nep-ban New Economics Papers
on Banking
Issue of 2018‒06‒25
nineteen papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. The Bank Lending Channel A Time-Varying Approach By Richard Varghese; ;
  2. The cost of bank regulatory capital By Plosser, Matthew; Santos, Joao A. C.
  3. The Role of Technology in Mortgage Lending By Fuster, Andreas; Plosser, Matthew; Schnabl, Philipp; Vickery, James
  4. The Impact of Institutions on Bank Governance and Stability: Evidence from African Countries By Samuel Mutarindwa; Dorothea Schäfer; Andreas Stephan
  5. Regulatory changes and the cost of capital for banks By Kovner, Anna; Van Tassel, Peter
  6. Determining size thresholds for the Too-Small-To-Survive and the Too-Big-To-Fail banks By Nikolaos I. Papanikolaou
  7. The Impact of Regulatory Stress Testing on Bank's Equity and CDS Performance By Lukas Ahnert; Pascal Vogt; Volker Vonhoff; Florian Weigert
  8. Do High Deposit Interest Rates Signal Bank Default? Evidence from the Russian Retail Deposit Market By Maria Bondarenko; Maria Semenova
  9. Shadow Banks and the Risk-Taking Channel of Monetary Policy Transmission in the Euro Area By Arina Wischnewsky; Matthias Neuenkirch
  10. A structural credit risk model based on purchase order information By Suguru Yamanaka; Misaki Kinoshita
  11. Macroprudential policy and income inequality By Jon Frost; René van Stralen
  12. Manipulating Reliance on Intuition Reduces Risk and Ambiguity Aversion By Luigi Guiso; Tullio Jappelli
  13. Collateral Runs By Sebastian Infante; Alexandros Vardoulakis
  14. Did Smaller Firms face Higher Costs of Credit during the Great Recession? A Vector Error Correction Analysis with Structural Breaks By Louisa Kammerer; Miguel D. Ramirez
  15. Optimal Capital Structure and Bankruptcy Choice: Dynamic Bargaining vs Liquidation By Antill, Samuel; Grenadier, Steven
  16. All economic ideas are equal, but some are more equal than others: A differentiated perspective on macroprudential ideas and their implementation By Ibrocevic, Edin; Thiemann, Matthias
  17. The Limits to Partial Banking Unions: A Political Economy Approach By Foarta, Dana
  18. The Financial Transmission of Housing Bubbles: Evidence from Spain By Alberto Martín; Enrique Moral-Benito; Tom Schmitz
  19. Liquidity regulation, the central bank and the money market By Julia Körding; Beatrice Scheubel

  1. By: Richard Varghese (IHEID, Graduate Institute of International and Development Studies, Geneva); ;
    Abstract: Using a cross-country panel of 925 banks from 19 advanced economies, for the period 1981-2016, I examine how the bank lending channel of monetary policy has evolved over time. I find that the sensitivity of lending to bank balance sheet liquidity declines over time, with nearly all the reduction occurring between the early 1990s and the early 2000s. Contrary to normal times, during recessions, more liquid banks reinforce the impact of monetary policy shocks on lending relative to their less liquid counterparts. The sensitivity of non-interest income to lending increases sharply from the late 1990s till the global financial crisis of 2008, and declines in the post-crisis period, indicating pro-cyclicality. Moreover, the relative ability of banks with higher non-interest income to mitigate monetary policy shocks increases sharply towards the end of the sample period, capturing the impact of the prolonged low interest rate environment on transmission process. These findings suggest that the structural changes in the banking industry and the state of the economy have a significant impact on the strength of the bank lending channel.
