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on Banking |
| By: | Ari, Anil |
| Abstract: | I propose a dynamic general equilibrium model in which strategic interactions between banks and depositors may lead to endogenous bank fragility and slow recovery from crises. When banks’investment decisions are not contractible, depositors form expectations about bank risk-taking and demand a return on deposits according to their risk. This creates strategic complementarities and possibly multiple equilibria: in response to an increase in funding costs, banks may optimally choose to pursue risky portfolios that undermine their solvency prospects. In a bad equilibrium, high funding costs hinder the accumulation of bank net worth, leading to a persistent drop in investment and output. I bring the model to bear on the European sovereign debt crisis, in the course of which under-capitalized banks in default-risky countries experienced an increase in funding costs and raised their holdings of domestic government debt. The model is quanti…ed using Portuguese data and accounts for macroeconomic dynamics in Portugal in 20102016. Policy interventions face a trade-o¤ between alleviating banks’funding conditions and strengthening risk-taking incentives. Liquidity provision to banks may eliminate the good equilibrium when not targeted. Targeted interventions have the capacity to eliminate adverse equilibria. JEL Classification: E44, F30, F34, G01, G21, G28, H63 |
| Keywords: | banking crises, financial constraints, risk-taking, sovereign debt crises |
| Date: | 2018–04 |
| URL: | http://d.repec.org/n?u=RePEc:srk:srkwps:201873&r=ban |
| By: | Mittal, Amit; Garg, Ajay Kumar |
| Abstract: | This study provides deeper insight into the linkages between Bank M&A and M&A literature and test the hypotheses that Acquirers gain significantly from a M&A strategy. Analyzing the Banking industry as an example of Horizontal mergers, the study aims to validate that M&A is a value creating strategy. A market model based event study provides robust results. We include private and public targets in the period 2006-2015. In a study of 24 M&A transactions in Indian Banks during the period 2006 -2015, we find convincing evidence for both acquirer and target gains. The t-statistic for Abnormal Returns is significant and Positive Abnormal Returns are shown. Size and profitability measures are not significant in this sample. Acquirers earning positive returns engage in multiple acquisitions and contribute significantly to positive abnormal returns in the sample. Acquirer returns depend on both Target and Acquirer Financial characteristics including Target Loan Loss provisions, Acquirer Tier I Capital, Acquirer proportion of Fee and Interest Income. The key limitation of the study is the unavailability of a larger sample of data. |
| Keywords: | Banking, Mergers & Acquisitions, Markets for Corporate Control, Horizontal mergers, Acquirer returns, India |
| JEL: | G14 G21 G34 |
| Date: | 2017–04 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:85354&r=ban |
| By: | Huber, Kilian |
| Abstract: | Lending cuts by banks directly affect the firms borrowing from them, but also indirectly depress economic activity in the regions in which they operate. This paper moves beyond firm-level studies by estimating the effects of an exogenous lending cut by a large German bank on firms and counties. I construct an instrument for regional exposure to the lending cut based on a historic, postwar breakup of the bank. I present evidence that the lending cut affected firms independently of their banking relationships, through lower aggregate demand and agglomeration spillovers in counties exposed to the lending cut. Output and employment remained persistently low even after bank lending had normalized. Innovation and productivity fell, consistent with the persistent effects. |
| JEL: | E32 E44 G21 G32 R11 R23 |
| Date: | 2018–03–01 |
| URL: | http://d.repec.org/n?u=RePEc:ehl:lserod:87410&r=ban |
| By: | Luisa Corrado (DEF & CEIS,University of Rome "Tor Vergata"); Tobias Schuler (Ifo Institute) |
| Abstract: | As a result of the global financial crisis countercyclical capital requirements have been discussed to prevent financial bubbles generated in the banking sector and to mitigate the adverse effects of financial repression after a bubble burst. This paper analyses the effects of an endogenous capital requirement based on the credit-to-GDP gap along with other policy instruments. We develop a macroeconomic framework which endogenizes market expectations on asset values and allows for interbank transactions. We then show how a bubble in the banking sector relaxes financing constraints. In policy experiments we find that an endogenous capital requirement can effectively reduce the impact of a financial bubble. We show that central bank intervention ("leaning against the wind") instead has only a minor effect. |
| Keywords: | Financial bubbles, credit-to-GDP gap, endogenous capital requirement, stabilization policies |
| JEL: | E44 E52 |
| Date: | 2018–04–06 |
| URL: | http://d.repec.org/n?u=RePEc:rtv:ceisrp:427&r=ban |
| By: | Trust R. Mpofu (School of Economics, University of Cape Town); Eftychia Nikolaidou (School of Economics, University of Cape Town) |
| Abstract: | This paper investigates the macroeconomic determinants of credit risk in the banking system of 22 Sub-Saharan African economies. We measure credit risk as the ratio of non-performing loans to total gross loans (NPLs) and employ a dynamic panel data approach over the period 2000-2016. Using a variety of specifications, the results show that an increase in real GDP growth rate has a statistically and economically significant reducing effect on the ratio of non-performing loans to total gross loans. Furthermore, inflation rate, domestic credit to private sector by banks as a percent of GDP, trade openness, VIX as a proxy of global volatility, and the 2008/2009 global financial crisis, all have positive and significant impact on NPLs. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:ctn:dpaper:2018-04&r=ban |
