nep-ban New Economics Papers
on Banking
Issue of 2018‒02‒19
twenty-one papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Shadow Banking and Market Discipline on Traditional Banks By Anil Ari; Matthieu Darracq-Paries; Christoffer Kok; Dawid Żochowski
  2. Bank Size, Information Sharing and Financial Access in Africa By Asongu, Simplice; Nwachukwu, Jacinta
  3. Foreign Banks and Credit Dynamics in CESEE By Maria Arakelyan
  4. International Commodity Prices and Domestic Bank Lending in Developing Countries By Isha Agrawal; Rupa Duttagupta; Andrea Presbitero
  5. Specialization in bank lending: evidence from exporting firms By Paravisini, Daniel; Rappoport, Veronica; Schnabl, Philipp
  6. Shadow Bank run: The Story of a Recession By Hamed Ghiaie
  7. An analysis of non-traditional activities at German savings banks: Does the type of fee and commission income matter? By Köhler, Matthias
  8. ICT, Conflicts in Financial Intermediation and Financial Access: Evidence of Synergy and Threshold Effects By Asongu, Simplice; Acha-Anyi, Paul
  9. The Bank of England as lender of last resort: new historical evidence from daily transactional data By Anson, Mike; Bholat, David; Kang, Miao; Thomas, Ryland
  10. Relational Capital in Lending Relationships. Evidence from European Family Firms By Marco Cucculelli; Valentina Peruzzi; Alberto Zazzaro
  11. Alternative finance and credit sector reforms: the case of China By Noëmi, Lisack
  12. Strengthened competition in payment services By Demary, Markus; Rusche, Christian
  13. Sovereign Risk and Bank Risk-Taking By Anil Ari
  14. Are lenders using risk-based pricing in the consumer loan market? The effects of the 2008 crisis By Silvia Magri
  15. The effects of bank loan renegotiation on corporate policies and performance By Christophe GODLEWSKI
  16. Shadow Funding Costs: Measuring the Cost of Balance Sheet Constraints By Matthias Fleckenstein; Francis A. Longstaff
  17. Banks’ leverage behaviour in a two-agent New Keynesian model By Andrea Boitani; Chiara Punzo
  18. Uncertainty and Cross-Border Banking Flows By Sangyup Choi; Davide Furceri
  19. Risk and competitiveness in the Italian banking sector By Francesco Marchionne; Alberto Zazzaro
  20. Evaluation of Individual and Group Lending under Asymmetric information By Peter Simmons; Nongnuch Tantisantiwong
  21. Financial stability: To Regulate or Not? A public choice inquiry By Le, Vo Phuong Mai; Meenagh, David; Minford, Patrick

  1. By: Anil Ari; Matthieu Darracq-Paries; Christoffer Kok; Dawid Żochowski
    Abstract: We present a model in which shadow banking arises endogenously and undermines market discipline on traditional banks. Depositors' ability to re-optimize in response to crises imposes market discipline on traditional banks: these banks optimally commit to a safe portfolio strategy to prevent early withdrawals. With costly commitment, shadow banking emerges as an alternative banking strategy that combines high risk-taking with early liquidation in times of crisis. We bring the model to bear on the 2008 financial crisis in the United States, during which shadow banks experienced a sudden dry-up of funding and liquidated their assets. We derive an equilibrium in which the shadow banking sector expands to a size where its liquidation causes a fire-sale and exposes traditional banks to liquidity risk. Higher deposit rates in compensation for liquidity risk also weaken threats of early withdrawal and traditional banks pursue risky portfolios that may leave them in default. Policy interventions aimed at making traditional banks safer such as liquidity support, bank regulation and deposit insurance fuel further expansion of shadow banking but have a net positive impact on financial stability. Financial stability can also be achieved with a tax on shadow bank profits.
