nep-ban New Economics Papers
on Banking
Issue of 2018‒01‒22
twenty-two papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Market Illiquidity, Credit Freezes and Endogenous Funding Constraints By Manuel Bachmann
  2. Can Macroprudential Measures Make Cross-Border Lending More Resilient? Lessons from the Taper Tantrum By Elod Takats; Judit Temesvary
  3. Are international banks different? Evidence on bank performance and strategy By Bertay, Ata Can; Demirguc-Kunt, Asli; Huizinga, Harry
  4. Bank Competition, Directed Search, and Loan Sales By Kevin x.d. Huang; Zhe Li; Jianfei Sun
  5. International Credit Supply Shocks By Cesa-Bianchi, Ambrogio; Ferrero, Andrea; Rebucci, Alessandro
  6. Does Monetary Policy Influence Banks' Perception of Risks? By Simona Malovana; Dominika Kolcunova; Vaclav Broz
  7. Intermediation in peer-to-peer markets: Evidence from auctions for personal loans By Klein, Thilo
  8. Credit Risk, Excess Reserves and Monetary Policy: The Deposits Channel By Bratsiotis, George
  9. Nominal rigidities in debt and product markets By Garriga, Carlos; Kydland, Finn E.; Šustek, Roman
  10. Consumer Demand for Credit Card Services By Alexandrov, Alexei; Bedre-Defolie, Özlem; Grodzicki, Daniel
  11. The Cross Section of Bank Value By Stefan Lewellen; Adi Sunderam; Mark Egan
  12. Determinants of bank profitability in emerging markets By Emanuel Kohlscheen; Andrés Murcia Pabón; Juan Contreras
  13. Does Size Matter? Bailouts with Large and Small Banks By Eduardo Dávila; Ansgar Walther
  14. Debt Service: The Painful Legacy of Credit Booms By Mikael Juselius; Anton Korinek; Mathias Drehmann
  15. Does Credit Market Integration Amplify the Transmission of Real Business Cycle During Financial Crisis? By Kyunghun Kim; Ju Hyun Pyun; Jiyoun An
  16. Credit Risk without Commitment By Leonardo Martinez; Juan Hatchondo
  17. Optimal Dynamic Capital Requirements By Kalin Nikolov; Javier Suarez; Dominik Supera; Caterina Mendicino
  18. Foreign booms, domestic busts: The global dimension of banking crises By Cesa-Bianchi, Ambrogio; Martin, Fernando Eguren; Thwaites, Gregory
  19. Monitoring Banking System Fragility with Big Data By Hale, Galina; Lopez, Jose A.
  20. Real Effects of Financial Distress: The Role of Heterogeneity By Sudipto Karmakar; Francisco Buera
  21. Intermediation as Rent Extraction By Maryam Farboodi; Gregor Jarosch; Guido Menzio
  22. Effects of payment instruments on unhealthy purchases By Frank van der Horst; Jelle Miedema; Daniël Schreij; Martijn Meeter

  1. By: Manuel Bachmann (Department of Economics, Vienna University of Economics and Business)
    Abstract: In this paper I propose a two-step theoretical extension of the baseline model by Diamond and Rajan (2011) and examine the amplification mechanisms when collateralized funding shocks are endogenously affected by liquidity shocks. Based on high returns on illiquid assets that are potentially available conditional on future fire sales, liquid banks increase their cash holdings by limiting term lending – a speculative motive of liquidity hoarding directly aggravated by a cash reduction due to increased haircuts on collateralized borrowing. As a result, funding liquidity shrinks steadily and credit freezes are more likely. On the other hand, illiquid banks refuse to sell more illiquid assets than necessary to meet depositors’ claims – a speculative motive of illiquidity seeking indirectly amplified as fire sale prices are endogenously depressed via increased collateral requirements. Illiquid banks are forced to sell more assets, the problem of insolvency becomes more severe and market freezes are thus even more likely.
