nep-ban New Economics Papers
on Banking
Issue of 2018‒05‒21
thirteen papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Local Banks, Credit Supply, and House Prices By Kristian Blickle; ; ;
  2. Going With the Flows: New Borrowing, Debt Service and the Transmission of Credit Booms By Mathias Drehmann; Mikael Juselius; Anton Korinek
  3. Bad loans and resource allocation in crisis years: Evidence from European banks By Brunella Bruno; Immacolata Marino
  4. A comprehensive view on risk reporting: Evidence from supervisory data By Abbassi, Puriya; Schmidt, Michael
  5. Illiquidity spirals in Coupled Over-The-Counter Markets By Christoph Aymanns; Co-Pierre Georg; Benjamin Golub;
  6. Strengthened competition in payment services By Demary, Markus; Rusche, Christian
  7. Commercial Banks, Credit Unions, and Monetary Policy By Edgar A. Ghossoub
  8. Discerning causal relationship between operational cost and bank profit for commercial banks: Turkish evidence with ARDL approach By Unal, Huseyin; Masih, Mansur
  9. Bank Profits and Margins in a World of Negative Rates By Philip Molyneux; Alessio Reghezza; Ru Xie
  10. Loss Given Default for residential real estate banks: Evidence from the Euro area By Claudio Giannotti; Gianluca Mattarocci; Xenia Scimone
  11. Chebyshev Methods for Ultra-efficient Risk Calculations By Mariano Zeron Medina Laris; Ignacio Ruiz
  12. The Varying Shadow of China's Banking System By Xiaodong Zhu
  13. When panic makes you blind: a chaotic route to systemic risk By Piero Mazzarisi; Fabrizio Lillo; Stefano Marmi

  1. By: Kristian Blickle; ; ;
    Abstract: I study the e?ects of an increase in the supply of local mortgage credit on local house prices and employment by exploiting a natural experiment from Switzerland. Losses in U.S. security holdings triggered a migration of dissatis?ed retail customers from a large, universal bank (UBS) to homogenous local mortgage lenders in mid-2008. Mortgage lenders close to UBS branches experience larger in?ows of deposits, unrelated to their investment opportunities. Using variation in the geographic distance between UBS branches and local mortgage lenders as an instrument for deposit growth, I ?nd that banks with an exogenous positive funding shock invest in strict accordance with their specialization (i.e. local mortgage lending). Consequently, house prices in neighborhoods around a?ected banks rise over 50% more than around una?ected banks. I also ?nd an increase in the number of employees at small ?rms, reliant on real estate collateral, in these neighborhoods. My results show that local mortgage oriented banks a?ect house prices through the supply of credit and that bank specialization thereby plays an important role in the allocation of capital across sectors.
    Keywords: credit supply, liquidity shock, house prices, local banking, employment
    JEL: G20 G21 R30
    Date: 2017–11
  2. By: Mathias Drehmann; Mikael Juselius; Anton Korinek
    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 household 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
    Date: 2018–04
  3. By: Brunella Bruno; Immacolata Marino
    Abstract: The aim of this study is to explore the relation between loan portfolio quality and lending in European banks over 2005-2014. We focus on lending behavior of banks from distressed countries since the Euro sovereign debt crisis. Our results confirm the existence of a negative nexus between poor loan quality and lending, since a higher NPL ratio explains a reduced loan growth and a lower allocation to loans at the advantage of government debt (as a percentage of total assets). Such an impact on lending and reallocation effect are strong and consistent across specifications and over and above other factors that may affect credit supply.
    Keywords: bad loans, NPLs, non-performing loans, bank lending, crisis
    JEL: G20 G21 G01
    Date: 2017
  4. By: Abbassi, Puriya; Schmidt, Michael
    Abstract: We show that banks' risk exposure in one asset category affects how they report regulatory risk weights for another asset category. Specifically, banks report lower credit risk weights for their loan portfolio when they face higher risk exposure in their trading book. This relationship is especially strong for banks that have binding regulatory capital constraints. Our results suggest the existence of incentive spillovers across different risk categories. We relate this behavior to the discretion inherent in internal ratings-based models which these banks use to assess risk. These findings imply that supervision should include a comprehensive view of different bank risk dimensions.
