nep-ban New Economics Papers
on Banking
Issue of 2018‒06‒18
twenty papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Does lending relationship help or alleviate the transmission of liquidity shocks? Evidence from a liquidity crunch in China By Bai, Yiyi; Dang, Vi Tri; He, Qing; Lu, Liping
  2. The Impact of the Dodd-Frank Act on Small Business By Bordo, Michael D.; Duca, John V.
  3. International Commodity Prices and Domestic Bank Lending in Developing Countries By Agarwal, Isha; Duttagupta, Rupa; Presbitero, Andrea F.
  4. Is Basel III counter-cyclical: The case of South Africa? By Guangling Liu; Thabang Molise
  5. Credit Misallocation During the European Financial Crisis By Fabiano Schivardi; Enrico Sette; Guido Tabellini
  6. The determinants of bank loan recovery rates in good times and bad -- new evidence By Hong Wang; Catherine S. Forbes; Jean-Pierre Fenech; John Vaz
  7. Testing the systemic risk differences in banks By Jokivuolle, Esa; Tunaru, Radu; Vioto, Davide
  8. Foreign Currency Bank Funding and Global Factors By Krogstrup, Signe; Tille, Cédric
  9. Why Are Banks Exposed to Monetary Policy? By Di Tella, Sebastian; Kurlat, Pablo
  10. Deposit Inflows and Outflows in Failing Banks: The Role of Deposit Insurance By Christopher Martin; Manju Puri; Alexander Ufier
  11. Investigating credit transmission mechanism in the Republic of Macedonia: evidence from Vector Error Correction Model By Milan Eliskovski
  12. Residential investment and economic activity: evidence from the past five decades By Emanuel Kohlscheen; Aaron Mehrotra; Dubravko Mihaljek
  13. CEO Compensation, Pay Inequality, and the Gender Diversity of Bank Board of Directors By Owen, Ann L.; Temesvary, Judit
  14. The Impact of the Current Expected Credit Loss Standard (CECL) on the Timing and Comparability of Reserves By Sarah Chae; Robert F. Sarama; Cindy M. Vojtech; James Z. Wang
  15. Externalities as Arbitrage By Hebert, Benjamin
  16. Banking Supervision and External Autditors: What works best? By Donato Masciandaro; Davide Romelli
  17. Riding the Credit Boom By Christopher Hansman; Harrison Hong; Wenxi Jiang; Yu-Jane Liu; Juan-Juan Meng
  18. Banking on Deposits: Maturity Transformation without Interest Rate Risk By Drechsler, Itamar; Savov, Alexi; Schnabl, Philipp
  19. On the Benefits of Universal Banks : Concurrent Lending and Corporate Bond Underwriting By Elliot Anenberg; Maggie Church; Serafin J. Grundl; You Suk Kim
  20. Impact of Contingent Payments on Systemic Risk in Financial Networks By Tathagata Banerjee; Zachary Feinstein

  1. By: Bai, Yiyi; Dang, Vi Tri; He, Qing; Lu, Liping
    Abstract: We examine China’s June 2013 liquidity crunch as a negative shock to banks and analyze the wealth effects on exchange-listed firms. Our findings suggest that liquidity shocks to financial institutions negatively impact borrower performance, particularly borrowers reporting outstanding loans at the end of 2012. Stock valuations of firms with long-term bank relationships, however, outperform the market and experience smaller subsequent declines in investment than peers lacking solid banking relationships. This effect is the strongest for firms that enjoy good relations with China’s large state-owned banks or foreign banks, and weakest for firms whose connections are solely with local banks. We document a positive correlation between the stock performances of firms and the stock performances of lender banks and the likelihood of lender banks operating as net lenders in the interbank market. These results suggest that banks transmit liquidity shocks to their borrowing firms and that a long-term bank-firm relationship may mitigate the negative effects of a liquidity shock.
    JEL: G30 G14 G21
    Date: 2018–05–08
  2. By: Bordo, Michael D. (Rutgers University); Duca, John V. (Federal Reserve Bank of Dallas)
    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 commercial and industrial (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 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.
    Keywords: small-business lending; business formation; regulation; Dodd-Frank; Sarbanes-Oxley; secular stagnation
    JEL: E40 E50 G21
    Date: 2018–04–21
  3. By: Agarwal, Isha (Asian Development Bank Institute); Duttagupta, Rupa (Asian Development Bank Institute); Presbitero, Andrea F. (Asian Development Bank Institute)
    Abstract: We study the role of the bank-lending channel in propagating fluctuations in commodity prices to credit aggregates and economic activity in developing countries. We use data on more than 1,600 banks from 78 developing countries to analyze the transmission of changes in international commodity prices to domestic bank lending. Identification relies on a bank specific time-varying measure of bank sensitivity to changes in commodity prices, based on daily data on bank stock prices. We find that a fall in commodity prices reduces bank lending, although this effect is confined to low-income countries and driven by commodity price busts. Banks with relatively lower deposits and poor asset quality transmit commodity price changes to lending more aggressively, supporting the hypothesis that the overall credit response to commodity prices works also through the credit supply channel. Our results also show that there is no significant difference in the behavior of foreign and domestic banks in the transmission process, reflecting the regional footprint of foreign banks in developing countries.
