nep-ban New Economics Papers
on Banking
Issue of 2018‒03‒12
24 papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Unclogging the Credit Channel: on the Macroeconomics of Banking frictions By Jakucionyte, Egle; van Wijnbergen, Sweder
  2. On the direct and indirect real effects of credit supply shocks By Laura Alfaro; Manuel García-Santana; Enrique Moral-Benito
  3. Market Discipline and Systemic Risk By Morrison, Alan; Walther, Ansgar
  4. Long-term outcomes of FHA first-time homebuyers By Lee, Donghoon; Tracy, Joseph
  5. Does Bank Stakeholder Orientation Enhance Financial Stability? Evidence from a Natural Experiment By Woon Sau Leung; Wei Song; Jie Chen
  6. Estimating risk efficiency in MiddleEast banks before and after the crisis.A Metafrontier framework. By Colesnic, Olga; Kounetas, Kostas; Polemis, Michael
  7. How do mortgage refinances affect debt, default, and spending? Evidence from HARP By Abel, Joshua; Fuster, Andreas
  8. The impact of market structure of the banking sector on the growth of bank loans in the EU after the global financial crisis By Georgios Kouretas; Małgorzata Pawłowska
  9. Credit Risk Analysis using Machine and Deep learning models By Peter Martey Addo; Dominique Guegan; Bertrand Hassani
  10. Listening to the buzz: social media sentiment and retail depositors' trust By Matteo Accornero; Mirko Moscatelli
  11. Cournot fire sales By Eisenbach, Thomas M.; Phelan, Gregory
  12. The corporate structure of multinational banks By Lóránth, Gyöngyi; Morrison, Alan
  13. Cooperative banks and local economic growth By Paolo Coccorese; Sherrill Shaffer
  14. The effect of heterogeneity on financial contagion due to overlapping portfolios By Banwo, Opeoluwa; Caccioli, Fabio; Harrald, Paul; Medda, Francesca
  15. Reverse stress testing interbank networks By Grigat, Daniel; Caccioli, Fabio
  16. Role of Verification in Peer-to-Peer Lending By Oleksandr Talavera; Haofeng Xu
  17. Bank capital buffers around the world: Cyclical patterns and the effect of market power By Carvallo Valencia, Oscar Alfonso; Ortiz Bolaños, Alberto
  18. Spillovers in Risk of Financial Institutions By John Cotter; Anita Suurlaht
  19. Customer Complaining and Probability of Default in Consumer Credit By Stefano Cosma; Francesca Pancotto; Paola Vezzani
  20. Banker My Neighbour: Matching and Financial Intermediation in Savings Groups By Cassidy, Rachel; Fafchamps, Marcel
  21. Auctions of Failed Banks and the Impact on Losing Bidders By Tim Mi Zhou
  22. Safe Haven CDS Premiums By Klinger, Sven; Lando, David
  23. Credit risk transfer and de facto GSE reform By Finkelstein, David; Strzodka, Andreas; Vickery, James
  24. On the Measurement of Large Financial Firm Resolvability By Jarque, Arantxa; Walter, John R.; Evert, Jackson

  1. By: Jakucionyte, Egle; van Wijnbergen, Sweder
    Abstract: We explore the consequences of different financial frictions on the corporate and banking level for macroeconomic policy responsiveness to major policy measures. We show that both corporate and bank debt overhang reduce the effectiveness of fiscal policy: multipliers turn negative with debt overhang in either sector. The negative impact of banking frictions on macro outcomes increases when a larger part of working capital is financed through credit in addition to investment. Debt overhang in banks leads to positive NPV loans being rejected; but after banks increase their equity ratio and subsequently engage less in risk shifting behavior, a decline in lending emerges. Thus the macroeconomic response to higher capital requirements depends on which friction is dominant: when there is debt overhang in banks higher capital leads to more, not less loans and is expansionary; while higher capital requirements lower loan volumes and have a recessionary impact when risk shifting is the problem in banks.We trace the differential importance of corporate versus banking debt overhang back to the different approaches followed on each side of the Atlantic in response to the undercapitalization of the banks after the onset of the financial crisis. We similarly trace macrodevelopment differences in the Southern periphery of Europe and the Northern European countries to differences in the problems and policies in their financial sector.
