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on Banking |
| By: | Allen, Franklin; Gu, Xian |
| Abstract: | The crisis demonstrated that microprudential regulation focusing on the risks taken by individual banks is not sufficient to prevent crises. This is because it ignores systemic risk. Six types of systemic risk are identified, namely: (i) panics - banking crises due to multiple equilibria; (ii) banking crises due to asset price falls; (iii) contagion; (iv) financial architecture; (v) foreign exchange mismatches in the banking system; (vi) behavioral effects from Knightian uncertainty. We focus on the first three as they are arguably the main causes of the 2007-9 crisis and consider regulatory and other policies to counteract them. |
| Keywords: | Asset price bubbles; contagion; Financial crises; macroprudential |
| JEL: | G01 G21 G28 |
| Date: | 2018–04 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:12862&r=ban |
| By: | Drehmann, Mathias; Juselius, Mikael; Korinek, Anton |
| Abstract: | Traditional economic models have had difficulty explaining the non-monotonic real effects of credit booms and, in particular, why they have predictable negative after-effects for up to a decade. We provide a systematic transmission mechanism by focusing on the flows of resources between borrowers and lenders, i.e. new borrowing and debt service. We construct the first cross-country dataset of these flows for a panel of house-hold debt in 16 countries. We show that new borrowing increases economic activity but generates a pre-specified path of debt service that reduces future economic activity. The protracted response in debt service derives from two key analytic properties of credit booms: (i) new borrowing is auto-correlated and (ii) debt contracts are long term. We confirm these properties in the data and show that debt service peaks on average four years after credit booms and is associated with significantly lower output and higher crisis risk. Our results explain the transmission mechanism through which credit booms and busts generate non-monotonic and long-lasting aggregate demand effects and are, hence, crucial for macroeconomic stabilization policy. |
| JEL: | E17 E44 G01 D14 |
| Date: | 2018–04–24 |
| URL: | http://d.repec.org/n?u=RePEc:bof:bofrdp:2018_010&r=ban |
| By: | Paweł Kopiec (Narodowy Bank Polski) |
| 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: | D80 E44 E58 G21 |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:nbp:nbpmis:280&r=ban |
| By: | Matthias Neuenkirch; Matthias Nöckel |
| Abstract: | In this paper, we provide evidence for a risk-taking channel of monetary policy transmission in the euro area that works through the relaxation of lending standards for borrowers. Our dataset covers the period 2003Q1-2016Q2 and includes, in addition to the standard variables for real GDP growth, inflation, and the monetary policy stance, indicators of bank lending standards and bank lending margins. Based on vector autoregressive models with (i) recursive identification and (ii) sign restrictions, we show that banks react aggressively to an expansionary monetary policy shock by lowering their lending standards. The banks’ efforts to keep their lending margin stable, however, are not successful as we detect a significant compression. We document these findings for the euro area as a whole and for its individual member states. In particular, banks in the Netherlands, Portugal, Spain, and Ireland lowered their lending standards after expansionary monetary policy shocks. The compression of the lending margin is most pronounced in the five crisis countries (Greece, Ireland, Italy, Portugal, and Spain). |
| Keywords: | European Central Bank, macroprudential policy, monetary policy transmission, risk-taking channel, vector autoregression |
| JEL: | E44 E51 E52 E58 G28 |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_6982&r=ban |
| By: | Hong Wang; Catherine S. Forbes; Jean-Pierre Fenech; John Vaz |
| Abstract: | We find that factors explaining bank loan recovery rates vary depending on the state of the economic cycle. Our modeling approach incorporates a two-state Markov switching mechanism as a proxy for the latent credit cycle, helping to explain differences in observed recovery rates over time. We are able to demonstrate how the probability of default and certain loan-specific and other variables hold different explanatory power with respect to recovery rates over `good' and `bad' times in the credit cycle. That is, the relationship between recovery rates and certain loan characteristics, firm characteristics and the probability of default differs depending on underlying credit market conditions. This holds important implications for modelling capital retention, particularly in terms of countercyclicality. |