    Keywords: Fire Sales, Insolvency, Market & Credit Freezes, Collateralized Borrowing
    JEL: G01 G12 G21
    Date: 2018–01
  2. By: Elod Takats; Judit Temesvary
    Abstract: We study the effect of macroprudential measures on cross-border lending during the taper tantrum, which saw a strong slowdown of cross-border bank lending to some jurisdictions. We use a novel dataset combining the BIS Stage 1 enhanced banking statistics on bilateral cross-border lending flows with the IBRN’s macroprudential database. Our results suggest that macroprudential measures implemented in borrowers’ host countries prior to the taper tantrum significantly reduced the negative effect of the tantrum on cross-border lending growth. The shock-mitigating effect of host country macroprudential rules are present both in lending to banks and non-banks, and are strongest for lending flows to borrowers in advanced economies and to the non-bank sector in general. Source (lending) banking system measures do not affect bilateral lending flows, nor do they enhance the effect of host country macroprudential measures. Our results imply that policymakers may consider applying macroprudential tools to mitigate international shock transmission through cross-border bank lending.
    Keywords: Diff-in-diff analysis ; Taper tantrum ; Cross-border claims ; Macroprudential policy
    JEL: F34 F42 G21 G38
    Date: 2017–12–18
  3. By: Bertay, Ata Can; Demirguc-Kunt, Asli; Huizinga, Harry
    Abstract: This paper provides evidence on how bank performance and strategies vary with the degree of bank internationalization using data for 113 countries over the 2000-2015 period. We investigate if international banks headquartered in developing countries behave and perform differently than those headquartered in high-income countries. Results show that compared to domestic banks, international banks have lower valuations and achieve lower returns on equity in general. This suggests on average bank internationalization has progressed beyond the point where it is in the interest of bank shareholders, potentially because of corporate governance failures and too-big-to-fail subsidies that accrue to large and complex banks. In contrast, developing country international banks seem to have benefited from internationalization compared to their high-income counterparts. Furthermore, for international banks headquartered in developing countries, bank internationalization reduces the cyclicality of their domestic credit growth with respect to domestic GDP growth, smoothing out local downturns. In contrast, if the international bank is from a high-income country investing in a developing country, its lending is relatively procyclical, which can be destabilizing.
    Keywords: Bank internationalization; procyclicality; risk-taking; south-south banking
    JEL: F36 G21 G28
    Date: 2017–12
  4. By: Kevin x.d. Huang (Vanderbilt University); Zhe Li (Shanghai University of Finance and Economics); Jianfei Sun (Shanghai Jiao Tong University)
    Abstract: We develop a theory of loan sales based on bank competition and entrepreneur directed search. We show how the interplay of the two can reduce interest rate on loans financed through on-balance-sheet activities and how this can motivate loan sales as a strategy of financing through off-balance-sheet activities. The results shed some light on the shift over the years preceding the recent financial crisis in the practice of U.S. and European banks, from the traditional ‘originate to hold' model of credit provision, towards the ‘originate to distribute' approach for credit extension, that is, the emergence of a ‘shadow banking system'.
    Keywords: Bank competition; Directed search; Loan sales; Shadow banking
    JEL: E4
    Date: 2018–01–12
  5. By: Cesa-Bianchi, Ambrogio; Ferrero, Andrea; Rebucci, Alessandro
    Abstract: House prices and exchange rates can potentially amplify the expansionary effect of capital inflows by inflating the value of collateral. We first set up a model of collateralized borrowing in domestic and foreign currency with international financial intermediation in which a change in leverage of global intermediaries leads to an international credit supply increase. In this environment, we illustrate how house price increases and exchange rates appreciations contribute to fueling the boom by inflating the value of collateral. We then document empirically, in a Panel VAR model for 50 advanced and emerging countries estimated with quarterly data from 1985 to 2012, that an increase in the leverage of US Broker-Dealers also leads to an increase in cross-border credit flows, a house price and consumption boom, a real exchange rate appreciation and a current account deterioration consistent with the transmission in the model. Finally, we study the sensitivity of the consumption and asset price response to such a shock and show that country differences are associated with the level of the maximum loan-to-value ratio and the share of foreign currency denominated credit.