    Keywords: Banking frictions; Capital requirements; Fiscal policy; volatility Shocks
    JEL: E44 E58 E62 G18 G21
    Date: 2018–02
  2. By: Laura Alfaro (Harvard Business School And Nber); Manuel García-Santana (Upf, Barcelona Gse, and Cepr); Enrique Moral-Benito (Banco de España)
    Abstract: We consider the real effects of bank lending shocks and how they permeate the economy through buyer-supplier linkages. We combine administrative data on all fi rms in Spain with a matched bank-fi rm-loan dataset incorporating information on the universe of corporate loans for 2003-2013. Using methods from the matched employer-employee literature for handling large data sets, we identify bank-specifi c shocks for each year in our sample. Combining the Spanish Input-Output structure and fi rm-specifi c measures of upstream and downstream exposure, we construct fi rm-specifi c exogenous credit supply shocks and estimate their direct and indirect effects on real activity. Credit supply shocks have sizable direct and downstream propagation effects on investment and output throughout the period but no signifi cant impact on employment during the expansion period. Downstream propagation effects are comparable or even larger in magnitude than direct effects. The results corroborate the importance of network effects in quantifying the real effects of credit shocks and show that real effects vary during booms and busts.
    Keywords: bank-lending channel, employment, investment, output, matched employeremployee, input-output linkages
    JEL: E44 G21 L25
    Date: 2018–03
  3. By: Morrison, Alan; Walther, Ansgar
    Abstract: We analyze a general equilibrium model in which financial institutions generate endogenous systemic risk, even in the absence of any government support. Banks optimally select correlated investments and thereby expose themselves to fire sale risk so as to sharpen their incentives. Systemic risk is therefore a natural consequence of banks' fundamental role as delegated monitors. Our model sheds light on recent and historical trends in measured systemic risk. Technological innovations and government-directed lending can cause surges in systemic risk. Strict capital requirements and well-designed government asset purchase programs can combat systemic risk.
    Keywords: macro-prudential regulation; market discipline; return correlation; systemic risk
    JEL: G01 G21
    Date: 2018–02
  4. By: Lee, Donghoon (Federal Reserve Bank of New York); Tracy, Joseph (Federal Reserve Bank of Dallas)
    Abstract: The Federal Housing Administration (FHA) has stated that its goal is to foster sustainable homeownership. In this paper, we propose some metrics for evaluating the degree to which the FHA is attaining this goal for first-time homebuyers. This work uses New York Fed Consumer Credit Panel data to examine the long-term outcome for households that make the transition from renting to owning using an FHA-insured mortgage. In addition to calculating the fraction of these borrowers whose FHA homeownership experience ends in default, we measure the degree to which these borrowers successfully remain homeowners after paying off their credit risk to the FHA. For the 2001 and 2002 cohorts, which were less impacted by the financial crisis than later cohorts, we find that 12 percent had their homeownership experience end in default while around 55 percent sustained their homeownership without the need for an FHA mortgage. Another 20 percent are either in their original home or have moved but continue to use an FHA mortgage.
    Keywords: FHA mortgages; first-time homebuyers; Federal Housing Administration
    JEL: G21 G28 R31
    Date: 2018–02–01
  5. By: Woon Sau Leung (Cardiff Business School, Cardiff University); Wei Song (School of Management, Swansea University); Jie Chen (Cardiff Business School, Cardiff University)
    Abstract: Using the staggered enactment of US state constituency statutes, which provides plausibly exogenous variations in directors’ fiduciary duties, we find that stakeholder orientation significantly reduces bank risk. This relation cannot be explained by reverse causality, local economic conditions and coincidental state antitakeover laws and banking deregulation policies. Consistent with lower risk-taking, we find that banks reduce risk through increasing capital and lending to safer borrowers. Furthermore, stakeholder orientation improves bank performance only for those banks that take excessive risk. Finally, banks that previously received a statute passage fared significantly better during the crises. Overall, our findings highlight the importance of bank directors’ fiduciary duties in safeguarding financial stability, and more broadly, support the increasing calls for greater emphasis on stakeholder interests in the current bank regulatory and governance reforms.
    Keywords: Bank risk-taking; Stakeholder orientation; Constituency statutes; Fiduciary duties; Financial stability.
