribution of each operating segment to total assets. Using a sample of international banks, we evaluate the extent to which our proposed metric affects banks’ profitability, stability, liquidity and capitalisation. In addition, we evaluate the implications of a more complex business model, featured by th interaction of universal banking and globalization. Results suggest that a higher degree of diversification enhances financial stability and capitalisation when the Universal Banking Index (UBI) is used as a proxy of universal banking. However, a more complex structure, conceived as the combination of universal and global business models, is associated with lower levels of capital and is less desirable from a financial stability perspective |
| Keywords: | Universal banking, financial products diversification, globalization |
| JEL: | G20 G21 L22 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:83166&r=ban |
| By: | Herbst-Murphy, Susan (Federal Reserve Bank of Philadelphia) |
| Abstract: | This recap of a January 2017 Payment Cards Center workshop conducted by Frank Martien of First Annapolis Consulting, Inc. (since acquired by and now part of Accenture) adds to the literature on conditions in the markets for consumer and commercial credit cards, and credit and debit cards use by small businesses, at a point some years after the 2007–2009 recession. Some insights are provided as to how the supply and demand sides for these products are operating after this major economic disruption and the enactment of two pieces of legislation affecting payment cards. The Credit Card Accountability Responsibility and Disclosure Act of 2009 (CARD Act) and the Durbin Amendment, which went into effect in 2010 and 2011, respectively, had implications for the market for payment cards used by consumers and small businesses. Commercial cards used by corporations and government were not affected by these regulations, but there have still been major developments in that product line. Readers will get a glimpse of some of the innovations occurring in commercial cards. |
| Keywords: | credit and debit cards; small business credit and payments; commercial cards; virtual cards; CARD Act; Durbin Amendment |
| JEL: | D18 G2 G28 |
| Date: | 2018–01–09 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedpdp:18-01&r=ban |
| By: | Keuschnigg, Christian; Kogler, Michael |
| Abstract: | Capital reallocation from unprofitable to profitable firms is a key source of productivity gain in an innovative economy. We present a model of credit reallocation and focus on the role of banks: Weakly capitalized banks hesitate to write off non-performing loans to avoid a violation of regulatory requirements or even insolvency. Such behavior blocks credit reallocation to expanding industries and results in a distorted investment process and low aggregate productivity. Reducing the cost of bank equity, tightening capital requirements, and improving insolvency laws relaxes constraints and mitigates distortions. |
| Keywords: | Banking; credit reallocation; finance and growth; regulations |
| JEL: | D92 G21 G28 G33 |
| Date: | 2017–11 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:12443&r=ban |
| By: | George J. Bratsiotis |
| Abstract: | This paper examines the role of the precautionary demand for liquidity and the interest on reserves as two potential determinants of the deposits channel that can help explain the role of monetary policy, particularly at the near zero-bound. At high levels of precautionary liquidity hoarding the optimal policy response of a Taylor rule is shown to indicate a zero weight on inflation. This is a determinate outcome, despite the violation of the Taylor Principle, because of the effect that the demand for liquidity has on the deposit rate which determines the intertemporal choices of households. Similarly, through its effect on the deposits channel the interest on reserves can act as the main monetary policy tool that can provide determinacy and replace the Taylor rule. This result holds at the zero-bound and it is independent of precautionary demand for liquidity, or fiscal theory of the price level properties. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:man:cgbcrp:236&r=ban |
| By: | Guillaume Khayat (GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille - EHESS - École des hautes études en sciences sociales - AMU - Aix Marseille Université - CNRS - Centre National de la Recherche Scientifique - ECM - Ecole Centrale de Marseille) |
