nep-ban New Economics Papers
on Banking
Issue of 2018‒04‒30
thirteen papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. When Japanese Banks Become Pure Creditors: The effects of declining shareholding by banks on bank lending and firms’risk-taking By Ono, Arito; Suzuki, Katsushi; Uesugi, Iichiro
  2. The Impact of the Dodd-Frank Act on Small Business By Michael D. Bordo; John V. Duca
  3. The Role of Technology in Mortgage Lending By Andreas Fuster; Matthew Plosser; Philipp Schnabl; James Vickery
  4. Bilateral netting and systemic liquidity shortages in banking networks By EDOARDO GAFFEO; Lucio Gobbi; Massimo Molinari
  5. The Effect of Retail Loans on Bank Profitability A Comparative Empirical Analysis By Dinc, Yusuf
  6. Countercyclical capital regulation in a small open economy DSGE model By Lozej, Matija; Onorante, Luca; Rannenberg, Ansgar
  7. Business Training and Loan Repayment: Theory and Evidence from Microcredit in France By Renaud Bourlès; Anastasia Cozarenco; Dominique Henriet; Xavier Joutard
  8. An Internally Consistent Approach to the Estimation of Market Power and Cost Efficiency with an Application to U.S. Banking By Tsionas, Mike; Malikov, Emir; Kumbhakar, Subal C.
  9. Accounting Noise and the Pricing of Cocos By Derksen, Mike; Spreij, Peter; van Wijnbergen, Sweder
  10. Bank lending standards over the cycle: the role of firms’ productivity and credit risk By Gabriel Jiménez; Enrique Moral-Benito; Raquel Vegas
  11. Capital and Funding By Claudio Albanese; Simone Caenazzo; Stéphane Crépey
  12. Counterparty risk and funding: immersion and beyond By Stéphane Crépey; Shiqi Song
  13. Private Information, Institutional Distance, and the Failure of Cross-Border Acquisitions: Evidence from the Banking Sector in Central and Eastern Europe By Bhaumik, Sumon K.; Owolabi, Oluwarotimi; Pal, Sarmistha

  1. By: Ono, Arito; Suzuki, Katsushi; Uesugi, Iichiro
    Abstract: Utilizing the regulatory change relating to banks' shareholding in Japan as an instrument, this study examines the causal effects of declining shareholding by banks on bank lending and firms’ risk-taking. Banks may hold equity claims over client firms for either of the following two reasons: (i) gaining a competitive advantage by exploiting complementarity between shareholding and lending activities, and (ii) mitigating shareholder–creditor conflict. Exogenous reduction in a bank’s shareholding would then impair the competitiveness of the bank’s lending activities and aggravate the risk-taking behavior of client firms. Using a firm–bank matched dataset for Japan’s listed firms during the period 2001–2006, we empirically test these two hypotheses and obtain the following findings. First, after a bank’s removal from the list of major shareholders of a client firm, the bank’s share of the firm’s loans decreases. Second, volatility of a firm’s return on assets increases after the top shareholding bank is removed from the list of the firm’s major shareholders. Third, the negative impact of a bank’s removal from the list of major shareholders on bank lending mainly applies to non-main banks, while the positive impact of the top shareholding bank’s removal from the list of major shareholders on firms’ risk-taking mainly applies to main banks.
    Keywords: Bank shareholding, cross-selling, conflict of interest
    JEL: G21 G32 G34
    Date: 2018–03
  2. By: Michael D. Bordo; John V. Duca
    Abstract: There are concerns that the Dodd-Frank Act (DFA) has impeded small business lending. By increasing the fixed regulatory compliance requirements needed to make business loans and operate a bank, the DFA disproportionately reduced the incentives for all banks to make very modest loans and reduced the viability of small banks, whose small-business share of C&I loans is generally much higher than that of larger banks. Despite an economic recovery, the small loan share of C&I loans at large banks and banks with $300 or more million in assets has fallen by 9 percentage points since the DFA was passed in 2010, with the magnitude of the decline twice as large at small banks. Controlling for cyclical effects and bank size, we find that these declines in the small loan share of C&I loans are almost all statistically attributed to the change in regulatory regime. Examining Federal Reserve survey data, we find evidence that the DFA prompted a relative tightening of bank credit standards on C&I loans to small versus large firms, consistent with the DFA inducing a decline in small business lending through loan supply effects. We also empirically model the pace of business formation, finding that it had downshifted around the time when the DFA and the Sarbanes-Oxley Act were announced. Timing patterns suggest that business formation has more recently ticked higher, coinciding with efforts to provide regulatory relief to smaller banks via modifying rules implementing the DFA. The upturn contrasts with the impact of the Sarbanes-Oxley Act, which appears to persistently restrain business formation.
