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on Banking |
| By: | Enrica Detragiache; Thierry Tressel; Rima Turk-Ariss |
| Abstract: | The paper investigates EU banks’ profitability through the recent financial cycle using banklevel balance sheet and income statement data. We find that banks that were more successful at protecting their profits had a less pronounced deterioration in loan quality and a larger improvement in cost efficiency. They also downsized their assets more aggressively during the crisis, and reduced reliance on wholesale funding more markedly post-crisis. Net interest margins remained broadly stable over the financial cycle, including post-crisis, and there is no clear evidence that aspects of bank business model, such as higher reliance on fees and commission income, were associated with better profitability post-crisis. |
| Date: | 2018–05–09 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:18/99&r=ban |
| By: | Beltratti, Andrea (Bocconi University); Stulz, Rene M. (Ohio State University) |
| Abstract: | We use days with tail sovereign CDS spread changes of peripheral countries to identify the effects of shocks to the cost of borrowing of these countries on stock returns of banks from other countries. We find that tail sovereign GIIPS CDS changes have an asymmetric impact in that bank stocks benefit more from negative CDS spread shocks than they are hurt by positive shocks, which creates moral hazard and is best explained by a "too-systemic-to-fail" effect. The contagion effects are stronger for more pervasive shocks, so that idiosyncratic shocks to small countries, such as Greece, do not have an economically significant impact, but shocks involving large GIIPS countries or multiple GIIPS countries have such an impact. In our benchmark specification, holdings of peripheral country bonds by banks from other countries do not constitute a statistically or economically significant contagion channel for tail spread increases. |
| JEL: | F34 G12 G15 G21 H63 |
| Date: | 2017–06 |
| URL: | http://d.repec.org/n?u=RePEc:ecl:ohidic:2017-15&r=ban |
| By: | Masayuki Kazato (Deputy Director, Institute for Monetary and Economic Studies, Bank of Japan (E-mail: masayuki.kazato@boj.or.jp)); Tetsuya Yamada (Director, Institute for Monetary and Economic Studies (currently Financial System and Bank Examination Department), Bank of Japan (E-mail: tetsuya.yamada@boj.or.jp)) |
| Abstract: | The issuance of contingent convertible securities (CoCos) has increased not only in Europe but also in Asia and other areas over the past several years. In this paper, we extend the existing model used to price CoCos to estimate the implied bail-in probability for a variety of CoCos by modifying loss rates for investors due to bail-ins of CoCos. Using our model for empirical analyses, we find that when the credit events occur, the bail-in probability of a CoCo increases by more than the default probability implied by credit default swaps (CDS). The result suggests that the bail-in probability can be used as an early warning indicator of financial crises. We also find that the conditional default probability after bail-in tends to be lower the more CoCos a bank has issued. This finding indicates that investors believe financial institutions become less likely to default as issuing more CoCos strengthens their loss absorption capacity. Overall, our analysis suggests that the market prices of CoCos contain useful information on financial stability. |
| Keywords: | Market-implied bail-in probability, Contingent convertible securities, Basel III, Financial stability |
| JEL: | G12 G15 G21 G28 G32 G33 |
| Date: | 2018–05 |
| URL: | http://d.repec.org/n?u=RePEc:ime:imedps:18-e-03&r=ban |
| By: | Schwert, Michael (Ohio State University) |
| Abstract: | This paper investigates the mechanisms behind the matching of banks and firms in the loan market and the implications of this matching for lending relationships, bank capital, and the provision of credit. I find that bank-dependent firms borrow from well capitalized banks, while firms with access to the bond market borrow from banks with less capital. This matching of bank-dependent firms with stable banks smooths cyclicality in aggregate credit provision and mitigates the effects of bank shocks on the real economy. |
| JEL: | G21 G32 |
| Date: | 2017–02 |
| URL: | http://d.repec.org/n?u=RePEc:ecl:ohidic:2016-17&r=ban |
| By: | Alphonse Noah; Luc Jacolin; Michael Brei |
| Abstract: | This paper investigates the impact of bank competition in Sub-Saharan Africa on bank non-performing loans, a measure of credit risk. Using bank-level data for a sample of 221 banks from 33 countries over the period 2000-15, we find a non-linear or U-shaped relationship between bank competition and credit risk. In other words, increased bank competition has the potential to lower credit risk via efficiency gains (lower credit cost, operational gains). However, the positive effects may be outweighed by adverse effects of excessive competition (lower profit margins, increased risk incentives). We also find that credit risk in Sub-Saharan Africa is not only related to macroeconomic determinants, such as growth, public debt, economic concentration, financial deepening and inclusion, but also to the business and regulatory environment. These results may provide useful insights on how to design and adapt prudential and regulatory frameworks to the specific needs in developing countries. |