| Abstract: | Credit institutions borrow liquidity from the central bank’s lending facility and deposit (excess) reserves at its deposit facility. The central bank directly controls the corridor: the non-market interest rates of its lending and deposit facilities. Modifying the corridor changes the conditions on the interbank market and allows the central bank to set the short-term interest rate in the economy. This paper assesses the use of the corridor’s width as an additional tool for monetary policy. Results indicate that a symmetric widening of the corridor boosts output and welfare while addressing the central bank’s concerns over higher risk-taking in the economy. |
| Keywords: | monetary policy,interbank market,heterogeneous interbank frictions,the corridor,excess reserves,financial intermediation |
| Date: | 2017–10 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:halshs-01611650&r=ban |
| By: | Claessens, Stijn; Kose, Ayhan |
| 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, emphasizes 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: | macro-financial linkages; real-financial linkages; financial accelerator |
| JEL: | D53 E21 E32 E44 E51 F36 F44 G01 G10 G12 G14 G15 G21 |
| Date: | 2017–11 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:12461&r=ban |
| By: | Goncharenko, Roman; Ongena, Steven; Rauf, Asad |
| Abstract: | Why do banks issue contingent convertible debt? To answer this question we study comprehensive data covering all issues by publicly traded banks in Europe of contingent convertible bonds (CoCos) that count as additional tier 1 capital (AT1). We find that banks with lower asset volatility are more likely to issue AT1 CoCos than their riskier counterparts, but that CDS spreads do not react following issue announcements. Our estimates therefore suggest that agency costs play a crucial role in banks' ability to successfully issue CoCos. The agency costs may be higher for CoCos than for equity explaining why we observe riskier or lowly capitalized banks to issue equity rather than CoCos. |
| Keywords: | CoCos,Contingent Convertible Bonds,Bank Capital Structure |
| JEL: | G01 G12 G24 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:cfswop:586&r=ban |
| By: | Igan, Deniz; Lambert, Thomas; Wagner, Wolf; Zhang, Quxian |
| Abstract: | We study how lobbying affects the resolution of failed banks, using a sample of FDIC auctions between 2007 and 2014. We show that bidding banks that lobby regulators have a higher probability of winning an auction. In addition, the FDIC incurs higher costs in such auctions, amounting to 16.4 percent of the total resolution losses. We also find that lobbying winners have worse operating and stock market performance than their non-lobbying counterparts, suggesting that lobbying results in a less efficient allocation of failed banks. Our results provide new insights into the bank resolution process and the role of special interests. |
| Keywords: | bank resolution; failed banks; financial crisis; Lobbying; rent seeking |
| JEL: | D72 E65 G18 G21 |
| Date: | 2017–11 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:12440&r=ban |
| By: | Deniz O Igan; Thomas Lambert; Wolf Wagner; Quxian Zhang |
| Abstract: | We study how lobbying affects the resolution of failed banks, using a sample of FDIC auctions between 2007 and 2014. We show that bidding banks that lobby regulators have a higher probability of winning an auction. In addition, the FDIC incurs higher costs in such auctions, amounting to 16.4 percent of the total resolution losses. We also find that lobbying winners have worse operating and stock market performance than their non-lobbying counterparts, suggesting that lobbying results in a less efficient allocation of failed banks. Our results provide new insights into the bank resolution process and the role of special interests. |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:17/262&r=ban |
| By: | Alexandre Belloni (Institute for Fiscal Studies); Mingli Chen (Institute for Fiscal Studies and Warwick); Victor Chernozhukov (Institute for Fiscal Studies and MIT) |
| Abstract: | The understanding of co-movements, dependence, and influence between variables of interest is key in many applications. Broadly speaking such understanding can lead to better predictions and decision making in many settings. We propose Quantile Graphical Models (QGMs) to characterize prediction and conditional independence relationships within a set of random variables of interest. Although those models are of interest in a variety of applications, we draw our motivation and contribute to the financial risk management literature. Importantly, the proposed framework is intended to be applied to non-Gaussian settings, which are ubiquitous in many real applications, and to handle a large number of variables and conditioning events. We propose two distinct QGMs. First, Condition Independence Quantile Graphical Models (CIQGMs) characterize conditional independence at each quantile index revealing the distributional dependence structure. Second, Prediction Quantile Graphical Models (PQGMs) characterize the best linear