    JEL: G01 G21 G28 G32 M14
    Date: 2018–02–24
  6. By: Colesnic, Olga; Kounetas, Kostas; Polemis, Michael
    Abstract: The aim of this study is two-fold. Firstly, it attempts to analyse the effect of risk on Middle East bank's efficiency levels before and after the recent financial crisis. Secondly, it seeks to determine the influence of bank size taking into consideration the possible inefficiency originated to risk abatement cost. To examine the aforementioned issues we introduce a risk efficiency index based on an output orientated directional distance function with weak and strong disposability assumptions. The methodology has been applied on a panel data of Middle East banks spanning the period 1998-2014.The empirical findings suggest that on average small banks are more efficient and their size have less negative impact on their technical efficiency and risk management. On the other hand, large banks' risk management is found to be more flexible during financial crisis. Finally, banks with higher fixed assets are associated with more costly dispose of non performing loans justifying the rejection of a positive relation between bank size and technical efficiency.
    Keywords: Risk efficiency, Middle East banks, Directional distance function, Metatechnology
    JEL: D20 D24 G1 G2 G21
    Date: 2018–02–09
  7. By: Abel, Joshua (Harvard University); Fuster, Andreas (Federal Reserve Bank of New York)
    Abstract: We use quasi-random access to the Home Affordable Refinance Program (HARP) to identify the causal effect of refinancing a mortgage on borrower balance sheet outcomes. We find that on average, refinancing into a lower-rate mortgage reduced borrowers' default rates on mortgages and nonmortgage debts by about 40 percent and 25 percent, respectively. Refinancing also caused borrowers to expand their use of debt instruments, such as auto loans, home equity lines of credit (HELOCs), and other consumer debts that are proxies for spending. All told, refinancing led to a net increase in debt equal to about 20 percent of the savings on mortgage payments. This number combines increases (new debts) of about 60 percent of the mortgage savings and decreases (paydowns) of about 40 percent of those savings. Borrowers with low FICO scores or low levels of unused revolving credit grow their auto and HELOC debt more strongly after a refinance but also reduce their bank card balances by more. Finally, we show that take-up of the refinancing opportunity was strongest among borrowers that were in a relatively better financial position to begin with.
    Keywords: mortgages; refinancing; monetary policy transmission; heterogeneity; HARP
    JEL: D14 E21 G21
    Date: 2018–02–01
  8. By: Georgios Kouretas (Department of Business Administration, Athens University); Małgorzata Pawłowska (Warsaw School of Economics, Narodowy Bank Polski)
    Abstract: The aim of this research is to investigate the issue of asymmetry of the credit market determinants of bank loans (corporate, consumer, and residential mortgage loans) between the CEE-11 countries (Bulgaria, Croatia, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Slovakia, Slovenia, Rumania) and the other countries (Austria, Belgium, Denmark, Finland, France, Greece, Italy, Spain, the Netherlands, Ireland, Luxembourg, Germany, Portugal, Sweden, United Kingdom, Malta, and Cyprus) after the global financial crisis (GFC) of 2007–09. For the analysis, we used annual bank-level data, which are collected from the Bankscope-Orbis database and interest rates for different loans from the European Central Bank and macroeconomic data on GDP growth. Panel data includes commercial banks, savings banks, and cooperative banks that were operating in the EU countries from the period 2010–2016. Using the methodology of panel regression, this study finds differences of the determinants of the growth of loans for two groups of countries after the global financial crisis. Panel data analysis of CEE-11 countries against other EU countries also finds differences between determinants of different types of bank loans.
    Keywords: banks, credit growth, concentration, foreign ownership, EU, CEE-11
    JEL: F36 G2 G21 G34 L1
    Date: 2018
  9. By: Peter Martey Addo (Data Scientist (Lead), Expert Synapses, SNCF Mobilite); Dominique Guegan (Université Paris1 Panthéon-Sorbonne, Centre d'Economie de la Sorbonne, LabEx ReFi and Ca' Foscari University of Venezia); Bertrand Hassani (VP, Chief Data Scientist, Capgemini Consulting and LabEx ReFi)
    Abstract: Due to the hyper technology associated to Big Data, data availability and computing power, most banks or lending financial institutions are renewing their business models. Credit risk predictions, monitoring, model reliability and effective loan processing are key to decision making and transparency. In this work, we build binary classifiers based on machine and deep learning models on real data in predicting loan default probability. The top 10 important features from these models are selected and then used in the modelling process to test the stability of binary classifiers by comparing performance on separate data. We observe that tree-based models are more stable than models based on multilayer artificial neural networks. This opens several questions relative to the intensive used of deep learning systems in the enterprises
    Keywords: Credit risk; Financial regulation; Data Science; Bigdata; Deep learning
    JEL: C02 C13 C19 G01 G21 G28 D81 G31
    Date: 2018–02
  10. By: Matteo Accornero (Bank of Italy); Mirko Moscatelli (Bank of Italy)
    Abstract: We investigate the relationship between the rumours on Twitter regarding banks and deposits growth. The sentiment expressed in tweets is analysed and employed for the nowcasting of retail deposits. We show that a Twitter-based indicator of sentiment improves the predictions of a standard benchmark model of depositor discipline based on financial data. We further improve the power of the model introducing a Twitter-based indicator of perceived interconnection, that takes into account spillover effects across banks.
