nep-ban New Economics Papers
on Banking
Issue of 2018‒01‒29
fifteen papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. How Bad Is a Bad Loan? Distinguishing Inherent Credit Risk from Inefficient Lending (Does the Capital Market Price This Difference?) By Joseph Hughes; Choon-Geol Moon
  2. Bank liquidity and the cost of debt By Miller, Sam; Sowerbutts, Rhiannon
  3. How does monetary policy influence bank lending? Evidence from the market for banks' wholesale funding By Max Breitenlechner; Johann Scharler
  4. Measuring the systemic importance of banks By Georgios Moratis; Plutarchos Sakellaris
  5. Decentralized multinational banks and risk taking: the spanish experience in the crisis By Isabel Argimón
  6. Dynamic Bank Capital Requirements By Tetiana Davydiuk
  7. Banks’ Capital Surplus and the Impact of Additional Capital Requirements By Simona Malovana
  8. Financial Intermediation, Capital Accumulation and Crisis Recovery By Gersbach, Hans; Rochet, Jean-Charles; Scheffel, Martin
  9. Did the bank capital relief induced by the supporting factor enhance SME lending? By Sergio Mayordomo; María Rodríguez-Moreno
  10. The European Deposit Insurance Scheme: Assessing risk absorption via SYMBOL By Lucia, Alessi; Giuseppina, Cannas; Sara, Maccaferri; Marco, Petracco Giudici
  11. Dynamic credit default swaps curves in a network topology By Xiu Xu; Wolfgang K. Härdle; Cathy Yi-Hsuan Chen
  12. Identifying "Default Thresholds" in Consumer Liabilities Using High Frequency Data By Don Schlagenhauf; Carlos Garriga
  13. Collusive Benchmark Rates Fixing By Nuria Boot; Timo Klein; Maarten Pieter Schinkel
  14. Measuring Dynamic Connectedness with Large Bayesian VAR Models By Dimitris Korobilis; Kamil Yilmaz
  15. A Macroeconomic Model with Financial Panics By Mark Gertler; Nobuhiro Kiyotaki; Andrea Prestipino

  1. By: Joseph Hughes (Rutgers University); Choon-Geol Moon (Hanyang University)
    Abstract: We develop a novel technique to decompose banks’ ratio of nonperforming loans to total loans into three components: first, a minimum ratio that represents best-practice lending given the volume and composition of a bank’s loans, the average contractual interest rate charged on these loans, and market conditions such as the average GDP growth rate and market concentration; second, a ratio, the difference between the bank’s observed ratio of nonperforming loans, adjusted for statistical noise, and the best-practice minimum ratio, that represents the bank’s proficiency at loan making; third, a statistical noise. The best-practice ratio of nonperforming loans, the ratio a bank would experience if it were fully efficient at credit-risk evaluation and loan monitoring, represents the inherent credit risk of the loan portfolio and is estimated by a stochastic frontier technique. We apply the technique to 2013 data on top-tier U.S. bank holding companies which we divide into five size groups. The largest banks with consolidated assets exceeding $250 billion experience the highest ratio of nonperformance among the five groups. Moreover, the inherent credit risk of their lending is the highest among the five groups. On the other hand, their inefficiency at lending is one of the lowest among the five. Thus, the high ratio of nonperformance of the largest financial institutions appears to result from lending to riskier borrowers, not inefficiency at lending. Small community banks under $1 billion also exhibit higher inherent credit risk than all other size groups except the largest banks. In contrast, their loan-making inefficiency is highest among the five size groups. Restricting the sample to publicly traded bank holding companies and gauging financial performance by market value, we find the ratio of nonperforming loans to total loans is on average negatively related to financial performance except at the largest banks. When nonperformance, adjusted for statistical noise, is decomposed into inherent credit risk and lending inefficiency, taking more inherent credit risk enhances market value at many more large banks while lending inefficiency is negatively related to market value at all banks. Market discipline appears to reward riskier lending at large banks and discourage lending inefficiency at all banks.
