nep-ban New Economics Papers
on Banking
Issue of 2018‒02‒26
sixteen papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. The “Too Big to Fail” Subsidy in Canada: Some Estimates By Patricia Palhau Mora
  2. A Replication of “Are Competitive Banking Systems More Stable?” (Journal of Money, Credit, and Banking, 2009) By Samangi Bandaranayake; Kuntal Das; W. Robert Reed
  3. The Interbank Market Puzzle By Franklin Allen; Xian Gu; Oskar Kowalewksi
  4. Can Technology Undermine Macroprudential Regulation? Evidence from Peer-to-Peer Credit in China By Braggion, Fabio; Manconi, Alberto; Zhu, Haikun
  5. Monetary policy operating procedures, lending frictions, and employment By Florian, David; Limnios, Chris; Walsh, Carl
  6. Bank lending behavior and business cycle under Basel regulations: Is there a significant procyclicality? By Katsutoshi Shimizu; Kim Cuong Ly
  7. Banks’ maturity transformation:risk, reward, and policy By Pierluigi Bologna
  8. Shock Propagation and Banking Structure By Giannetti, Mariassunta; Saidi, Farzad
  9. Banking Across Borders With Heterogeneous Banks By Niepmann, Friederike
  10. Flooded through the back door: Firm-level effects of banks' lending shifts By Rehbein, Oliver
  11. Cournot Fire Sales By Thomas M. Eisenbach; Gregory Phelan
  12. Monetary Policy and Financial Conditions: A Cross-Country Study By Adrian, Tobias; Duarte, Fernando; Grinberg, Federico; Mancini-Griffoli, Tommaso
  13. Banks, Sovereign Risk and Unconventional Monetary Policies By Auray Stéphane; Eyquem Aurélien; Mairesse Xiaofei
  14. Financial Vulnerability and Monetary Policy By Adrian, Tobias; Duarte, Fernando
  15. A Leverage-Based Measure of Financial Stability By Adrian, Tobias; Borowiecki, Karol Jan; Tepper, Alexander
  16. Multimarket Competition and Profitability: Evidence from Ukrainian banking By Tho Pham; Oleksandr Talavera; Junhong Yang

  1. By: Patricia Palhau Mora
    Abstract: Implicit government guarantees of banking-sector liabilities reduce market discipline by private sector stakeholders and temper the risk sensitivity of funding costs. This potentially increases the likelihood of bailouts from taxpayers, especially in the absence of effective resolution frameworks. Estimates of “too big to fail” (TBTF) implicit subsidies are useful to understand bank agents’ incentives, measure potential resolution costs and assess the credibility of regulatory reform. Given the implicit nature of the subsidy, I propose a framework that adopts two empirical approaches to assess the quantum of the subsidies accruing to systemic banks in Canada. The first is based on credit rating agencies’ assessment of public support and the second relies on a contingent claims analysis. Results suggest more progress on resolution is needed, such as the implementation of a credible statutory bail-in regime for senior obligations, to increase market discipline and help address TBTF externalities. That said, Canada being an early adopter of Basel III might help explain the significant reduction in the government’s contingent liability since the peak years of the crisis.
    Keywords: Financial Institutions, Financial stability
    JEL: G13 G21 G28
    Date: 2018
  2. By: Samangi Bandaranayake; Kuntal Das (University of Canterbury); W. Robert Reed (University of Canterbury)
    Abstract: This study replicates Schaeck, Čihák, and Wolfe (2009), henceforth SCW, and performs a variety of robustness checks. Using a cross-country, time series sample of 45 countries from 1980-2005, SCW investigate the relationship between competition and concentration in the banking system, and the occurrence of country-level systemic crises. Their primary measure of competition in the banking industry is Panzar and Rosse’s H-statistic. Concentration is measured using a concentration ratio of the three largest banks. They conclude that (i) competition and concentration measure two separate dimensions of the banking sector, and (ii) greater competition is associated with fewer systemic crises. Using data and code provided by the authors, we are able to exactly reproduce the original results of SCW. However, we find that their results are not robust. In none of our many robustness checks do we find that H-statistic is significant at the 5-percent level. Further, the estimated effect sizes are small and economically inconsequential. Unfortunately, our results with respect to concentration are inconsistent, depending on the estimation procedure, variable specification, and measure of financial stability that we employ. Thus, while we are confident in concluding that competition, as measured by H-statistic, plays an inconsequential role with respect to systemic crises, further research needs to be done to better understand the importance of concentration in the banking sector.
