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on Banking |
| By: | Aurélien Violon; Dominique Durant; Oana Toader |
| Abstract: | Most research papers dealing with systemic footprint in the banking system either investigate the definition and the measure of systemic risk, or try to identify systemic banks and to calibrate the systemic risk buffers. To the best of our knowledge, this paper is among the first to provide empirical evidence on how the recent international regulation designed for global systemically important banks (GSIBs) drove changes on these institutions’ activity. Our data consists of cross-section observations for 97 large international banks from 22 countries from 2005 to 2016 (12 years). Our econometric approach quantifies the impact of the FSB designation on GSIBs’ activity, controlling for both structural differences between GSIBs and non-GSIBs and structural evolutions of the banking system over time (industry trends). We find that GSIBs have curbed downward the expansion of their total balance sheet after the FSB designation, which resulted in an additional improvement of their leverage ratio. In turn, a sizeable downward pressure is noticed on their return on equity (ROE). However, no adverse consequences can be observed on risk-taking and issuance of loans to the economy. Finally, while the relative deleveraging experienced by GSIBs illustrates a mean-reverting process, tending to close the structural gap between GSIBs and non-GSIBs, this is not the case for the cost of their deposits, which remains lower than the one of other banks, tending to prove that the GSIB framework has not so far put an end to the “too-big-to-fail” distortions. |
| Keywords: | GSIBs, business model, profitability, leverage, RWA. |
| JEL: | G01 G21 G28 G32 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:bfr:decfin:33&r=ban |
| By: | Ugo Albertazzi (European Central Bank); Fulvia Fringuellotti (University of Zurich); Steven Ongena (University of Zurich) |
| Abstract: | Why do some residential mortgages carry a fixed interest rate and others an adjustable rate? To answer this question we studied unique data from 103 banks belonging to 73 different banking groups across twelve countries in the euro area. To explain the large cross-country and time variations observed, we distinguished between the conditions that determine the local demand for credit and the characteristics of banks that supply credit. As bank funding mostly occurs at the group level, we disentangled these two sets of factors by comparing the outcomes observed for the same banking group across the different countries. Local demand conditions dominate. In particular we find that the share of new loans with a fixed rate is larger when: (1) the historical volatility of inflation is lower, (2) the correlation between unemployment and the short-term interest rate is higher, (3) households' financial literacy is lower, and (4) the use of local mortgages to back covered bonds and of mortgage-backed securities is more widespread. |
| Keywords: | mortgages, financial duration, cross-border banks |
| JEL: | F23 G21 |
| Date: | 2018–06 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:wptemi:td_1176_18&r=ban |
| By: | Gopalakrishnan, Balagopal; Jacob, Joshy; Pandey, Ajay |
| Abstract: | We examine the credit risk-choices of the public sector banks (PSBs) in India with a novel dataset that is able to trace the borrowers to their banks. We determine the likelihood of the ownership type of the lender bank associated with every firm, using a lender type prediction model with a set of observable risk proxies such as the ex-ante credit ratings. The analysis indicates that the PSBs are more likely to lend to observably risky firms compared to the private banks (PBs). The observed likelihood of lending to riskier firms is significantly higher among the smaller PSBs. The set of firms that majorly contribute to the higher credit-risk choice of the PSBs include the riskier service-sector firms, firms that borrow by pledging promoter shares, and firms that are likely to be impacted by the change of political regime. |
| Date: | 2018–07–04 |
| URL: | http://d.repec.org/n?u=RePEc:iim:iimawp:14590&r=ban |
| By: | Gareth Peters (Department of Statistical Sciences - UCL - University College of London [London]); Pavel Shevchenko (CSIRO - Commonwealth Scientific and Industrial Research Organisation [Canberra]); Bertrand Hassani (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique); Ariane Chapelle (Department of Computer Science - UCL - University College of London [London]) |
