nep-ban New Economics Papers
on Banking
Issue of 2018‒04‒09
fourteen papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Business cycles and the balance sheets of the financial and non-financial sectors By Villacorta, Alonso
  2. Macroprudential regulation in the European Union in 1995-2014: introducing a new data set on policy actions of a macroprudential nature By Budnik, Katarzyna; Kleibl, Johannes
  3. Credit Risk Analysis using Machine and Deep learning models By Peter Martey Addo; Dominique Guegan; Bertrand Hassani
  4. Credit supply and productivity growth By Francesco Manaresi; Nicola Pierri
  5. Financial Disruption and State Dependant Credit Policy By Thibaud Cargoet; Jean-Christophe Poutineau
  6. Housing boom-bust cycles and asymmetric macroprudential policy By William Gatt
  7. Interbank Market Turmoils and the Macroeconomy By Kopiec, Pawel
  8. The Digital Transformation in Banking and The Role of FinTechs in the New Financial Intermediation Scenario By Omarini, Anna
  9. Global Banking, Trade, and the International Transmission of the Great Recession By Alexandra Born; Zeno Enders
  10. The Governance Structures of Japanese Credit Associations and Their Objective Functions By Kondo, Kazumine
  11. Currency Union with and without Banking Union By Vincent Bignon; Régis Breton; Mariana Rojas Breu
  12. Payments delay: propagation and punishment By B. Craig; D. Salakhova; M. Saldias
  13. Resolving a Non-Performing Loan crisis: the ongoing case of the Irish mortgage market By McCann, Fergal
  14. The macroeconomics determinants of default of the borrowers: The case of Moroccan bank By Anas Yassine; Abdelmadjid Ibenrissoul

  1. By: Villacorta, Alonso
    Abstract: I propose and estimate a dynamic model of financial intermediation to study the different roles of the condition of banks’ and firms’ balance sheets in real activity. The net worth of firms determines their borrowing capacity both from households and banks. Banks provide risky loans to multiple firms and use their diversified portfolio as collateral to borrow from households. This intermediation process allows additional funds to flow from households to firms. Banks require net worth for intermediation as they are exposed to aggregate risk. The net worth of banks and firms are both state variables. In normal recessions, firm and bank net worth play the same role, so their sum determines the allocation of capital. During financial crises, shocks to bank net worth have an additional effect beyond that in standard financial frictions’ models. This mechanism works through intermediation and affects activity, even if shocks redistribute net worth from banks to firms. I estimate my model and find that the new mechanism accounts for 40% of the fall in output and 80% of the fall in bank net worth during the Great Recession. Finally, the model is consistent with the different dynamics of the share of bank loans in total firm debt and credit spreads during the recessions of 1990, 2001, and 2008. JEL Classification: E44, E32, G01
    Keywords: balance sheet channel, financial crises, financial frictions, financial markets and the macroeconomy
    Date: 2018–02
  2. By: Budnik, Katarzyna; Kleibl, Johannes
    Abstract: This paper introduces a new comprehensive data set on policies of a macroprudential nature in the banking sectors of the 28 member states of the European Union (EU) between 1995 and 2014. The Macroprudential Policies Evaluation Database (MaPPED) offers a detailed overview of the “life-cycle” of policy instruments which are either genuinely macroprudential or are essentially microprudential but likely to have a significant impact on the whole banking system. It tracks events of the introduction, recalibration and termination of eleven categories and 53 subcategories of instruments. MaPPED has been based on a carefully designed questionnaire, which has been completed in cooperation with experts from national central banks and supervisory authorities of all EU member states. This paper describes the design and structure of the new data set and presents the first descriptive analysis of the use of policy measures with a macroprudential nature in the EU over the last two decades. The results indicate that there has been a remarkable variation in the use of policies of a macroprudential nature both across EU countries and over time. Moreover, the analysis provides some tentative evidence of an impact of capital buffers, lending restrictions and caps on maturity mismatches on credit to the non-financial private sector in the EU as well as of the relative ineffectiveness of sectoral risk weights in controlling credit growth. JEL Classification: E50, E60, G28
    Keywords: financial stability, macroprudential instruments, macroprudential policy, policy assessment
    Date: 2018–01
  3. By: Peter Martey Addo (Expert Synapses SNCF Mobilité; LabEx ReFi); Dominique Guegan (University Paris 1 Pantheon Sorbonne; Ca' Foscari Unversity Venice; IPAG Business School; LabEx ReFi); Bertrand Hassani (Capgemini Consulting; 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
    Date: 2018
  4. By: Francesco Manaresi; Nicola Pierri
    Abstract: We study the impact of bank credit supply on firm output and productivity. By exploiting a matched firm-bank database which covers all the credit relationships of Italian corporations over more than a decade, we measure idiosyncratic supply-side shocks to firms' credit availability. We use our data to estimate a production model augmented with financial frictions and show that an expansion in credit supply leads firms to increase both their inputs and their output (value added and revenues) for a given level of inputs. Our estimates imply that a credit crunch will be followed by a productivity slowdown, as experienced by most OECD countries after the Great Recession. Quantitatively, the credit contraction between 2007 and 2009 could account for about a quarter of the observed decline in Italy's total factor productivity growth. The results are robust to an alternative measurement of credit supply shocks that uses the 2007-08 interbank market freeze as a natural experiment to control for assortative matching between borrowers and lenders. Finally, we investigate possible channels: access to credit fosters IT-adoption, innovation, exporting, and the adoption of superior management practices.