    Keywords: Financial crisis;United States;Western Hemisphere;Financial crises;Shadow banking;Central banks and their policies;Market discipline, Fire-sales, Financial Markets and the Macroeconomy, Government Policy and Regulation
    Date: 2017–12–22
  2. By: Asongu, Simplice; Nwachukwu, Jacinta
    Abstract: Purpose - This study investigates how bank size affects the role of information asymmetry on financial access in a panel of 162 banks in 39 African countries for the period 2001-2011. Design/methodology/approach - The empirical evidence is based on instrumental variable Fixed Effects regressions with overlapping and non-overlapping bank size thresholds to control for the QLH (Quiet Life Hypothesis). The QLH postulates that managers of large banks will use their privileges for private gains at the expense of making financial services more accessible to the general public. Financial access is measured with loan price and loan quantity whereas information asymmetry is implicit in the activities of public credit registries and private credit bureaus. Findings - The findings with non-overlapping thresholds are broadly consistent with those that are conditional on overlapping thresholds. First, public credit registries have a decreasing effect on the price of loans with the magnitude of reduction comparable across all bank size thresholds. Second, both public credit registries and private credit bureaus enhance the quantity of loans. Third, compared with public credit registries, private credit bureaus have a greater influence in increasing financial access because they have a significantly higher favourable effect on the quantity and price of loans Fourth, the QLH is not apparent because large banks are not associated with lower levels of financial access compared to small banks. Originality/value - Studies of public credit registries and private credit bureaus in Africa are sparse. This is one of the few to assess linkages between bank size, information asymmetry and financial access.
    Keywords: Public goods; Financial access; Bank size; Information sharing
    JEL: G20 G29 L96 O40 O55
    Date: 2017–01
  3. By: Maria Arakelyan
    Abstract: We use bank-level data on 16 CESEE economies over 2005-2014 to assess the role of foreign banks in the region’s credit dynamics. We confirm that macroeconomic fundamentals of both host and home countries matter, as do the bank and parent bank characteristics. Moreover, we take a new approach by studying the drivers of differential credit growth between parent banks and their foreign subsidiaries. Host country macroeconomic fundamentals cease to play a significant role, while bank-level characteristics and in particular parent bank-level characteristics remain important. From policymakers’ perspective, the paper provides further empirical evidence on the importance of monitoring the health of foreign parent banks as well as the potential regulatory changes in their home jurisdictions.
    Keywords: Foreign banks;International financial markets;credit growth, emerging europe, Globalization: Finance
    Date: 2018–01–05
  4. By: Isha Agrawal; Rupa Duttagupta; Andrea Presbitero
    Abstract: We study the role of the bank-lending channel in propagating fluctuations in commodity prices to credit aggregates and economic activity in developing countries. We use data on more than 1,600 banks from 78 developing countries to analyze the transmission of changes in international commodity prices to domestic bank lending. Identification relies on a bankspecific time-varying measure of bank sensitivity to changes in commodity prices, based on daily data on bank stock prices. We find that a fall in commodity prices reduces bank lending, although this effect is confined to low-income countries and driven by commodity price busts. Banks with relatively lower deposits and poor asset quality transmit commodity price changes to lending more aggressively, supporting the hypothesis that the overall credit response to commodity prices works also through the credit supply channel. Our results also show that there is no significant difference in the behavior of foreign and domestic banks in the transmission process, reflecting the regional footprint of foreign banks in developing countries.
