nep-ban New Economics Papers
on Banking
Issue of 2018‒03‒26
sixteen papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. How Banks Respond to Negative Interest Rates: Evidence from the Swiss Exemption Threshold By Christoph Basten; Mike Mariathasan
  2. How Post-crisis Regulation Has Affected Bank CEO Compensation By Vittoria Cerasi; Sebastian M. Deininger; Leonardo Gambacorta; Tommaso Oliviero
  3. Mortgage debt and shadow banks By Sebastiaan Pool
  4. Sensitivity of credit risk stress test results: Modelling issues with an application to Belgium By Patrick Van Roy; Stijn Ferrari; Cristina Vespro
  5. A critical review of the statistics on the size and riskiness of the securitization market: evidence from Italy and other euro-area countries By Giorgio Nuzzo
  6. Credit risk and bank competition in Sub-Saharan Africa By M. Brei; L. Jacolin; A. Noah
  7. The Financing of Local Government in the People’s Republic of China: Stimulus Loan Wanes and Shadow Banking Waxes By Chen, Zhuo; He, Zhiguo; Liu, Chun
  8. Systematic Risk, Bank Moral Hazard, and Bailouts By Marcella Lucchetta; Michele Moretto; Bruno Maria Parigi
  9. Loan Contract Structure and Adverse Selection: Survey Evidence from Uganda By Gulesci, Selim; Madestam, Andreas; Stryjan, Miri
  10. Is trade credit a substitute for relationship lending credit? By Jeremie Bertrand; Pierluigi Murro
  11. Bank Volatility Connectedness in South East Asia By Kamil Yilmaz
  12. Concentration and Competition in Serbian Banking Sector By Bukvić, Rajko
  13. Does a bank levy increase frictions on the interbank market? By Aneta Hryckiewicz; Piotr Mielus; Karolina Skorulska; Malgorzata Snarska
  14. Market power and the risk-taking of banks: Some semiparametric evidence from emerging economies By Jeon, Bang Nam; Wu, Ji; Guo, Mengmeng; Chen, Minghua
  15. Optimal Forbearance of Bank Resolution By Linda Schilling
  16. Japan’s Credit Guarantee System Reform of 2017 and New Functions of Credit Guarantee Associations By Nobuyoshi Yamori

  1. By: Christoph Basten; Mike Mariathasan
    Abstract: We analyze the effect of negative monetary policy rates on banks, using detailed supervisory information from Switzerland. For identification, we compare changes in the behavior of banks that had different fractions of their central bank reserves exempt from negative rates. More affected banks reduce costly reserves and bond financing while maintaining non-negative deposit rates and larger deposit ratios. Higher fee and interest income successfully compensates for squeezed liability margins, but credit and interest rate risk increase. Portfolio rebalancing implies relatively more lending, also compared to an earlier rate cut within positive territory, and risk-taking reduces regulatory capital cushions and liquidity.
    Keywords: monetary policy transmission, negative interest rates, bank profitability, risk-taking, bank lending, Basel III
    JEL: E43 E44 E52 E58 G20 G21
    Date: 2018
  2. By: Vittoria Cerasi (Bicocca University); Sebastian M. Deininger (Basel Chamber of Commerce); Leonardo Gambacorta (BIS and CEPR); Tommaso Oliviero (CSEF, Università di Napoli Federico II)
    Abstract: This paper assesses whether compensation practices for bank Chief Executive Officers (CEOs) changed after the Financial Stability Board (FSB) issued post-crisis guidelines on sound compensation. Banks in jurisdictions which implemented the FSB’s Principles and Standards of Sound Compensation in national legislation changed their compensation policies more than other banks. Compensation in those jurisdictions is less linked to short-termprofits and more linked to risks, with CEOs at riskier banks receiving less, by way of variable compensation, than those at less-risky peers. This was particularly true of investment banks and of banks which previously had weaker risk management, for example those that previously lacked a Chief Risk Officer.
    Keywords: Banks; Managerial compensation; Prudential regulation; Risk-taking
    JEL: G21 G28 G32
    Date: 2018–03–07
  3. By: Sebastiaan Pool
    Abstract: Since the 1980s, the global banking sector has been characterized by three trends: i) a secular decline in interest rates, ii) a reallocation of bank investments from corporate loans towards mortgages and iii) the rise of shadow banking relative to regulated banking. This paper builds a general equilibrium framework that connects, analyzes and explains these trends in a causal way. In the model, exogenous downward pressure on real interest rates increases the share of mortgage investments. Consequently, the interbank market for mortgage securities becomes more liquid. This increases funding liquidity and shadow banks gain comparative advantage over regulated banks with respect to the supply of mortgage loans. In relative terms, the shadow banking sector grows. Meanwhile, the economy becomes more vulnerable to financial crises as shadow banks issue too many uninsured deposits. To enhance financial stability, I consider restrictions on admissible loan-to-value ratios for mortgage loans to reduce house price and mortgage supply fluctuation. Finally, I suggest to introduce interest-paying central bank deposits for households to raise the costs for banks to finance themselves with uninsured deposits.
