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on Banking |
| By: | Narayan Bulusu; Pierre Guérin |
| Abstract: | We identify the drivers of unsecured and collateralized loan volumes, rates and haircuts in Canada using the Bayesian model averaging approach to deal with model uncertainty. Our results suggest that the key friction driving behaviour in this market is the collateral reallocation cost faced by borrowers. Borrowers therefore adjust unsecured lending in response to changes in short-term cash needs, and use repos to finance persistent liquidity demand. We also find that lenders set rates and haircuts taking into account counterparty credit risk and collateral market price volatility. |
| Keywords: | Financial markets; Wholesale funding |
| JEL: | E43 G23 |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:18-5&r=ban |
| By: | Mwinlaaru, Peter Yeltulme; Ofori, Isaac Kwesi; Adiyiah, Kwadwo Agyeman; Idun, Anthony Adu-Asare |
| Abstract: | ABSTRACT The maintenance of asset quality, efficiency and profitability is a vital requirement for the survival and development of Universal Banks. Loans constitute the main asset class from which banks generate their major portion of income and also signify the greatest risk to banks. Recently, the default rate of loan in the country has been on the increase and perturbing to all. Due to the detrimental effect that Non-Performing Loans (NPLs) have on a bank’s revenue and the economic welfare of a country, the study sort to determine the impact of NPLs on Universal Banks profitability based on a quarterly data from 2000 to 2014. The study employed the ARDL bounds test of co-integration as an estimation technique to show the evidence of long run relationship among the variables. The study found that NPLs had a significant negative impact on Universal Banks profitability in both the short run and long run The study recommends that Universal Banks should revise their lending policy depending on the situation and economic condition of the country as well as minimising their periodic loans targets by not engaging in risky loaning practices. |
| Keywords: | Auto Regressive Distributed Lag (ARDL), Gross Domestic Product Growth, Non-Performing Loans, Unemployment rate, Universal Banks Profitability |
| JEL: | E02 E2 E21 G2 |
| Date: | 2016–10–10 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:82902&r=ban |
| By: | David Florian Hoyle (Central Reserve Bank of Peru); Chris Limnios (Providence College); Carl E. Walsh (University of California, Santa Cruz) |
| Abstract: | This paper studies a channel system for implementing monetary policy when bank lending is subject to frictions. These frictions affect the spread between the interbank rate and the loan rate. We show how the width of the channel, the nature of random payment flows in the interbank market and the presence of frictions in the loan market affect the propagation of financial shocks that originate either in the interbank market or in the loan market. We study the transmission mechanism of two different financial shocks: 1) An increase in the volatility of the payment shock that banks face once the interbank market has closed and 2) An exogenous termination of loan contracts that directly affects the probability of continuation of credit relationships. Both financial shocks are propagated through the interaction of the marginal value of having excess reserves as collateral relative to other bank assets, the real marginal cost of labor for all active firms and the reservation productivity that selects the mass of producing firms. Our results suggest that financial shocks produce a reallocation of bank assets towards excess reserves as well as intensive and extensive margin effects over employment. The aggregation of those effects produce deep and prolonged recessions that are associated to fluctuations in the endogenous component of total factor productivity that appears as an additional input in the aggregate production function of the economy. We show that this wedge depends on aggregate credit conditions and on the mass of producing firms. |
| Keywords: | Monetary policy implementation, channel system, central bank, credit frictions |
| JEL: | E4 G21 |
| Date: | 2018–02 |
| URL: | http://d.repec.org/n?u=RePEc:apc:wpaper:118&r=ban |
| By: | Lucchetta, Marcella; Moretto, Michele; Parigi, Bruno M. |
| Abstract: | We show that the impact of government bailouts (liquidity injections) on a representative bank’s risk taking depends on the level of systematic risk of its loans portfolio. In a model where bank’s output follows a geometric Brownian motion and the government guarantees bank’s liabilities, we show first that more generous bailouts may or may not induce banks to take on more risk depending on the level of systematic risk; if systematic risk is high (low), a more generous bailout decreases (increases) bank’s risk taking. Second, the optimal liquidity policy itself depends on systematic risk. Third, the relationship between bailouts and bank’s risk taking is not monotonic. When systematic risk is low, the optimal liquidity policy is loose and more generous bailouts induce banks to take on more risk. If systematic risk is high and the optimal liquidity policy is tight, less generous bailouts induce banks to take on less risk. However, when high systematic risk makes a very tight liquidity policy optimal, a less generous bailout could increase bank’s risk taking. While in this model there is only one representative bank, in an economy with many banks, a higher level of systematic risk could also be a source of systemic risk if a tighter liquidity policy induces correlated risk taking choices by banks. |