| Keywords: | Bank competition, credit risk, bank stability, Africa |
| JEL: | G21 G28 D4 O55 |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:drm:wpaper:2018-27&r=ban |
| By: | Lorenzo Pandolfi (Università di Napoli Federico II and CSEF) |
| Abstract: | This paper analyzes the effects of bail-in policies on banks’ funding cost, incentives for loan monitoring, and financing capacity. In a model with moral hazard and two investment stages, a full bail-in turns out to be, ex post, the first-best policy to deal with failing banks. As a consequence, however, investors expect bail-ins rather than bailouts. Ex ante, this raises banks’ cost of debt and depresses bankers’ incentives to monitor. When moral hazard is severe, this time inconsistency leads to a credit market collapse unless the government pre-commits to an alternative resolution policy. The optimal policy is either a combination of bail-in and bailout or liquidation, depending on the severity of moral hazard and the shadow cost of the partial bailout. |
| Keywords: | bail-in; bailout; moral hazard, resolution policies; bank regulation. |
| JEL: | D82 E58 G21 G28 |
| Date: | 2018–05–22 |
| URL: | http://d.repec.org/n?u=RePEc:sef:csefwp:499&r=ban |
| By: | Haufler, Andreas (LMU Munich); Wooton, Ian (University of Strathclyde) |
| Abstract: | We set up a two-country, regional model of trade in financial services. Competitive firms in each country manufacture non-traded consumer goods in an uncertain productive environment, borrowing funds from a bank in either the home or the foreign market. Duopolistic banks can choose their levels of monitoring of firms and thus the levels of risk-taking, where the risk of bank failure is partly borne by taxpayers in the banks\' home countries. Moreover, each bank chooses the allocation of its lending between domestic and foreign firms, while the bank\'s overall loan volume is fixed by a capital requirement set optimally in its home country. In this setting we consider two types of financial integration. A reduction in the compliance costs of cross-border banking reduces aggregate output and increases risk-taking, thus harming consumers and taxpayers in both countries. In contrast, a reduction in the costs of screening foreign firms is likely to be eneficial for banks, consumers, and taxpayers alike. |
| Keywords: | multinational banks; foreign direct investment; capital regulation; financial integration; |
| JEL: | F36 G18 H81 |
| Date: | 2018–05–30 |
| URL: | http://d.repec.org/n?u=RePEc:rco:dpaper:99&r=ban |
| By: | Minton, Bernadette A. (Ohio State University); Stulz, Rene M. (Ohio State University); Toboada, Alvaro G. (Mississippi State University) |
| Abstract: | We investigate whether the value of large banks, defined as banks with assets in excess of the Dodd-Frank threshold for enhanced supervision, increases with the size of their assets using Tobin's q and market-to-book as our valuation measures. Many argue that large banks receive subsidies from the regulatory safety net, so they should be worth more and their valuation should increase with size. Instead, using a variety of approaches, we find (1) no evidence that large banks are valued more highly, (2) strong cross-sectional evidence that the valuation of large banks falls with size, and (3) strong evidence of a within-bank negative relation between valuation and size for large banks from 1987 to 2006 but not when the post-Dodd-Frank period is included in the sample. The negative relation between bank value and bank size for large banks cannot be systematically explained by differences in ROA or ROE, equity volatility, tail risk, distress risk, and equity discount rates. However, we find that banks with more trading assets are worth less. A 1% increase in trading assets is associated with a Tobin's q lower by 0.2% in regressions with year and bank fixed effects. This relation between bank value and trading assets helps explain the cross-sectional negative relation between large bank valuation and size. Our results hold when we use instrumental variables for bank size. |
| JEL: | G2 G21 G28 G3 |
| Date: | 2017–02 |
| URL: | http://d.repec.org/n?u=RePEc:ecl:ohidic:2017-08&r=ban |
| By: | Anouk Levels; René de Sousa van Stralen; Sînziana Kroon Petrescu; Iman van Lelyveld |