    Keywords: Shadow Banking; Regulated Banking; Financial Stability
    JEL: E44 G10 G21 G23
    Date: 2018–03
  4. By: Patrick Van Roy (National Bank of Belgium and Université Libre de Bruxelles, Boulevard de Berlaimont 14, 1000 Brussels, Belgium); Stijn Ferrari (National Bank of Belgium, Boulevard de Berlaimont 14, 1000 Brussels, Belgium); Cristina Vespro (National Bank of Belgium, Boulevard de Berlaimont 14, 1000 Brussels, Belgium - Present address: European Commission, Rue de Spa 2, 1000 Brussels, Belgium.)
    Abstract: This paper assesses the sensitivity of solvency stress testing results to the choice of credit risk variable and level of data aggregation at which the stress test is conducted. In practice, both choices are often determined by technical considerations, such as data availability. Using data for the Belgian banking system, we find that the impact of a stress test on banks' Tier 1 ratios can differ substantially depending on the credit risk variable and the level of data aggregation considered. If solvency stress tests are going to be used as a supervisory tool or to set regulatory capital requirements, there is a need to further harmonise their execution across institutions and supervisors in order to enhance comparability. This is certainly relevant in the context of the EUwide stress tests, where institutions often use different credit risk variables and levels of data aggregation to estimate the impact of the common methodology and macroeconomic scenario on their capital level while supervisors rely on different models to quality assure and validate banks’results. More generally, there is also a need to improve the availability and quality of the data to be used for stress testing purposes.
    Keywords: stress tests, credit risk, sensitivity analysis, capital requirements, modelling choices.
    JEL: C52 G21
    Date: 2018–03
  5. By: Giorgio Nuzzo (Bank of Italy)
    Abstract: The paper provides a critical analysis of the indicators most widely used at international level to measure the size and risk of the securitization market and its contribution to shadow banking. The analysis outlines the reasons why measuring the size of the market on the basis of the total assets of Financial Vehicle Corporations (FVCs) is likely to result in an overestimation of the phenomenon. An alternative measure is proposed, based on the stock of securities issued by FVCs, net of those repurchased by the banks. The paper argues against an approach to measuring the risk of shadow banking by applying the same measures for different non-bank financial intermediaries. In particular, it is suggested that some of them, such as leverage, interconnection with the banking system and credit intermediation, may be misleading if they are applied to the securitization market and assessed through the FVCs’ balance sheet. The analysis, however, highlights the degree of opacity/complexity of a specific area for the analysis of risks from securitizations and proposes two new indicators. According to the proposed indicators, at the end of 2016, the Italian securitization market is smaller and less risky than that of other euro-area countries.
    Keywords: shadow banking system, securitizations, risk measures
    JEL: E44 E58 G00 G01 G23
    Date: 2017–10
  6. By: M. Brei; L. Jacolin; A. Noah
    Abstract: This paper investigates the impact of bank competition in Sub-Saharan Africa on bank non-performing loans, a measure of credit risk. Using bank-level data for a sample of 221 banks from 33 countries over the period 2000-15, we find a non-linear or U-shaped relationship between bank competition (measured by the Lerner Index) and credit risk. In other words, increased bank competition has the potential to lower credit risk via efficiency gains (lower credit cost, operational gains). However, the positive effects may be outweighed by adverse effects of excessive competition (lower profit margins, increased risk incentives). We also find that credit risk in Sub-Saharan Africa is not only related to macroeconomic determinants, such as growth, public debt, economic diversification, financial deepening and inclusion, but also to the regulatory environment. These results may provide useful insights on how to design and adapt prudential and regulatory frameworks to the specific needs in developing countries.
    Keywords: Bank competition, Credit risk, Bank stability, Lerner index, Africa.
