nep-ban New Economics Papers
on Banking
Issue of 2018‒03‒05
nineteen papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Chained financial frictions and credit cycles By Federico Lubello; Ivan Petrella; Emiliano Santoro
  2. The role of technology in mortgage lending By Fuster, Andreas; Plosser, Matthew; Schnabl, Philipp; Vickery, James
  3. Empirical Evidence on the Effectiveness of Capital Buffer Release By Sivec, Vasja; Volk, Matjaz; Chen, Yi-An
  4. A Global Lending Channel Unplugged? Does U.S. Monetary Policy Affect Cross-border and Affiliate Lending by Global U.S. Banks? By Temesvary, Judit; Ongena, Steven; Owen, Ann L.
  5. Bank Capital Regulation in a Zero Interest Environment By Robin Döttling
  6. Lending Pro-Cyclicality and Macro-Prudential Policy: Evidence from Japanese LTV Ratios By Arito Ono; Hirofumi Uchida; Gregory Udell; Iichiro Uesugi
  7. The Credit Structure Database By Florian LEON
  8. Collateral Damage By Gary B. Gorton; Toomas Laarits
  9. “Incorporating creditors' seniority into contingent claim models:Application to peripheral euro area countries” By Marta Gómez-Puig; Simón Sosvilla-Rivero; Manish K. Singh
  10. Essays in banking and household finance By Diepstraten, Maaike
  11. Decomposing banking performance into economic and risk management efficiencies By Jean-Philippe Boussemart; Hervé Leleu; Zhiyang Shen; Michael Vardanyan; Ning Zhu
  12. From window guidance to interbank rates : Tracing the transition of monetary policy in Japan and China By Angrick, Stefan; Naoyuki, Yoshino
  13. Sovereign - bank risk interconnections during the Greek financial crisis and the role of the Italian debt By Giulio Cifarelli; Giovanna Paladino
  14. Beyond Common Equity - The Influence of Secondary Capital on Bank Insolvency Risk By Thomas Conlon; John Cotter; Philip Molyneux
  15. Financial Crisis, Monetary Base Expansion and Risk By Stylianos Tsiaras
  16. A Leverage-Based Measure of Financial Stability By Adrian, Tobias; Borowiecki, Karol Jan; Tepper, Alexander
  17. Household Credit, Global Financial Cycle, and Macroprudential Policies; Credit Register Evidence from an Emerging Country By Mircea Epure; Irina Mihai; Camelia Minoiu; José-Luis Peydró
  18. Heterogeneous Effects of Credit Constraints on SMEs’ Employment: Evidence from the Great Recession By Cornille, David; Rycx, François; Tojerow, Ilan
  19. Screening on Loan Terms: Evidence from Maturity Choice in Consumer Credit By Hertzberg, Andrew; Liberman, Andres; Paravisini, Daniel

  1. By: Federico Lubello; Ivan Petrella; Emiliano Santoro
    Abstract: We examine the role of bank collateral in shaping credit cycles. To this end, we develop a tractable model where bankers intermediate funds between savers and borrowers. If bankers default, savers acquire the right to liquidate bankers' assets. However, due to the vertically integrated structure of our credit economy, savers anticipate that liquidating nancial assets (i.e., bank loans) is conditional on borrowers being solvent on their debt obligations. This friction limits the collateralization of bankers' financial assets beyond that of other assets that are not involved in more than one layer of financial contracting. In this context, increasing the pledgeability of financial assets eases more credit and reduces the spread between the loan and the deposit rate, thus attenuating capital misallocation as it typically emerges in credit economies a la Kiyotaki and Moore (1997). We uncover a close connection between the collateralization of bank loans, macroeconomic amplification of shocks and the degree of procyclicality of bank leverage. A regulator may reduce macroeconomic volatility through the introduction of a countercyclical capital buffer, while a fixed capital adequacy requirement displays limited stabilization power.
    Keywords: Banking; Bank Collateral; Liquidity; Capital Misallocation; Macroprudential Policy.
    JEL: E32 E44 G21 G28
    Date: 2018–02
  2. By: Fuster, Andreas (Federal Reserve Bank of New York); Plosser, Matthew (Federal Reserve Bank of New York); Schnabl, Philipp (NYU Stern School of Business, NBER, and CEPR); Vickery, James (Federal Reserve Bank of New York)
    Abstract: Technology-based (“FinTech”) lenders increased their market share of U.S. mortgage lending from 2 percent to 8 percent from 2010 to 2016. Using market-wide, loan-level data on U.S. mortgage applications and originations, we show that FinTech lenders process mortgage applications about 20 percent faster than other lenders, even when controlling for detailed loan, borrower, and geographic observables. Faster processing does not come at the cost of higher defaults. FinTech lenders adjust supply more elastically than other lenders in response to exogenous mortgage demand shocks, thereby alleviating capacity constraints associated with traditional mortgage lending. In areas with more FinTech lending, borrowers refinance more, especially when it is in their interest to do so. We find no evidence that FinTech lenders target marginal borrowers. Our results suggest that technological innovation has improved the efficiency of financial intermediation in the U.S. mortgage market.