| Abstract: | Recently, Basel Committee for Basel Committee for Banking Supervision proposed to replace all approaches, including Advanced Measurement Approach (AMA), for operational risk capital with a simple formula referred to as the Standardised Measurement Approach (SMA). This paper discusses and studies the weaknesses and pitfalls of SMA such as instability, risk insensitivity, super-additivity and the implicit relationship between SMA capital model and systemic risk in the banking sector. We also discuss the issues with closely related operational risk Capital-at-Risk (OpCar) Basel Committee proposed model which is the precursor to the SMA. In conclusion, we advocate to maintain the AMA internal model framework and suggest as an alternative a number of standardization recommendations that could be considered to unify internal modelling of operational risk. The findings and views presented in this paper have been discussed with and supported by many OpRisk practitioners and academics in Australia, Europe, UK and USA, and recently at OpRisk Europe 2016 conference in London. |
| Keywords: | Basel Committee for Banking Supervision regulations,loss distribution approach,advanced measurement approach,operational risk,standardised measurement approach |
| Date: | 2016–07 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:halshs-01391091&r=ban |
| By: | Littke, Helge C. N.; Ossandon Busch, Matias |
| Abstract: | Since the global financial crisis, economic literature has highlighted banks' inclination to bolster up their liquid asset positions once the aggregate interbank funding market experiences a dry-up. To this regard, we show that liquidity hoarding and its detrimental effects on credit can also be triggered by idiosyncratic, i.e. bankspecific, interbank funding shocks with implications for monetary policy. Combining a unique data set of the Brazilian banking sector with a novel identification strategy enables us to overcome previous limitations for studying this phenomenon as a bankspecific event. This strategy further helps us to analyse how disruptions in the bank headquarters' interbank market can lead to liquidity and lending adjustments at the regional bank branch level. From the perspective of the policy maker, understanding this market-to-market spillover effect is important as local bank branch markets are characterised by market concentration and relationship lending. |
| Keywords: | financial crisis,interbank market,liquidity risk |
| JEL: | G01 G11 G21 |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:iwhdps:122018&r=ban |
| By: | Masahiro SEKINO; Wako WATANABE |
| Abstract: | Using the contract level data, we find that the lending by Japan Finance Corporation for Small and Medium Enterprise (JASME), a state owned lending institution, mitigated a firm’s loss of borrowing from its main bank during the credit crunch. We further find that the JASME’s lending instrumented by the main bank’s lending supply growth as explained by the bank’s capital adequacy, which captures the lending to mitigate the loss of borrowing, had negative effects on the investment rate and that the JASME’s lending had an weak effect to mitigate the cash sensitivity of cash that captures the firm’s financial constraint. |
| Keywords: | government financial institution, credit crunch, loan contracts JEL classification: G01, G21, G28 |
| Date: | 2017–11 |
| URL: | http://d.repec.org/n?u=RePEc:esj:esridp:342&r=ban |
| By: | Timmer, Yannick |
| Abstract: | This paper contrasts the investment behavior of di↵erent financial institutions in debt securities as a response to past returns. For identification, I use unique securitylevel data from the German Microdatabase Securities Holdings Statistics. Banks and investment funds respond in a pro-cyclical manner to past security-specific holding period returns. In contrast, insurance companies and pension funds act countercyclically; they buy when returns have been negative and sell after high returns. The heterogeneous responses can be explained by di↵erences in their balance sheet structure. I exploit within-sector variation in the financial constraint to show that tighter constraints are associated with relatively more pro-cyclical investment behavior. JEL Classification: G11, G15, G12, G21, G22, G23 |
| Keywords: | balance sheet constraints, debt securities, financial markets, investment behavior, portfolio allocation |
| Date: | 2018–07 |
| URL: | http://d.repec.org/n?u=RePEc:srk:srkwps:201877&r=ban |
| By: | Sangyup Choi (Yonsei University); Davide Furceri (IMF) |