    Keywords: Capital Flows; Credit Supply Shock; Cross-border claims; Exchange Rates; House Prices; International Financial Intermediation.; leverage
    JEL: C32 E44 F44
    Date: 2017–12
  6. By: Simona Malovana; Dominika Kolcunova; Vaclav Broz
    Abstract: This paper studies the extent to which monetary policy may affect banks' perception of credit risk and the way banks measure risk under the internal ratings-based approach. Specifically, we analyze the effect of different monetary policy indicators on banks' risk weights for credit risk. We present robust evidence of the existence of the risk-taking channel in the Czech Republic. Further, we show that the recent prolonged period of accommodative monetary policy has been instrumental in establishing this relationship. Finally, we obtain comparable results by extending the analysis to cover all the Visegrad Four countries. The presented findings have important implications for the prudential authority, which should be aware of the possible side-effects of monetary policy on how banks measure risk.
    Keywords: Banks, financial stability, internal ratings-based approach, risk-taking channel
    JEL: E52 E58 G21 G28
    Date: 2017–12
  7. By: Klein, Thilo
    Abstract: I examine the role of intermediaries on the world's largest peer-to-peer online lending platform. This marketplace as well as other recently opened lending websites allow people to auction microcredit over the internet and are in line with the disintermediation in financial transactions through the power of enabling technologies. On the online market, the screening of potential borrowers and the monitoring of loan repayment can be delegated to designated group leaders. I find that, despite superior private information, these financial intermediaries perform worse than the average lender with respect to borrower selection. I attribute this to deliberately sending wrong signals. Bivariate probit estimates of the effect of group membership on loan default indicate positive self selection into group loans. That is borrowers with worse observed and unobserved characteristics select into this contract form. I provide evidence that this is due to a missleading group reputation system that is driven by a short term incentive design, which was introduced by the platform to expand the market and has been discontinued. I further find that, after controlling for this group growth driven selection effect, group affliation per se significantly reduces the probability of loan default.
    Keywords: peer-to-peer,finance,market design,matching,auctions
    JEL: D02 D82 G21 O16
    Date: 2017
  8. By: Bratsiotis, George
    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.
    Keywords: Deposits channel,zero-bound monetary policy,excess reserves,credit risk,welfare,required reserve ratio,interest on reserves,balance sheet channel,DSGE models
    Date: 2017
  9. By: Garriga, Carlos; Kydland, Finn E.; Šustek, Roman
    Abstract: Standard models used for monetary policy analysis rely on sticky prices. Recently, the literature started to explore also nominal debt contracts. Focusing on mortgages, this paper compares the two channels of transmission within a common framework. The sticky price channel is dominant when shocks to the policy interest rate are temporary, the mortgage channel is important when the shocks are persistent. The first channel has significant aggregate effects but small redistributive effects. The opposite holds for the second channel. Using yield curve data decomposed into temporary and persistent components, the redistributive and aggregate consequences are found to be quantitatively comparable.
    JEL: E32 E52 G21 R21
    Date: 2016–08–23
  10. By: Alexandrov, Alexei; Bedre-Defolie, Özlem; Grodzicki, Daniel
    Abstract: We estimate how demand for credit card transacting, borrowing, and late payment responds to the interest rate and late payment fee. We find that lower rates increase borrowing and lower fees increase late payments. Prime cardholders demand for all services is decreasing in any price. In contrast, subprime cardholders borrow less when fees drop, a response consistent with models of limited attention. We calculate that a 2 percentage point rise in the Federal Funds rate decreases borrowing by 16 percent, or $130 billion, that this effect is greater in higher income communities, and that it exhibits geographic agglomeration.
