nep-ban New Economics Papers
on Banking
Issue of 2018‒07‒09
eleven papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Capital Requirements, Risk-Taking and Welfare in a Growing Economy By Pierre-Richard Agénor; Luiz A. Pereira da Silva
  2. Bank runs, prudential tools and social welfare in a global game general equilibrium model By Daisuke, Ikeda
  3. Bank liquidity provision and Basel liquidity regulations By Roberts, Daniel; Sarkar, Asani; Shachar, Or
  4. How do banks and households manage interest rate risk? Evidence from mortgage applications and banks’ responses By Basten, Christoph; Guin, Benjamin; Koch, Catherine
  5. Regulation and risk shuffling in bank securities portfolios By Fuster, Andreas; Vickery, James
  6. Foreign currency bank funding and global factors By Krogstrup, Signe; Tille, Cédric
  8. Counterparty credit risk and the effectiveness of banking regulation By Iman van Lelyveld; Sinziana Kroon
  9. The impact of the leverage ratio on client clearing By Smith, Jonathan; Ferrara, Gerardo; Rodriguez, Francesc
  10. Bank profitability and economic growth By Klein, Paul-Olivier; Weill, Laurent
  11. Young Enterprises and Bank Credit Denials By Mascia, Danilo V.

  1. By: Pierre-Richard Agénor; Luiz A. Pereira da Silva
    Abstract: The effects of capital requirements on risk-taking and welfare are studied in a stochastic overlapping generations model of endogenous growth with banking, limited liability, and government guarantees. Capital producers face a choice between a safe technology and a risky (but socially inefficient) technology, and bank risk-taking is endogenous. Setting the capital adequacy ratio above a structural threshold can eliminate the equilibrium with risky loans (and thus inefficient risk-taking), but numerical simulations show that this may entail a welfare loss. In addition, the optimal ratio may be too high in practice and may concomitantly require a broadening of the perimeter of regulation and a strengthening of financial supervision to prevent disintermediation and distortions in financial markets.
    Keywords: Capital Requirements, Bank risk-taking, Investment, Financial Stability, Economic Growth, Capital Goods, Financial Regulation, Financial Intermediaries, Financial Markets, risky investments, financial stability, financial regulation
    JEL: O41 G28 E44
    Date: 2017–03
  2. By: Daisuke, Ikeda (Bank of England)
    Abstract: I develop a general equilibrium model that features endogenous bank runs in a global game framework. A bank run probability — systemic risk — is increasing in bank leverage and decreasing in bank liquid asset holdings. Bank risk shifting and pecuniary externalities induce excessive leverage and insufficient liquidity, resulting in elevated systemic risk from a social welfare viewpoint. Addressing the inefficiencies requires prudential tools on both leverage and liquidity. Imposing one tool only causes risk migration: banks respond by taking more risk in another area. I extend the model and study risk migration in other fields including sectoral lending, concentration risk and shadow banking.
    Keywords: Bank runs; global games; capital and liquidity requirements; risk migration
    JEL: E44 G01 G21 G28
    Date: 2018–06–08
  3. By: Roberts, Daniel (Federal Reserve Bank of New York); Sarkar, Asani (Federal Reserve Bank of New York); Shachar, Or (Federal Reserve Bank of New York)
    Abstract: We examine liquidity creation per unit of assets by banks subject to the Liquidity Coverage Ratio (LCR) using the liquidity measures Liquidity Mismatch Index (LMI) (Bai et al., 2018) and BB (Berger and Bouwman, 2009). We identify the LCR effects through time and cross-section effects, specific LCR-constrained balance sheet categories, an economically similar asset pair with different LCR weights, and the differential implementation of LCR by the very large and less-large LCR banks. We find that, since 2013, there has been reduced liquidity creation by LCR banks compared to non-LCR banks, occurring mostly through greater holdings of liquid assets and lower holdings of illiquid assets. Trends in liquid asset holdings are driven by High Quality Liquid Assets (HQLA), an LCR-defined category, particularly for assets where market and LCR liquidity weights are most similar. Of particular interest is a post-LCR shift in LCR bank portfolios to GNMA MBS rather than GSE MBS, economically similar assets with different LCR weights, that is not attributable to relatively greater issuances or relative price effects. We also find sharper declines of commercial and residential real estate loans by LCR banks relative to non-LCR banks post-2013. Finally, we find a decline in the high run-off category of LCR liabilities for LCR banks relative to non-LCR banks post-2013 for the largest LCR banks with greater than $250 billion in assets. Our results highlight the trade-off between lower liquidity creation and lower run risk from reduced liquidity mismatch of the largest banks.
    Keywords: LCR; banks; liquidity creation
    JEL: G01 G21 G28
    Date: 2018–06–01
  4. By: Basten, Christoph (University of Zurich); Guin, Benjamin (Bank of England); Koch, Catherine (Bank for International Settlements)
    Abstract: We exploit a unique dataset that features both un-intermediated mortgage requests and independent responses from multiple banks to each request. We show that households typically are not prudent risk managers, but prioritize minimizing current mortgage payments over insurance against future rate increases. Contrary to assumptions in the previous literature, we find that banks do also influence contracted rate fixation periods. They trade off their own exposure to interest rate risk against household requests and against credit risk.