    Keywords: internal ratings-based regulation,credit risk,market risk,incentive spillovers,capital regulation,comprehensive risk assessment
    JEL: G01 G21 G28
    Date: 2018
  5. By: Christoph Aymanns; Co-Pierre Georg; Benjamin Golub;
    Abstract: Banks provide intermediation of two economically coupled assets, each traded on an OTC market—e.g., secured debt and the underlying collateral. We model banks’ decisions to provide liquidity as a game of strategic complements on two coupled trading networks:incentives to be active in one network are increasing in its neighbors’ activity in both networks. When an exogenous shock renders some banks inactive, other banks follow in an illiquidity spiral across the two networks. Liquidity can be improved if one of the two OTC markets is replaced by an exchange. For a class of market structures associated with random graphs, liquidity changes discontinuously in the size of an exogenous shock, in contrast to contagion on one network.
    Keywords: market liquidity, funding liquidity, over-the-counter markets
    JEL: G21 G23 D85
    Date: 2017–12
  6. By: Demary, Markus; Rusche, Christian
    Abstract: Starting on January 13, 2018, the Second Payment Services Directive (PSD2) will apply in the European Union. Among other things, the Directive's aim is to adapt regulation to the innovations in payment services and to promote the Single Market for non-cash payments. However, PSD2 will only strengthen competition between payment services under a common standard for the access to banking accounts.
    Date: 2018
  7. By: Edgar A. Ghossoub (UTSA)
    Abstract: The objective of this manuscript is to study the strategic interaction between different types of financial institutions and its implications for economic activity and monetary policy. While commercial banks and credit unions provide similar financial services, they have different ownership structure and therefore have different objectives. For instance, banks are often perceived as profit maximizers, while credit unions act like cooperative entities seeking value and aim to maximize the welfare of their depositors. Following the 2007-2008 financial crisis, credit unions gained more market share and their role in the process of financial intermediation became more pronounced. Such changes raise some important questions that I attempt to address in this manuscript. First, how does the strategic interaction between credit unions and commercial banks affect risk sharing, total welfare, and capital formation? Second, will the effects of monetary policy become stronger if credit unions gain more market share? Finally, what is the optimal size of each financial institution? In order to address these important questions, I study a dynamic general equilibrium model with an important role for money and where different types of financial intermediaries interact strategically in deposit and capital markets. Length: 22 pages
    Keywords: Credit Union, Banking Competition, Monetary Policy
    JEL: E31 E41 E44 O42
    Date: 2016–11–30
  8. By: Unal, Huseyin; Masih, Mansur
    Abstract: The purpose of this study is to identify the causality relationship between bank profits and operational expense for the commercial banks in Turkish banking sector. A robust time series technique, ARDL is applied by using the monthly data for the year between 2007 and 2017, which is collected from the website of Banking Regulation and Supervision Agency of Turkey. While Net Profits (PR) and Operational Expense (OE) are determined as focus variables, Total Asset (TA) and Liquidity (LQ) are chosen as control variables. The results indicate that there is long-term causality relationship between PR and OE. We found OE as an exogenous variable leading PR which is an endogenous variable. Operational expense as the most exogenous variable leads the bank profits in the long run. Findings suggest that efficient operational investments will provide more profitability. Therefore, investing in sales and marketing, new branches, advertisement, human forces, IT services which are called efficient operational cost is suggested for more profitability in the long-term.
    Keywords: Operational Expense, Bank Profit, Causality Relationship, ARDL
    JEL: C58 G21
    Date: 2017–12–27
  9. By: Philip Molyneux (Bangor University); Alessio Reghezza (Bangor University); Ru Xie (University of Bath)
    Abstract: This paper investigates the influence of negative interest rate policy (NIRP) on bank margins and profitability. Using a dataset comprising 7242 banks from 33 OECD member countries over 2012-2016 and a difference-in-differences methodology, we find that bank margins and profits fell in NIRP-adopter countries compared to countries that did not adopt the policy. The results are robust to a variety of checks. This adverse NIRP effect appears to have been stronger for banks that were small, operating in competitive system as well as in countries where floating loan rates predominate.