    Date: 2017–12
  11. By: Stefan Lewellen (London Business School); Adi Sunderam (Harvard Business School); Mark Egan (University of Minnesota Carlson School)
    Abstract: We study the determinants of value creation within U.S. commercial banks. We begin by constructing two new measures of bank productivity: one focused on deposit-taking productivity and one focused on asset productivity. We then use these measures to evaluate the cross-section of bank value. Consistent with theories of safe-asset production, we find that variation in deposit productivity is responsible for the majority of variation in bank value. We also find evidence consistent with synergies between deposit-taking and lending activities: banks with high deposit productivity have high asset productivity, a relationship driven by the tendency of deposit-productive banks to hold illiquid loans. Our results suggest that both sides of the balance sheet contribute meaningfully to bank value creation, with the liability side playing a primary role.
    Date: 2017
  12. By: Emanuel Kohlscheen; Andrés Murcia Pabón; Juan Contreras
    Abstract: We analyse key determinants of bank profitability based on the evolution of balance sheets of 534 banks from 19 emerging market economies. We find that higher long-term interest rates tend to boost profitability, while higher short-term rates reduce profits by raising funding costs. We also find that in normal times credit growth tends to be more important for bank profitability than GDP growth. The financial cycle thus appears to predict bank profitability better than the business cycle. We also show that increases in sovereign risk premia reduce bank profits in a significant way, underscoring the role of credible fiscal frameworks in supporting the overall financial stability.
    Keywords: bank profitability, credit, risk premia, emerging markets, interest rates
    JEL: E32 E43 G21
    Date: 2018–01
  13. By: Eduardo Dávila; Ansgar Walther
    Abstract: We explore how large and small banks make funding decisions when the government provides system-wide bailouts to the financial sector. We show that bank size, purely on strategic grounds, is a key determinant of banks' leverage choices, even when bailout policies treat large and small banks symmetrically. Large banks always take on more leverage than small banks because they internalize that their decisions directly affect the government's optimal bailout policy. In equilibrium, small banks also choose strictly higher borrowing when large banks are present, since banks' leverage choices are strategic complements. Overall, the presence of large banks increases aggregate leverage and the magnitude of bailouts. The optimal ex-ante regulation features size-dependent policies that disproportionally restrict the leverage choices of large banks. A quantitative assessment of our model implies that an increase in the share of assets held by the five largest banks from 50% to 70% is associated with a 3.5 percentage point increase in aggregate debt-to-asset ratios (from 90.1% to 93.6%). Under the optimal policy, large banks face a “size tax” of 40 basis points (0.4%) per dollar of debt issued.
    JEL: E61 G21 G28
    Date: 2017–12
  14. By: Mikael Juselius (Bank of FInland); Anton Korinek (Johns Hopkins University); Mathias Drehmann (Bank for International Settlements)
    Abstract: This paper documents the main channel through which credit booms affect real economic activity in the future. As a matter of simple accounting, credit booms generate a predictable increase in future debt service that transfers spending power from borrowers to lenders. We document this dynamic pattern in a panel of 17 countries from 1980 to 2015 and identify a robust lead-lag relationship of about 3 years between the peak of credit booms and the peak in debt service. We develop a method to decompose what fraction of future real effects of credit booms is explained by debt service and show that debt service almost fully accounts for several puzzling findings in the recent empirical literature: that high growth in credit predicts low output growth in the future, deeper recessions, and a greater likelihood of financial crises. Explicitly accounting for debt service not only sheds light on the channel behind these findings but also generates stronger empirical relationships. We hope that our results will provide useful guidance for future efforts to model credit cycles.
    Date: 2017
  15. By: Kyunghun Kim (KIEP); Ju Hyun Pyun (Korea University); Jiyoun An (Kyung Hee University)
    Abstract: This study explores the role of cross-border (short-term and long-term) debt holdings in the transmission of the crisis shock to international real business cycle. We first provide a simple two-country DSGE model which distinguishes two transmission channels of real business cycle in credit markets: i) balance sheet effect operating in the short-term debt market owing to roll-over risk and ii) efficient allocation of investment working through the long-term debt market. Consistent with the model’s prediction, our empirical analysis using country-pair data for 57 countries during 2001–2013 shows the heterogeneous roles of short-term and long-term debt integration during financial crises. Short-term debt integration among developed countries drives the results of business cycle synchronization during the crises, whereas long term debt holdings by emerging and developing countries cushioned the transmission of the real business cycle.