    Keywords: credit supply, productivity, export, management, IT adoption
    JEL: D22 D24 G21
    Date: 2018–03
  5. By: Thibaud Cargoet (CREM - Centre de recherche en économie et management - UNICAEN - Université de Caen Normandie - NU - Normandie Université - UR1 - Université de Rennes 1 - CNRS - Centre National de la Recherche Scientifique); Jean-Christophe Poutineau (CREM - Centre de recherche en économie et management - UNICAEN - Université de Caen Normandie - NU - Normandie Université - UR1 - Université de Rennes 1 - CNRS - Centre National de la Recherche Scientifique)
    Abstract: This paper analyses how long credit policy measures should last to restore a normal function-ning of the loan market. We build a DSGE model where financial intermediaries and non financial agents face balance sheet constraints. Our results are two. First, we find that a credit policy has an intertemporal effect as it smoothes the negative shock along a greater number of periods. It dampens the inital negative consequences of financial shocks at the expense of a higherlength of the uncoventional period. Second, accounting for the joint effect of shocks on the length of the starurated period and on the fluctuation of activity in the transitory period back to the steady state situation, we find that the positive effect of this policy requires some qualification. For the benchmark calibration, conducting such a policy affects activity positively. However, for a high value of firm's leverage we find that unconventional monetary policy can be counterproductive. Ignoring credit policy will generate higher short run losses in activity but the transition to the steady state would be quicker, implying lower short run activity losses than those encountered with a credit policy where the transition to the steady state would last longer.
    Keywords: Financial Frictions,Financial Accelerator,DSGE model
    Date: 2018–01
  6. By: William Gatt (Central Bank of Malta)
    Abstract: Macroprudential policy is pre-emptive, aimed at preventing crises. Empirical evidence hints at the existence of asymmetric policy in booms and recessions. This paper uses a New Keynesian model with a financial friction on mortgage borrowing and collateral to show what implications this asymmetry might have on the economy. The main source of fluctuations is a bubble in the housing market, which causes house prices and credit to deviate from their fundamental values, leading to a boom and bust cycle. The main macroprudential tool is the regulatory loan to value (LTV) ratio. The author finds that while the asymmetric policy dampens the boom phase, it introduces more volatility in the economy by exacerbating the correction that follows. The higher the asymmetry in the policy response, the more volatile the economy is relative to one in which policy reacts symmetrically.
    JEL: C61 E32 E44 E61 R21
    Date: 2018
  7. By: Kopiec, Pawel
    Abstract: This paper studies the macroeconomic consequences of interbank market disruptions caused by higher counterparty risk. I propose a novel, dynamic model of banking sector where banks trade liquidity in the frictional OTC market à la Afonso and Lagos (2015) that features counterparty risk. The model is then embedded into an otherwise standard New Keynesian framework to analyze the macroeconomic impact of interbank market turmoils: economy suffers from a prolonged slump and deflationary pressure during such episodes. I use the model to analyze the effectiveness of two policy measures: rise in the supply of central bank reserves and interbank market guarantees in mitigating the adverse effects of those disruptions.