    Keywords: bank lending channel, monetary policy, financial regulation
    JEL: E51 E52 E44
    Date: 2018–05
  2. By: Plosser, Matthew (Federal Reserve Bank of New York); Santos, Joao A. C. (Federal Reserve Bank of New York)
    Abstract: The Basel I Accord introduced a discontinuity in required capital for undrawn credit commitments. While banks had to set aside capital when they extended commitments with maturities in excess of one year, short-term commitments were not subject to a capital requirement. The Basel II Accord sought to reduce this discontinuity by extending capital standards to most short-term commitments. We use these differences in capital standards around the one-year maturity to infer the cost of bank regulatory capital. Our results show that following Basel I, undrawn fees and all-in-drawn credit spreads on short-term commitments declined (relative to those of long-term commitments). In contrast, following the passage of Basel II, both undrawn fees and spreads went up. These results are robust and confirm that banks act to conserve regulatory capital by modifying the cost and supply of credit.
    Keywords: Basel accords; capital regulation; cost of capital; loan spreads
    JEL: G21 G28
    Date: 2018–06–01
  3. By: Fuster, Andreas; Plosser, Matthew; Schnabl, Philipp; Vickery, James
    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.
    Keywords: Financial Intermediation; Fintech; Mortgages
    JEL: G21 G23 L51
    Date: 2018–05
  4. By: Samuel Mutarindwa; Dorothea Schäfer; Andreas Stephan
    Abstract: This paper sheds new light on how African countries’ legal systems and institutions influence the governance and stability of their banks. We find that institutional factors, in particular the legal family of origin, political stability, contract enforcement and strength of investor protection promote central corporate governance reforms. Using a difference-in-difference approach, we also reveal that those reforms mediate the impact of institutions on banks. If countries have a corporate governance reform in place their banks show better internal governance and higher stability.
    Keywords: African banks, corporate governance, legal systems, institutions, bank stability
    JEL: G21 G28 G30 G32 G38
    Date: 2018
  5. By: Kovner, Anna (Federal Reserve Bank of New York); Van Tassel, Peter (Federal Reserve Bank of New York)
    Abstract: We estimate the cost of capital for the banking industry and find that while the cost of capital soared for banks in the financial crisis, after the passage of the Dodd-Frank Act, the value-weighted cost of capital for banks fell differentially more than did the cost of capital for nonbanks. The very largest banks drive the decline in expected returns. Over a longer time horizon, the cost of capital for banks may be differentially higher than that for nonbanks relative to the time period before the Graham-Leach-Bliley Act was passed, although in some measures the difference is negative and/or cannot be distinguished from zero. We find some evidence that stress testing has lowered the cost of capital for the largest stress-tested banks, although not for those added more recently to stress testing.
    Keywords: cost of capital; beta; bank regulation; Dodd-Frank; banks
    JEL: G12 G21 G28
    Date: 2018–06–01
  6. By: Nikolaos I. Papanikolaou (Bournemouth University)
    Abstract: In the recent crisis, the U.S. authorities bailed out numerous banks, while let many others to fail as going concern entities. Even though both interventions fully protect depositors, a bail out represents an implied subsidy to shareholders, which is not yet the case with closures where creditors are not subsidised. We investigate this non-uniform policy, demonstrating that size and not performance is the decision variable that endogenously determines one threshold below which banks are treated as Too-Small-To-Survive by regulators and another one above which are considered to be Too-Big-To-Fail.
    Keywords: Distressed banks, Too-Big-To-Fail, Too-Small-To-Survive, bank size, threshold estimation
    JEL: G01 G21 G28
    Date: 2018–06
  7. By: Lukas Ahnert; Pascal Vogt; Volker Vonhoff; Florian Weigert
    Abstract: This paper investigates the impact of stress testing results on bank's equity and CDS performance using a large sample of ten tests from the US CCAR and the European EBA regimes in the time period between 2010 and 2017. We find that passing banks experience positive abnormal equity returns and tighter CDS spreads, while failing banks show strong drops in equity prices and widening CDS spreads. Interestingly, we also document strong market reactions at the announcement date of the stress tests. A bank’s asset quality and its return on equity at the time of the announcement are significant predictors of the pass/fail outcome of a bank.