    Date: 2017
  16. By: Leonardo Martinez (International Monetary Fund); Juan Hatchondo (Indiana University)
    Abstract: We study economies with credit risk in which, each period, borrowers cannot commit to borrow from only one lender. We extend the analysis in Bizer and DeMarzo (1992) by allowing for multiple borrowing periods. In particular, we remove the exclusive-borrowing- contract assumption from a quantitative model of household bankruptcy a la Chatterjee et al. (2007). We compare equilibrium allocations with and without commitment to exclusive contracts. In contrast with Bizer and DeMarzo (1992), we find that borrowing levels are much lower without commitment. Imposing commitment increases the average debt-to-income ratio in the simulations from 9% to 16%. This is the case because (i) the cost of defaulting is lower without commitment and (ii) only without commitment, an increase in current borrowing levels deteriorates future borrowing opportunities. These effects are not relevant in Bizer and DeMarzo’s (1992) model with a unique borrowing period. In contrast with the standard household bankruptcy model and consistently with the data, the model without commitment features (i) borrowing opportunities that resemble credit lines, (ii) borrowing opportunities that depend on the borrowing history (credit score), (iii) credit rationing, and (iv) a higher dispersion of interest rates across households. Introducing an interest rate limit to deal with the non-exclusivity problem produces ex-ante welfare gains equivalent to a permanent increase in consumption of 0.7%.
    Date: 2017
  17. By: Kalin Nikolov (European Central Bank); Javier Suarez (CEMFI); Dominik Supera (European Central Bank); Caterina Mendicino (European Central Bank)
    Abstract: We characterize welfare maximizing capital requirement policies in a macroeconomic model with household, firm and bank defaults calibrated to Euro Area data. We optimize on the level of the capital requirements applied to each loan class and their sensitivity to changes in default risk. We find that getting the level right (so that bank failure risk remains small) is of foremost importance, while the optimal sensitivity to default risk is positive but typically smaller than under Basel IRB formulas. When starting from low levels, initially both savers and borrowers benefit from higher capital requirements. At higher levels, only savers are in favour of tighter and more time-varying capital charges.
    Date: 2017
  18. By: Cesa-Bianchi, Ambrogio; Martin, Fernando Eguren; Thwaites, Gregory
    Abstract: This paper provides novel empirical evidence showing that foreign financial developments are a powerful predictor of domestic banking crises. Using a new data set for 38 advanced and emerging economies over 1970-2011, we show that credit growth in the rest of the world has a large positive effect on the probability of banking crises taking place at home, even when controlling for domestic credit growth. Our results suggest that this effect is larger for financially open economies, and is consistent with transmission via cross-border capital flows and market sentiment. Direct contagion from foreign crises plays an important role, but does not account for the whole effect.
    Keywords: Financial Crises; Global Credit Cycle; Banking; Financial Stability; Sentiment.
    JEL: E32 E44 E52
    Date: 2017–01–24
  19. By: Hale, Galina (Federal Reserve Bank of San Francisco); Lopez, Jose A. (Federal Reserve Bank of San Francisco)
    Abstract: The need to monitor aggregate financial stability was made clear during the global financial crisis of 2008-2009, and, of course, the need to monitor individual financial firms from a microprudential standpoint remains. In this paper, we propose a procedure based on mixed-frequency models and network analysis to help address both of these policy concerns. We decompose firm-specific stock returns into two components: one that is explained by observed covariates (or fitted values), the other unexplained (or residuals). We construct networks based on the co-movement of these components. Analysis of these networks allows us to identify time periods of increased risk concentration in the banking sector and determine which firms pose high systemic risk. Our results illustrate the efficacy of such modeling techniques for monitoring and potentially enhancing national financial stability.
