nep-ban New Economics Papers
on Banking
Issue of 2018‒04‒16
fourteen papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Two Big Distortions: Bank Incentives for Debt Financing By Groenewegen, Jesse; Wierts, Peter
  2. The Roles of Alternative Data and Machine Learning in Fintech Lending: Evidence from the LendingClub Consumer Platform By Jagtiani, Julapa; Lemieux, Catharine
  3. Credit supply and productivity growth By Francesco Manaresi; Nicola Pierri
  4. Does Scale Matter in Community Bank Performance? Evidence Obtained by Applying Several New Measures of Performance By Hughes, Joseph P.; Jagtiani, Julapa; Mester, Loretta J.; Moon, Choon-Geol
  5. Loan supply and bank capital: A micro-macro linkage By Kick, Thomas; Kreiser, Swetlana; Merkl, Christian
  6. Italian banks and market-based corporate financing By Giorgio Albareto; Giuseppe Marinelli
  7. Credit Misallocation During the European Financial Crisis By Fabiano Schivardi; Enrico Sette; Guido Tabellini
  8. Do Fintech Lenders Penetrate Areas That Are Underserved by Traditional Banks? By Jagtiani, Julapa; Lemieux, Catharine
  9. Bank credit and business financing By Morales Arenas, Diana
  10. Leverage—A Broader View By Manmohan Singh; Zohair Alam
  11. On Fairness of Systemic Risk Measures By Francesca Biagini; Jean-Pierre Fouque; Marco Frittelli; Thilo Meyer-Brandis
  12. Credit Spread, Financial Market and Real Activities under Financial Instability: Empirical Evidence with MS-SBVAR By Satoshi Tezuka; Yoichi Matsubayashi
  13. Microfinance development in Armenia: Sectoral characteristics and problems By Knar Khachatryan; Emma Avetisyan
  14. Early Observations on Improving the Effectiveness of Post-Crisis Regulation : a speech at the American Bar Association Banking Law Committee Annual Meeting, Washington, D.C., January 19, 2018. By Quarles, Randal K.

  1. By: Groenewegen, Jesse; Wierts, Peter
    Abstract: Systemically important banks are subject to at least two departures from the neutrality of debt versus equity financing: the tax deductibility of interest payments and implicit funding subsidies. This paper fills a gap in the literature by comparing their mechanism and interaction within a common analytical framework. Findings indicate that both the tax shield and implicit funding subsidy remain large, in the order of up to 1 percent of GDP, despite decreases in recent years. But the underlying mechanisms differ. The tax shield incentivises debt financing as it reduces tax payments to the government. The implicit funding subsidy incentivises debt financing as it lowers private bankruptcy costs. This funding subsidy is passed on to other bank stakeholders. It therefore provides incentives for increases in balance sheet size and risk taking. This, in turn, increases the value of the tax shield. Overall, these results help to explain why systemically important banks are highly leveraged. JEL Classification: G21, G32, H25
    Keywords: debt, leverage, subsidies, taxation
    Date: 2017–08
  2. By: Jagtiani, Julapa (Federal Reserve Bank of Philadelphia); Lemieux, Catharine (Federal Reserve Bank of Chicago)
    Abstract: Supersedes Working Paper 17-17. Fintech has been playing an increasing role in shaping financial and banking landscapes. There have been concerns about the use of alternative data sources by fintech lenders and the impact on financial inclusion. We compare loans made by a large fintech lender and similar loans that were originated through traditional banking channels. Specifically, we use account-level data from LendingClub and Y-14M data reported by bank holding companies with total assets of $50 billion or more. We find a high correlation with interest rate spreads, LendingClub rating grades, and loan performance. Interestingly, the correlations between the rating grades and FICO scores have declined from about 80 percent (for loans that were originated in 2007) to only about 35 percent for recent vintages (originated in 2014–2015), indicating that nontraditional alternative data have been increasingly used by fintech lenders. Furthermore, we find that the rating grades (assigned based on alternative data) perform well in predicting loan performance over the two years after origination. The use of alternative data has allowed some borrowers who would have been classified as subprime by traditional criteria to be slotted into “better” loan grades, which allowed them to get lower priced credit. In addition, for the same risk of default, consumers pay smaller spreads on loans from LendingClub than from credit card borrowing.