    Keywords: bank lending; commodity prices; macrofinancial linkages; developing countries
    JEL: F30 F34 G21 Q02
    Date: 2018–02–12
  4. By: Guangling Liu (Department of Economics, University of Stellenbosch); Thabang Molise (Department of Economics, University of Stellenbosch)
    Abstract: This paper develops a dynamic general equilibrium model with banking and a macroprudential authority, and studies the extent to which the Basel III bank capital regulation promotes financial and macroeconomic stability in the context of South African economy. The decomposition analysis of the transition from Basel II to Basel III suggests that it is the counter-cyclical capital buffer that effectively mitigates the pro-cyclicality of its predecessor, while the impact of the conservative buffer is marginal. Basel III has a pronounced impact on the financial sector compared to the real sector and is more effective in mitigating fluctuations in financial and business cycles when the economy is hit by financial shocks. In contrast to the credit-to-GDP ratio, the optimal policy analysis suggests that the regulatory authority should adjust capital requirement to changes in credit and output when implementing the counter-cyclical buffer.
    Keywords: Bank capital regulations, Financial stability, Counter-cyclical capital buffer, DSGE
    JEL: E44 E47 E58 G28
    Date: 2018
  5. By: Fabiano Schivardi; Enrico Sette; Guido Tabellini
    Abstract: Do banks with low capital extend excessive credit to weak firms, and does this matter for aggregate efficiency? Using a unique data set that covers almost all bank-firm relationships in Italy in the period 2004-2013, we find that, during the Eurozone financial crisis: (i) Under-capitalized banks were less likely to cut credit to non-viable firms. (ii) Credit misallocation increased the failure rate of healthy firms and reduced the failure rate of non viable firms. (iii) Nevertheless, the adverse effects of credit misallocation on the growth rate of healthier firms were negligible, and so were the effects on TFP dispersion. This goes against previous infl uential findings that, we argue, face serious identification problems. Thus, while banks with low capital can be an important source of aggregate inefficiency in the long run, their contribution to the severity of the great recession via capital misallocationvwas modest.
    Keywords: Bank capitalization, zombie lending, capital misallocation
    JEL: D23 E24 G21
    Date: 2017
  6. 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. Using US bank default loan data from Moody's Ultimate Recovery Database and covering the pre- and post-GFC period, this paper develops a dynamic predictive model for bank loan recovery rates, accommodating the distinctive empirical features of the recovery rate data while incorporating a large number of possible determinants. We find that 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, meaning that the relationship between recovery rates and certain loan characteristics, firm characteristics and the probability of default differs depending on underlying credit market conditions. Our findings demonstrate the importance of accounting for countercyclical expected recovery rates when determining capital retention levels.
    Keywords: credit risk, Basel III, countercyclicality, Bayesian estimation, LASSO prior, Markov switching.
    JEL: G17 G21 G28
    Date: 2018
  7. By: Jokivuolle, Esa; Tunaru, Radu; Vioto, Davide
    Abstract: This paper contains a testing framework for the reliability of systemic risk measurement of banks, using the three leading market-based measures of systemic risk. We test whether the difference within the same category and across dfferent categories of systemic risk of individual banks is signifcant. We find that in general the systemic risk categories defined by the Financial Stability Board are dfferent from those constructed in a full pairwise comparison approach based on the market measures. Moreover, these dfferences were more pronounced during episodes of high market turbulence.To account for model risk we introduce a more robust ranking method based on nonparametric confidence intervals. We show that there is a large number of banks with overlapping confidence intervals of their market-based systemic risk measures.Further, similarity measures indicate that the scoring based rankings are not perfectly aligned with rankings produced by market based systemic risk measures.
    JEL: G01 G32
    Date: 2018–06–01
  8. By: Krogstrup, Signe; Tille, Cédric
    Abstract: The literature on 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 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. Analysis of data on European banks' aggregate balance sheets lends support to the model predictions, especially in countries outside the euro area.
    Keywords: Capital Flows; cross-border transmission of shocks; currency mismatch; European bank balance sheets.; push factors; Spillovers
    JEL: F32 F34 F36
    Date: 2018–05
  9. By: Di Tella, Sebastian (Stanford University); Kurlat, Pablo (Stanford University)
    Abstract: We propose a model of banks' exposure to movements in interest rates and their role in the transmission of monetary shocks. Since bank deposits provide liquidity, higher interest rates allow banks to earn larger spreads on deposits. Therefore, if risk aversion is higher than one, banks' optimal dynamic hedging strategy is to take losses when interest rates rise. This risk exposure can be achieved by a traditional maturity mismatched balance sheet, and amplifies the effects of monetary shocks on the cost of liquidity. The model can match the level, time pattern, and cross-sectional pattern of banks' maturity mismatch.