    Keywords: Systemic risk, Bank competition, concentration, H-statistic, Replication
    JEL: C41 G21 G28 L11
    Date: 2018–02–01
  3. By: Franklin Allen (Imperial College London, United Kingdom); Xian Gu (Central University of Finance & Economics, China); Oskar Kowalewksi (IESEG School of Management (LEM-CNRS-UMR 9221))
    Abstract: This study documents significant differences in the interbank market lending and borrowing levels across countries. We argue that the existing differences in interbank market usage can be explained by the trust of the market participants in the stability of the country’s banking sector and counterparties. We test our assumptions by employing different proxies for trust in the countries’ banking sectors and by controlling for bank-specific risk. We find that banks originating from a country that has experienced longer periods of banking crises or more bank failures are able to attract less interbank deposits. However, we find that the quality of legal regulations and institutions can help mitigate the adverse impact of the low level of trust in the banking system. Hence, institutional factors might partially substitute for the limited trust and enhance interbank activity.
    Keywords: interbank market, trust, counterparty risk, crises, legal enforcement, regulations
    JEL: G01 G21 G28
    Date: 2018–02
  4. By: Braggion, Fabio; Manconi, Alberto; Zhu, Haikun
    Abstract: We study whether and to what extent peer-to-peer (P2P) credit helps circumvent loan-to-value (LTV) caps, a key macroprudential tool to contain household leverage. We exploit the tightening of mortgage LTV caps in a number of cities in China in 2013 as our testing ground, in a difference-in-differences setting, and we base our tests on a novel, hand-collected database covering all lending transactions at RenrenDai, a leading Chinese P2P credit platform. P2P loans increase at the cities affected by the LTV cap tightening relative to the control cities, consistent with borrowers tapping P2P credit to circumvent the regulation. The granularity of our data allows us to separate credit demand from credit supply effects, with a fixed effects strategy. Our results also indicate that P2P lenders do not adjust their pricing and screening to the influx of new borrowers after 2013, despite the fact that their loans ex post have higher delinquency and default rates. Symmetric effects are associated with a loosening of mortgage LTV caps in 2015. Our test provides empirical evidence on the capacity of P2P credit to undermine LTV caps. More broadly, our analysis informs the debate on the challenges posed by the interaction between FinTech and credit regulation.
    Keywords: peer-to-peer credit; household leverage; macroprudential regulation; loan-to-value caps
    JEL: G01 G23 G28
    Date: 2018–01
  5. By: Florian, David (Banco Central de Reserva del Perú); Limnios, Chris (Providence College); Walsh, Carl (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
  6. By: Katsutoshi Shimizu (Department of Economics, Nagoya University); Kim Cuong Ly (School of Management, Swansea University)
    Abstract: This paper re-examines the procyclical effect of risk{sensitive capital regulation on bank lending. The risk{sensitive requirement of the Basel II/III regulation affects procyclically the bank lending in European countries, but the actual requirements are indeed too risk-insensitive. However, the risk{sensitive capital regulation induces less lending than the risk-insensitive capital regulation. Furthermore, the introduction of Basel II has a negative impact on lending even under the risk{insensitive regulation.
    Keywords: Bank capital, Basel regulation, macro-prudential policy, business cycle, procyclicality, buffer capital, countercyclical buffer.