    Keywords: Fintech; LendingClub; Marketplace Lending; Alternative Data; Shadow Banking; P2P Lending; Peer-to-peer Lending
    JEL: G18 G21 G28 L21
    Date: 2018–04–05
  3. By: Francesco Manaresi (Bank of Italy); Nicola Pierri (Stanford University)
    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
  4. By: Hughes, Joseph P. (Rutgers University); Jagtiani, Julapa (Federal Reserve Bank of Philadelphia); Mester, Loretta J. (Federal Reserve Bank of Cleveland); Moon, Choon-Geol (Hanyang University)
    Abstract: We consider how size matters for banks in three size groups: banks with assets of less than $1 billion (small community banks), banks with assets between $1 billion and $10 billion (large community banks), and banks with assets between $10 billion and $50 billion (midsize banks). Community banks have potential advantages in relationship lending compared with large banks. However, increases in regulatory compliance and technological burdens may have disproportionately increased community banks’ costs, raising concerns about small businesses’ access to credit. Our evidence suggests that (1) the average costs related to regulatory compliance and technology decrease with size; (2) while small community banks exhibit relatively more valuable investment opportunities, larger community banks and midsize banks exploit theirs more efficiently and achieve better financial performance; (3) unlike small community banks, large community banks have financial incentives to increase lending to small businesses; and (4) for business lending and commercial real estate lending, large community banks and midsize banks assume higher inherent credit risk and exhibit more efficient lending. Thus, concern that small business lending would be adversely affected if small community banks find it beneficial to increase their scale is not supported by our results.
    Keywords: community banking; scale; financial performance; small business lending
    JEL: G21 L25
    Date: 2018–03–13
  5. By: Kick, Thomas; Kreiser, Swetlana; Merkl, Christian
    Abstract: In the presence of financial frictions, banks' capital position may constrain their ability to provide loans. The banking sector may thus have important feedback effects on the macroeconomy. To shed new light on this issue, we combine two approaches. First, we use microeconomic balance sheet data from Germany and estimate banks' loan supply response to capital changes. Second, we modify the model of Gertler and Karadi (2011) such that it can be calibrated to the estimated partial equilibrium elasticity of bank loan supply with respect to bank capital. Although the targeted elasticity is remarkably different from the one in the baseline model, banks continue to be an important originator and amplifier of macroeconomic shocks.Thus, combining microeconometric results with macroeconomic modeling provides evidence on the effects of the banking sector on the macroeconomy.
    Keywords: DSGE,bank capital,loan supply,financial frictions
    Date: 2018
  6. By: Giorgio Albareto (Banca d’Italia); Giuseppe Marinelli (Banca d’Italia)
    Abstract: The recent financial crisis has induced firms to turn increasingly to financing sources other than bank credit, and banks to boost their income from non-lending services. This paper provides some evidence concerning possibility and convenience for Italian banks to expand the supply of financial services to firms by examining the placement market for Italian corporate securities and its relationship with the credit market in the period 2000-2016. The paper shows that when firms entered the stock and bond markets, bank credit was partially crowded-out and interest rates dropped for both first-time issuers and risky firms. However, when banks also played a major role both in placing corporate issues and in financing the issuers, lending relationships did not weaken.
    Keywords: stock and bond issues, securities placement, banks’ profitability, corporate financing
    JEL: G21 G24 G30 G32
    Date: 2018–03
  7. By: Fabiano Schivardi (Università LUISS "Guido Carli"); Enrico Sette (Banca d'Italia); Guido Tabellini (Università Bocconi)
    Abstract: Do banks with low capital extend excessive credit to weak firms, and does this matter for aggregate eciency? Using a unique data set that covers almost all bank-firm relationships in Italy in the period 2008-2013, we find that, during the Eurozone financial crisis: (i) Under-capitalized banks cut credit to healthy firms (but not to zombie firms) and are more likely to prolong a credit relationship with a zombie firm, compared to stronger banks. (ii) In areas-sectors with more low-capital banks, zombie firms are more likely to survive and non-zombies are more likely to go bankrupt; (iii) Nevertheless, bank under-capitalization does not hurt the growth rate of healthy firms, while it allows zombie firms to grow faster. This goes against previous in uential findings that, we argue, face a serious identification problem. Thus, while banks with low capital can be an important source of aggregate ineffciency in the long run, their contribution to the severity of the great recession via capital misallocation was modest.