    Keywords: Banks, Stress Testing, Equity Performance, CDS Performance
    JEL: G00 G21 G28
    Date: 2018–05
  8. By: Maria Bondarenko (National Research University Higher School of Economics); Maria Semenova (National Research University Higher School of Economics)
    Abstract: In recent years the Russian banking system has witnessed numerous bank license withdrawals. Many of the failed banks had significant volumes of retail deposits in their liabilities, thus, transmitting the default burden to the Deposit Insurance Agency and ultimately to the taxpayers. In their attempt to stay in the market banks may try to attract the depositor funds even more intensively when the failure is not far away. The main assumption of this paper is that banks raise additional funds through inflated deposit interest rates – the overstatement strategy – before leaving the market. We use unique data on Russian bank deposit interest rates for deposits of different maturities in 2015–2016 combined with data about bank fundamentals coming from their financial statements. The results suggest that if a bank offers too generous interest rates for deposits for 180-365 days this can be a signal of a significantly higher probability of license withdrawal in 3 quarters. In their attempt to urgently attract funds when moving closer to default banks assign the highest rates for the longest-term deposits, with the maturity over one year. The interest rates higher than the market average dramatically increase the probability of a bank failure in 2 quarters.
    Keywords: Bank failure, Deposit interest rates, Market discipline, Personal deposits, Russia
    JEL: G21 G01 P2
    Date: 2018
  9. By: Arina Wischnewsky; Matthias Neuenkirch
    Abstract: In this paper, we provide evidence for a risk-taking channel of monetary policy transmission in the euro area that works through an increase in shadow banks’ total asset growth and their risk assets ratio. Our dataset covers the period 2003Q1–2017Q3 and includes, in addition to the standard variables for real GDP growth, inflation, and the monetary policy stance, the aforementioned two indicators for the shadow banking sector. Based on vector autoregressive models for the euro area as a whole, we find for conventional monetary policy shocks that a portfolio reallocation effect towards riskier assets is more pronounced, whereas for unconventional monetary policy shocks we detect stronger evidence for a general expansion of assets. Country-specific estimations confirm these findings for most of the euro area countries, but also reveal some heterogeneity in the shadow banks’ reaction.
    Keywords: European Central Bank, Macroprudential Policy, Monetary Policy Transmission, Risk-Taking Channel, Shadow Banks, Vector Autoregression
    JEL: E44 E52 E58 G11 G23 G28
    Date: 2018
  10. By: Suguru Yamanaka (Musashino University); Misaki Kinoshita (Bank of Japan (currently at Iyo Bank, Ltd. j)
    Abstract: This study proposes a credit risk model based on purchase order (PO) information, which is called a gPO-based structural model, hand performs an empirical analysis on credit risk assessment using real PO samples. A time-series model of PO transitions is introduced and the asset value of the borrower firm is obtained using the PO time-series model. Then, we employ a structural framework in which default occurs when the asset value falls below the debt amount, in order to estimate the default probability of the borrower firm. The PO-based structural model enables us to capture borrower firms' precise business conditions on a real-time basis, which is not the case when using only financial statements. With real PO samples provided by some sample firms, we empirically show the effectiveness of our model in estimating default probabilities of the sample firms. One of the advantages of our model is its ability to obtain default probabilities reflecting borrower firms' business conditions, such as trends in PO volumes and credit quality of buyers.
    Keywords: Purchase order information; Credit risk, Structural model
    Date: 2018–06–15
  11. By: Jon Frost; René van Stralen
    Abstract: Based on newly available data, we examine the relationship between macroprudential policies (MaPs) and the Gini coefficient of both market income inequality, i.e. the Gini coefficient of income inequality before redistributive policies, and net income inequality, i.e. inequality after redistribution. We run panel regressions for 69 countries over the period 2000 to 2013. Our results show a positive association of the use of some MaPs with both market and net income inequality. In particular, we find that concentration limits, macroprudential reserve requirements and interbank exposure limits have a positive relationship with market income inequality, while loan-to-value (LTV) limits have a positive association with net inequality. The results for other measures are relatively sensitive to specification.