| Abstract: | While global uncertainty-measured by the VIX-has proven to be a robust global ¡°push¡± factor of international capital flows, there has been no systematic study assessing the role of uncertainty in driving bilateral capital flows. This paper tries to fill this gap in the literature by examining the effects of higher country-specific uncertainty on cross-border banking flows using data from the Bank for International Settlements Locational Banking Statistics. The bilateral structure of this data allows to disentangle supply factors from demand factors, thereby helping identify the effect of higher uncertainty on cross-border banking flows from other confounding factors. The results of this analysis suggest that: (i) uncertainty in a source country (domestic economy) is both a lender-specific push and pull factor that robustly predicts a decrease in outflows (cross-border lending) and inflows (crossborder borrowing); (ii) a decline in cross-border borrowing is larger than a decline in cross-border lending so that the net cross-border position of the banking sector increases; (iii) despite a decline in cross-border bank lending in the absolute sense, the share of cross-border bank lending in total bank lending increases, suggesting a portfolio rebalancing; (iv) this rebalancing occurs only when banks are lending to borrowers in advanced economies, not those in emerging market economies. |
| Keywords: | Uncertainty; Cross-border banking flows; Stops; Retrenchment; Portfolio rebalancing; Flight-to-safety. |
| JEL: | F21 F32 F42 |
| Date: | 2018–07 |
| URL: | http://d.repec.org/n?u=RePEc:yon:wpaper:2018rwp-125&r=ban |
| By: | Lin, Chen (Asian Development Bank Institute); Liu, Sibo (Asian Development Bank Institute); Wei, Lai (Asian Development Bank Institute) |
| Abstract: | We summarize the major findings of empirical studies that examine the effect of banking development on innovation and highlight their relative contributions to our understanding of the various roles the banking sector plays in determining innovation. We reassess the effect of banking development and innovation, extending the scope of analysis to more granular dimensions of innovation and to Asian economies where financial markets are less developed. We find that while theoretical implications are generally indefinite about the effect of banking development on innovation, empirical findings are less ambiguous given their distinct focus of sample firms and the underlying channels investigated. The development conditions of financial markets also matter in drawing implications for the effect of financial institutions on innovation. Specifically, when the stock market is relatively less developed, as in most Asian economies, banks play a significant role in financing and promoting innovation. Therefore, it seems plausible for policy makers in these regions to strengthen the development of the banking sector and to improve the depth of the credit market. In this survey, we will summarize the major findings of the empirical studies that examine the effect of banking development on innovation and highlight their relative contributions to our understanding about the various roles that the banking sector plays in determining innovation. Then, we will reassess the effect of banking development and innovation. |
| Keywords: | banking development; innovation; financial markets |
| JEL: | G02 |
| Date: | 2018–03–05 |
| URL: | http://d.repec.org/n?u=RePEc:ris:adbiwp:0815&r=ban |
| By: | Lopez, Jose A. (Federal Reserve Bank of San Francisco); Rose, Andrew K. (University of California, Berkeley); Spiegel, Mark M. (Federal Reserve Bank of San Francisco) |
| Abstract: | We examine the effect of negative nominal interest rates on bank profitability and behavior using a cross-country panel of over 5,100 banks in 27 countries. Our data set includes annual observations for Japanese and European banks between 2010 and 2016, which covers all advanced economies that have experienced negative nominal rates, including currency union members as well as both fixed and floating exchange rates countries. When we compare negative nominal interest rates with low positive rates, banks experience losses in interest income that are almost exactly offset by savings on deposit expenses and gains in non-interest income, including capital gains on securities and fees. We find heterogeneous effects of negative rates: floating exchange rates, small banks, and banks with low deposit ratios drive most of our results. Low-deposit banks have enjoyed particularly striking gains in non-interest income, likely from capital gains on securities. There have only been modest differences between high and low deposit-ratio banks’ changes in interest expenses; high deposit banks do not seem disproportionately vulnerable to negative rates. Overall, our results indicate surprisingly benign implications of negative rates for commercial banks thus far. |