    JEL: E41 E43 E44 E51
    Date: 2017–11
  10. By: Christopher Martin; Manju Puri; Alexander Ufier
    Abstract: Using unique, daily, account-level balances data we investigate deposit stability and the drivers of deposit outflows and inflows in a distressed bank. We observe an outflow of uninsured depositors from the bank following bad regulatory news. We find that government deposit guarantees, both regular deposit insurance and temporary deposit insurance measures, reduce the outflow of deposits. We also characterize which accounts are more stable (e.g., checking accounts and older accounts). We further provide important new evidence that, simultaneous with the run-off, gross funding inflows are large and of first-order impact — a result which is missed when looking at aggregated deposit data alone. Losses of uninsured deposits were largely offset with new insured deposits as the bank approached failure. We show our results hold more generally using a large sample of banks that faced regulatory action. Our results raise questions about depositor discipline, widely considered to be one of the key pillars of financial stability, raising the importance of other mechanisms of restricting bank risk taking, including prudent supervision.
    JEL: D12 G01 G21 G28
    Date: 2018–05
  11. By: Milan Eliskovski (National Bank of the Republic of Macedonia)
    Abstract: Research subject of this paper is the credit transmission mechanism in the Republic of Macedonia or in other words this paper investigates the effects of the monetary signals by the National Bank of the Republic of Macedonia on banks' lending. The credit transmission is analyzed through its narrow nature or so called bank lending channel. In order to explain how the bank lending channel operates in Macedonia, two theoretical models are considered and econometrically tested. The first one is the traditional bank lending channel explained by Bernanke and Blinder model and the second one is the credit rationing model by Stiglitz and Weiss. The econometric technique employed is the vector error correction model or known as Johansen cointegration technique which is appropriate for empirical testing based on time series. The empirical results suggest that the Stiglitz and Weiss model better explains the banks' behavior in the Republic of Macedonia, that is the banking sector is risk averse and rations loans with an aim not to deteriorate its' profitability. Therefore, monetary tightening signals clearly affect the banks to restrict lending. On the other hand, the monetary expansionary signals have to be supported by favorable balance sheet structure of the banks as well as by favorable macroeconomic conditions in order to encourage lending.
    Keywords: bank lending channel, monetary transmission, credit rationing, VECM analysis
    JEL: C22 E52 E58 G21
    Date: 2018
  12. By: Emanuel Kohlscheen; Aaron Mehrotra; Dubravko Mihaljek
    Abstract: We analyse the evolution and main drivers of residential investment, using a panel with quarterly data for 15 advanced economies since the 1970s. Residential investment is a notably volatile component of real GDP in all countries in the sample. We find real house price growth, net migration inflows and the size of the existing housing stock to be significant drivers of residential investment across various model specifications. We also detect important asymmetries: interest rate increases affect residential investment more than interest rate cuts, and interest rate changes have larger effects on residential investment when its share in overall GDP is rising. Finally, we show that adding information on residential investment significantly improves the performance of standard recession prediction models.
    Keywords: housing markets, residential investment, house prices, business cycles, construction, interest rates, recession forecasts
    JEL: E22 E32 E37 E43 E52 F44
    Date: 2018–06
  13. By: Owen, Ann L.; Temesvary, Judit
    Abstract: Greater gender diversity on bank board of directors is associated with higher compensation inequality because CEOs at these banks have higher base salary. This effect disappears during the financial crisis, largely due to adjustment of non-salary compensation.
    Keywords: CEO compensation; gender diversity, board of directors
    JEL: G21 G34 J33
    Date: 2018–05
  14. By: Sarah Chae; Robert F. Sarama; Cindy M. Vojtech; James Z. Wang
    Abstract: The new forward-looking credit loss provisioning standard, CECL, is intended to promote proactive provisioning as loan loss reserves can be conditioned on expectations of the economic cycle. We study the degree to which one modeling decision–expectations about the path of future house prices – affects the size and timing of provisions for first-lien residential mortgage portfolios. While we find that provisions are generally less pro-cyclical compared to the current incurred loss standard, CECL may complicate the comparability of provisions across banks and time. Market participants will need to disentangle the degree to which variation in provisions across firms is driven by underlying risk versus differences in modeling assumptions.