| JEL: | G00 G20 G21 |
| Date: | 2018–01–23 |
| URL: | http://d.repec.org/n?u=RePEc:bof:bofrdp:2018_002&r=ban |
| By: | Hosung Jung (Economic Research Institution, The Bank of Korea) |
| Abstract: | This paper analyzes changes in home mortgage loan delinquencies related to the interest rate factor and the risk factor, using the personal mortgage lending and delinquency panel data held by the Bank of Korea. It finds that changes in the probability of mortgage loan default have been affected mainly by the interest rate factor since 2012. It finds in addition that the affects of the interest rate and risk factors in determining the default probability differ depending upon borrowers' ages and their income-to-loan ratios. Specifically, while the probabilities of home mortgage loan default due to the interest rate factor have dropped regardless of personal characteristics since 2012, for borrowers in their 20s to 30s and with low income-to-loan ratios the probability of default caused by the risk factor is found to have risen compared to June 2012. This is the first study to estimate the factors causing default based on personal borrower characteristics through use of personal lending and delinquency panel data. It is believed that our study may provide important information about the sources of mortgage loan risk and accordingly help in the putting forward of policy response alternatives. |
| Keywords: | Home mortgage loan, Default probability, Deliquencies |
| JEL: | G30 G34 |
| Date: | 2017–02–07 |
| URL: | http://d.repec.org/n?u=RePEc:bok:wpaper:1706&r=ban |
| By: | Sotirios Kokas; Dmitri Vinogradov; Marios Zachariadis |
| Abstract: | By adjusting their lending, banks can smooth or amplify the macroeconomic impact of deposit fluctuations. This may however lead to extended periods of disproportionately high lending relative to deposit intake, resulting in the accumulation of risk in the banking system. Using bank-level data for 8,477 banks in 129 countries for the 24-year period from 1992 to 2015, we examine how individual banks' market power and other characteristics may contribute to smoothing or amplification of shocks and to the accumulation of risk. We find that the higher their market power the lower is the growth rate of lending relative to deposits. As a result, in periods of falling deposits, higher market power for the average bank would be associated with a greater fall in lending resulting in amplification of adverse effects as deposits fall during relatively bad times. Strikingly, at very high levels of market power there is a threshold past which the effect of market power on the growth rate of lending relative to deposits turns positive so that “superpower” banks contribute to smoothing of adverse effects when deposits are falling. In periods of rising deposits, however, such banks lead to amplification and accumulation of risk in the economy. |
| Keywords: | smoothing; amplification; risk accumulation; market power; competition; crisis |
| JEL: | E44 E51 F3 F4 G21 |
| Date: | 2018–01 |
| URL: | http://d.repec.org/n?u=RePEc:ucy:cypeua:01-2018&r=ban |
| By: | Byoung-Ki Kim (Monetary Policy Department, The Bank of Korea); Jun Gyu Min (Economic Research Institute, The Bank of Korea) |
| Abstract: | This paper shows that discrete and vastly different loan rates offered by different types of financial firms constitute, in fact, an elaborate mechanism that makes borrowers tell the truth regarding their ability to pay back loan principal and interest. Suppose that once a borrower fails to pay back a loan to a bank, he cannot borrow from any banks again and must contact higher-interest charging credit finance companies to get a new loan. This creates a well-defined incentive for borrowers: pay back and remain in the banks' loan market vs. do not pay back and move to, say, credit finance companies' loan market in which a higher loan rate is charged. This mechanism does not require the financial firms to verify even if the borrower declares bankruptcy, and therefore is more efficient than a standard debt contract à la Townsend (1979) in terms of verification cost. As the interest rates offered by different types of financial firms should be well aligned in order to prevent the deception of borrowers, we can also analyze how many different types of financial firms, that is, how many discrete and different loan rates, can co-exist in the economy. |
| Keywords: | Debt contract, Mechanism, Loan rates, Co-existence of financial sectors |
| JEL: | D82 G21 G23 |
| Date: | 2016–11–28 |
| URL: | http://d.repec.org/n?u=RePEc:bok:wpaper:1616&r=ban |
| By: | Austin J. Drukker (Brookings Institution); Ted Gayer (Brookings Institution); Harvey S. Rosen (Princeton University) |