    JEL: E40 E50 G21
    Date: 2018–04
  3. By: Andreas Fuster; Matthew Plosser; Philipp Schnabl; James Vickery
    Abstract: Technology-based ("FinTech") lenders increased their market share of U.S. mortgage lending from 2% to 8% from 2010 to 2016. Using market-wide, loan-level data on U.S. mortgage applications and originations, we show that FinTech lenders process mortgage applications about 20% faster than other lenders, even when controlling for detailed loan, borrower, and geographic observables. Faster processing does not come at the cost of higher defaults. FinTech lenders adjust supply more elastically than other lenders in response to exogenous mortgage demand shocks, thereby alleviating capacity constraints associated with traditional mortgage lending. In areas with more FinTech lending, borrowers refinance more, especially when it is in their interest to do so. We find no evidence that FinTech lenders target marginal borrowers. Our results suggest that technological innovation has improved the efficiency of financial intermediation in the U.S. mortgage market.
    JEL: G21 G23
    Date: 2018–04
  4. By: EDOARDO GAFFEO; Lucio Gobbi; Massimo Molinari
    Abstract: The cross holding of interbank deposits represents an optimal ex-ante coinsurance arrangement whenever the uncertainty concerning banks’ liquidity needs is idiosyncratic and imperfectly correlated. When a shock to aggregate liquidity demand occurs, however, such an arrangement could be detrimental – depending on the topological structure of interlinkages - as financial exposures become a means to spread risk. If the ex-post facto is an excess demand for liquidity, therefore, regulators could severe potential channels of contagion by forcing banks to net their mutual debt obligations. Starting from these premises we employ simulation techniques with simple interbank structures to obtain two results. First, a state-contingent mandatory policy to bilaterally net mutual interbank exposures comes with a trade-off between the benefits of thwarting the channels of contagion and the harms of a greater concentration of the remaining netted expositions. Second, the balance between the two prongs of the trade-off depends on the metric used by regulators to define financial stability and the topological structure characterizing the interbank market.
    Keywords: Interbank markets; Bilateral netting; Systemic liquidity risk
    JEL: C63 D85 G21
    Date: 2018
  5. By: Dinc, Yusuf
    Abstract: Retail loans became an important instrument of banking during 1960s. The effect of retail loans, in which mortgage and consumer loans have a great share, in the profitability of banks has not been analyzed in detail so far. The main items of retail loans, like mortgage and consumer loans, contribute greatly to the risk management of banks with their characteristics like having regular cash flow in banks. Due to the structure of the guarantee and mortgage loans, which provides low risk weight, it is important to determine the capital needs of banks. However, due to relatively long maturity structure, mortgage loans also feed the maturity mismatch risk, which is the basic problem of banking system. Such loans, with which low costs are provided in favor of the clients, play a considerable role in the profitability of banks. Consumer loans, on the other hand, are provided to the clients in shorter maturity periods and with costs that are more in favor of banks. In the scope of this study, the effects of retail loans on conventional banks and participation banks, which are active in Turkey, have been investigated for mortgage and consumer loans. The findings of the study show that retail loan types have strong negative effects on Net Interest Margin (NIM), which has been selected as the profitability indicator for conventional banks in the scope of the study. For Participation Banks, on the other hand, unlike conventional banks, retail loan types have stronger and more positive influences on Net Profit Share Margin (NPSM). The findings of the present study are important for further studies that will be conducted on retail banking and for comparative studies on performance assessment.