    Keywords: Commodity prices;Developing countries;Bank lending; Commodity prices; Macro-financial linkages; Developing countries, Bank lending, Macro-financial linkages, General, International Lending and Debt Problems, Global Commodity Crises
    Date: 2017–12–14
  5. By: Paravisini, Daniel; Rappoport, Veronica; Schnabl, Philipp
    Abstract: We develop an empirical approach for identifying specialization in bank lending using granular data on borrower activities. We illustrate the approach by characterizing bank specialization by export market, combining bank, loan, and export data for all firms in Peru. We find that all banks specialize in at least one export market, that specialization affects a firm’s choice of new lenders and how to finance exports, and that credit supply shocks disproportionately affect a firm’s exports to markets where the lender specializes in. Thus, bank market-specific specialization makes credit difficult to substitute, with consequences for competition in credit markets and the transmission of credit shocks to the economy
    Keywords: banking; export finance; specialization
    JEL: F14 F34 G21
    Date: 2017–07–01
  6. By: Hamed Ghiaie (Université de Cergy-Pontoise, THEMA)
    Abstract: This paper proposes a DSGE model of liquidity mismatch and bank runs, which incorporates housing and credit markets. The paper shows that a real shock is amplified by the financial sector through household balance sheets, bank balance sheets and market liquidity channels. The shock, depending on macroeconomic fundamentals, may shift the economy from a no-bank run to a bank run equilibrium. In the case of bank run equilibrium, households stop rolling over their deposits and banks are forced to liquidate their assets at fire sale prices. This paper shows that introducing the housing and credit markets shortens the sunspots’ lifetime while asset liquidity prices reduce. In addition, this paper comprehensively details the consequences of economic crises, namely the output downward spiral, home price double-dip and lengthy recovery period. Here, it is indicated that macropruential policy tools in the form of capital adequacy buffers and loan-to-value ratios safeguard the economy against extreme busts and help mitigate systemic risks by insulating asset prices.
    Keywords: Shadow banking, Bank run, Recession, Sunspot equilibrium, Double-dip.
    JEL: E23 E32 E44 G21 G33
    Date: 2018
  7. By: Köhler, Matthias
    Abstract: In this paper, we use a fully anonymized dataset provided by the German Savings Banks Association (DSGV) to analyse which savings banks have expanded into fee-producing activities more quickly. In addition, we investigate whether their profitability and stability is correlated with the share of their fee and commission income. Notably, we examine whether the effect on bank profitability differs depending on the type of fee and commission income. Our results support the view that savings banks with low net interest margins are under greater pressure to expand into fee-producing activities. They further suggest that savings banks with a higher share of fee and commission income, in particular from payment services and securities business, also have a higher profitability. The Z-score also correlates positively with the share of securities business income, possibly because it responds to different shocks than net interest income and, therefore, offers the largest diversification potential.
    Keywords: savings banks,fee and commission income,profitability
    JEL: G20 G21 G29
    Date: 2018
  8. By: Asongu, Simplice; Acha-Anyi, Paul
    Abstract: In this study we investigate the role of information and communication technology (ICT) in conflicts of financial intermediation for financial access. The empirical evidence is based on contemporary (or current values) and non-contemporary (or lagged by a year) quantile regressions in 53 African countries for the period 2004-2011. The main findings are: First, the net effect of ICT in formalization for financial activity in the banking system is consistently beneficial with positive thresholds. The fact that corresponding, unconditional and conditional effects are persistently positive is evidence of synergy or complementary effects. Second, the net effect of ICT in financial informalization for financial activity in the financial system is negative with a consistent negative threshold. Hence, the positive (negative) complementarity of ICT and financial formalization (informalization) is an increasing (decreasing) function of financial activity. Policy measures on how to leverage the synergy or complementarity between ICT and financial formalization in order to enhance financial access are discussed.
    Keywords: Allocation efficiency; financial sector development; ICT
    JEL: G20 G29 L96 O40 O55
    Date: 2017–01
  9. By: Anson, Mike (Bank of England); Bholat, David (Bank of England); Kang, Miao (Bank of England); Thomas, Ryland (Bank of England)
    Abstract: We use daily transactional ledger data from the Bank of England’s Archive to test whether and to what extent the Bank of England during the mid-nineteenth century adhered to Walter Bagehot’s rule that a central bank in a financial crisis should lend cash freely at a penalty rate in exchange for ‘good’ securities. The archival data we use provides granular, loan-level insight on the price and quantity of credit, and information on its distribution to particular counterparties. We find that the Bank’s behaviour during this period broadly conforms to Bagehot’s rule, though with variation across the crises of 1847, 1857 and 1866. Using a new, higher frequency series on the Bank’s balance sheet, we find that the Bank did lend freely, with the number of discounts and advances increasing during crises. These loans were typically granted at a rate above pre-crisis levels and, in 1857 and 1866, typically at a spread above Bank Rate, though we also find some instances in the daily discount ledgers where individual loans were made below Bank rate in 1847. Another set of customer ledgers shows that the securities the Bank purchased were debts owed by a geographically and industrially diverse set of debtors. And using new data on the Bank’s income and dividends, we find the Bank and its shareholders profited from lender of last resort operations. We conclude our paper by relating our findings to contemporary debates including those regarding the provision of emergency liquidity to shadow banks.
