nep-ban New Economics Papers
on Banking
Issue of 2018‒07‒23
seventeen papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. The impact of the interchange fee regulation on merchants: evidence from Italy By Guerino Ardizzi; Michele Savini Zangrandi
  2. Benefits and costs of liquidity regulation By Hoerova, Marie; Mendicino, Caterina; Nikolov, Kalin; Schepens, Glenn; Heuvel, Skander Van den
  3. Bank Lending in the Knowledge Economy By DellAriccia, Giovanni; Kadyrzhanova, Dalida; lev, ratnovski; Minoiu, Camelia
  4. European banks after the global financial crisis: Peak accumulated losses, twin crises and business models By Leo de Haan; Jan Kakes
  5. The Rise of Shadow Banking : Evidence from Capital Regulation By Rustom M. Irani; Rajkamal Iyer; Ralf R. Meisenzahl; Jose Luis Peydro
  6. The Good, the Bad, and the Ugly: Impact of Negative Interest Rates and QE on the Profitability and Risk-Taking of 1600 German Banks By Urbschat, Florian
  7. Why do banks use derivatives? An analysis of the Italian banking system By Luigi Infante; Stefano Piermattei; Raffaele Santioni; Bianca Sorvillo
  8. Time-varying capital requirements and disclosure rules: Effects on capitalization and lending decisions By Imbierowicz, Björn; Kragh, Jonas; Rangvid, Jesper
  9. Which Banks Smooth and at What Price? By Sotirios Kokas; Dmitri Vinogradov; Marios Zachariadis
  10. Bank profitability and macroeconomic conditions: are business models different? By Emilia Bonaccorsi di Patti; Francesco Palazzo
  11. Endogenous Scope Economies in Microfinance Institutions By Malikov, Emir; Hartarska, Valentina
  12. Bank-intermediated arbitrage By Boyarchenko, Nina; Eisenbach, Thomas M.; Gupta, Pooja; Shachar, Or; Van Tassel, Peter
  13. Evaluating Efficient Multilateral Interchange Fees: Evidence from End-User Benefits By Egor A. Krivosheya
  14. Characterization of the Chilean Financial Cycle, Early Warning Indicators and Implications for Macro-Prudential Policies By Juan Francisco Martínez; Daniel Oda
  15. Lender of Last Resort versus Buyer of Last Resort – Evidence from the European Sovereign Debt Crisis By Viral V. Acharya; Diane Pierret; Sascha Steffen
  16. Leverage limits and bank risk: new evidence on an old question By Choi, Dong Boem; Holcomb, Michael R.; Morgan, Donald P.
  17. Profit shifting by EU banks: evidence from country-by-country reporting By Fatica, Serena; Wildmer, Gregori

  1. By: Guerino Ardizzi (Bank of Italy); Michele Savini Zangrandi (Bank of Italy)
    Abstract: Interchange fees (IF) are fees that a cardholder’s bank (issuer) receives from the merchant’s bank (acquirer) when a card payment is executed. Interchange fees are an important part of the fees charged to merchants by acquirers. Because of their level and fragmentation, interchange fees can restrict competition and have thus been regulated in the EU. The Interchange Fee Regulation (IFR) came into effect for all EU member states in 2015 and sets maximum limits on interchange fees. By using a panel of Italian banks we assess the impact of introducing the IF regulation on the fees that acquiring banks charge to merchants (merchant fees), and on the merchants’ acceptance of card-based payments. We find that, in line with the regulatory intent, the ceiling imposed on interchange fees has led to a sizeable drop in merchant fees and to an increase in the acceptance of card payments, measured as transactions per terminal.
    Keywords: interchange fee, payment card, acquiring, point of sale, banking panel data
    JEL: E41 G14 G21 G38 L14 L42 L51
    Date: 2018–06
  2. By: Hoerova, Marie; Mendicino, Caterina; Nikolov, Kalin; Schepens, Glenn; Heuvel, Skander Van den
    Abstract: This paper investigates the costs and benefits of liquidity regulation. We find that liquidity tools are beneficial but cannot completely remove the need for Lender of Last Resort (LOLR) interventions by the central bank. Full compliance with current Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR) rules would have reduced banks’ reliance on publicly provided liquidity during the global financial crisis without removing such assistance altogether. The paper also investigates the output costs of introducing the LCR and NSFR using two macro-financial models. We find these costs to be modest. JEL Classification: E44, E58, G21, G28
    Keywords: banking, capital requirements, Central bank, Lender of Last Resort, liquidity regulation
    Date: 2018–07
  3. By: DellAriccia, Giovanni; Kadyrzhanova, Dalida; lev, ratnovski; Minoiu, Camelia
    Abstract: We study bank portfolio allocations during the transition of the real sector to a knowledge economy in which firms increasingly use intangible assets. We show that higher corporate investment in intangible assets slows down banks' commercial lending. Banks reallocate the resulting lending capacity to other assets, notably mortgages. The findings are consistent with financial intermediation frictions due to lower collateral value of corporate intangible assets. Additional tests rule out alternative explanations such as higher mortgage demand. We estimate that higher corporate intangible assets conservatively explain 25-40% of the decline in bank commercial lending since the mid-1980s.