| Date: | 2018–04 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1804.07022&r=ban |
| By: | von Beschwitz, Bastian; Foos, Daniel |
| Abstract: | Several papers find a positive association between a bank's equity stake in a borrowing firm and lending to that firm. While such a positive cross-sectional correlation may be due to equity stakes benefiting lending, it may also be driven by endogeneity. To distinguish the two, we study a German tax reform that permitted banks to sell their equity stakes tax-free. After the reform, many banks sold their equity stakes, but did not reduce lending to the firms. Thus, our findings question whether prior evidence can be interpreted causally and suggest that banks' equity stakes may be less important for lending than previously thought. |
| Keywords: | Relationship banking,Ownership,Monitoring |
| JEL: | G21 G32 |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubdps:062018&r=ban |
| By: | Kalemli-Ozcan, Sebnem; Laeven, Luc; Moreno, David |
| Abstract: | We quantify the role of financial factors that have contributed to sluggish investment in Europe in the aftermath of the 2008-2009 crisis. Using a big data approach, we match the firms to their banks based on banking relationships in 8 European countries over time, obtaining over 2 million observations. We document four stylized facts. First, the decline in investment in the aftermath of the crisis can be linked to higher leverage, increased debt service, and having a relationship with a weak bank-once we condition on aggregate demand shocks. Second, the relation between leverage and investment depends on the maturity structure of debt: firms with a higher share of long-term debt have higher investment rates relative to firms with a lower share of long-term debt since the rollover risk for the former is lower and the latter is higher. Third, the negative effect of leverage is more pronounced when firms are linked to weak banks, i.e., banks with high exposure to sovereign risk. Firms with higher shares of short-term debt decrease investment more relative to firms with lower shares of short-term debt even both set of firms linked to weak banks. This result suggests that loan evergreening by weak banks played a limited role in increasing investment. Fourth, the direct negative effect of weak banks on the average firm's invest- ment disappears once demand shocks are controlled for, although the differential effects with respect to leverage and the maturity of debt remain. |
| Keywords: | Bank-Sovereign Nexus; Debt Maturity; Firm Investment; Rollover Risk |
| JEL: | E22 E32 E44 F34 F36 G32 |
| Date: | 2018–04 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:12881&r=ban |
| By: | Dinc, Yusuf |
| Abstract: | Capital adequacy ratio is the main indicator for banks to proceed with their operations. Standards for the calculation of the ratio are based on Basel Accord. Key factor for the calculation is credit risk. Credit risk is a function of credit and collateral type. In this case, mortgage has lower risk weight based on its collateral structure on credit risk. This research evaluates the effects of mortgages on capital adequacy ratio to understand the effects of collateral based credits. The findings show positive results between capital adequacy ratio and mortgages of participation banks. However, mortgages have negative impact on capital adequacy ratio of conventional banks. Participation and conventional banks of Turkey are compared on linear regression to analyse the effects of mortgages on capital adequacy ratio. Results are important for further research and professionals. |
| Keywords: | Capital adequacy ratio Mortgage Islamic banking Retail credit |
| JEL: | G21 G29 |
| Date: | 2017–05–07 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:86451&r=ban |
| By: | Colliard, Jean-Edouard |
| Abstract: | Both in the United States and in the Euro Area, bank supervision is the joint responsibility of local and central supervisors. I study a model in which local supervisors do not internalize as many externalities as a central supervisor. Local supervisors are more lenient, but banks also have weaker incentives to hide information from them. These two forces can make a joint supervisory architecture optimal, with more weight put on centralized supervision when cross-border externalities are larger. Conversely, more centralized supervision endogenously encourages banks to integrate more cross-border. Due to this complementarity, the economy can be trapped in an equilibrium with both too little central supervision and too little financial integration, when a superior equilibrium would be achievable. |