    Keywords: commercial banking, credit risk, nonperforming loans, lending efficiency
    JEL: G21 L25 C58
    Date: 2018–01–16
  2. By: Miller, Sam (Bank of England); Sowerbutts, Rhiannon (Bank of England)
    Abstract: Since the 2007–09 crisis, tougher bank liquidity regulation has been imposed which aims to ensure banks can survive a severe funding stress. Critics of this regulation suggest that it raises the cost of maturity transformation and reduces productive lending. In this paper we build a bank run model with a unique equilibrium where solvent banks can fail due to illiquidity. We endogenise banks’ funding costs as a function of their liquid asset holdings and show how they are negatively related to liquidity, therefore offsetting some of the costs from higher liquidity requirements. We find evidence for this relationship using post-crisis data for US banks, implying that liquidity requirements may be less costly than previously thought.
    Keywords: Bank runs; global games; liquidity
    JEL: G21 G28
    Date: 2018–01–19
  3. By: Max Breitenlechner; Johann Scharler
    Abstract: We study the transmission of monetary policy shocks to loan volumes using a structural VAR. To disentangle different transmission channels, we use aggregated data from the market for large certificates of deposits and apply a sign restrictions approach. We find that although the standard bank lending channel as well as the recently formulated risk-pricing channel (Disyatat, 2011; Kishan and Opiela, 2012) contribute to the transmission of policy shocks, the effects associated with the risk-pricing channel are quantitatively stronger. Our results also show that policy shocks give rise to non-negligible effects on loan demand.
    Keywords: bank lending channel, risk-pricing channel, external finance premium, structural vector autoregression, sign restrictions
    JEL: C32 E44 E52
    Date: 2018–01
  4. By: Georgios Moratis (Athens University of Economics and Business); Plutarchos Sakellaris (Athens University of Economics and Business)
    Abstract: We measure the systemic importance of all banks that issue publicly traded CDS contracts among the world’s biggest 150. Systemic importance is captured by the intensity of spillovers of daily CDS movements. Our new empirical tool uses Bayesian VAR to address the dimensionality problem and identifies banks that may trigger instability in the global financial system. For the period January 2008 to June 2017, we find the following: A bank’s systemic importance is not adequately captured by its size. European banks have been the main source of global systemic risk with strong interconnections to US banks. For the global system, we identify periods of increased interconnections among banks, during which systemic and idiosyncratic shocks are propagated more intensely via the network. Using principal components analysis, we identify a single dominant factor associated with fluctuations in CDS spreads. Individual banks’ exposure to this factor is related to their government’s ability to support them and to their retail orientation but not to their size.
    JEL: E30 E50 E58 E60
    Date: 2017–12
  5. By: Isabel Argimón (Banco de España)
    Abstract: This paper analyses the effects of decentralized multinational banks, characterized by the large autonomy of the affiliates that the banking group has abroad, on bank’s risk, using Spanish confidential supervisory data. Having activity abroad, in countries whose business and financial cycles may be less than perfectly correlated with those of the home country can generate more stability in the results of the consolidated banking group. Such isolation should be greater for multinational and decentralized banks. On the other hand, the international activity of banks may be associated to more risk taking as distance can hinder the ability of a bank’s headquarters to monitor its subsidiaries or because of the more limited knowledge of the host country that the group has. Which effect dominates is an empirical matter which could be taken into account in capital requirements and when carrying out stress-tests. We provide empirical evidence of the relevance of the model of entry into foreign markets, international geographic diversification and business co-movements between the Spanish and the host economy on bank’s ex-post risk. The results are consistent with the hypothesis that geographic diversification reduces risk.