    Keywords: macroprudential policy; financial regulation; inequality; income distribution
    JEL: D63 G28 O16
    Date: 2018–05
  12. By: Luigi Guiso (Einaudi Institute for Economics and Finance (EIEF) and CEPR); Tullio Jappelli (University of Naples Federico II, CSEF, and CEPR)
    Abstract: Rational investors perceive correctly the value of financial information. Investment in information is therefore associated with a higher expected portfolio return and Sharpe ratio. Overconfident investo rs overstate the quality of their own information, and thus investment in information is associated with a lower expected Sharpe ratio despite they realize higher average returns. We contrast the implications of these two models using two unique surveys of customers of a leading Italian bank with portfolio data and measures of financial information. We find that the investment in information is positively associated with returns to financial wealth and negatively to Sharpe ratio. The latter falls with proxies for overconfidence. We relate these findings to the wealth inequality debate.
    Keywords: Portfolio Choice, Information, Overconfidence
    JEL: E2 D8 G1
    Date: 2018–06–14
  13. By: Sebastian Infante; Alexandros Vardoulakis
    Abstract: This paper models an unexplored source of liquidity risk faced by large broker-dealers: collateral runs. By setting different contracting terms on repurchase agreements with cash borrowers and lenders, dealers can source funds for their own activities. Cash borrowers internalize the risk of losing their collateral in case their dealer defaults, prompting them to withdraw it. This incentive creates strategic complementarities for counterparties to withdraw their collateral, reducing a dealer's liquidity position and compromising her solvency. Collateral runs are markedly different than traditional wholesale funding runs because they are triggered by a contraction in dealers' assets, rather than their liabilities.
    Keywords: Dealer ; Collateral ; Default ; Liquidity ; Rehypothecation ; Repo ; Runs
    JEL: G23 G33 G01 C72
    Date: 2018–04–04
  14. By: Louisa Kammerer; Miguel D. Ramirez (Department of Economics, Trinity College)
    Abstract: This paper examines the challenges firms(and policymakers) encounter when confronted by a recession at the zero lower bound, when traditional monetary policy is ineffective in the face of deteriorated balance sheets and high costs of credit. Within the larger body of literature, this paper focuses on the cost of credit during a recession, which constrains smaller firms from borrowing and investing, thus magnifying the contraction. Extending and revising a model originally developed by Walker (2010) and estimated by Pandey and Ramirez (2012), this study uses a Vector Error Correction Model with structural breaks to analyze the effects of relevant economic and financial factors on the cost of credit intermediation for small and large firms. Specifically, it tests whether large firms have advantageous access to credit, especially during recessions. The findings suggest that during the Great Recession of 2007-09 the cost of credit rose for small firms while it decreased for large firms, ceteris paribus. From the results, the paper assesses alternative ways in which the central bank can respond to a recession facing the zero lower bound.
    Keywords: Cost of credit; General impulse response functions; Granger causality test; Great Recession; Gregory Hansen single-break cointegration test; Johansen cointegration test; KPSS unit root test; Monetary policy; Vector error correction model (VECM); Small and large firms; and Zero lower bound (ZLB).
    JEL: C22 E50 G01
    Date: 2018–05
  15. By: Antill, Samuel (Stanford University); Grenadier, Steven (Stanford University)
    Abstract: We model a firm's optimal capital structure decision in a framework in which it may later choose to enter either Chapter 11 reorganization or Chapter 7 liquidation. Creditors anticipate equityholders' ex-post reorganization incentives and price them into the ex-ante credit spreads. Using a realistic dynamic bargaining model of reorganization, the implied capital structure results in both higher credit spreads and dramatically lower leverage than existing models. If reorganization is less efficient than liquidation, the added option of reorganization can actually make equityholders worse off ex-ante, even when they liquidate on the equilibrium path.