| By: | Carmassi, Jacopo; Dobkowitz, Sonja; Evrard, Johanne; Parisi, Laura; Silva, André; Wedow, Michael |
| Abstract: | On 24 November 2015, the European Commission published a proposal to establish a European Deposit Insurance Scheme (EDIS). The proposal provides for the creation of a Deposit Insurance Fund (DIF) with a target size of 0.8% of covered deposits in the euro area and the progressive mutualisation of its resources until a fully-fledged scheme is introduced by 2024. This paper investigates the potential impact and appropriateness of several features of EDIS in the steady state. The main findings are the following: first, a fully-funded DIF would be sufficient to cover payouts even in a severe banking crisis. Second, risk-based contributions can and should internalise specificities of banks and banking systems. This would tackle moral hazard and facilitate moving forward with risk sharing measures towards the completion of the Banking Union in parallel with risk reduction measures; this approach would also be preferable to lowering the target level of the DIF to take into account banking system specificities. Third, smaller and larger banks would not excessively contribute to EDIS relative to the amount of covered deposits in their balance sheet. Fourth, there would be no unwarranted systematic cross-subsidisation within EDIS in the sense of some banking systems systematically contributing less than they would benefit from the DIF. This result holds also when country-specific shocks are simulated. Fifth, under a mixed deposit insurance scheme composed of national deposit insurance funds bearing the first burden and a European deposit insurance fund intervening only afterwards, cross-subsidisation would increase relative to a fully-fledged EDIS. The key drivers behind these results are: i) a significant risk-reduction in the banking system and increase in banks' loss-absorbing capacity in the aftermath of the global financial crisis; ii) a super priority for covered deposits, further contributing to protect EDIS; iii) an appropriate design of risk-based contributions, benchmarked at the euro area level, following a "polluter-pays" approach. JEL Classification: G21, G28 |
| Keywords: | cross-subsidisation, European Deposit Insurance Scheme (EDIS), risk-based contributions |
| Date: | 2018–04 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbops:2018208&r=ban |
| By: | Glenn Boyle (University of Canterbury); Roger Stover; Amrit Tiwana; Oleksandr Zhylyevskyy |
| Abstract: | Using a conjoint analysis of 417 finance professionals from six countries, we find no evidence that higher interest rates cause knowledgeable depositors to moderate their withdrawals during a banking crisis. In fact, intended withdrawals are positively correlated with expected interest rate changes. After accounting for endogeneity, this relationship disappears, consistent with the attractiveness of higher returns being offset by increased doubts about bank solvency. The withdrawal decisions of finance professionals are also independent of their personal characteristics, but they appear to place considerable store on deposit insurance generosity and the presence of a formal insurance fund. |
| Keywords: | Interest rates; deposit withdrawals; banking crisis; conjoint analysis |
| JEL: | G21 G28 |
| Date: | 2018–04–01 |
| URL: | http://d.repec.org/n?u=RePEc:cbt:econwp:18/07&r=ban |
| By: | Trofimov, Ivan D.; Md. Aris, Nazaria; Ying Ying, Jovena Kho |
| Abstract: | This study aims to examine the relationship between non-performing loans (NPLs) and commercial banks' performance in Malaysia, alongside other factors. It considers the effect of NPLs, cost efficiency and bank size on commercial banks' profitability by using panel data regression (Pooled OLS model), covering the period of 2010-2015. The findings of the study show that NPLs and cost efficiency have a significant negative relationship with commercial banks' performances in Malaysia. On the other hand, bank size is found to have a significant positive relation with commercial banks' performances in Malaysia. Several policy and strategic implications are outlined: the continuing need to manage credit risk, reduction of non-core lending activities, improvement of systems transparency, cost control, and more lenient competition and anti-trust policies. |
| Keywords: | Profitability, non-performing loans, banks |
| JEL: | C23 G21 G28 |
| Date: | 2018–03–16 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:85598&r=ban |
| By: | Jokubas Markevicius (Bank of Lithuania) |
| Abstract: | In the aftermath of the financial crisis, Lithuania‘s banking sector faced structural changes related to higher concentration, decreased interconnectedness and lower risk appetite. At the same time banks were able to maintain strong profitability levels measured by the EU standards largely due to increased efficiency, very low funding costs, reduced impairments and stable commission income. This paper describes the banking sector of Lithuania in the post-crisis environment and argues that the post-crisis structural changes in general had positive effects on the banking sector’s resilience and in the first instance on profitability. In particular, high concentration of the sector was likely to help banks achieve higher efficiency while reduced risk tolerance had direct positive effects on lower impairments as well as indirect effects on lower funding costs. On the other hand, good profitability of the sector has been largely dependent on two largest market participants while smaller banks and branches had less prosperous profitability prospects. In the environment where large banks appear to have particularly good cost management practises, the possibilities for entry of new market players of significant size are plausible only if the newcomers are able to reach the prevailing level of high efficiency. However, without a sizeable market share this might be difficult to achieve. |