| Abstract: | Using new regulatory data, this paper contributes to the growing literature on derivatives markets and (systemic) risk, by providing a first account of the Dutch CDS market, investigating the factors that drive buying and selling of credit protection ('flow-of risk'), and analysing the impact of Brexit. We find that the CDS market has a 'core-periphery' structure in which Dutch banks are CDS sellers while insurance firms and pension funds (ICPF's) and 'other financial institutions' (OFIs) are buyers. When the volatility of a reference entity increases, the propensity to sell CDS decreases for banks and increases for ICPFs and OFIs. This hints at procyclical behaviour by banks and countercyclical behaviour by ICPFs and OFIs. The 'core-periphery' structure of the CDS market became more pronounced around Brexit events, making the CDS market more vulnerable to shocks emanating from 'systemic' players. Banks reduced net buying and selling of CDS protection on UK reference entities, while OFIs and investment funds became more dominant. This underpins the importance of adequate buyers for systemic institutions and extending the regulatory perimeter beyond banking. |
| Keywords: | EMIR; trade repositories; CDS markets; Brexit |
| JEL: | G15 G18 |
| Date: | 2018–05 |
| URL: | http://d.repec.org/n?u=RePEc:dnb:dnbwpp:592&r=ban |
| By: | Siciliani, Paolo (Bank of England) |
| Abstract: | Commercial banks’ mainstream business model, which is reliant on a stable supply of retail deposits, continues to be challenged by new and innovative sources of non-bank competition. This paper examines the implications of one such source: a substitute for commercial banks’ personal and saving accounts that provides a safer money storage option thanks to access to a central bank’s balance sheet. I model competition for retail deposits between a bank and a non-bank payment service operator by adopting the two-sided platform framework to capture the payment functionality between consumers and merchants under various configurations. I show that banks’ mainstream business model is most vulnerable when consumers perceive the two service providers as close substitutes; they have the option to sign up with both service providers; their distribution of deposit is skewed; and they are not allowed to make payments across platforms. |
| Keywords: | Two-sided platforms; retail deposit; non-bank payment service operator; central bank digital currency |
| JEL: | D43 G21 L15 L20 L50 |
| Date: | 2018–05–25 |
| URL: | http://d.repec.org/n?u=RePEc:boe:boeewp:0728&r=ban |
| By: | Alexey Vasilenko (Bank of Russia, Russian Federation;National Research University Higher School of Economics, Laboratory for Macroeconomic Analysis.) |
| Abstract: | This paper studies systemic risk and financial fragility in the Chinese economy, applying the dynamic factor model approach. First, we estimate a dynamic factor model to forecast systemic risk that exhibits significant out-of-sample forecasting power, taking into account the effect of several macroeconomic factors on systemic risk, such as economic growth slowdown, large corporate debt, rise of shadow banking, and real estate market slowdown. Second, we analyse the historical dynamics of financial fragility in the Chinese economy over the last ten years using factor-augmented quantile regressions. The results of the analysis demonstrate that the level of fragility in the Chinese financial system decreased after the Global Financial Crisis of 2007-2009, but has been gradually rising since 2015. |
| Keywords: | systemic risk, financial fragility, factor model, quantile regressions, China . |
| JEL: | C58 E44 G2 |
| Date: | 2018–03 |
| URL: | http://d.repec.org/n?u=RePEc:bkr:wpaper:wps30&r=ban |
| By: | Signe Krogstrup; Cédric Tille |
| Abstract: | The literature on the drivers of capital flows stresses the prominent role of global financial factors. Recent empirical work, however, highlights how this role varies across countries and time, and this heterogeneity is not well understood. We revisit this question by focusing on financial intermediaries’ funding flows in different currencies. A concise portfolio model shows that the sign and magnitude of the response of foreign currency funding flows to global risk factors depend on the financial intermediary’s pre-existing currency exposure. An analysis of a rich dataset of European banks’ aggregate balance sheets lends support to the model predictions, especially in countries outside the euro area. |
| Date: | 2018–05–09 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:18/97&r=ban |
| By: | Ristolainen, Kim |
| Abstract: | The recent financial crises have brought into focus questions regarding the quality of banks' assets. We study the patterns in banks reserving for and reporting of loan losses in the EU before and after implementation of the Single Supervisory Mechanism (SSM). We find that banks that 1) have less tier 1 capital, 2) are smaller, 3) are less liquid and 4) have smaller net interest margins either report relatively smaller loan loss reserves or less loan losses, even after including various controls. This supports the hypothesis that financially weaker banks may have a larger incentive to engage in balance sheet window dressing. We further find that the SSM has reduced but not eliminated the under-reserving and under-reporting bias. In addition, there has been a separate positive effect on the overall proportion of nonperforming loans (NPLs) that are realised as losses among the banks that have been under direct supervision by the SSM since implementation of the SSM. |