    JEL: G21 G28 D4 O55
    Date: 2018
  7. By: Chen, Zhuo (Asian Development Bank Institute); He, Zhiguo (Asian Development Bank Institute); Liu, Chun (Asian Development Bank Institute)
    Abstract: The People’s Republic of China (PRC)’s four-trillion-yuan stimulus package fueled by bank loans in 2009 has led to the rapid growth of shadow banking activities in the PRC after 2012. The local governments in the PRC financed the stimulus plan mainly through bank loans in 2009, and resorted to non-bank debt financing after 2012 given the mounting rollover pressure from bank debt coming due, a manifestation of the stimulus loan-hangover effect. Cross-sectionally, provinces with abnormally greater bank loan growth in 2009 experienced more Municipal Corporate Bonds issuance during 2012-2015, as well as more shadow banking activities including entrusted loans and wealth management products. We highlight the market forces behind the regulation changes on local government debt post 2012, together with the expedited reform on interest rate liberalization during that period.
    Keywords: local government financing vehicles; municipal corporate bonds; shadow banking in china
    JEL: E61 G21 H72 O17
    Date: 2018–01–25
  8. By: Marcella Lucchetta; Michele Moretto; Bruno Maria Parigi
    Abstract: We show that the impact of government bailouts (liquidity injections) on a representative bank’s risk taking depends on the level of systematic risk of its loans portfolio. In a model where bank’s output follows a geometric Brownian motion and the government guarantees bank’s liabilities, we show first that more generous bailouts may or may not induce banks to take on more risk depending on the level of systematic risk; if systematic risk is high (low), a more generous bailout decreases (increases) bank’s risk taking. Second, the optimal liquidity policy itself depends on systematic risk. Third, the relationship between bailouts and bank’s risk taking is not monotonic. When systematic risk is low, the optimal liquidity policy is loose and more generous bailouts induce banks to take on more risk. If systematic risk is high and the optimal liquidity policy is tight, less generous bailouts induce banks to take on less risk. However, when high systematic risk makes a very tight liquidity policy optimal, a less generous bailout could increase bank’s risk taking. While in this model there is only one representative bank, in an economy with many banks, a higher level of systematic risk could also be a source of systemic risk if a tighter liquidity policy induces correlated risk taking choices by banks.
    Keywords: bailout, bank closure, real option, systematic risk
    JEL: G00 G20 G21
    Date: 2018
  9. By: Gulesci, Selim; Madestam, Andreas; Stryjan, Miri
    Abstract: While adverse selection is an important theoretical explanation for credit rationing it is difficult to empirically quantify. One reason is that most studies measure the elasticity of credit demand of existing or previous borrowers as opposed to the population at large. We circumvent the issue by surveying a representative sample of microenterprises in urban Uganda and present evidence of adverse selection in two key dimensions of credit contracts - interest rates and collateral requirements. Theory suggests that a lower interest rate or a lower collateral obligation should increase take up among less risky borrowers. Using hypothetical loan demand questions, we test these predictions by examining if firm owners respond to changes in the interest rate or the collateral requirement and whether take up varies by firms' risk type. We find that contracts with lower interest rates or lower collateral obligations increase hypothetical demand, especially for less risky firms. The effects are particularly strong among manufacturing businesses. Our results imply that changes to the standard microfinance product may have substantial effects on credit demand.
    Keywords: Adverse Selection; Collateral; interest rates; Microfinance; SMEs
    JEL: D22 G21 O12
    Date: 2018–02
  10. By: Jeremie Bertrand (ISA Lille); Pierluigi Murro (LUMSA University)
    Abstract: Despite its importance to the funding of small enterprises (SMEs), the question of how trade credit is used has not been fully answered. Recently, Uchida et al. (2013) showed that trade creditors can act as relationship lenders. To advance this result, we study the use of trade credit as a substitute for relationship lending credit when firms cannot otherwise obtain such credit. Using a sample of SMEs from the Survey of Italian Manufacturing Firms, we show that when opaque firms seeking relationship credit encounter transactional banks, they retain a greater portion of trade credit in their loans. These firms thus substitute trade credit for their missing relationship credit, because trade creditors are better evaluators of firms than are transactional lenders. The results depend on the size and age of the firm, the nature of the bank, and the size of the firm’s banking pool.