| Date: | 2018–04–06 |
| URL: | http://d.repec.org/n?u=RePEc:lie:opaper:21&r=ban |
| By: | Adam Elbourne (CPB Netherlands Bureau for Economic Policy Analysis); Kan Ji (CPB Netherlands Bureau for Economic Policy Analysis); Sem Duijndam (CPB Netherlands Bureau for Economic Policy Analysis) |
| Abstract: | How effective are unconventional monetary policies? Through which mechanisms do they work? Central banks have been conducting monetary policy through unconventional means such as expanding their balance sheets or forward guidance because the conventional instrument of monetary policy, the short-term policy rate, has been at or close to the zero lower bound since shortly after the fall of Lehmann Brothers. These unconventional monetary policies are new and bring with them many questions, which were addressed in the CPB policy brief ‘Onderweg naar normaal monetair beleid’ [CPB policy brief 2017/07, 8 June 2017]. Understanding how and why unconventional monetary policy works is a crucial first step for answering subsequent questions, such as the likely effects of the withdrawal of unconventional monetary policy, or about how domestic policy makers can best respond. This discussion paper contains a detailed presentation of the new scientific evidence we reported in the policy brief, and adds to the relatively scarce literature in this field We estimate the effects of unconventional monetary policy shocks on output and inflation in the euro area using data from 2009 to 2016, which covers the period of all of the major unconventional monetary policies that the ECB has used. We employ a two stage estimation strategy: first, we identify unconventional monetary policy shocks in a dedicated euro area level structural vector autoregression (SVAR) model. Subsequently we use these unconventional monetary policy shocks in country level models. By estimating the effects of unconventional monetary policy shocks in the individual countries of the euro area, we aim to shed some light on the most important transmission mechanisms through which unconventional monetary policy works. We find weak evidence that expansionary unconventional monetary policy shocks increase output growth, but the effects on inflation at the aggregate euro area level are economically insignificant. At the individual country level we find a range of responses across the countries in our sample, and those differences in the magnitudes of output responses are consistent with some of the transmission channels that have been proposed for how unconventional monetary policy works. Interestingly, though, we find that healthier banking systems at the start of our sample and lower government debts are associated with larger peak output responses. This is the opposite of what the bank lending channel predicts, which is one of the most important proposed channels. We are not the only authors to have found this, for example Van Dijk and Dubovik (2018) also find no evidence of the bank lending channel when they focus on the effect of the announcement of the ECB’s Asset Purchase Programme in January 2015 on lending rates. |
| JEL: | C32 E52 |
| Date: | 2018–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpb:discus:371&r=ban |
| By: | Eliud Moyi (School of Economics, University of Cape Town); Eftychia Nikolaidou (School of Economics, University of Cape Town) |
| Abstract: | Credit risk in African microfinance institutions seems to be rising, and the financial health of these institutions is becoming an issue of concern. Given this trend, this study seeks to unravel the factors that explain variations in credit risk in sub-Sahara African MFIsand, if such factors exist, to establish whether they have the same effects on credit risk in other developing regions. The study approach accommodates dynamic panel bias by applying system generalised method of moments estimators. Results suggest that the main predictors of credit risk in sub-Saharan Africa are lagged credit risk, loan growth, provision for loan impairment, GDP per capita growth and ease of getting credit. In addition, the study identifies threshold effects in the relationship between credit risk and loan growth. Credit risk falls with loan growth until a trough at 36.8% when this relationship is reversed.Further results from regional comparisons suggest that credit risk is most persistent in East Asia and the Pacific but least persistent in Sub-Saharan Africa. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:ctn:dpaper:2018-09&r=ban |
| By: | Qingqing Cao (Michigan State University); Raoul Minetti (Michigan State University); Maria Pia Olivero (Drexel University and Haverford College) |
| Abstract: | We study the role of multinational banks in the propagation of business cycles in host countries. In our economy, multinational banks can transfer liquidity across borders through internal capital markets. However, their scarce knowledge of local firms’ collateral hinders their allocation of liquidity to firms. We find that, through the interaction between the “liquidity origination” advantage and the “liquidity allocation” disadvantage, multinational banks can act as a stabilizer in the immediate aftermath of domestic liquidity shocks but be a drag on the subsequent recovery. Structural and cyclical policies can ameliorate the trade-off induced by the presence of multinational banks |
| Keywords: | Multinational Banks; Macroeconomic Stability; Business Cycle |
| JEL: | E44 |
| Date: | 2018–04 |
| URL: | http://d.repec.org/n?u=RePEc:lsa:wpaper:wpc27&r=ban |