| Keywords: | banking union; bank supervision; financial integration |
| JEL: | G21 G28 L51 |
| Date: | 2017–09–01 |
| URL: | http://d.repec.org/n?u=RePEc:ebg:heccah:1230&r=ban |
| By: | Simone Auer; Christian Friedrich; Maja Ganarin; Teodora Paligorova; Pascal Towbin |
| Abstract: | This paper studies the international transmission of monetary policy through banks in small open economies using the examples of Switzerland and Canada. We assess the inward transmission of foreign monetary policy for Switzerland and the outward transmission of domestic monetary policy for Canada. In both country cases, we focus on the international bank lending and the international portfolio channel, which make opposing predictions about how monetary policy transmits internationally through banks. Our results on the inward transmission of foreign monetary policy through banks in Switzerland are consistent with a role for the international portfolio channel, but we find no evidence for the traditional international bank lending channel. The results on the outward transmission of domestic monetary policy in Canada suggest that foreign lending by Canadian banks is affected through both channels, which work as predicted and largely balance each other. |
| Keywords: | International banking, monetary policy, inward transmission, outward transmission, small open economies, Switzerland, Canada |
| JEL: | G21 E5 F21 F32 |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:snb:snbwpa:2018-04&r=ban |
| By: | Allen, Franklin; Qian, Meijun; Xie, Jing |
| Abstract: | This paper offers a framework to understand informal financing based on mechanisms to deal with asymmetric information and enforcement. We find that constructive informal financing such as trade credits and family borrowing that relies on information advantages or an altruistic relationship is associated with good firm performance. Underground financing such as money lenders who use violence for enforcement is not. Constructive informal financing is prevalent in regions where access to bank loans is extensive, while its role in supporting firm growth decreases with bank loan availability. International comparisons show that China is not an outlier but rather average in using informal financing. |
| Keywords: | asymmetric information; Firm Growth; Informal financing; social collateral |
| JEL: | G21 G30 O16 O17 |
| Date: | 2018–04 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:12863&r=ban |
| By: | Michel Alexandre da Silva; Giovani Antônio Silva Brito; Theo Cotrim Martins |
| Abstract: | The aim of this paper is to assess the impact of defaulting on one personal credit type on future default on other types of loan. Using Brazilian micro data, we run a logistic regression to estimate the probability of default on a given credit type, by including personal overdue exposure in the other debt types among the explanatory variables. Our results show that this effect is positive and significant, although quantitatively heterogeneous. We also discuss the rationale behind these results. Specifically, it was found that financing credit types (vehicle and real estate financing) contaminate the other credit types more, as defaulting may cause the debtor to lose the financed good. Moreover, riskier loan types (overdraft, non-payroll-educted personal credit, and credit card) are more contaminated by defaults on other credit types, which is explained by the fact that defaulting individuals have limited access to less risky debt types |
| Date: | 2018–04 |
| URL: | http://d.repec.org/n?u=RePEc:bcb:wpaper:476&r=ban |
| By: | Colliard, Jean-Edouard |
| Abstract: | The regulatory use of banks' internal models makes capital requirements more risk-sensitive but invites regulatory arbitrage. I develop a framework to study bank regulation with strategic selection of risk models. A bank supervisor can discourage arbitrage by auditing risk models, and implements capital ratios less risk-sensitive than in the first-best to reduce auditing costs. The optimal capital ratios of a national supervisor can be different from those set by supranational authorities, in which case the supervisor optimally tolerates biased models. I discuss the empirical implications of this "hidden model" problem, and policy answers such as leverage ratios and more reliance on backtesting mechanisms. |
| Keywords: | basel risk-weights; internal risk models; leverage ratio; supervisory audits |
| JEL: | D82 D84 G21 G32 G38 |
| Date: | 2017–09–01 |