    Keywords: Retail Loans, Profitability, Islamic Banking, Comparison, Participation Banking
    JEL: G21
    Date: 2017–08–05
  6. By: Lozej, Matija; Onorante, Luca; Rannenberg, Ansgar
    Abstract: We examine, conditional on structural shocks, the macroeconomic performance of different countercyclical capital buffer (CCyB) rules in small open economy estimated medium scale DSGE. We find that rules based on the credit gap create a trade-off between the stabilization of fluctuations originating in the housing market and fluctuations caused by foreign demand shocks. The trade-off disappears if the regulator targets house prices instead. As a result, the optimal simple CCyB rule depends only on the house price but not the credit gap. Moreover, the optimal simple rule leads to significant welfare gains compared to the no CCyB case. JEL Classification: F41, G21, G28, E32, E44
    Keywords: bank capital, boom-and-bust, countercyclical capital regulation, housing bubbles
    Date: 2018–04
  7. By: Renaud Bourlès (Aix-Marseille Univ., CNRS, EHESS, Centrale Marseille, AMSE); Anastasia Cozarenco (Montpellier Business School and CERMi); Dominique Henriet (Aix-Marseille Univ., CNRS, EHESS, Centrale Marseille, AMSE); Xavier Joutard (Aix-Marseille University, CNRS, LEST and OFCE)
    Abstract: Although most Microfinance Institutions (MFIs) invest in non-financial services such as business training, empirical evidence on the impact of training on microborrowers’ performance is at best mixed. We address this issue by accounting for business training allocation and its possible effects on borrowers’ behavior. We first show empirically (using data from a French MFI) that the relationship between business training allocation and borrowers’ risk is complex and non- linear. By taking this into account, we establish a positive effect of business training on the survival time of loans. These results are robust to controlling for the MFI’s selection process. We moreover propose a theoretical explanation for the non-linear relationship between borrowers’ risk and training allocation based on reverse asymmetric information, showing that it can lead to increased MFI outreach.
    Keywords: microcredit, business training, reverse asymmetric information
    JEL: C34 C41 D82 G21
    Date: 2018–03
  8. By: Tsionas, Mike; Malikov, Emir; Kumbhakar, Subal C.
    Abstract: We develop a novel unified econometric methodology for the formal examination of the market power -- cost efficiency nexus. Our approach can meaningfully accommodate a mutually dependent relationship between the firm's cost efficiency and marker power (as measured by the Lerner index) by explicitly modeling the simultaneous determination of the two in a system of nonlinear equations consisting of the firm's cost frontier and the revenue-to-cost ratio equation derived from its stochastic revenue function. Our framework places no a priori restrictions on the sign of the dependence between the firm's market power and efficiency as well as allows for different hierarchical orderings between the two, enabling us to discriminate between competing quiet life and efficient structure hypotheses. Among other benefits, our approach completely obviates the need for second-stage regressions of the cost efficiency estimates on the constructed market power measures which, while widely prevalent in the literature, suffer from multiple econometric problems as well as lack internal consistency/validity. We showcase our methodology by applying it to a panel of U.S. commercial banks in 1984-2007 using Bayesian MCMC methods.
    Keywords: Productivity, Competitiveness, Efficiency, Market Power, Lerner Index, Banks, Quiet Life Hypothesis
    JEL: C11 C30 D24 D40 G21
    Date: 2018
  9. By: Derksen, Mike; Spreij, Peter; van Wijnbergen, Sweder
    Abstract: Contingent Convertible bonds (CoCos) are debt instruments that convert into equity or are written down in times of distress. Existing pricing models assume conversion triggers based on market prices and on the assumption that markets can always observe all relevant firm information. But all Cocos issued sofar have triggers based on accounting ratios and/or regulatory intervention. We incorporate that markets receive information through noisy accounting reports issued at discrete intervals, which allows us to distinguish between market and accounting values, and between automatic triggers and regulator-mandated conversions. Our second contribution is to incorporate that coupon payments are contingent too: their payment is conditional on the maxumum Distributable Amount not being exceeded. We examine the impact of CoCo design parameters, asset volatility and accounting noise on the price of a CoCo; and investigate the interaction between CoCo design features, the capital structure of the issuing bank and their implications for risk taking and investment incentives. Finally, we use our model to explain the crash in coco prices after Deutsche Bank's profit warning february 2016.