    Keywords: Bank of England; lender of last resort; financial crises; financial history; central banking
    JEL: E58 G01 G18 G20 H12
    Date: 2017–11–10
  10. By: Marco Cucculelli; Valentina Peruzzi (Università Politecnica delle Marche); Alberto Zazzaro (University of Naples Federico II, CSEF and MoFiR.)
    Abstract: We investigate the role of a family CEO’s relational capital and a non-family CEO’s managerial abilities in the context of bank relationships for a large sample of small- and medium-sized European firms. We begin by examining whether the relational capital embodied in the family leadership of the company influences the lending relationship with the bank in terms of information sensitivity and duration. Next, we test how banks value in their credit decisions the leadership of professionals and their managerial skills with respect to the relational capital of family CEOs. The results indicate that family businesses appointing managers from within the family are significantly more likely to maintain soft-information-based and longer-lasting lending relationships. However, family executives do not have a negative impact on the firm’s access to credit, while the creation of soft-information-based and long-lasting lending relationships significantly reduce the likelihood of experiencing credit restrictions. In view of these findings, family relational capital appears to have a univocal beneficial impact on the bank–firm relationship in our sample.
    Keywords: Family firm, family CEO, soft information, relational capital, relationship lending, credit rationing
    JEL: D22 G21 G22
    Date: 2018–02–01
  11. By: Noëmi, Lisack (Bank of England)
    Abstract: This paper studies the impact of credit sector reforms in a general equilibrium framework where heterogeneous firms choose their optimal investment and how to finance it. Besides retained earnings and bank loans, I focus on the crucial role played by alternative sources of funding, including family, friends, non-listed equity and informal banking institutions. While small young enterprises face important difficulties to finance their investment, these alternative financing sources allow them to partially bypass credit constraints. The model can account for the financing patterns observed in Chinese data. Despite an increase in non-performing loans by 11%, liberalizing the banking sector increases the steady-state aggregate level of capital by 10% and the steady-state aggregate production by 5%, inducing efficiency gains and a welfare increase of 1.8%. Selectively tightening the regulation of the alternative finance sector, if simultaneous to bank liberalization, may prevent the rise in non-performing loans while preserving most welfare improvements. This remains however detrimental to the development of small, young enterprises and limits efficiency gains.
    Keywords: Informal finance; banking reform; heterogeneous agents; credit constraints; China
    JEL: E22 O16 O17
    Date: 2017–11–17
  12. By: Demary, Markus; Rusche, Christian
    Abstract: Starting on January 13, 2018, the Second Payment Services Directive (PSD2) will apply in the European Union. Among other things, the Directive's aim is to adapt regulation to the innovations in payment services and to promote the Single Market for non-cash payments. However, PSD2 will only strengthen competition between payment services under a common standard for the access to banking accounts.
    Date: 2018
  13. By: Anil Ari
    Abstract: I propose a dynamic general equilibrium model in which strategic interactions between banks and depositors may lead to endogenous bank fragility and slow recovery from crises. When banks' investment decisions are not contractible, depositors form expectations about bank risk-taking and demand a return on deposits according to their risk. This creates strategic complementarities and possibly multiple equilibria: in response to an increase in funding costs, banks may optimally choose to pursue risky portfolios that undermine their solvency prospects. In a bad equilibrium, high funding costs hinder the accumulation of bank net worth, leading to a persistent drop in investment and output. I bring the model to bear on the European sovereign debt crisis, in the course of which under-capitalized banks in defaultrisky countries experienced an increase in funding costs and raised their holdings of domestic government debt. The model is quantified using Portuguese data and accounts for macroeconomic dynamics in Portugal in 2010-2016. Policy interventions face a trade-off between alleviating banks' funding conditions and strengthening risk-taking incentives. Liquidity provision to banks may eliminate the good equilibrium when not targeted. Targeted interventions have the capacity to eliminate adverse equilibria.