    JEL: G21 G28 G18 G14 G32
    Date: 2018–02–01
  7. By: Pierluigi Bologna
    Abstract: The aim of this paper is twofold: first, to study the determinants of banks’ net interest margin with a particular focus on the role of maturity transformation, using a new measure of maturity mismatch; second, to analyse the implications for banks of the relaxation of a binding prudential limit on maturity mismatch, in place in Italy until the mid-2000s. The results show that maturity transformation is an important driver of the net interest margin, as higher maturity transformation is typically associated with higher net interest margin. However, there is a limit to this positive relationship as ‘excessive’ maturity transformation — even without leading to systemic vulnerabilities — has some undesirable implications in terms of higher exposure to interest rate risk and lower net interest margin. JEL Classification: E43, G21, G28
    Keywords: banks, profitability, maturity transformation, interest rates, macroprudential,microprudential
    Date: 2018–01
  8. By: Giannetti, Mariassunta (Stockholm School of Economics); Saidi, Farzad (Stockholm School of Economics)
    Abstract: We conjecture that lenders’ decisions to provide liquidity are affected by the extent to which they internalize negative spillovers. We show that lenders with a large share of loans outstanding in an industry provide liquidity to industries in distress when spillovers are expected to be strong, because fire sales are likely to ensue. Lenders with a large share of outstanding loans also provide liquidity to customers and suppliers of industries in distress, especially when the disruption of supply chains is expected to be costly. Our results suggest a novel channel explaining why credit concentration may favor financial stability.
    Keywords: syndicated loans; bank concentration; supply chains; fire sales; externalities
    JEL: E23 E32 E44 G20 G21 L14
    Date: 2017–12–01
  9. By: Niepmann, Friederike
    Abstract: This paper develops a model of banking across borders where banks differ in their efficiencies that can replicate key patterns in the data. More efficient banks are more likely to have assets, liabilities and affiliates abroad and have larger foreign operations. Banks are more likely to be active in countries that have less efficient domestic banks, are bigger and more open to foreign entry. In the model, banking sector integration leads to bank exit and entry and convergence in the return on loans and funding costs across countries. Bank heterogeneity matters for the associated welfare gains. Results suggest that differences in bank efficiencies across countries drive banking across borders, that fixed costs are crucial for foreign bank operations and that globalization makes larger banks even larger.
    Keywords: cross-border banking; Heterogeneity; Multinational banks; Trade in Services
    JEL: F12 F21 F23 G21
    Date: 2018–01
  10. By: Rehbein, Oliver
    Abstract: I show that natural disasters transmit to firms in non-disaster areas via their banks. This spillover of non-financial shocks through the banking system is stronger for banks with less regulatory capital. Firms connected to a disaster-exposed bank with below median capital reduce their employment by 11% and their fixed assets by 20% compared to firms in the same region without such a bank during the 2013 flooding in Germany. Relationship banking and higher firm capital also mitigate the effects of such negative cross-regional spillovers.
    Keywords: natural disaster,real effects,shock transmission,bank capital
    JEL: E24 E44 G21 G29
    Date: 2018
  11. By: Thomas M. Eisenbach (Research and Statistics Group, Federal Reserve Bank of New York); Gregory Phelan (Williams College)
    Abstract: In standard Walrasian macro-finance models, pecuniary externalities such as fire sales lead to overinvestment in illiquid assets or underprovision of liquidity. We investigate whether imperfect competition (Cournot) improves welfare through internalizing the externality and find that this is far from guaranteed. In a standard model of liquidity shocks, when liquidity is sufficiently scarce, Cournot competition leads to even less liquidity than the Walrasian equilibrium. In a standard model of productivity shocks, the Cournot equilibrium over-corrects for the fire-sale externality and holds less capital than socially efficient. Implications for welfare and regulation therefore depend highly on the nature of the shocks and the competitiveness of the industry considered.
    Keywords: liquidity, fire sales, overinvesment, financial regulation, macroprudential regulation
    JEL: D43 D62 E44 G18 G21
    Date: 2018–02
  12. By: Adrian, Tobias; Duarte, Fernando; Grinberg, Federico; Mancini-Griffoli, Tommaso
    Abstract: Loose financiall conditions forecast high output growth and low output volatility up to six quarters into the future, generating time varying downside risk to the output gap which we measure by GDP-at-Risk (GaR). This finding is robust across countries, conditioning variables, and time periods. We study the implications for monetary policy in a reduced form New Keynesian model with financial intermediaries that are subject to a Value at Risk (VaR) constraint. Optimal monetary policy depends on the magnitude downside risk to GDP, as it impacts the consumption-savings decision via the Euler constraint, and the financial conditions via the tightness of the VaR constraint. The optimal monetary policy rule exhibits a pronounced response to shifts in financial conditions for most countries in our sample. Welfare gains from taking financial conditions into account are shown to be sizable.