    Keywords: accounting noise; Coco design; Coco triggers; Contingent capital pricing; Investment incentives; risk taking incentives
    JEL: G12 G13 G18 G21 G28 G32
    Date: 2018–04
  10. By: Gabriel Jiménez (Banco de España); Enrique Moral-Benito (Banco de España); Raquel Vegas (Banco de España)
    Abstract: We show that bank lending standards are influenced by macroeconomic conditions. We use monthly data from the Banco de España Central Credit Register, which allow us to monitor all loan applications made by non-financial firms to non-current banks from 2002 to 2015. To test the pro-cyclicality of banks’ appetite for risk, we investigate how two firm characteristics (ex-ante credit risk and productivity) interacting with two macroeconomic indicators (business cycle and the monetary policy stance) affect the probability of granting a loan. In order to enhance identification we account for unobserved heterogeneity by means of firm and banktime fixed effects. Our findings indicate that banks soften their credit standards during booms or when monetary policy is loose to harden them during busts or when short-term interest rates increase. This pattern is especially relevant in the case of firms’ productivity, which might partly explain the dismal evolution of aggregate productivity in Spain during the pre-crisis period. Finally, we also find that these results are more pronounced among less capitalized, less liquid and more profitable banks.
    Keywords: productivity, credit risk, bank supply, lending standards
    JEL: G21 E51 D24 O47
    Date: 2018–04
  11. By: Claudio Albanese (CASS Business School - London, UK); Simone Caenazzo (LaMME - Laboratoire de Mathématiques et Modélisation d'Evry - INRA - Institut National de la Recherche Agronomique - UEVE - Université d'Évry-Val-d'Essonne - ENSIIE - CNRS - Centre National de la Recherche Scientifique); Stéphane Crépey (LaMME - Laboratoire de Mathématiques et Modélisation d'Evry - INRA - Institut National de la Recherche Agronomique - UEVE - Université d'Évry-Val-d'Essonne - ENSIIE - CNRS - Centre National de la Recherche Scientifique)
    Abstract: Banking operations are being rewired around XVA metrics quantifying market incompleteness. This paper focuses on the cost of funding of variation margin and the cost of capital, i.e. FVA and KVA. The two metrics are intertwined since economic capital is itself a source of funding. Accurate valuations require simulations of capital and funding costs. Motivated by Basel Pillar II, Solvency II and IFRS 4 Phase II, we propose a principled approach to accounting regulatory treatments for FVA and KVA.
    Date: 2018–04–11
  12. By: Stéphane Crépey (LaMME - Laboratoire de Mathématiques et Modélisation d'Evry - INRA - Institut National de la Recherche Agronomique - UEVE - Université d'Évry-Val-d'Essonne - ENSIIE - CNRS - Centre National de la Recherche Scientifique); Shiqi Song (LaMME - Laboratoire de Mathématiques et Modélisation d'Evry - INRA - Institut National de la Recherche Agronomique - UEVE - Université d'Évry-Val-d'Essonne - ENSIIE - CNRS - Centre National de la Recherche Scientifique)
    Abstract: In Crépey [9], a basic reduced-form counterparty risk modelling approach was introduced under a standard immersion hypothesis between a reference filtration and the filtration progressively enlarged by the default times of the two parties. This basic setup, with a related continuity assumption on some of the data at the first default time of the two parties, is too restrictive for wrong-way and gap risk applications, such as counterparty risk on credit derivatives. This paper introduces an extension of the basic approach, implements it through marked default times and applies it to counterparty risk on credit derivatives.
    Keywords: Credit derivatives, Collateral, Gap risk, Wrong-way risk, Immersion, Reduced-form credit modelling, BSDE, Funding,Counterparty risk
    Date: 2018–04–11
  13. By: Bhaumik, Sumon K. (University of Sheffield); Owolabi, Oluwarotimi (Covenant University); Pal, Sarmistha (University of Surrey)
    Abstract: In this paper, we develop an information theory-based framework about cross-border acquisitions in the financial intermediation industry. We argue that even though "soft" information embedded in customer relationships of local banks can, in principle, help multinational banks (MNBs) overcome informational disadvantage in host countries, the cost of verification of this private information may, paradoxically, make local banks with significant customer relationships unattractive for cross-border acquisition. Further, we propose that the relationship between the amount of customer information embedded in an incumbent bank and the likelihood of its acquisition by a MNB is modified by the institutional distance between the home and host countries of the MNB. Specifically, the strength of the negative relationship increases with institutional distance between home and host countries because it increases the verification cost of private information with institutional distance. Our hypotheses find support in the context of Central and Eastern Europe.
    Keywords: multinational bank, cross-border acquisition, customer relationship, private information, verification cost, institutional distance, Central and Eastern Europe
    JEL: F23 G21 P33
    Date: 2018–03

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