    Keywords: Accounting rule change ; CECL ; Mortgage loans ; Model risk
    JEL: G21 G28 M40 M48
    Date: 2018–03–09
  15. By: Hebert, Benjamin (Stanford University)
    Abstract: Regulations on financial intermediaries can create apparent arbitrage opportunities. Intermediaries are unable to fully exploit these opportunities due to regulation, and other agents are unable to exploit them at all due to limited participation. Does the existence of arbitrage opportunities imply that regulations are sub-optimal? No. I develop of general equilibrium model, with financial intermediaries and limited participation by other agents, in which a constrained-efficient allocation can be implemented with asset prices featuring arbitrage opportunities. Absent regulation, there would be no arbitrage; however, allocations would be constrained-inefficient, due to pecuniary externalities and limited market participation. Optimal policy creates arbitrage opportunities whose pattern across states of the world reflects these externalities. From financial data alone, we can construct perceived externalities that would rationalize the pattern of arbitrage observed in the data. By examining these perceived externalities, and comparing them to the stated goals of regulators, as embodied in the scenarios of the stress tests, we can ask whether regulations are having their intended effect. The answer, in recent data, is no.
    Date: 2017–12
  16. By: Donato Masciandaro; Davide Romelli
    Abstract: What are the pros and cons of involving external auditors in banking supervision? This paper investigates the relationship between banking supervision and the involvement of external auditors from a theoretical and empirical perspective. We first provide a simple principal-agent framework that highlights the importance of several country-specific institutional characteristics in determining an optimal level of involvement of external auditors in banking supervision. We then propose a new index that captures the degree of involvement of external auditors in financial sector supervision. We construct this index for a broad set of 142 countries and show that countries characterized by higher levels of auditor involvement in supervision are less likely to experience a financial crisis. These results provide new and original empirical evidence on the link between regulatory and supervisory institutional designs and the probability of financial distress.
    Keywords: Banking Supervision, Auditing, Delegation, Economics and Law
    JEL: G21 G28
    Date: 2017
  17. By: Christopher Hansman; Harrison Hong; Wenxi Jiang; Yu-Jane Liu; Juan-Juan Meng
    Abstract: Research on leverage and asset-price fluctuations focuses on the direct effect of lax bank lending enabling financially-constrained investors to take excessive risks. Ignored are unconstrained investors speculating on higher prices during credit booms. To identify these two effects, we utilize China's staggered liberalization of stock-margin lending from 2010-2015—which encouraged a bank/brokerage-credit-fueled stock-market bubble. The direct effect is a 25 cent increase in a stock's market capitalization for each dollar of margin debt. Unconstrained investors led to an even larger increase in valuations of an additional 32 cents as they speculated on stocks likely to qualify for lending.
    JEL: E51 G01
    Date: 2018–05
  18. By: Drechsler, Itamar; Savov, Alexi; Schnabl, Philipp
    Abstract: We show that maturity transformation does not expose banks to significant interest rate risk---it actually hedges banks' interest rate risk. We argue that this is driven by banks' deposit franchise. Banks incur large operating costs to maintain their deposit franchise, and in return get substantial market power. Market power allows banks to charge depositors a spread by paying deposit rates that are low and insensitive to market rates. The deposit franchise therefore works like an interest rate swap where banks pay the fixed-rate leg (the operating costs) and receive the floating-rate leg (the deposit spread). To hedge the deposit franchise, banks must therefore hold long-term fixed-rate assets; i.e., they must engage in maturity transformation. Consistent with this view, we show that banks' aggregate net interest margins have been highly stable and insensitive to interest rates over the past six decades, and that banks' equity values are largely insulated from monetary policy shocks. Moreover, in the cross section we find that banks match the interest-rate sensitivities of their income and expenses one-for-one, and that banks with less sensitive interest expenses hold substantially more long-term assets. Our results imply that forcing banks to hold only short-term assets (``narrow banking'') would make banks unhedged and, more broadly, that the deposit franchise is what allows banks to lend long term.
    Keywords: banks; deposits; interest rate risk; maturity transformation
    JEL: E43 E52 G21 G31
    Date: 2018–05
  19. By: Elliot Anenberg; Maggie Church; Serafin J. Grundl; You Suk Kim
    Abstract: In this note, we explore whether "universal banks" provide value to firms through their ability to provide both lending and underwriting services.
    Date: 2018–04–05
  20. By: Tathagata Banerjee; Zachary Feinstein
    Abstract: In this paper we study the implications of contingent payments on the clearing wealth in a network model of financial contagion. We consider an extension of the Eisenberg-Noe financial contagion model in which the nominal interbank obligations depend on the wealth of the firms in the network. We first consider the problem in a static framework and develop conditions for existence and uniqueness of solutions as long as no firm is speculating on the failure of other firms. In order to achieve existence and uniqueness under more general conditions, we introduce a dynamic framework. We demonstrate how this dynamic framework can be applied to problems that were ill-defined in the static framework.
    Date: 2018–05

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