    Keywords: Bank capitalization, zombie lending, capital misallocation
    JEL: D23 E24 G21
    Date: 2018
  8. By: Jagtiani, Julapa (Federal Reserve Bank of Philadelphia); Lemieux, Catharine (Federal Reserve Bank of Chicago)
    Abstract: Supersedes Working Paper 17-17 Fintech has been playing an increasing role in shaping financial and banking landscapes. In this paper, we use account-level data from LendingClub and Y-14M data reported by U.S. banks with assets over $50 billion to examine whether the fintech lending platform could expand credit access to consumers. We find that LendingClub’s consumer lending activities have penetrated areas that may be underserved by traditional banks, such as in highly concentrated markets and in areas that have fewer bank branches per capita. We also find that the portion of LendingClub loans increases in areas where the local economy is not performing well.
    Keywords: fintech; LendingClub; marketplace lending; banking competition; shadow banking; peer-to-peer lending
    JEL: G18 G21 G28 L21
    Date: 2018–03–23
  9. By: Morales Arenas, Diana (Tilburg University, School of Economics and Management)
    Abstract: This dissertation consists of three essays on empirical banking. They explore the bank lending granted to businesses. Chapter 1 explores the effect of less stringent collateral requirements on small firms’ employment growth. Not having to pledge collateral seems to have an effect on the growth strategy of very small firms leading to a more rapid increase of their workforce. Chapter 2 analyzes the access to long-term credit by firms following takeovers of many domestic banks by foreign banks. Overall, our findings suggest that a wholesale takeover of domestic banks by foreign banks has a widely-shared positive impact on loan rate, in the immediate post-takeover period, and on the loan amount, spread over time. Chapter 3 studies the impact of banking sector reforms on bank lending and trade credit among medium and large firms. A much stronger regulation, either loosening or tightening, seems to spur a bank lending complement, trade credit, among medium and large firms.
    Date: 2018
  10. By: Manmohan Singh; Zohair Alam
    Abstract: Traditional measures of leverage in the financial system tend to reflect bank balance sheet data. The paper argues that these traditional, bank-centric measures should be augmented by considering pledged collateral in the financial system since pledged collateral provides a measure of an important part of nonbank funding to banks. From a policy perspective, the paper suggests that a broader view on leverage will enhance our understanding of global systemic risk, and complement the theoretical work in this field by providing a link from micro-level leverage data to macro aggregates such as credit to the economy.
    Date: 2018–03–19
  11. By: Francesca Biagini; Jean-Pierre Fouque; Marco Frittelli; Thilo Meyer-Brandis
    Abstract: In our previous paper \cite{BFFMB}, we have introduced a general class of systemic risk measures that allow random allocations to individual banks before aggregation of their risks. In the present paper, we address the question of fairness of these allocations and we propose a fair allocation of the total risk to individual banks. We show that the dual problem of the minimization problem which identify the systemic risk measure, provides a valuation of the random allocations which is fair both from the point of view of the society/regulator and from the individual financial institutions. The case with exponential utilities which allows for explicit computation is treated in details.
    Date: 2018–03
  12. By: Satoshi Tezuka (Graduate School of Economics, Kobe University); Yoichi Matsubayashi (Graduate School of Economics, Kobe University)
    Abstract: The purpose of the paper is to show how widening credit spreads in "unstable periods" influence the primary markets, the lending markets, and production activities, in comparison with stable periods. The MS-SBVAR identifies the 2008 global financial crisis and the 2011 great East Japan earthquake as unstable periods. During unstable periods, negative shocks influence industrial activities and bond issuance, while outstanding loans are affected by positive shocks, which results from the banks in Japan remaining their financial health. In addition, marginal research is conducted, using a "modified credit spread," which eases the excess impact of the great East Japan earthquake on credit spreads. It is confirmed that the results are constant, although the regime of the disturbance terms corresponds to other events.
    Date: 2018–03
  13. By: Knar Khachatryan (GREDEG - Groupe de Recherche en Droit, Economie et Gestion - UNS - Université Nice Sophia Antipolis - UCA - Université Côte d'Azur - CNRS - Centre National de la Recherche Scientifique - UCA - Université Côte d'Azur); Emma Avetisyan (Audencia Business School)
    Abstract: The heavy-handed regulation enforced a commercialization process and as a result pushed microfinance institutions towards a commercial logic. This commercial shift, in its turn, diminished the importance of the social component.
    Date: 2017–11
  14. By: Quarles, Randal K. (Board of Governors of the Federal Reserve System (U.S.))
    Date: 2018–04–04

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