| JEL: | E43 G21 |
| Date: | 2018–06–20 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedfwp:2018-07&r=ban |
| By: | Yoshino, Naoyuki (Asian Development Bank Institute); Taghizadeh-Hesary, Farhad (Asian Development Bank Institute); Nili, Farhad (Asian Development Bank Institute) |
| Abstract: | Deposit insurance is a key element in modern banking, as it guarantees the financial safety of deposits at depository financial institutions. It is necessary to have at least a dual fair premium rate system based on the creditworthiness of financial institutions, as a singular premium system for all banks will have a moral hazard. In this paper, we develop a theoretical as well as an empirical model for calculating dual fair premium rates. Our definition of a fair premium rate is a rate that can cover the operational expenditures of the deposit insuring organization, provides it with sufficient funds to enable it to pay a certain percentage share of deposit amounts to depositors in the case of bank default, and provides it with sufficient funds as precautionary reserves. To identify and classify healthier and more stable banks, we use credit rating methods that employ two major dimensional reduction techniques. For forecasting nonperforming loans, we develop a model that can capture both macro shocks and idiosyncratic shocks to financial institutions in a vector error correction model. Our results show that deposit insurance premium rates need to vary in relation to banks’ creditworthiness. |
| Keywords: | deposit insurance premium rate; forecasting nonperforming loans; idiosyncratic shocks |
| JEL: | E44 G21 G28 |
| Date: | 2017–07–05 |
| URL: | http://d.repec.org/n?u=RePEc:ris:adbiwp:0757&r=ban |
| By: | Atkeson, Andrew (Federal Reserve Bank of Minneapolis); d'Avernas, Adrien (Stockholm School of Economics); Eisfeldt, Andrea L. (University of California, Los Angeles); Weill, Pierre-Olivier (University of California, Los Angeles) |
| Abstract: | Banks' ratio of the market value to book value of their equity was close to 1 until the 1990s, then more than doubled during the 1996-2007 period, and fell again to values close to 1 after the 2008 financial crisis. Sarin and Summers (2016) and Chousakos and Gorton (2017) argue that the drop in banks' market-to-book ratio since the crisis is due to a loss in bank franchise value or profitability. In this paper we argue that banks' market-to-book ratio is the sum of two components: franchise value and the value of government guarantees. We empirically decompose the ratio between these two components and find that a large portion of the variation in this ratio over time is due to changes in the value of government guarantees. |
| Keywords: | Banking; Bank valuation; Bank financial soundness; Bank regulation; Risk shifting; Bank leverage |
| JEL: | E44 G21 G28 G32 G38 H12 |
| Date: | 2018–06–19 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedmsr:567&r=ban |
| By: | Zhu, Haikun (Tilburg University, School of Economics and Management) |
| Abstract: | This thesis consists of two chapters in political economy of finance and one chapter in FinTech. My central interest is to study the interaction between socioeconomic stability and financial activities of corporations and financial institutions. The first chapter focuses on whether economic shocks trigger labour unrest and fuel political extremism. The second chapter provides an analysis as to how state-owned firms use internal funds to address sudden social unrest events. The final chapter investigates if new peer-to-peer (P2P) lending technology undermines macroprudential regulation and adds risk to financial stability. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:tiu:tiutis:93f94423-e671-4041-bb24-8e5ab6f2192e&r=ban |
| By: | Dominique Guegan (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique, Labex ReFi - UP1 - Université Panthéon-Sorbonne); Bertrand Hassani (Grupo Santander, CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique, Labex ReFi - UP1 - Université Panthéon-Sorbonne); Kehan Li (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique, Labex ReFi - UP1 - Université Panthéon-Sorbonne) |