    Keywords: Interest rate risk; credit risk; maturity mismatch; duration; fixation period; repricing frequency; fixed-rate mortgage; adjustable rate mortgage
    JEL: D14 E43 G21
    Date: 2018–06–08
  5. By: Fuster, Andreas (Swiss National Bank); Vickery, James (Federal Reserve Bank of New York)
    Abstract: Bank capital requirements are based on a mix of market values and book values. We investigate the effects of a policy change that ties regulatory capital to the market value of the “available-for-sale" investment securities portfolio for some banking organizations. Our analysis is based on security-level data on individual bank portfolios matched to bond characteristics. We find little clear evidence that banks respond by reducing the riskiness of their securities portfolios, although there is some evidence of a greater use of derivatives to hedge securities exposures. Instead, banks respond by reclassifying securities to mitigate the effects of the policy change. This shift is most pronounced for securities with high levels of interest rate risk.
    Keywords: bank; securities; available-for-sale; capital regulation; fair value accounting
    JEL: G21 G23 G28
    Date: 2018–06–01
  6. 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: currency mismatch,capital flows,push factors,spillovers,cross-border transmission of shocks,European bank balance sheets
    JEL: F32 F34 F36
    Date: 2018
  7. By: Hyejin Cho (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique)
    Abstract: In examining the global imbalance by the excess liquidity level, the argument is whether commercial banks want to hold excess reserves for the precautionary aim or expect to get better return through risky decision. By pictorial representations, risk preference in the Machina's triangle (1982, 1987) encapsulates motivation to hold excess liquidity. This paper introduces an endogenous liquidity model for the financial sector where the imbalance argument comes from credit rationing extended from outside liquidity (Holmstrom and Tirole, 2011). We also conduct a stylistic analysis of excess liquidity in Jordan and Lebanon from 1993 to 2015. As such, the proposed model exemplifies the combination of credit, liquidity and regulation.
    Keywords: credit rationing, excess liquidity, inside liquidity, risk preference,E58,L51
    Date: 2017–04–10
  8. By: Iman van Lelyveld; Sinziana Kroon
    Abstract: We investigate how counterparty credit risk influences the prices of over-the-counter CDS contracts using confidential transaction level data for practically all Dutch trades. We confirm our prior of a significant negative relationship between the credit worthiness of the CDS seller and the price of the CDS contract. We find that an increase of 100 basis points in the credit spread of the seller, decreases the price of the CDS contract by 7.2 basis points. Also, the larger the size of the CDS contract the lower the price of the CDS contract. Finally, we find that regulatory exemptions have a statistically significant but economically negligible impact on CDS pricing: Transactions exempted from banking capital requirements for Credit Valuation Adjustment risk - mostly banks transacting with non-financial institutions, sovereigns and pension funds - trade 0.14 basis points lower, all else equal.
    Keywords: OTC market; counterparty credit risk; credit default swap
    JEL: G10 G12 G14 G20 G23
    Date: 2018–06
  9. By: Smith, Jonathan (Bank of England); Ferrara, Gerardo (Bank of England); Rodriguez, Francesc (Cass Business School)
    Abstract: As part of the post-crisis regulatory reform, many interest-rate derivative transactions are required to be centrally cleared. Nevertheless, the treatment of this type of transaction under the leverage ratio (LR) requirement does not allow for the use of initial margin to reduce the exposure, thereby increasing capital costs. As a result, LR affected clearing member banks may be more reluctant to provide central clearing services to clients given this additional cost. This in turn can prevent some real economy firms from hedging their risks. We analyse whether this is the case by exploiting detailed confidential transaction and portfolio level data as well as the introduction and posterior tightening of the LR in the UK in a diff-in-diff framework. Our results suggest that the LR had a disincentivising effect on client clearing, both in terms of daily transactions as well as the number of clients, but this impact seems to be driven by a reduced willingness to take on new clients.
    Keywords: Financial regulation; leverage ratio; interest rate derivatives; clearing; banking
    JEL: G01 G18 G20 G28
    Date: 2018–06–15
  10. By: Klein, Paul-Olivier; Weill, Laurent
    Abstract: This paper analyses the effect of bank profitability on economic growth. While policymakers have shown major concerns for low levels of bank profitability, there are no empirical studies on the growth effects of bank profitability. To fill this gap, we investigate the impact of bank profitability on economic growth using a sample of 133 countries during the period 1999–2013 with several empirical approaches. Our first major conclusion is that a high current level of bank profitability contributes positively to economic growth. Our second conclusion is that the past level of bank profitability exerts a negative influence on economic growth leading to the absence of significance for the overall bank profitability. Hence, the positive impact of bank profitability on economic growth is short-lived. These findings are robust to a battery of robustness checks, including those using alternative measures for profitability and growth.
    JEL: G21 O16 O40
    Date: 2018–07–02
  11. By: Mascia, Danilo V. (Asian Development Bank Institute)
    Abstract: By employing a sample of 20,956 observations of nonfinancial small and medium-sized enterprises (SMEs) headquartered in the euro area, between 2009 and 2015, we test whether young businesses are more likely to face credit rejections from lenders than their older peers. Our findings appear to confirm our suspicions that new enterprises consistently experience higher denials from banks compared with more established businesses. Such a result is stable to different model specifications and is also confirmed once we handle the issue of sample selection bias potentially affecting our data. Additional tests also reveal that credit constraints are particularly difficult for young SMEs located in Southern and Central Europe, as well as for those operating in the “trade” industry. Overall, our evidence suggests that actions from the policy maker could be desirable to support the viability of credit and, thus, ensure the growth of young businesses in the euro area.
    Keywords: SMEs; young enterprises; bank loans; credit rationing
    JEL: D82 G20 G21 G30 L26 M13
    Date: 2018–05–09

This nep-ban issue is ©2018 by Christian Calmès. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.