    Keywords: mortgage; technology; prepayments; nonbanks
    JEL: D14 D24 G21 G23
    Date: 2018–02–01
  3. By: Sivec, Vasja; Volk, Matjaz; Chen, Yi-An
    Abstract: With the new regulatory framework, known as Basel III, policymakers introduced a countercyclical capital buffer. It subjects banks to higher capital requirements in times of credit excess and is released in a financial crisis. This incentivizes banks to extend credit and to buffer losses. Due to its recent introduction empirical research on its effects are limited. We analyse a unique policy experiment to evaluate the effects of buffer release. In 2006, the Slovenian central bank introduced a temporary deduction item in capital calculation, creating an average capital buffer of 0.8% of risk weighted assets. It was released at the start of the financial crisis in 2008 and is akin to a release of a countercyclical capital buffer. We estimate its impact on bank behaviour. After its release, firms borrowing from banks holding 1 p.p. higher capital-buffer received 11 p.p. more in credit. Also we find the impact was greater for healthy firms, and it increased loan-loss provisioning for firms in default.
    Keywords: countercyclical capital buffer, macroprudential policy, credit, loan loss provisions
    JEL: G01 G21 G28
    Date: 2018–01–02
  4. By: Temesvary, Judit; Ongena, Steven; Owen, Ann L.
    Abstract: We examine how U.S. monetary policy affects the international activities of U.S. Banks. We access a rarely studied U.S. bank-level regulatory dataset to assess at a quarterly frequency how changes in the U.S. Federal funds rate (before the crisis) and quantitative easing (after the onset of the crisis) affects changes in cross-border claims by U.S. banks across countries, maturities and sectors, and also affects changes in claims by their foreign affiliates. We find robust evidence consistent with the existence of a potent global bank lending channel. In response to changes in U.S. monetary conditions, U.S. banks strongly adjust their cross-border claims in both the pre and post-crisis period. However, we also find that U.S. bank affiliate claims respond mainly to host country monetary conditions.
    Keywords: Bank lending channel; Cross-country analysis; Global banking; Monetary transmission
    JEL: E44 E52 F42 G15 G21
    Date: 2018–02–02
  5. By: Robin Döttling (University of Amsterdam)
    Abstract: How do near-zero interest rates affect bank competition, risk taking and regulation? I study these questions in a tractable dynamic general equilibrium model, in which forward-looking banks compete imperfectly for deposit funding, and deposit insurance may induce excessive risk taking. The zero lower bound on deposit rates (ZLB) distorts bank competition and boosts risk shifting incentives, particularly if rates are expected to remain near-zero for long. At the ZLB, capital regulation becomes a less effective tool to curb risk shifting incentives. When banks cannot pass on the cost of capital to depositors, tight capital requirements erode franchise value, countervailing the usual "skin in the game" effect. Optimal capital requirements vary with the interest rate cycle, highlighting a novel interaction between monetary and macro-prudential policies. Complementing existing regulation with policy tools that subsidize the funding cost of banks may improve welfare at the ZLB.
    Keywords: Zero lower bound; search for yield; capital regulation; bank competition; risk shifting; franchise value
    JEL: G21 G28 E43
    Date: 2018–02–28
  6. By: Arito Ono; Hirofumi Uchida; Gregory Udell; Iichiro Uesugi
    Abstract: Using a large and unique micro dataset compiled from the official real estate registry in Japan, we examine the loan-to-value (LTV) ratios for business loans from 1975 to 2009 to draw some implications for the ongoing debate on the use of LTV ratio caps as a macro-prudential policy measure. We find that the LTV ratio exhibits counter-cyclicality, implying that the increase (decrease) in loan volume is smaller than the increase (decrease) in land values during booms(busts). Most importantly, LTV ratios are at their lowest during the bubble period in the late 1980s and early 1990s. The counter-cyclicality of LTV ratios is robust to controlling for various characteristics of loans, borrowers, and lenders. We also find that borrowers that exhibited high-LTV loans performed no worse ex-post than those with lower LTV loans, and sometimes performed better during the bubble period. Our findings imply that a simple fixed cap on LTV ratios might not only be ineffective in curbing loan volume in boom periods but also inhibit well-performing firms from borrowing. This casts doubt on the efficacy of employing a simple LTV cap as an effective macro-prudential policy measure.