    Keywords: Financial crises;Banking crises;Risk-taking, Financial constraints, Sovereign debt crises, Financial Markets and the Macroeconomy, General, International Lending and Debt Problems, Government Policy and Regulation
    Date: 2017–12–14
  14. By: Silvia Magri (Bank of Italy)
    Abstract: This paper analyzes whether in Italy the price of consumer loans is based on borrower specific risk. Mispricing could threat financial stability through negative effects on lenders' profitability; risk-based pricing also leads to a more efficient allocation of credit through lower prices for low-risk borrowers, with positive effects on economic growth and financial stability. The evidence available from data collected since 2006 through the Survey on Household Income and Wealth shows that consumer loan pricing has been more risk-based after the 2008 financial crisis. Households’ economic and financial conditions (net wealth, number of income earners and education of the household head) became significant and economically important in influencing the interest rates in 2010-12. These are also the most important drivers of the probability of delinquency on consumer loans; lenders also focus on these variables in selecting borrowers. As a consequence of the 2008 crisis, lenders have therefore paid more attention to borrowers' credit risk not only during the selection process, but also in deciding the price of the loan.
    Keywords: interest rates, consumer loans, risk-based pricing
    JEL: D40 D82 E43
    Date: 2018–01
  15. By: Christophe GODLEWSKI (LaRGE Research Center, Université de Strasbourg)
    Abstract: I investigate the effects of bank loan renegotiation on firm’s financial and investment policies, and performances. I employ OLS and endogenous switching regime regressions using a large crosscountry sample of loans issued and amended on a long-time period. I find that bank loan renegotiation has an economically significant and causal impact on financial policy and performances. Renegotiation provides the firm with additional degrees of freedom and unlocks its economic potential, implying important effects of firm’s tangibility, growth, opportunities and cash on financial policy and performances. Bank loan renegotiation also exhibits a certification and signaling effect which can increase the effect of amendments to the credit agreement on firm’s financial policy.
    Keywords: bank loan, renegotiation, financial policy, investment policy, performance, treatment effect, Europe.
    JEL: G21 G32 C31 C34
    Date: 2018
  16. By: Matthias Fleckenstein; Francis A. Longstaff
    Abstract: Recent theory suggests that balance sheet frictions and constraints faced by financial intermediaries can have major asset pricing implications. We propose a new measure of the impact of these constraints on intermediary funding costs that is based on the implied cost of renting intermediary balance sheet space. On average, balance sheet constraints add 81 basis points to intermediary funding costs, but the impact often exceeds 200 basis points during a crisis. We find that these balance sheet costs have real effects on intermediary investment decisions and asset holdings. Increases in balance sheet costs are associated with short-term increases in the use of derivatives, but longer-term declines in risk-taking by financial institutions. Balance sheet costs introduce a wedge between on- and off-balance-sheet investments which may help resolve a number of asset pricing puzzles.
    JEL: G12 G13 G21 G23 G28
    Date: 2018–01
  17. By: Andrea Boitani (Department of Economics and Finance, Università Cattolica del Sacro Cuore); Chiara Punzo (Department of Economics and Finance, Università Cattolica del Sacro Cuore)
    Abstract: In a NK model with two types of rational agents,savers and capitalists, and non-maximizing banks, fi?nancial shocks do affect the macroeconomic dynamics depending on banks ?behaviour as for their leverage ratio. We fi?rst show that the level of banks' leverage - which may be imposed by banks regulation - affects the steady state level of output, employment and consumption, as might be expected in a non-Modigliani-Miller world. Different banks? behaviour after a shock has widely different effects on the macroeconomic dynamics:passive leverage results to be shock absorbing and capable of neutralizing an initial fi?nancial shock,whilst procyclical behaviour implies higher and more persistent instability and distributive effects than the constant leverage behaviour. Finally, we show that the interaction of procyclical leverage with hysteres is in output and employment stregthens the persistence of fi?nancial shocks.