    Date: 2017–09
  16. By: Ibrocevic, Edin; Thiemann, Matthias
    Abstract: In this study we investigate which economic ideas were prevalent in the macroprudential discourse post-crises in order to understand the availability of ideas for reform minded agents. We base our analysis on new findings in the field of ideational shifts and regulatory science, which posit that change-agents engage with new ideas pragmatically and strategically in their effort to have their economic ideas institutionalized. We argue that in these epistemic battles over new regulation, scientific backing by academia is the key resource determining the outcome. We show that the present reforms implemented internationally follow this pattern. In our analysis we contrast the entire discourse on systemic risk and macroprudential regulation with Borio's initial 2003 proposal for a macroprudential framework. We find that mostly cross-sectional measures targeted towards increasing the resilience of the financial system rather than inter-temporal measures dampening the financial cycle have been implemented. We provide evidence for the lacking support of new macroprudential thinking within academia and argue that this is partially responsible for the lack of anti-cyclical macroprudential regulation. Most worryingly, the financial cycle is largely absent in the academic discourse and is only tacitly assumed instead of fully fledged out in technocratic discourses, pointing to the possibility that no anti-cyclical measures will be forthcoming.
    Date: 2018
  17. By: Foarta, Dana (Stanford University)
    Abstract: This paper studies the welfare effects of a partial banking union in which cross-country financial transfers that could be used towards bailouts are decided at the supranational level, but policymakers in member countries hold decision power over the distribution of funds. This allows the policymakers, who are partially self-interested, to extract rents in the bailout process. In equilibrium, such a banking union lowers the welfare of citizens in the country receiving transfers. Supranational fiscal rules are ineffective at reversing this result, but a Pareto improvement may be achieved if scale rules are combined with domestic reforms that reduce political rents.
    Date: 2017–11
  18. By: Alberto Martín; Enrique Moral-Benito; Tom Schmitz
    Abstract: What are the effects of a housing bubble on the rest of the economy? We show that if firms and banks face collateral constraints, a housing bubble initially raises credit demand by housing firms while leaving credit supply unaffected. It therefore crowds out credit to non-housing firms. If time passes and the bubble lasts, however, housing firms eventually pay back their higher loans. This leads to an increase in banks’ net worth and thus to an expansion in their supply of credit to all firms: crowding-out gives way to crowding-in. These predictions are confirmed by empirical evidence from the recent Spanish housing bubble. In the early years of the bubble, non-housing firms reduced their credit from banks that were more exposed to the bubble, and firms that were more exposed to these banks had lower credit and output growth. In its last years, these effects were reversed. Keywords: Housing bubble, Credit, Investment, Financial Frictions, Financial Transmission, Spain. JEL Codes: E32, E44, G21.
    Date: 2018
  19. By: Julia Körding; Beatrice Scheubel
    Abstract: Money markets play a central role in monetary policy implementation. Money market functioning has changed since the financial crisis. This arguably reflects the interaction of two forces: Changes in monetary policy, and changes in regulation. This interaction is not yet well understood. We focus on the newly introduced Liquidity Coverage Ratio (LCR) and how it influences the behaviour of banks and the equilibrium on the money market. We develop a theoretical model to analyse how liquidity regulation may interfere with the central bank's implementation of monetary policy. We find that when the market equilibrium is suboptimal due to asymmetric information, both the central bank and the regulator can act to improve welfare. These actions can be complementary or conflicting, depending on the environment. The main insight from the central bank perspective is that the regulator can reach the welfare optimum, but at the expense of the central bank moving away from its optimum. The central bank will thus need to adjust its implementation of monetary policy accordingly, to address the effects of liquidity regulation.
    Keywords: regulation; Basel III; central bank; interbank lending; money market; asymmetric information
    JEL: E43 E58 G01 H12 L51
    Date: 2018–05

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