  7. By: Florian LEON (CREA, Université du Luxembourg)
    Abstract: We describe a new publicly available dataset on credit structure across the world over the period 1995-2014. The database contains two modules. The first part reports the structure of bank loan by types of borrowers (households vs. firms). Data are available for 143 countries. Household credit is breakdown between mortgage loans and other household loans (credit cards, car loans, student loans, etc.). Firm credit is decomposed into six sectors (agriculture, industry, construction, transport, trade and other services). The second module contains credit by maturity for 85 countries. Short-term credit is defined as loans with a maturity of one year or less and long-term credit as loans whose maturity exceeds one year,
    Keywords: Financial development; household credit; firm credit; long-term credit; short-term credit.
    JEL: G21 O16
    Date: 2018
  8. By: Gary B. Gorton; Toomas Laarits
    Abstract: A financial crisis is an event in which the holders of short-term debt come to question the collateral backing that debt. So, the resiliency of the financial system depends on the quality of that collateral. We show that there is a shortage of high-quality collateral by examining the convenience yield on short-term debt, which summarizes the supply and demand for short-term safe debt, taking into account the availability of high-quality collateral. We then show how the private sector has responded by issuing more (unsecured) commercial paper at shorter maturities. The results suggest that there is a shortage of safe debt now compared to the pre-crisis period, implying that the seeds for a new shadow banking system to grow exist.
    JEL: E4 E44 E58 G21
    Date: 2018–02
  9. By: Marta Gómez-Puig (Risckcenter Research group–IREA. Av. Diagonal 696; 08034 Barcelona ,Spain); Simón Sosvilla-Rivero (Complutense Institute of International Economics, Universidad Complutense de Madrid, Spain); Manish K. Singh (Risckcenter Research group–IREA. Av. Diagonal 696; 08034 Barcelona ,Spain)
    Abstract: This paper highlights the role of multilateral creditors (i.e., the ECB, IMF, ESM etc.) and their preferred creditor status in explaining the sovereign default risk of peripheral euro area (EA) countries. Incorporating lessons from sovereign debt crises in general, and from the Greek debt restructuring in particular, we define the priority structure of sovereigns' creditors that is most relevant for peripheral EA countries in severe crisis episodes. This new priority structure of creditors, together with the contingent claims methodology, is then used to derive a set of sovereign credit risk indicators. In particular, the sovereign distance-to-default indicator, proposed in this paper (which includes both accounting metrics and market-based measures) aims to isolate sovereign credit risk by using information from the public sector balance sheets to build it up. Analyzing and comparing it with traditional market-based measures of sovereign risk suggests that the measurement and predictive ability of credit risk measures can be vastly improved if we account for the changing composition of sovereigns' balance sheet risk based on creditors' seniority.
    Keywords: Sovereign default risk, peripheral euro area countries, contingent claims,distance-to-default. JEL classification:E62, H3, C11.
    Date: 2018–02
  10. By: Diepstraten, Maaike (Tilburg University, School of Economics and Management)
    Abstract: The thesis consists of four chapters in banking and household finance. The first chapter examines the joint impact of bank size and scope on banks’ exposure to systemic risk. It shows that the dark side of diversification dominates for small banks, whereas the bright side effects of diversification and innovation dominate for medium and large banks. The second chapter provides insight in consumer bank switching behaviour. It outlines the most important factors in explaining variation in switching propensities for switching with the main savings account, current account and mortgage loan. Besides, it documents barriers that withhold people from switching and sheds light on (hypothetical) policy initiatives to facilitate switching. The third chapter studies bank switching behaviour after government interventions. Although aggregate switching behaviour did not change after the troubles and bail-outs, there is heterogeneity in customer responses. Customers with low levels of trust in the government are more likely to switch away after a nationalisation. Moreover, risk-averse current account holders are more likely to leave the nationalised bank. The last chapter is on savings behaviour. It shows that the socio-economic dimension, parental teaching, household administration skills, personality factors and the social circle are all related to savings. The socio-economic dimension and the social circle are most important in explaining variation in savings behaviour, irrespective of how savings behaviour is measured.