    Keywords: Leverage, Procyclicality, Two-agent model, Non-maximising banks
    JEL: E32 E44 G01
    Date: 2018–01
  18. By: Sangyup Choi; Davide Furceri
    Abstract: While global uncertainty—measured by the VIX—has proven to be a robust global “push” factor of international capital flows, there has been no systematic study assessing the role of country-specific uncertainty as a key (pull and push) factor of international capital flows. This paper tries to fill this gap in the literature by examining the effects of country-specific uncertainty shocks on cross-border banking flows using the confidential Bank for International Settlements Locational Banking Statistics data. The dyadic structure of this data allows to disentangle supply and demand factors and to better identify the effect of uncertainty shocks on cross-border banking flows. The results of this analysis suggest that: (i) uncertainty is both a push and pull factor that robustly predicts a decrease in both outflows (retrenchment) and inflows (stops); (ii) global banks rebalance their lending towards safer foreign borrowers from local borrowers when facing higher uncertainty; (iii) this rebalancing occurs only towards advanced economies (flight to quality), but not emerging market economies.
    Date: 2018–01–05
  19. By: Francesco Marchionne (Indiana University); Alberto Zazzaro (University of Naples Federico II; CSEF & MoFiR (Italy))
    Abstract: In this paper, we analyse the relationship between risk and competition in the Italian banking sector over the period from 2006 to 2010. We employ OLS and panel estimators to estimate the impact of the Lerner index, a measure of bank market power, on the Altman Z-score, a proxy of the insolvency probability. Our results are consistent with the traditional charter value paradigm and reject the new risk-shifting paradigm proposed by Boyd-De Nicolo' (2005). We find that the relationship between bank risk and competition becomes more tightening during the financial crisis. Our results are robust to different definitions of crisis and different specifications.
    Keywords: bank, competition, stability, financial crisis
    JEL: G01 G21 G33
    Date: 2018–02
  20. By: Peter Simmons; Nongnuch Tantisantiwong
    Abstract: The paper attempts to find the socially best loan contract by comparing exante welfare, interest and default rates of individual and group lending. We introduce a general framework which allows auditing policies and interest rates to be simultaneously determined by maximising the social welfare. Both variables vary with the types of risk considered: independently identically distributed and positively correlated risk. An individual project outcome is private information of its owner, but reported outcomes can be audited at a cost which then publicly reveals the true project outcome. We find that incentive compatibility in a group loan context is delicate: the conditions for truth telling vary with the borrowers’ perception of the overall solvency of the group. In addition, group loans are often made to local groups who have established local networks. This may mean that the group has cheaper policing of truthtelling, but also that the risks on projects within the group are likely to be correlated. To explore this, we numerically solve for the optimal contracts with varying audit cost differences and correlation, using a betabinomial distribution. We find that with an audit cost advantage, small group loans (typically to two borrowers) dominate individual loans even with correlation. But if audit costs are identical, the individual loan dominates. In the larger the group, the higher the audit probability is required to ensure truthtelling. Our finding provides an argument for why the number of borrowers should be limited to 2-5.
    Keywords: Group lending, Heterogeneous and Correlated risk, Welfare, Loan Auditing
    JEL: D81 G21
    Date: 2018–02
  21. By: Le, Vo Phuong Mai (Cardiff Business School); Meenagh, David (Cardiff Business School); Minford, Patrick (Cardiff Business School)
    Abstract: The paper takes the stand that the central banks as financial regulators have their own interest in imposing more regulations. It models the institutional behaviour for the central bank and government using the Indirect Inference testing and estimation method as it finds a set of coefficients of the model that can generate the actual observed behaviour for the US. The paper establishes that good monetary policy can reduce instability. Regulation at worse destabilises the economy and at best contributes little to stabilise the economy. After the financial crisis, financial regulations were too severe and thus actually increased instability.
    Keywords: DSGE, Regulations, Financial Stability, Monetary Policy
    JEL: E10 E58 G28
    Date: 2018–01

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