    Keywords: Financial crisis, Interbank market, Policy intervention, OTC market
    JEL: E44 E58 G21
    Date: 2018–03–07
  8. By: Omarini, Anna
    Abstract: One of the main changes in the industry is becoming digitalization which is witnessing a profound transformation to the banking system. Digitalization offers new opportunities for banks to place the customer at the center of the development process. New technologies seem to be and stay in the market to disrupt the retail financial service value chain, as well as introducing new players into the competitive arena. Incumbents and new comers have innovative levers to adopt. The forces shaping these changes have led the industry to reconsider the role of banking and finance, more as an “enabler” than a provider of products and services. The article aims at defining digital transformation in the banking industry, outlining what banks and FinTech companies are both developing in the market, and also pointing out that it is not going to be the technology itself that will be the disruptor of the banking industry, but rather how firm deploys the technology that will cause the disruptio
    Keywords: Digitalization; Digital Transformation; FinTech; Retail Banking; Business Model; Incumbents; Innovation.
    JEL: G20 G21 G23 G29 O30
    Date: 2017–06–09
  9. By: Alexandra Born; Zeno Enders
    Abstract: The global financial crisis of 2007-2009 spread through different channels from its origin in the United States to large parts of the world. In this paper we explore the financial and the trade channel in a unified framework and quantify their relative importance for this transmission. Specifically, we employ a DSGE model of an open economy with an internationally operating banking sector. We investigate the transmission of the crisis via the collapse of export demand and through losses in the value of cross-border asset holdings. Calibrated to German data, the model predicts the trade channel to be twice as important for the transmission of the crisis than the financial channel. In the UK, the latter dominates due to higher foreign-asset holdings, which, at the same time, serve as an automatic stabilizer in case of plummeting foreign demand. The transmission via the financial channel triggers a much longer-lasting recession relative to the trade channel, resulting in larger cumulated output losses and a prolonged crisis particularly in the UK. Stricter enforcement of bank capital requirements would have deepened the initial slump while simultaneously speeding up the recovery. The effects of higher capital requirements depend on the way banks’ balance sheets adjust to this intervention.
    Keywords: financial crisis, international transmission, international business cycles, global banks
    JEL: F44 F41 E32
    Date: 2018
  10. By: Kondo, Kazumine
    Abstract: Although Japanese credit associations are nonprofit cooperative financial institutions, they shoulder the same financial functions as regional banks that are stock companies and they could compete with each other in a regional market. On the other hand, governance structures of credit associations tend to make disciplines be weaker than those of regional banks and their performances might be better than regional banks for these reasons. In the present paper, we empirically investigated whether the objective functions of credit associations are different from those of regional banks with considering the differences of their governance structures. As a result, although significant differences of profitability of these two types of institutions were not detected, it was also demonstrated that credit associations can capture more share of deposits than regional banks and the former are more conservative in risk taking than the latter. From these, there is a possibility that Japanese credit associations have different objective functions from regional banks.
    Keywords: governance structures; objective functions; labor expenses; credit associations; regional banks
    JEL: G21
    Date: 2018–03–19
  11. By: Vincent Bignon (Banque de France - Direction de la Recherche); Régis Breton (Banque de France - Direction de la Recherche); Mariana Rojas Breu (LEDa - Laboratoire d'Economie de Dauphine - Université Paris-Dauphine)
    Abstract: This paper analyzes a two-country model of currency, banks and endogenous default to study whether impediments to credit market integration across jurisdictions impact the desirability of a currency union. We show that when those impediments induce a higher cost for banks to manage cross-border credit compared to domestic credit, welfare may not be maximal under a regime of currency union. But a banking union that would suppress hurdles to banking integration restores the optimality of that currency arrangement. The empirical and policy implications in terms of banking union are discussed.
    Abstract: Cet article propose un modèle avec monnaie externe, banques et défaut endogène sur les emprunts afin d'analyser l'impact du degré d'imperfection du marché du crédit sur la désirabilité -pour les populations- des unions monétaires. Nous montrons que lorsque ces imperfections entraînent un coût plus élevé pour les banques d'octroyer un crédit sur l'étranger plutôt que dans leur juridiction, le bien-être peut être réduit en régime d'union monétaire. Nous montrons également que la mise en place d'une union bancaire qui supprimerait ces barrières à l'intégration des marchés du crédit restaure le résultat habituel d'optimalité des unions. Les implications empiriques de ces résultats pour l'organisation de l'union bancaire sont discutées.