| JEL: | G18 G21 G28 |
| Date: | 2018–05–23 |
| URL: | http://d.repec.org/n?u=RePEc:bof:bofrdp:2018_011&r=ban |
| By: | Fache Rousová, Linda; Caloca, Antonio Rodríguez |
| Abstract: | This paper presents a detailed set of new, quantity-based indicators of financial integration in the euro area. The indicators are based on granular data from securities holdings statistics and help us disentangle the main drivers of the portfolio changes observed since the financial crisis. Three key developments since the crisis stand out. First, we find that financial integration in equity is less than that in the debt market, although the equity market was the main contributor to the partial recovery in financial integration observed since mid-2012. Second, we observe a gradual shift in cross-border investment activity from the banking sector towards other non-bank financial entities. In particular, our results show that euro area banks significantly decreased their investment in debt securities issued by banks in other euro area countries and that this decrease explains around 55% of the decline in financial integration in the debt market observed since the crisis. Finally, we find that the sharp decrease in financial integration between 2009 and 2012 was mainly driven by foreign investor flight from government debt securities, a trend that has since reversed. JEL Classification: F36, G1, G10, G15 |
| Keywords: | financial integration, international financial markets, micro-data, quantity-based indicators, securities, securities holdings statistics, security-by-security data |
| Date: | 2018–05 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbsps:201828&r=ban |
| By: | Deepal Basak; Yunhui Zhao |
| Abstract: | Consistent with the Minsky hypothesis and the “volatility paradox” (Brunnermeier and Sannikov, 2014), recent empirical evidence suggests that financial crises tend to follow prolonged periods of financial stability and investor optimism. But does financial tranquility always call for more stringent regulation over time? We examine this question using a simple portfolio choice model that features the interaction between learning and externality. We evaluate the potential of a macroprudential policy to restore efficiency, and characterize the necessary and sufficient condition for the countercyclicality of the optimal regulation/macroprudential policy. Our paper implies that policymakers should not only consider the cyclical indicators “on the surface” (for example, credit growth), but also closely examine the deep structural change of the resilience of the system. The paper also highlights the importance of assigning the macroprudential policy function to independent agencies with technical expertise. |
| Date: | 2018–05–31 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:18/123&r=ban |
| By: | Melchisedek Joslem Ngambou Djatche (Université Côte d'Azur; GREDEG CNRS) |
| Abstract: | In this paper, we analyse the link between monetary policy and banks’ risk-taking behaviour. Some theoretical and empirical studies show that monetary easy whet banks’ risk appetite through asset valuation and search for yield process. However, since 2010, the low interest rate environment has cast doubt on these results. Our study deepens the analysis of the monetary risk-taking channel considering non-linearity, especially through threshold effects model. Using a dataset of US banks, we find that the impact of low interest rates on banks risk depend on the regime of the monetary stance, i.e on the deviation of monetary rate from the Taylor rule. |
| Keywords: | Monetary policy, financial stability, bank risk-taking, non-dynamic panel threshold model |
| JEL: | E44 E58 G21 |
| Date: | 2018–05 |
| URL: | http://d.repec.org/n?u=RePEc:gre:wpaper:2018-12&r=ban |
| By: | Yann Braouezec (IESEG School of Management (LEM-CNRS-UMR 9221)) |
| Abstract: | Why do banks decide to reach their target capital ratio by selling assets and/or issuing new shares when each channel of adjustment is costly? We offer a simple framework to answer this question in which the aim of the bank is to minimize the total adjustment cost subject to the target's constraint and we derive its optimal strategy. We then compare our model's predictions to the decisions taken by two systemic banks to issue new shares in 2017 and for which the target ratio was publicly disclosed. Predictions are consistent with the observed decisions. Smaller banks are also considered. |
| Keywords: | Equity issuance, asset sale, price impact, target capital ratio, large banks |
| Date: | 2018–05 |
| URL: | http://d.repec.org/n?u=RePEc:ies:wpaper:f201805&r=ban |