    Keywords: financial conditions; Financial Stability; monetary policy
    JEL: E52
    Date: 2018–02
  13. By: Auray Stéphane (CREST-ENSAI ; ULCO); Eyquem Aurélien (ENSAI-CREST ; Université Lumière Lyon 2 ; CNRS (GATE)); Mairesse Xiaofei (ENSAI-CREST ; Université Lumière Lyon 2 ; CNRS (GATE))
    Abstract: We develop a two-country model with an explicitly microfounded interbank market and sovereign default risk. Both features interact and give rise to a debt-banks-credit loop by which sovereign default risk can have large contractionary effects on the economy. Calibrated to the Euro Area, the model performs well in matching key business cycle facts on real, ?nancial and ?scal time series. We then use the model to assess the effects of the Great Recession and quantify the potential effects of alternative unconventional policies on the dynamics of European economies. All the policies considered can bring sizable reductions in the welfare losses from the Great Recession, but policies targeted at sovereign bonds and interbank loans are more efficient than standard credit interventions.
    Keywords: recession, interbank market, sovereign default risk, monetary policy
    JEL: E32 E44 E58 F34
    Date: 2017–06–18
  14. By: Adrian, Tobias; Duarte, Fernando
    Abstract: We present a microfounded New Keynesian model that features financial vulnerabilities. Financial intermediaries' occasionally binding value at risk constraints give rise to variation in the pricing of risk that generate time varying risk in the conditional mean and volatility of the output gap. The conditional mean and volatility are negatively related: during times of easy financial conditions, growth tends to be high, and risk tends to be low. Monetary policy affects output directly via the IS curve, and indirectly via the pricing of risk that relates to the tightness of the value at risk constraint. The optimal monetary policy rule always depends on financial vulnerabilities in addition to the output gap, inflation, and the natural rate. We show that a classic Taylor rule exacerbates deviations of the output gap from its target value of zero relative to an optimal interest rate rule that includes vulnerability. Simulations show that optimal policy significantly increases welfare relative to a classic Taylor rule. Alternative policy paths using historical examples illustrate the usefulness of the proposed policy rule.
    Keywords: Financial Stability; Macro-Finance; monetary policy
    JEL: E52 G10 G12
    Date: 2018–02
  15. By: Adrian, Tobias; Borowiecki, Karol Jan; Tepper, Alexander
    Abstract: The size and the leverage of financial market investors and the elasticity of demand of unlevered investors define MinMaSS, the smallest market size that can support a given degree of leverage. The financial system's potential for financial crises can be measured by the stability ratio, the fraction of total market size to MinMaSS. We use that financial stability metric to gauge the buildup of vulnerability in the run-up to the 1998 Long-Term Capital Management crisis and argue that policymakers could have detected the potential for the crisis.
    Keywords: financial crisis; Financial Stability; leverage; Long-Term Capital Management; LTCM; minimum market size for stability; MinMaSS; stability ratio
    JEL: G01 G10 G20 G21
    Date: 2018–02
  16. By: Tho Pham (School of Management, Swansea University); Oleksandr Talavera (School of Management, Swansea University); Junhong Yang
    Abstract: This paper examines the impact of non-price competition, indicated by multimarket contacts, on bank performance. Using a unique data set of Ukrainian banks’ branch locations, we construct three measures of multimarket linkages. We find that banks with a higher level of multimarket contacts are more likely to have higher financial performance. The findings support the mutual forbearance hypothesis: when banks compete in multiple markets, they have incentives to cooperate instead of competing aggressively. This cooperative incentive is induced by the familiarity and the similarity among multimarket competitors. The positive effect of multimarket competition on bank profitability is stronger when banks interact in more competitive markets. However, the anti-competitive effect of multimarket contacts is lessened following an exogenous shock to banks' branch networks. Banks that were more exposed to the shock experience worsened competitive positions and no longer benefited from multimarket contacts.
    Keywords: Banking, Multimarket competition, Multimarket contact, Mutual forbearance hypothesis, Profitability, Difference-in-differences, Political conflict.
    JEL: G21 L11 L25 L40
    Date: 2018–01–25

This nep-ban issue is ©2018 by Christian Calmès. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.