    Date: 2018
  11. By: Jean-Philippe Boussemart (University of Lille 3 and IÉSEG School of Management (LEM 9221-CNRS)); Hervé Leleu (CNRS-LEM 9221 and IÉSEG School of Management); Zhiyang Shen (Eximbank, Anhui University of Finance and Economics); Michael Vardanyan (IÉSEG School of Management (LEM-CNRS - UMR 9221)); Ning Zhu (South China University of Technology, School of Economics and Commerce)
    Abstract: This paper proposes a novel non-parametric approach of a banking production technology that decomposes performance into economic and risk management efficiencies. The basis of our approach is to separate the production technology into two sub-technologies. The former is the production of non-interest income and loans from a set of traditional inputs. The latter is attached to the production of interest income from loans where an explicit distinction between good and non-performing loans is introduced. Economic efficiency comes from the production of good outputs, namely interest and non-interest income, while risk-management efficiency is related to the minimization of the non-performing loans that can be considered as an unintended or bad output. The model is applied to Chinese financial data covering 30 banks from 2005 to 2012 and different scenarios are considered. The results indicate that income could be increased by an average rate of 16% while non-performing loans could be decreased by an average rate of 33%. According to our results, banking managers could strike a balance between economic performance and risk-management and make more appropriate decisions in line with their preferences.
    Keywords: Data Envelopment Analysis; Risk management; Economic efficiency; Banking performance; Non-performing loans
    Date: 2017–10
  12. By: Angrick, Stefan; Naoyuki, Yoshino
    Abstract: Monetary policy in most major economies has traditionally focused on control of the interbank interest rate to achieve an inflation target. Monetary policy in transition economies, in contrast, relied on a mixed system of price-based and quantity based instruments and targets. Japanese monetary policy up to the 1990s was based on such a mix, and echoes of this system are today found in China’s monetary policy set-up. We explore the transition of these two monetary policy regimes historically and quantitatively with institutional comparison and Structural Vector Autoregressive (SVAR) models. Specifically, we examine the role of the interbank rate and “window guidance,” a policy by which authorities use “moral suasion” to communicate target quotas for lending growth directly to commercial banks. In Japan’s case, we compile historical statistics on window guidance from newspapers and industry sources. For China, we apply Romer–Romer text analysis and computational linguistic techniques to policy reports to quantify information on window guidance.We empirically demonstrate the declining effectiveness of quantity measures and the increasing importance of price measures. We end with a policy assessment of managing the transition of monetary policy from a quantity-based system to a price-based system.
    JEL: E5 E52 E58
    Date: 2018–02–21
  13. By: Giulio Cifarelli (Dipartimento di Scienze per l'Economia e l'Impresa); Giovanna Paladino
    Abstract: The Greek crisis has brought to light the strong nexus between the credit risks of European banks and their sovereign. We study this phenomenon in Germany, France, Italy and Spain by estimating the conditional correlations between sovereign and bank CDS bond spreads over the period 2006-2015. A trivariate time-varying regime switching correlation analysis, the STCC-GARCH, is implemented to associate the state shifts to the dynamics of the so-called “transition variable†. We start selecting as transition variable the first difference of the spread between Greek and German sovereign bond yields. We then expand the model – via a DSTCC-GARCH parameterization - and introduce a second transition variable, representing the influence of the Italian sovereign debt. There is a clear evidence of significant changes in the correlations structure due to the evolution of the Greek crisis and to the sustainability of the Italian debt, which in turns impinges on the tenability of the euro project. The role of Italy on the nexuses of France and Germany increases after 2011.
    Keywords: CDS spreads, Greek financial crisis, STCC- and DSTCC-GARCH correlation analysis, contagion
    JEL: E43 E52 F36 C32
    Date: 2018
  14. By: Thomas Conlon (University College Dublin); John Cotter (University College Dublin); Philip Molyneux (University of Sharjah)
    Abstract: Banks adhere to strict rules regarding the quantity of regulatory capital held, but have some flexibility as to its composition. In this paper, we examine bank insolvency risk (distance to default) for listed North American and European banks over the period 2002-2014, focusing on sensitivity to capital other than common equity. Decomposing tier 1 capital into equity and non-core components reveals a heretofore unidentified variation in risk reduction capacity. Greater non-core tier 1 capital is associated with increased insolvency risk for larger and more diversified banks, impairing the risk reducing capacity of aggregate tier 1 capital. Overall tier 2 capital is not linked with insolvency risk, although a conflicting relationship is isolated conditional on the level of total regulatory capital held. Finally, the association between risk and capital is weakened when the latter is defined relative to risk-weighted assets.