    Keywords: Banks, Lending Technologies, Small Business, Trade Credit
    JEL: G21 L14 L22
    Date: 2018–03
  11. By: Kamil Yilmaz (Koc University)
    Abstract: This paper presents an analysis of the volatility connectedness of major bank stocks in the South East Asia (SEACEN) region between 2004 and 2016. Applying the Diebold-Yilmaz Connectedness Index (DYCI) framework to daily stock return volatilities of major banks in the region, we obtain results that help us uncover valuable information on the region's static and dynamic bank volatility network. The volatility connectedness increased substantially during the US financial crisis (from 2007 to 2009) and during the European sovereign debt and banking crisis in 2011. The recent increase in the total connectedness has resulted from temporary financial shocks on a global scale. Once included in the analysis, the global systemically important banks (GSIBs) from the U.S. and Europe generate substantial volatility connectedness to SEACEN banks. We also identify country clusters in the banking volatility network. Major Indian, Taiwanese and Chinese banks generate volatility connectedness to their counterparts in other countries of the region. Finally, we show that the region's bank volatility network becomes tighter during systemic events; banks from different countries in the region generate volatility connectedness to the others.
    Keywords: Systemic risk, Connectedness, Network, Global Systemically Important Banks, Vector Autoregression, Variance Decomposition, South East Asia.
    JEL: C32 G21
    Date: 2018–03
  12. By: Bukvić, Rajko
    Abstract: The paper analyzes the degree of concentration and competition in Serbian banking sector on the basis of bank financial statements for year 2016. It uses the traditional concentration indicators (CRn and HH indices), as well as the relatively rarely used Linda indices. The concentration degree is calculated based on five variables: total assets, deposits, capital, bank operating income and loans. It was demonstrated that in the case of the relatively large number of banks in Serbia, the existing concentration degree is low, which provides suitable conditions for the development of healthy competition among them.
    Keywords: Concentration, competition, banking sector, Serbia, indices Linda, Herfindahl-Hirschman index, concentration ratio
    JEL: C38 G21 L10
    Date: 2017
  13. By: Aneta Hryckiewicz; Piotr Mielus; Karolina Skorulska; Malgorzata Snarska
    Abstract: The crisis has shown that a drop in liquidity, as well as the shortened maturity of interbank transactions, has caused many problems for banks. We analyze how the introduction of a bank levy on bank assets in Poland has affected the interbank market, as well as money market pricing. Analyzing daily volume and number of interbank transactions, along with daily bank quotes, we document that the bank levy has significantly reduced trading intensity on the market, shortening the maturity of transactions. We also find that it has increased the dispersion of bank quotes for short-term transactions, while at the same time ''killing'' interbank long-term transactions, including the pricing for this market. The regulators should re-think the nature of bank levies in several countries, as they negatively affect the functioning of the interbank market and brings intoquestion the credibility of interbank benchmarks.
    Keywords: C32, G28, E43, C54
    Date: 2018–03
  14. By: Jeon, Bang Nam (Drexel University); Wu, Ji (Southwestern University of Finance and Economics); Guo, Mengmeng (Southwestern University of Finance and Economics); Chen, Minghua (Southwestern University of Finance and Economics)
    Abstract: We investigate the nexus between the market power of banks and their risk-taking, using bank-level data from 35 emerging economies during the period of 2000-2014. Under a Bayesian framework, we employ the semiparametric method, which allows for a nonlinear risk impact of banks' market power. Our results suggest a significant nonlinear relationship between the market power and the risk-taking of banks.
    Keywords: Market power; bank risk-taking; emerging economies
    JEL: D53 G15 G21
    Date: 2018–01–22
  15. By: Linda Schilling (Utrecht University)
    Abstract: We analyze optimal strategic delay of bank resolution ('forbearance') and deposit insurance in a setting where, after bad news on the bank, depositors fear for the uninsured part of their deposit and withdraw while the regulator observes withdrawals and needs to decide when to intervene. Under low insurance coverage the optimal intervention policy is to walk away. Optimal deposit insurance coverage is always interior. Fast intervention cannot minimize public losses and be optimal at the same time. The paper sheds light on the differences between the U.S. and the European Monetary Union in terms of their bank resolution policies.
    Keywords: Bank resolution, suspension of convertibility, mandatory stay, forbear- ance, bank run, deposit insurance, deposit freeze, recovery rates, global games
    JEL: G28 G21 G33
    Date: 2018
  16. By: Nobuyoshi Yamori (Research Institute for Economics and Business Administration (RIEB), Kobe University, Japan)
    Abstract: In June 2017, the Japanese Diet passed “the Act on the Partial Revision of the Small and Medium-sized Enterprise Credit Insurance Act to Promote Improvements and Developments of SME's Business Management” (Credit Guarantee System Reform Act in short) in order to enhance the roles that credit-guarantee system plays in terms of supporting SMEs. In this paper, the author, who was a member of the Small and Medium Enterprise Policy-Making Council's Financial Working Group (the Financial WG), tries to explain what this reform aims.
    Keywords: Credit guarantee, SMEs, Bank, Government support, Japan
    Date: 2018–02

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