    Keywords: bank lending; commercial loans; corporate intangible assets; real estate loans
    JEL: E22 E44 G21
    Date: 2018–06
  4. By: Leo de Haan; Jan Kakes
    Abstract: This paper takes stock of European banks' accumulated losses since 2007 and relates these to bank characteristics. In line with previous studies, we find that large, market-oriented banks were particularly hit by the 2007-2009 global financial crisis whereas smaller, retail-oriented banks weathered these years relatively well. In subsequent years, however, the picture reversed and retail-oriented banks were most affected. Over the entire period, medium-sized banks suffered most losses and often needed state aid. This suggests that measures to contain systemic risk, such as capital surcharges and bail-in requirements, are as relevant for these institutions as they are for the largest banks.
    Keywords: Bank profitability; Business model; Financial crisis
    JEL: G01 G21
    Date: 2018–07
  5. By: Rustom M. Irani; Rajkamal Iyer; Ralf R. Meisenzahl; Jose Luis Peydro
    Abstract: We investigate the connections between bank capital regulation and the prevalence of lightly regulated nonbanks (shadow banks) in the U.S. corporate loan market. For identification, we exploit a supervisory credit register of syndicated loans, loan-time fixed-effects, and shocks to capital requirements arising from surprise features of the U.S. implementation of Basel III. We find that less-capitalized banks reduce loan retention and nonbanks step in, particularly among loans with higher capital requirements and at times when capital is scarce. This reallocation has important spillovers: loans funded by nonbanks with fragile liabilities experience greater sales and price volatility during the 2008 crisis.
    Keywords: Shadow banks ; Risk-based capital regulation ; Basel III ; Interactions between banks and nonbanks ; Trading by banks ; Distressed debt
    JEL: G01 G21 G23 G28
    Date: 2018–06–20
  6. By: Urbschat, Florian
    Abstract: The recent negative interest rate policy (NIRP) and quantitative easing (QE) programme by the ECB have raised concerns about the pass-through of monetary policy. On the one hand, negative rates could lead to declining bank profitability making an expansionary monetary policy contractionary. Also, if interest rates are too low for too long banks could be induced to take too much risky credit. On the other hand, several economists argue that there is nothing special about negative interest rates per se. This paper uses a large micro level data set of the German bank universe to examine how banks behave in this uncharted territory. The evidence found suggests that bank’s business model, i.e. the share of overnight deposits, plays a crucial role. While some banks may benefit in the short run via for instance reduced refinancing costs or lower loan loss provisions, many banks with high deposit ratios face lower net interest income and lower credit growth rates. If continued for too long QE and NIRP erode bank profits for most banks eventually.
    Keywords: Negative Interest Rate Policy; Banks' Profitability; Net Interest Rate Margin; Risk-Taking Channel
    JEL: C53 E43 E52 G11 G21
    Date: 2018–07–09
  7. By: Luigi Infante (Bank of Italy); Stefano Piermattei (Bank of Italy); Raffaele Santioni (Bank of Italy); Bianca Sorvillo (Bank of Italy)
    Abstract: The derivatives market has experienced quick growth all over the world in the last two decades. Banks decide to participate in the derivatives market either to hedge against unexpected movements in economic variables or for trading and broker-dealer activities. This paper analyses, by means of multivariate descriptive statistical tools, the determinants of Italian banks’ use of derivatives over a long time horizon (2003-2017) by using quarterly Bank of Italy supervisory data. We find that size and being part of a banking group positively affect banks’ use of derivatives. Moreover, banks mainly employ derivatives for hedging purposes, especially to hedge against interest rate and credit risks. Finally, derivatives represent a hedging alternative to capital and liquidity. Our results are robust to different specifications that take into account the classification of derivatives by purpose (hedging versus trading) and the distinction between dealer versus end-user banks.