    Keywords: banks,currency union,default,limited commitment,défaut,banques,engagement limité,union monétaire,crédit
    Date: 2018–01–16
  12. By: B. Craig; D. Salakhova; M. Saldias
    Abstract: We use a unique dataset of transactions from the real-time gross settlement system TARGET2 to analyze the behavior of banks with respect to the settlement of interbank claims. We focus on the time that passes between a payment’s introduction to the system and its settlement, the so-called payment delay. Delays represent the means by which some participants could free ride on the liquidity of others. These delays are important in that they can propagate other delays, thus prompting concerns that they could cause system gridlock. This paper characterizes the delays in the TARGET2 and analyzes whether delays in incoming transactions could cause delays in outgoing transactions. We distinguish between the potentially mechanical pass-through of delays and the reaction of one bank to its delaying counterparty, and we propose a set of instruments to tackle endogeneity issues. We find evidence that delays do propagate downstream; however, in most cases the effect is rather limited. As for delaying strategies on a payment-by-payment basis, contrary to the theoretical literature, the data show only very weak evidence. This conclusion opens a venue for research how banks may rather follow persistent liquidity management routines.
    Keywords: Payment delays, endogenous regressors, liquidity, TARGET2.
    JEL: C26 E42 G21
    Date: 2018
  13. By: McCann, Fergal
    Abstract: The Irish banking system has in recent years experienced a large build-up in Non-Performing Loans (NPLs) during the crisis followed by a sharp reduction in the 2013-2017 period. In this article I present a recent history of the ongoing resolution of the mortgage arrears crisis in Ireland. Using a large and close to exhaustive panel data set of Irish mortgages from 2008 to 2016, I present a number of new findings on loan transitions between delinquency states, the importance of legacy effects of the crisis in explaining recent entry to arrears, the role of mortgage modification in the reduction in arrears balances, the extent of borrower-lender engagement and the financial vulnerability that remains in pockets of the Irish mortgage market. JEL Classification: G01, G21
    Keywords: borrower engagement, loan transitions, mortgage modification, mortgages, Non-Performing Loans
    Date: 2018–03
  14. By: Anas Yassine (MSFGR - Laboratoire Management, Systèmes Financiers et Gestion des Risques [Casablanca] - Université Hassan II Casablanca - UH2C (MOROCCO)); Abdelmadjid Ibenrissoul
    Abstract: This article aims to explore an empirical approach to analyze the macroeconomicsdeterminants of default of borrowers. For this purpose, we have measured the impact of the adverse economic conditions on the degradation of the credit portfolio quality. In our paper, we have shed more light on the question of the aggravation of default rate. For this, we have undertaken econometric modeling of the default rate distribution of a Moroccan bank while we inspired from some studies carried out. Our findings demonstrate that the decline in the economic situation has a positive impact on default of borrowers. Hence, the bank also has responsibility for monitoring the adverse economic conditions.
    Abstract: Cet article se propose d'explorer une approche empirique pour détecter les déterminants macroéconomiques de la défaillance des emprunteurs. Ceci, dans l'objectif de mesurer et expliquer l'impact des évolutions défavorables de la conjoncture économique sur la dégradation de la qualité du portefeuille de crédit. Dans notre étude nous avons jeté la lumière sur la problématique de l'aggravation des taux de défaut, en s'inspirant des travaux précurseurs sur la défaillance des emprunteurs. Nos résultats démontrent que les récessions économiques sont au cœur de la problématique de la solvabilité des emprunteurs. De ce fait, les banques doivent surveiller d'une façon active les évolutions des facteurs de risques macroéconomiques, et redéfinir leurs dispositifs de gestion des risques traditionnellement inscrits dans le cadre des mesures microprudentielles.
    Keywords: solvability,Risk factors,solvability 2,solvabilité,taux de défaut,macroéconomique,Facteurs de risque,Key-words: Risk factors,macroeconomic,default rate,credit
    Date: 2017–01–05

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