predictor under asymmetric loss functions. A key difference between those models is the (non-vanishing) misspeci cation between the best linear predictor and the conditional quantile functions. We also propose estimators for those QGMs. Due to high-dimensionality, the two distinct QGMs require different estimators. The estimators are based on high-dimensional techniques including (a continuum of) L1-penalized quantile regressions (and low biased equations), which allow us to handle the potential large number of variables. We build upon a recent literature to obtain new results for valid choice of the penalty parameters, rates of convergence, and con dence regions that are simultaneously valid. We illustrate how to use QGMs to quantify tail interdependence (instead of mean dependence) between a large set of variables which is relevant in applications concerning with extreme events. We show that the associated tail risk network can be used for measuring systemic risk contributions. We also apply the framework to study international financial contagion and the impact of market downside movement on the dependence structure of assets' returns. |
| Keywords: | High-dimensional approximately sparse model, tail risk network, conditional independence, nonlinear correlation, penalized quantile regression, systemic risk, financial contagion, downside movement |
| Date: | 2017–12–05 |
| URL: | http://d.repec.org/n?u=RePEc:ifs:cemmap:54/17&r=ban |
| By: | Cecchetti, Stephen G; Schoenholtz, Kermit |
| Abstract: | The financial crisis of 2007-09 revealed many deficiencies in the financial system. In response, authorities have implemented a wide range of regulatory reforms. We survey the reforms and offer our views on where there could be further improvements. While capital requirements and levels are far higher, they are not high enough. New liquidity requirements are useful, but need simplification. Shifting derivatives transactions to central counterparties has improved resilience, but also created indispensable financial market utilities that lack credible resolution and recovery regimes. And systemic (macroprudential) regulation lacks the metrics, policy tools, governance structure, and international cooperation needed to be effective. |
| Keywords: | Capital requirements; Central clearing; financial regulation; liquidity requirements; macro-financial linkages; macroprudential policy; Prudential regulation; recovery and resolution planing |
| JEL: | E58 G01 G18 G28 G38 |
| Date: | 2017–11 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:12465&r=ban |
| By: | Panagiotis Avramidis (ALBA Graduate Business School); Ioannis Asimakopoulos (Bank of Greece); Dimitris Malliaropulos (Bank of Greece and University of Piraeus); Nickolaos G. Travlos (Bank of Greece) |
| Abstract: | Using a data set of bank loans to Greek firms during the period of the Greek sovereign crisis, we provide empirical evidence that firms affiliated with groups are less likely to default on their bank loan during a credit crunch, compared to stand-alone firms. We show that the lower default risk of affiliated firms is due to access to the internal capital market in the form of intra-group loans and to enhanced access to the restricted external financing. Furthermore, we provide empirical evidence that banks evaluate positively the group membership and that they collect private information about the delinquent affiliated firms from other firms that belong to the group. Finally, we find that banks are more likely to show forbearance against affiliated firms with non-performing loans, in order to delay additional loan charge-offs and to preserve their relationship with the rest of the group. |
| Keywords: | group affiliation; co-insurance; non-performing loans; forbearance |
| JEL: | G01 G21 G32 C23 |
| Date: | 2017–12 |
| URL: | http://d.repec.org/n?u=RePEc:bog:wpaper:237&r=ban |
| By: | C. Cahn; A. Duquerroy; W. Mullins |
| Abstract: | How to support private lending to firms in recessions is a major open question. This paper uses an unexpected change in the collateral framework of the European Central Bank that reduced the cost of funding loans to a subset of firms in France in 2012, to examine how bank adjust their corporate lending portfolio in a downturn. It provides causal evidence that targeted unconventional monetary policy can be an effective lever to increase private credit and reduce contagion of financial distress. The effect is strongly driven by firms with only a single bank relationship, especially less risky borrowers with information intensive banking relationships. |
| Keywords: | Unconventional Monetary Policy, Relationship Banking, SME finance, Bank Lending, Small Business, Collateral. |
| JEL: | D24 O11 O47 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:bfr:banfra:659&r=ban |