    Keywords: financial crises, geographic diversification, bank regulation, banking, risk
    JEL: G21 G28 G01 F40
    Date: 2017–12
  6. By: Tetiana Davydiuk (Wharton School, University of Pennsylvania)
    Abstract: The Basel III Accord requires countercyclical capital buffers to protect the banking system against potential losses associated with excessive credit growth and buildups of systemic risk. In this paper, I provide a rationale for time-varying capital requirements in a dynamic general equilibrium setting. An optimal policy trades off reduced inefficient lending with reduced liquidity provision. Quantitatively, I find that the optimal Ramsey policy requires a capital ratio that mostly varies between 4% and 6% and depends on economic growth, bank supply of credit, and asset prices. Specifically, a one standard deviation increase in the bank credit-to-GDP ratio (GDP) translates into a 0.1% (0.7%) increase in capital requirements, while each standard deviation increase in the liquidity premium leads to a 0.1% decrease. The welfare gain from implementing this dynamic policy is large when compared to the gain from having an optimal fixed capital requirement.
    Date: 2017
  7. By: Simona Malovana (Institute of Economic Studies, Faculty of Social Sciences, Charles University in Prague, Smetanovo nabrezi 6, 111 01 Prague 1, Czech Republic; Czech National Bank, Na Prikope 28, 115 03 Prague 1, Czech Republic)
    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: 2017–12
  8. By: Gersbach, Hans; Rochet, Jean-Charles; Scheffel, Martin
    Abstract: This paper integrates banks into a two-sector neoclassical growth model to account for the fact that a fraction of firms relies on banks to finance their investments. There are four major contributions to the literature: First, although banks’ leverage amplifies shocks, the endogenous response of leverage to shocks is an automatic stabilizer that improves the resilience of the economy. In particular, financial and labor market institutions are essential factors that determine the strength of this automatic stabilization. Second, there is a mix of publicly financed bank re-capitalization, dividend payout restrictions, and consumption taxes that stimulates a Pareto-improving rapid build-up of bank equity and accelerates economic recovery after a slump in the banking sector. Third, the model replicates typical patterns of financing over the business cycle: procyclical bank leverage, procyclical bank lending, and countercyclical bond financing. Fourth, the framework preserves its analytical tractability wherefore it can serve as a macro-banking module that can be easily integrated into more complex economic environments.
    Keywords: Financial intermediation; capital accumulation; banking crisis; macroeconomic shocks; business cycles; bust-boom cycles; managing recoveries
    JEL: E21 E32 G21 G28
    Date: 2018–01
  9. By: Sergio Mayordomo (Banco de España); María Rodríguez-Moreno (Banco de España)
    Abstract: The introduction of the SME Supporting Factor (SF) allows banks to reduce capital requirements for credit risk on exposures to SME. This means that banks can free up capital resources that can be redeployed in the form of new loans. Our study documents that the SF alleviates credit rationing for medium-sized firms that are eligible for the application of the SF but not for micro/small firms. These results suggest that European banks were aware of this policy measure and optimized both their regulatory capital and their credit exposures by granting loans to the medium-sized firms, which are safer than micro/small firms.
    Keywords: SME, credit access, supporting factor, bank lending
    JEL: E51 E58 G21
    Date: 2017–12
  10. By: Lucia, Alessi (European Commission – JRC); Giuseppina, Cannas (European Commission - JRC); Sara, Maccaferri (European Commission - JRC); Marco, Petracco Giudici (European Commission - JRC)
    Abstract: In November 2015, the European Commission adopted a legislative proposal to set up a European Deposit Insurance Scheme (EDIS), a single deposit insurance system for all bank deposits in the Banking Union. JRC was requested to quantitatively assess the effectiveness of introducing a single deposit insurance scheme and to compare it with other alternative options for the set-up of such insurance at European level. JRC compared national Deposit Guarantee Schemes and EDIS based on their respective ability to cover insured deposits in the face of a banking crisis. Analyses are based upon the results of the SYMBOL model simulation of banks’ failures.