    Keywords: Negative interest rates, bank profitability, NIMs, difference-in-differences estimation
    JEL: E43 E44 E52 G21 F34
    Date: 2018–01
  10. By: Claudio Giannotti; Gianluca Mattarocci; Xenia Scimone
    Abstract: Loss given default (LGD) for residential real estate loans is affected by real estate market trends due to the impact on the value of debtors’ main collateral. Banks specialised in real estate lending are expected to be better at selecting lending opportunities, properly evaluating real estate collaterals, and managing the recovery process. The recovery process is expected to differ for specialised lenders but there is no consensus about their differences from other market players.The paper examines LGD for a representative sample of European banks to underline the key differences related to real estate specialisation. Results show that real estate banks, on average, perform a better recovery process. Moreover, real estate banks not fully specialised in real estate can better manage the real estate market cycle effect, reducing the pro-cyclicality of LGD.
    Keywords: Lending; Loss Given Default; Real estate banks; Real Estate Market
    JEL: R3
    Date: 2017–07–01
  11. By: Mariano Zeron Medina Laris; Ignacio Ruiz
    Abstract: Financial institutions now face the important challenge of having to do multiple portfolio revaluations for their risk computation. The list is almost endless: from XVAs to FRTB, stress testing programs, etc. These computations require from several hundred up to a few million revaluations. The cost of implementing these calculations via a "brute-force" full revaluation is enormous. There is now a strong demand in the industry for algorithmic solutions to the challenge. In this paper we show a solution based on Chebyshev interpolation techniques. It is based on the demonstrated fact that those interpolants show exponential convergence for the vast majority of pricing functions that an institution has. In this paper we elaborate on the theory behind it and extend those techniques to any dimensionality. We then approach the problem from a practical standpoint, illustrating how it can be applied to many of the challenges the industry is currently facing. We show that the computational effort of many current risk calculations can be decreased orders of magnitude with the proposed techniques, without compromising accuracy. Illustrative examples include XVAs and IMM on exotics, XVA sensitivities, Initial Margin Simulations, IMA-FRTB and AAD.
    Date: 2018–05
  12. By: Xiaodong Zhu
    Abstract: The rapid rise of shadow banking activities in China since 2009 has attracted a great deal of attention in both academia and policy circles. Most existing studies and commentary on China’s shadow banking have treated it as a recent phenomenon that appeared after the Global Financial Crisis and China’s response to it. In this paper, I argue that shadow banking is not a new phenomenon; it has always been a part of China’s financial system since the 1980s, and arose from the need to get around various lending restrictions imposed by the central government on banks. I also emphasize that there are two types of shadow banking activities, those initiated by banks and those initiated by local governments or state-owned enterprises. I provide evidence suggesting that the shadow banking activities initiated by banks tend to be efficiency enhancing, but those initiated by local governments and state-owned enterprises are more likely to be associated with misallocation of capital. The policy implication is that the central government should implement policies and regulations that break the link between financial institutions and local governments or state-owned enterprises.
    Keywords: China, Banking System, Shadow Banking, Capital Allocation
    JEL: G21 G23 G28 E44 O16
    Date: 2018–05–17
  13. By: Piero Mazzarisi; Fabrizio Lillo; Stefano Marmi
    Abstract: We present an analytical model to study the role of expectation feedbacks and overlapping portfolios on systemic stability of financial systems. Building on [Corsi et al., 2016], we model a set of financial institutions having Value at Risk capital requirements and investing in a portfolio of risky assets, whose prices evolve stochastically in time and are endogenously driven by the trading decisions of financial institutions. Assuming that they use adaptive expectations of risk, we show that the evolution of the system is described by a slow-fast random dynamical system, which can be studied analytically in some regimes. The model shows how the risk expectations play a central role in determining the systemic stability of the financial system and how wrong risk expectations may create panic-induced reduction or over-optimistic expansion of balance sheets. Specifically, when investors are myopic in estimating the risk, the fixed point equilibrium of the system breaks into leverage cycles and financial variables display a bifurcation cascade eventually leading to chaos. We discuss the role of financial policy and the effects of some market frictions, as the cost of diversification and financial transaction taxes, in determining the stability of the system in the presence of adaptive expectations of risk.
    Date: 2018–05

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