| Abstract: | Unimodal probability distribution has been widely used for Value-at-Risk (VaR) computation by investors, risk managers and regulators. However, financial data may be characterized by distributions having more than one modes. Using a unimodal distribution may lead to bias for risk measure computation. In this paper, we discuss the influence of using multimodal distributions on VaR and Expected Shortfall (ES) calculation. Two multimodal distribution families are considered: Cobb's family and distortion family. We provide two ways to compute the VaR and the ES for them: an adapted rejection sampling technique for Cobb's family and an inversion approach for distortion family. For empirical study, two data sets are considered: a daily data set concerning operational risk and a three month scenario of market portfolio return built five minutes intraday data. With a complete spectrum of confidence levels from 0001 to 0.999, we analyze the VaR and the ES to see the interest of using multimodal distribution instead of unimodal distribution. |
| Keywords: | Risks,Multimodal distributions,Value-at-Risk,Expected Shortfall,Moments method,Adapted rejection sampling,Regulation |
| Date: | 2017–03 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:halshs-01491990&r=ban |
| By: | William Mullins; Patricio Toro |
| Abstract: | Credit guarantee schemes for bank loans are at the heart of most Governments’ strategies to help firms, and often direct vast volumes of credit. This paper examines Chile’s credit guarantee scheme for bank loans to small and medium enterprises (SMEs), which is structured like many OECD countries’ schemes. We use a regression discontinuity around the eligibility cutoff and find that this credit guarantee design generates large positive effects on firms’ total borrowing without large increases in default rates. The scheme also has an amplification effect: firms increase borrowing from other banks in the eighteen months following a loan guarantee. Moreover, we show that the guarantees are used to build new bank relationships, an important process for SMEs. Finally, we show that firms use the credit increase to significantly scale up their sales, employment and input purchases. These results provide evidence that credit guarantees are an effective policy tool for both boosting credit availability, and for establishing new bank relationships for SMEs.sentiment score - proxies for the monetary policy tilt. We then evaluate how the surprise component of the sentiment scores - together with unexpected policy changes - impact Chilean financial assets. |
| Date: | 2018–06 |
| URL: | http://d.repec.org/n?u=RePEc:chb:bcchwp:820&r=ban |
| By: | González, Marta Ramos; Ureña, Antonio Partal; Fernández-Aguado, Pilar Gómez |
| Abstract: | Following the financial crisis, the share of non-performing loans has significantly increased, while the regulatory guidelines on the Internal-Ratings Based (IRB) approach for capital adequacy calculation related to defaulted exposures remains too general. As a result, the high-risk nature of these portfolios is clearly in danger of being managed in a heterogeneous and inappropriate manner by those financial institutions permitted to use the IRB system, with the consequent undue variability of Risk-Weighted Assets (RWA). This paper presents a proposal to construct Advanced IRB models for defaulted exposures, in line with current regulations, that preserve the risk sensitivity of capital requirements. To do so, both parameters Expected Loss Best Estimate (ELBE) and Loss Given Default (LGD) in-default are obtained, backed by an innovative indicator (Mixed Adjustment Indicator) that is introduced to ensure an appropriate estimation of expected and unexpected losses. The methodology presented has low complexity and is easily applied to the databases commonly used at these institutions, as illustrated by two examples. JEL Classification: C51, G21, G28, G32 |
| Keywords: | banking regulation, credit risk, defaulted exposures |
| Date: | 2018–06 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20182165&r=ban |
| By: | Mosk, Thomas |
| Abstract: | This paper examines bargaining as a mechanism to resolve information problems. To guide the analysis, I develop a parsimonious model of a credit negotiation between a bank and firms with varying levels of impatience. In equilibrium, impatient firms accept the bank's offer immediately, while patient firms wait and negotiate price adjustments. I test the empirical predictions using a hand-collected dataset on credit line negotiations. Firms signing the bank's offer right away draw down their line of credit after origination and default more than late signers. Late signers negotiate price adjustments more frequently, and, consistent with the model, these adjustments predict better ex post performance. |
| Keywords: | Credit lines,Contract terms,Bargaining,Screening |
| JEL: | G21 G32 |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:safewp:211&r=ban |