    Keywords: banking regulation; banking crisis; deposit insurance
    JEL: C15 G01 G21 G28
    Date: 2017–12
  11. By: Xiu Xu; Wolfgang K. Härdle; Cathy Yi-Hsuan Chen
    Abstract: Abstract: Systemically important banks are connected and have dynamic dependencies of their default probabilities. An extraction of default factors from cross-sectional credit default swaps (CDS) curves allows to analyze the shape and the dynamics of the default probabilities. Extending the Dynamic Nelson Siegel (DNS) model, we propose a network DNS model to analyze the interconnectedness of default factors in a dynamic fashion, and forecast the CDS curves. The extracted level factors representing long-term default risk demonstrate 85.5% total connectedness, while the slope and the curvature factors document 79.72% and 62.94% total connectedness for the short-term and middle-term default risk, respectively. The issues of default spillover and systemic risk should be weighted for the market participants with longer credit exposures, and for regulators with a mission to stabilize financial markets. The US banks contribute more to the long-run default spillover before 2012, whereas the European banks are major default transmitters during and after the European debt crisis either in the long-run or short-run. The outperformance of the network DNS model indicates that the prediction on CDS curve requires network information.
    Keywords: Key Words: CDS, network, default risk, variance decomposition, risk management JEL Classification: C32, C51, G17
    JEL: C00
    Date: 2016–08
  12. By: Don Schlagenhauf (Federal Reserve Bank of St Louis); Carlos Garriga (Federal Reserve Bank of St. Louis)
    Abstract: The concept of "default threshold" captures the notion of a level of debt that it is not sustainable that results in default. This paper constructs different measures based on the dynamics of the monthly debt payment to after-tax income ratio. The preliminary examination using data from the Consumer Credit Panel suggest that some of these measures have some predictive content when compared to alternative measures based on FICO scores. A quantitative model of default behavior is constructed to replicate the dynamic patterns observed in the data.
    Date: 2017
  13. By: Nuria Boot (KU Leuven, DIW Berlin); Timo Klein (Amsterdam School of Economics, University of Amsterdam); Maarten Pieter Schinkel (Amsterdam School of Economics and ACLE, University of Amsterdam)
    Abstract: The fixing of the Libor and Euribor benchmark rates has proven vulnerable to manipulation. Individual rate-setters may have incentives to fraudulently distort their submissions. For the contributing banks to collectively agree on the direction in which to rig the rate, however, their interests need to be sufficiently aligned. In this paper we develop cartel theory to show how an interbank lending rates cartel can be sustained by preemptive portfolio changes. Exchange of information facilitates front running that allows members to reduce conflicts in their trading books. Designated banks then engage in eligible transactions rigging to justify their submissions. As the cartel is not able to always find stable cooperative submissions against occasional extreme exposure values, there is episodic recourse to non-cooperative quoting. Periods of heightened volatility in the rates may be indicative of cartelization. Recent reforms to broaden the class of transactions eligible for submission may reduce the level of manipulation, but can lead to more frequent collusive quoting.
    Keywords: Libor; Euribor; IRD; banking; cartel; insider trading
    JEL: E43 G14 G21 K21 L41
    Date: 2017–12–27
  14. By: Dimitris Korobilis (University of Essex); Kamil Yilmaz (Koc University)
    Abstract: We estimate a large Bayesian time-varying parameter vector autoregressive (TVP-VAR) model of daily stock return volatilities for 35 U.S. and European financial institutions. Based on that model we extract a connectedness index in the spirit of Diebold and Yilmaz (2014) (DYCI). We show that the connectedness index from the TVP-VAR model captures abrupt turning points better than the one obtained from rolling-windows VAR estimates. As the TVP-VAR based DYCI shows more pronounced jumps during important crisis moments, it captures the intensification of tensions in financial markets more accurately and timely than the rolling-windows based DYCI. Finally, we show that the TVP-VAR based index performs better in forecasting systemic events in the American and European financial sectors as well.
    Keywords: Connectedness, Vector autoregression, Time-varying parameter model, Rolling window estimation, Systemic risk, Financial institutions.
    JEL: C32 G17 G21
    Date: 2018–01
  15. By: Mark Gertler; Nobuhiro Kiyotaki; Andrea Prestipino
    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.
    JEL: E0 E44
    Date: 2017–12

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