    Keywords: bank distress, twitter analytics, sentiment analysis
    JEL: G21 G28 E58
    Date: 2018–02
  11. By: Eisenbach, Thomas M. (Federal Reserve Bank of New York); Phelan, Gregory (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 overcorrects 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; overinvestment; financial regulation; macroprudential regulation
    JEL: D43 D62 E44 G18 G21
    Date: 2018–02–01
  12. By: Lóránth, Gyöngyi; Morrison, Alan
    Abstract: Multinational banks are increasingly subject to centralised supervision that relies upon precise aggregation and consolidation of risk data from all of their constituent parts. We present a model of organisational form for multinational bank expansion within which we can consider this trend. In our model, multinational banks design their corporate form so as to control the granularity of internal information flows. Genuine delegation to subsidiary banks is feasible because they report less precise information to home banks. Home banks can therefore use subsidiary expansion to commit ex ante to accept projects that may ex post be unattractive. That commitment comes at the cost of higher expected compensation costs; branch banks guarantee better information flows and so allow for more precise incentive contracts. Centralization of supervision mitigates the benefit of subsidiaries for the home bank and may result in credit rationing to small and medium-sized companies in host countries. Our model explains the closer engagement of subsidiaries in host countries and yields several testable implications.
    Keywords: branch; information flows; Multinational banks; subsidiary
    JEL: G21
    Date: 2018–02
  13. By: Paolo Coccorese; Sherrill Shaffer
    Abstract: In this paper we study the impact of cooperative banks on local economic development. Working on Italian municipality data in the period 2001-2011, we find that this type of banks plays a distinct role in enhanced local economic performance – particularly income, employment and firms’ birth growth rates – and that their presence is more effective compared to conventional banks. This evidence upholds the view that their more widespread presence would be beneficial, especially in those areas that suffer from lower economic growth, and accords with other studies underlining the decisive role of cooperative banks in supporting traditional credit provision to local borrowers.
    Keywords: Cooperative banks, Growth, Municipalities, Economic performance
    JEL: G21 O4 R11
    Date: 2018–02
  14. By: Banwo, Opeoluwa; Caccioli, Fabio; Harrald, Paul; Medda, Francesca
    Abstract: We consider a model of financial contagion in a bipartite network of assets and banks recently introduced in the literature, and we study the effect of power law distributions of degree and balance-sheet size on the stability of the system. Relative to the benchmark case of banks with homogeneous degrees and balance-sheet sizes, we find that if banks have a power law degree distribution the system becomes less robust with respect to the initial failure of a random bank, and that targeted shocks to the most specialized banks (i.e., banks with low degrees) or biggest banks increases the probability of observing a cascade of defaults. In contrast, we find that a power law degree distribution for assets increases stability with respect to random shocks, but not with respect to targeted shocks. We also study how allocations of capital buffers between banks affects the system’s stability, and we find that assigning capital to banks in relation to their level of diversification reduces the probability of observing cascades of defaults relative to size-based allocations. Finally, we propose a non-capital-based policy that improves the resilience of the system by introducing disassortative mixing between banks and assets.
    Keywords: Contagion; systemic risk; network models
    JEL: F3 G3
    Date: 2017–02–10
  15. By: Grigat, Daniel; Caccioli, Fabio
    Abstract: We reverse engineer dynamics of financial contagion to find the scenario of smallest exogenous shock that, should it occur, would lead to a given final systemic loss. This reverse stress test can be used to identify the potential triggers of systemic events, and it removes the arbitrariness in the selection of shock scenarios in stress testing. We consider in particular the case of distress propagation in an interbank market, and we study a network of 44 European banks, which we reconstruct using data collected from banks statements. By looking at the distribution across banks of the size of smallest exogenous shocks we rank banks in terms of their systemic importance, and we show the effectiveness of a policy with capital requirements based on this ranking. We also study the properties of smallest exogenous shocks as a function of the parameters that determine the endogenous amplification of shocks. We find that the size of smallest exogenous shocks reduces and that the distribution across banks becomes more localized as the system becomes more unstable.