| Abstract: | Conventional estimates of the size and distribution of the mortgage interest deduction (MID) in the personal income tax fail to account for potentially important responses in household behavior. As noted by Gervais and Pandey (2008) and Poterba and Sinai (2011), among others, were the MID to be eliminated, households would sell financial assets such as stocks and bonds to pay down their mortgage debt, and the smaller holdings of these taxable assets would offset some of the revenue gains from taxing mortgage interest. Conventional estimates therefore overstate the increase in revenues associated with eliminating the MID. Conventional estimates also overstate the progressivity of eliminating the MID, because households with higher levels of non-residential assets would respond by selling their taxable, non-residential assets. This paper builds on previous work that estimates the consequences of removing the MID using a framework that allows for the possibility of portfolio rebalancing. Unlike previous studies, we analyze data for several years — every third year from 1988 to 2012, inclusive. This reduces the likelihood that our estimates are due to the idiosyncrasies of some particular year, and allows us to investigate how and why the differences between estimates with and without a portfolio response have evolved over time. We then turn to the distributional implications of eliminating the MID, again looking at multiple years. A noteworthy feature of our distributional analyses is that we focus on both wealth and income as classifying variables. Our main findings are: (i) The revenue loss associated with the MID is smaller if one allows for rebalancing, with the ratio of the rebalancing-adjusted revenue loss to the conventionally estimated revenue loss varying from 76 percent in 1997 to 90 percent in 2009. While not dramatic, these are non-trivial effects. (ii ) During our sample period, changes in the ratio of the 2 revenue loss estimates were due primarily to changes in the relative stocks of assets to mortgage debt as opposed to changes in rates of return and the tax system, (iii) Portfolio rebalancing attenuates the increase in progressivity associated with elimination of the MID. |
| JEL: | H24 H31 |
| Date: | 2017–10 |
| URL: | http://d.repec.org/n?u=RePEc:pri:cepsud:251&r=ban |
| By: | Hosung Jung (Economic Research Institute, The Bank of Korea); Jieun Lee (Economic Research Institute, The Bank of Korea) |
| Abstract: | We investigate the effects of macro-prudential policies on house prices using event study approaches and dynamic panel models. We construct a unique dataset with house price index based on real transactions and newly estimated loan-to-value (LTV) and debt-to-income (DTI) limits for a monthly panel of 98 districts across Seoul, the Gyeonggi Province and six metropolitan cities covering the period from March 2006 to June 2015. We show that DTI limits appear to be more effective in stabilizing house prices than LTV limits. Both tightening and loosening DTI and only loosening LTV limits are effective. Overall, the results indicate that macro-prudential policies could be a useful tool in curbing excessive household debts and the subsequent house price bubbles. This is the first study to estimate LTV and DTI limits at the district level and analyze the effects of macro-prudential policies on house prices. Our study would provide important lessons for the policy authorities that are implementing LTV and DTI regulations with an aim to cope with a surge in house prices and credit extension. |
| Keywords: | Macro-prudential policies, Household debt, House prices, LTV, DTI |
| JEL: | E30 E44 E58 G28 |
| Date: | 2016–07–15 |
| URL: | http://d.repec.org/n?u=RePEc:bok:wpaper:1610&r=ban |
| By: | Héctor Pérez Saiz; Siddharth Untawala; Gabriel Xerri |
| Abstract: | This paper estimates potential exposures, netting benefits and settlement gains by merging retail and wholesale payments into batches and conducting multiple intraday settlements in this hypothetical model of a single "calibrated payments system." The results demonstrate that credit risk exposures faced by participants in the system are largely dependent on their relative activity in the retail and wholesale payments systems. Participants experience lower exposures in the calibrated system owing to increased netting and significant gains through higher payment values and volumes. This result is reinforced when analyzing participant exposures in periods of stress, particularly during the Great Recession. Relative activity is also indicative of the variations in exposures across participants when implementing multiple batch sizes, especially because increasing batch sizes enhances the value and volume of payments accumulated, thus leading to higher netting and lower exposures. These results and further work may contribute to a better understanding of participant exposures and trade-offs arising from this potential system design. |
| Keywords: | Econometric and statistical methods, Financial stability, Payment clearing and settlement systems |
| JEL: | G21 G23 C58 |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocadp:18-3&r=ban |