    JEL: C32 G21 G28
    Date: 2017–09–15
  20. By: Sudipto Karmakar (Banco de Portugal); Francisco Buera (Federal Reserve Bank of Chicago)
    Abstract: How severe are the real consequences of financial distress caused by sovereign debt crisis? What are the channels through which sovereign debt crisis affect banks and firms, and vice versa? Does firm heterogeneity matter? If yes, what are the important dimensions of heterogeneity? Using micro data from Portugal during the sovereign cri- sis starting in 2010, we address these questions. We make use of the Bank of Portugal’s detailed credit registry database together with bank and firm balance sheets and income statements to conduct this analysis. We first study the direct effect of the sovereign crisis on bank balance sheets by analyzing the differential impact on firms that had relations with banks who were more exposed to the sovereign (pre-crisis). We find that more fragile firms that had relations with more exposed banks contracted more than their counterparts. Specifically we find leverage and maturity structure of debt to be important dimensions of heterogeneity determining a firm’s fragility. Highly leveraged firms and those that had a larger share of short term debt contracted more during the sovereign debt crisis. We analyze firm performance on the basis of growth rate of employment, assets, liabilities and usage of intermediate commodities. We show that our findings are consistent with a simple model of leverage and maturity choice. We then document the spillover effects across firms that are mediated through the banking sector. To do this, we focus on the set of firms that were current on all their loans through the crisis, i.e., the set of performing firms. We find that performing firms that had relations with banks whose corporate loan balance sheet deteriorate by more were more affected by the sovereign crisis. Again, highly leveraged firms and those that had a larger share of short term debt contracted more during the sovereign debt crisis.
    Date: 2017
  21. By: Maryam Farboodi; Gregor Jarosch; Guido Menzio
    Abstract: We propose a theory of intermediation as rent extraction, and explore its implications for the extent of intermediation, welfare and policy. A frictional asset market is populated by agents who are heterogeneous with respect to their bargaining skills, as some can commit to take-it-or-leave-it offers and others cannot. In equilibrium, agents with commitment power act as intermediaries and those without act as final users. Agents with commitment trade on behalf of agents without commitment to extract more rents from third parties. If agents can invest in a commitment technology, there are multiple equilibria differing in the fraction of intermediaries. Equilibria with more intermediaries have lower welfare and any equilibrium with intermediation is inefficient. Intermediation grows as trading frictions become small and during times when interest rates are low. A simple transaction tax can restore efficiency by eliminating any scope for bargaining.
    JEL: D40
    Date: 2017–12
  22. By: Frank van der Horst; Jelle Miedema; Daniël Schreij; Martijn Meeter
    Abstract: In this online replication study we investigate if the pain of paying in cash - as opposed to paying by cards - can curb impulsive urges to purchase unhealthy or 'vice' products. This effect was found by Thomas et al (2011) when comparing the payment instruments cash and credit card. We investigate whether these results also hold in the Netherlands, where the dominant payment methods are cash and debit card. In total, 2,213 participants bought on average 12.3% more unhealthy supermarket products when paying with cards compared to cash. Participants who paid with cards bought more products in general (5.1%), however, the difference for healthy or 'virtue' products was not significant. The pattern of the mean scores per payment instrument indicate that paying with cards has a specific effect on vice purchases, but this study does not have the statistical power to show that convincingly. A regression analysis shows that the number of purchases of vice products is partly explained by paying with cards. Other explanatory variables are impulsivity, seduceability, gender, age, education and conscious eating behaviour. Pain of paying did not differ by payment instrument, but was larger for participants that paid with their usual means of payment, either debit card or cash. The present study contributes to the literature of so-called "pay cash, eat less trash" - studies, as it shows that the use of cash limits overall spending and purchases of vice products.
    Keywords: payment instruments; consumer behaviour; virtual reality study; pain of paying
    JEL: D12 D14 D18 D83 I12 E58 Z13

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