    JEL: G32 F3 G3
    Date: 2017–11–15
  16. By: Oleksandr Talavera (School of Management, Swansea University); Haofeng Xu (School of Management, Swansea University)
    Abstract: Using data from a leading Chinese Peer-to-Peer (P2P) lending platform from 2012 to 2015, we investigate the role of verification in the P2P lending market. We find that borrowers with thorough and complete verification are more likely to obtain funding and also less likely to default on loans. We also find that borrowers that have incomplete verification are more likely to upwardly misrepresent their income. This leads to higher default rates for this group when compared to the default rates of more thoroughly verified borrowers. The further analysis documents that returning borrowers are more likely to maintain a good credit record. We discuss the implications of our findings for the role of verification in the growing P2P lending sector and the design of a stable financial system.
    Keywords: Information asymmetry, verification, P2P, income exaggeration
    JEL: G21 G23
    Date: 2018–03–02
  17. By: Carvallo Valencia, Oscar Alfonso; Ortiz Bolaños, Alberto
    Abstract: We examine the effect of competition and business cycles on bank capital buffers around the world. We use a dataset of 3,461 banks from 25 developed and 54 developing countries over the 2001-2013 period. Banks tend on average to exhibit pro-cyclical behavior. But capital buffers seem to be more pro-cyclical in developing countries. Our results show that more competition leads to higher buffers in developed countries but to lower buffers in developing ones. This evidence suggests that the “competition-stability” thesis adheres in developed economies, whereas “competition-fragility” makes more sense in developing countries. This asymmetric result may have important policy implications, particularly with regard to new, globally-negotiated capital adequacy standards.
    Keywords: Bank capital buffers; Business cycle; Regulation; Market power
    JEL: G21 L1 L5
    Date: 2018–02–18
  18. By: John Cotter (University College Dublin); Anita Suurlaht (University College Dublin)
    Abstract: We analyse the total and directional spillovers across a set of financial institution systemic risk state variables: credit risk, real estate market risk, interest rate risk, interbank liquidity risk and overall market risk. A multiple structural break estimation procedure is employed to detect sudden changes in the time varying spillover indices in response to major market events and policy events and policy interventions undertaken by the European Central Bank and the Bank of England. Our sample includes five European Union countries: core countries France and Germany, periphery countries Spain and Italy, and a reference country, the UK. We show that national stock markets and real estate markets have a leading role in shock transmission across selected state variables; whereas the role of the other variables reverses over the course of the crisis. Real estate market risk is also found to be mostly affected by country specific events. The shock transmission dynamics of interest rate risk and interbank liquidity risk differs for the UK and Eurozone countries; empirical results imply that interest rate changes lead changes in interbank liquidity.
    Keywords: macro-financial state variables, financial crisis, spillover effects, credit default swaps, real estate risk.
    JEL: G01 G15 G20
    Date: 2018–02–19
  19. By: Stefano Cosma; Francesca Pancotto; Paola Vezzani
    Abstract: In many countries, Banking Authorities have adopted an Alternative Dispute Resolution (ADR) procedure to manage complaints that customers and financial intermediaries cannot solve by themselves. As a consequence, banks have had to implement complaint management systems in order to deal with customers’ demands. The growth rate of customer complaints has been increasing during the last few years. This does not seem to be only related to the quality of financial services or to lack of compliance in banking products. Another reason lies in the characteristics of the procedures themselves, which are very simple and free of charge. The paper analyzes some determinants regarding the willingness to complain. In particular, it examines whether a high customers’ probability of default leads to an increase in non-valid complaints. The paper uses a sample of approximately 1,000 customers who received a loan and made a claim against the lender. The analysis shows that customers with higher Probability of Default are more likely to make claims against Financial Institutions. Moreover, it shows that opportunistic behaviors and non-valid complaints are more likely if the customer is supported by a lawyer or other professionals and if the reason for the claim may result in a refund or damage compensation.