| URL: | http://d.repec.org/n?u=RePEc:ebg:heccah:1229&r=ban |
| By: | Mike Derksen; Peter Spreij; Sweder van Wijnbergen |
| 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 so far have triggers based on accounting ratios and/or regulatory intervention. We incorporate that markets receive information through noisy accounting reports issued at discrete time instants, 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 Maximum 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 in February 2016. |
| Date: | 2018–04 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1804.06890&r=ban |
| By: | Michał Brzoza-Brzezina (Narodowy Bank Polski; Warsaw School Economics); Marcin Kolasa (Narodowy Bank Polski; Warsaw School Economics); Krzysztof Makarski (Narodowy Bank Polski; Warsaw School Economics; Group for Research in Applied Economics (GRAPE)) |
| Abstract: | This paper checks how international spillovers of shocks and policies are modified when banks are foreign owned. To this end we build a two-country macroeconomic model with banking sectors that are owned by residents of one (big and foreign) country. Consistently with empirical findings, in our model foreign ownership of banks amplifies spillovers from foreign shocks. It also strengthens the international transmission of monetary and macroprudential policies. We next use the model to replicate the financial crisis in the euro area and show how, by preventing bank capital outflow in 2009, the Polish regulatory authorities managed to reduce its contagion to Poland. We also find that under foreign bank ownership such policy is strongly preferred to a recapitalization of domestic banks. Finally, we check how foreign ownership of banks affects transmission of domestic shocks to find that it has a stabilizing effect. |
| Keywords: | foreign-owned banks, monetary and macroprudential policy, international spillovers, DSGE models with banking |
| JEL: | E32 E44 E58 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:fme:wpaper:18&r=ban |
| By: | Elise S. Brezis (Bar-Ilan University) |
| Abstract: | This paper addresses the effects of the revolving door phenomenon on the inequality of influence among firms. It shows that firms are not equal in their capacities to benefit from state connections. We first develop a theoretical model introducing the notion of ‘bureaucratic capital’ and showing how the revolving door generates inequality in bureaucratic capital and in profits leading to inequality of influence. Then, this prediction is tested on a new database tracking the revolving door process involving the 20 biggest US commercial banks. We show that regulators who have created a large stock of ‘bureaucratic capital’ are more likely to be hired by the top five banks after leaving public office. We then develop indices of the inequality of influence between banks. We show that banks in the top revenue quintile concentrate around 80% of the stock of revolvers. Goldman Sachs appears as the prime beneficiary of this process, by concentrating almost 30% of the revolving door phenomenon. |
| Keywords: | regulators, revolving door, rent-seeking, state connections, bureaucratic capital, inequality of influence, connected firms, corruption, unethical behavior. |
| JEL: | D73 G01 G18 L51 |
| Date: | 2017–09 |
| URL: | http://d.repec.org/n?u=RePEc:biu:wpaper:2017-09&r=ban |
| By: | Navarro, Noemí; Tran, Dan H. |
| Abstract: | We study how the presence of transitive cycles in the interbank network affects the extent of financial contagion. In a regular network setting, where the same pattern of links repeats for each node, we allow an external shock to propagate losses through the system of linkages (interbank network). The extent of contagion (contagiousness) of the network is measured by the limit of the losses when the initial shock is diffused into an infinitely large network. This measure indicates how a network may or may not facilitate shock diffusion in spite of other external factors. Our analysis highlights two main results. First, contagiousness decreases as the length of the minimal transitive cycle increases, keeping the degree of connectivity (density) constant. Second, as density increases the extent of contagion can decrease or increase, because the addition of new links might decrease the length of the minimal transitive cycle. Our results provide new insights to better understand systemic risk and could be used to build complementary indicators for financial regulation. |
| Keywords: | Financial contagion, networks, shock diffusion, transitive cycles, degree |
| JEL: | C02 C69 D85 G33 |
| Date: | 2018–04–10 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:86267&r=ban |