    Keywords: Regulatory Capital, Bank Risk, Regulatory Capital Arbitrage, Tier 1, Tier 2
    JEL: G21 G28 G32
    Date: 2018–02–19
  15. By: Stylianos Tsiaras (University of Surrey)
    Abstract: This paper examines the post-2008 European Central Bank's liquidity enhancing policies, namely 'Long Term Refinancing Operations', and the increase of banks' excess reserves that followed. To evaluate this in a quantitative environment, I build a dynamic, general equilibrium model that incorporates financial frictions in both the supply and demand for credit and allows banks to receive liquidity and hold reserves. Results suggest the existence of a risk-shifting channel of monetary policy in the recent ECB operations. Specifically, I show that when the central bank supplies liquidity during turbulent times, banks grant loans to riskier _rms. This increases the firms' default on new credit and worsens the performance of the economy although the banks' health is improved. Additionally, I find that an increase in the riskiness of the non-financial corporations can explain the recent reserve accumulation by the banking system. Lastly, I evaluate the effects of negative interest rates on credit and assess the welfare implications of the recent policies.
    JEL: E44 E58
    Date: 2018–01
  16. By: Adrian, Tobias (International Monetary Fund); Borowiecki, Karol Jan (Department of Business and Economics); Tepper, Alexander (Columbia University)
    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: Leverage; financial crisis; financial stability; minimum market size for stability; MinMaSS; stability ratio; Long-Term Capital Management; LTCM
    JEL: G01 G10 G20 G21
    Date: 2018–02–07
  17. By: Mircea Epure; Irina Mihai; Camelia Minoiu; José-Luis Peydró
    Abstract: We analyze the effects of macroprudential policies on local bank credit cycles and interactions with international financial conditions. For identification, we exploit the comprehensive credit register containing all bank loans to individuals in Romania, a small open economy subject to external shocks, and the period 2004-2012, which covers a full boom-bust credit cycle when a wide range of macroprudential measures were deployed. Although household leverage is known to be a key driver of financial crises, to our knowledge this is the first paper that employs a household credit register to study leverage and macroprudential policies over a full economic cycle. Our results show that tighter macroprudential conditions are associated with a significant decline in household credit, with substantially stronger effects for foreign currency (FX) loans than for local currency loans. The effects on FX loans are higher for: (i) ex-ante riskier borrowers proxied by higher debt-service-toincome ratios and (ii) banks with greater exposure to foreign funding. Moreover, tighter macroprudential policy has stronger dampening effects on FX lending when global risk appetite is high and foreign monetary policy is expansionary. Finally, quantitative effects are in general larger for borrower rather than lender macroprudential policies.
    Keywords: Household credit;Romania;Europe;Central banks and their policies;macroprudential policies, global financial cycle, cross-border spillovers, General
    Date: 2018–01–24
  18. By: Cornille, David; Rycx, François; Tojerow, Ilan
    Abstract: This paper takes advantage of access to detailed matched bank-firm data to investigate whether and how employment decisions of SMEs have been affected by credit constraints in the wake of the Great Recession. Variability in banks’ financial health following the 2008 crisis is used as an exogenous determinant of firms’ access to credit. Findings, relative to the Belgian economy, clearly highlight that credit matters. They show that SMEs borrowing money from pre-crisis financially less healthy banks were significantly more likely to be affected by a credit constraint and, in turn, to adjust their labour input downwards than pre-crisis clients of more healthy banks. These results are robust across types of loan applications that were denied credit, i.e. applications to finance working capital, debt or new investments. Yet, estimates also show that credit constraints have been essentially detrimental for employment among SMEs experiencing a negative demand shock or facing strong product market competition. In terms of human resources management, credit constraints are not only found to foster employment adjustment at the extensive margin but also to increase the use of temporary layoff allowances for economic reasons. This outcome supports the hypothesis that short-time compensation programmes contribute to save jobs during recessions.
    Keywords: SMEs,banks’ financial health,credit constraints,employment,short-time compensation programmes,Great Recession,matched bank-firm data
    JEL: C35 C36 D22 G01 G21 J21 J23
    Date: 2018
  19. By: Hertzberg, Andrew (Federal Reserve Bank of Philadelphia); Liberman, Andres (New York University); Paravisini, Daniel (London School of Economics)
    Abstract: We exploit a natural experiment in the largest online consumer lending platform to provide the first evidence that loan terms, in particular maturity choice, can be used to screen borrowers based on their private information. We compare two groups of observationally equivalent borrowers who took identical unsecured 36-month loans; for only one of the groups, a 60-month loan was also available. When a long-maturity option is available, fewer borrowers take the short-term loan, and those who do default less. Additional findings suggest borrowers self-select on private information about their future ability to repay.
    Keywords: Screening; Adverse Selection; Loan Maturity; Consumer Credit
    JEL: D14 D82
    Date: 2018–01–31

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