    Keywords: Alternative Dispute Resolution (ADR); credit complaints; consumer credit; customer relationship
    JEL: G21 G23
    Date: 2018–03
  20. By: Cassidy, Rachel; Fafchamps, Marcel
    Abstract: Efforts to promote financial inclusion have largely focused on microcredit and microsaving separately, and less so on promoting financial intermediation across poor borrowers and savers. Village Savings and Loan Associations (VSLAs) and other Self-Help Groups have features of both a borrowing and a commitment savings technology, potentially enabling savers and borrowers to meet each other's needs. Intermediation may however be impeded by limited liability and imperfect information. To investigate this, we use a large-scale survey of mature VSLA groups in rural Malawi to analyse how members sort across groups. Wefindthat present-biased members tend to group with time-consistent members, suggesting that the former may be gaining a commitment savings technology by lending to the latter. In contrast, members of the same occupation sort into groups together, suggesting unrealised intermediation possibilities between farming and non-farming households. This has implications for the design of such groups.
    Keywords: commitment savings; financial inclusion; Microfinance; savings groups
    JEL: O1 O12 O16
    Date: 2018–02
  21. By: Tim Mi Zhou (School of Management, Swansea University)
    Abstract: We find that losing bidders in FDIC auctions of failed banks from 2007 to 2013 experience positive abnormal stock returns. Returns are inversely related to the wealth transfer from the FDIC to the winning bidders that losing bidders fail to capture. Losing bidders' stock-holders, nevertheless, react positively to improved competitive market conditions due to the auctions.
    Keywords: FDIC, Banks, Resolution, Auction
    JEL: D44 G14 G21 G28
    Date: 2018–02–26
  22. By: Klinger, Sven; Lando, David
    Abstract: Credit Default Swaps can be used to lower capital requirements of dealer banks who enter into uncollateralized derivatives positions with sovereigns. We show in a model that the regulatory incentive to obtain capital relief makes CDS contracts valuable to dealer banks and empirically that, consistent with the use of CDS for regulatory purposes, there is a disconnect between changes in bond yield spreads and in CDS premiums especially for safe sovereigns. Additional empirical tests related to volumes of contracts outstanding, effects of regulatory proxies, and the corporate bond and CDS markets support that CDS contracts are used for capital relief.
    Keywords: capital charges; CDS premiums; CDS-bond basis; CVA
    JEL: F34 G12 G15
    Date: 2018–02
  23. By: Finkelstein, David (Annaly Capital Management); Strzodka, Andreas (Annaly Capital Management); Vickery, James (Federal Reserve Bank of New York)
    Abstract: We summarize and evaluate Fannie Mae and Freddie Mac’s credit risk transfer (CRT) programs, which have been used since 2013 to shift a portion of credit risk on more than $1.8 trillion of mortgages to private sector investors. We argue that the CRT programs have been successful in reducing the exposure of the federal government to mortgage credit risk without disrupting the liquidity or stability of mortgage secondary markets. In the process, the programs have created a new financial market for pricing and trading mortgage credit risk, which has grown in size and liquidity over time. The CRT programs provide an important building block to help facilitate reform of the U.S. housing finance system.
    Keywords: mortgage; credit risk transfer; securitization; Fannie Mae; Freddie Mac; GSE
    JEL: G10 G18 G21 G23 G28
    Date: 2018–02–01
  24. By: Jarque, Arantxa (Federal Reserve Bank of Richmond); Walter, John R. (Federal Reserve Bank of Richmond); Evert, Jackson (Federal Reserve Bank of Richmond)
    Abstract: We say that a large financial institution is "resolvable" if policymakers would allow it to go through unassisted bankruptcy in the event of failure. The choice between bankruptcy or bailout trades off the higher loss imposed on the economy in a potentially disruptive resolution against the incentive for excessive risk-taking created by an assisted resolution or a bailout. The resolution plans ("living wills") of large financial institutions contain information needed to evaluate this trade-off. In this paper, we propose a tool to complement the living will review process: an impact score that compares expected losses in the economy stemming from a resolution in bankruptcy with those expected under an assisted resolution or a bailout, based solely on objective characteristics of a bank holding company. We provide a framework that allows us to discuss the data needed and the concepts that underlie the construction of such a score. Importantly, the same firm characteristics may be ascribed different impacts under different resolution methods or crisis scenarios, and these impacts can depend on policymakers' assessments. We say that a firm's structure is acceptable if its impact score under bankruptcy is lower than that of any other resolution method. We study the current score used to designate firms as GSIBs and propose a modified version that we view as a starting point for an impact score.
    Keywords: resolution; bankruptcy; financial regulation; safety net
    JEL: G01 G21 G28 G33
    Date: 2018–03–02

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