    Keywords: banking, derivatives, financial risks, hedging
    JEL: G21 G32
    Date: 2018–06
  8. By: Imbierowicz, Björn; Kragh, Jonas; Rangvid, Jesper
    Abstract: We investigate how banks' capital and lending decisions respond to changes in bankspecific capital and disclosure requirements. We find that an increase in the bankspecific regulatory capital requirement results in a higher bank capital ratio, brought about via less asset risk. A decrease in the requirement implies more lending to firms but also less Tier 1 capital and higher bank leverage. We do not observe differences between confidential and public disclosure of capital requirements. Our results empirically illustrate a tradeoff between bank resilience and a fostering of the economy through more bank lending using banks' capital requirement as policy instrument.
    Keywords: capital requirement,bank lending,bank capital structure,capital disclosure rules
    JEL: G21 G28
    Date: 2018
  9. By: Sotirios Kokas; Dmitri Vinogradov; Marios Zachariadis
    Abstract: By adjusting lending, banks can smooth the macroeconomic impact of deposit fluctuations. This may however lead to extended periods of disproportionately high lending relative to deposit intake, resulting in the accumulation of risk in the banking system. Using bank-level data for 8,477 banks in 129 countries for the 24-year period from 1992 to 2015, we examine how individual banks’ market power and other characteristics may contribute to smoothing or amplification of shocks and to the accumulation of risk. We find that the higher their market power the lower is the growth rate of lending relative to deposits. As a result, in periods of falling deposits, higher market power for the average bank would be associated with a greater fall in lending resulting in amplification of adverse effects as deposits fall during relatively bad times. Strikingly, at very high levels of market power there is a threshold past which the effect of market power on the growth rate of lending relative to deposits turns positive so that “superpower” banks contribute to smoothing of adverse effects when deposits are falling. In periods of rising deposits, however, such banks lead to amplification and accumulation of risk in the economy
    Keywords: smoothing, amplification, risk accumulation, market power, competition, crisis.
    JEL: E44 E51 F3 F4 G21
    Date: 2018–06
  10. By: Emilia Bonaccorsi di Patti (Bank of Italy); Francesco Palazzo (Bank of Italy)
    Abstract: The paper investigates the impact of macroeconomic conditions on the profitability of EU banks, by testing for differential effects according to the business model. We group banks into three business models using a hierarchical cluster analysis, and find that using clusters based on the share of assets invested in loans reveals heterogeneity in the sensitivity of bank profitability to economic growth across business models. Our main result is that GDP growth, credit growth and the risk-free yield curve influence profitability as expected, but we also find that the effect of GDP growth is only significant for banks that have a high and medium share of assets invested in loans, and not for banks that hold large portfolios of securities. This difference depends on the impact of growth on asset write downs, especially those on loans and, to a lesser extent, on revenues. The results suggest that studies relating bank profitability to macroeconomic conditions should take the heterogeneity of business models into account.
    Keywords: bank profitability, bank business model, income statement, revenues, net interest income
    JEL: G21
    Date: 2018–06
  11. By: Malikov, Emir; Hartarska, Valentina
    Abstract: Scope economies resulting from the joint offering of loans and savings accounts (as opposed to loans only) are customarily invoked to promote the transformation of credit-only microfinance institutions (MFIs) into integrated loans-and-savings entities. To ensure robust inference, we estimate scope economies for the microfinance industry using a novel approach which, among its other advantages, accommodates inherent heterogeneity across loans-only and loans-and-savings MFIs as well as controls for endogenous self-selection of institutions into the either type. For analysis, we use a large 2004--2014 Mixmarket dataset. Unlike earlier studies, we do not find prevalent scope economies in the microfinance industry. We find that the median degree of scope economies is statistically indistinguishable from zero and that scope economies are significantly positive for less than a half of loans-and-savings MFIs. For a non-trivial 14% of institutions, the empirical evidence suggests the existence of significantly negative diseconomies of scope indicating that the separate production of loans and savings accounts actually has the potential to reduce an MFI's costs. We also find that the failure to account for endogenous selectivity dramatically overestimates the degree of scope economies resulting in the failure to detect scope diseconomies among MFIs. Thus, our findings call for caution when invoking scope economies as a blanket justification for universal expansion of the scope of financial operations by MFIs. Instead, promoting integrated loans-and-savings MFIs may be justifiable as a means to meeting the needs of the poor rather than as a way for the industry to save costs.
    Keywords: microfinance institutions, scope economies, endogenous selection, financial intermediation, savings and lending
    JEL: G15 G21 L33 O16
    Date: 2018–03–25
  12. By: Boyarchenko, Nina (Federal Reserve Bank of New York); Eisenbach, Thomas M. (Federal Reserve Bank of New York); Gupta, Pooja (Federal Reserve Bank of New York); Shachar, Or (Federal Reserve Bank of New York); Van Tassel, Peter (Federal Reserve Bank of New York)
    Abstract: We argue that post-crisis bank regulation can explain large, persistent deviations from parity on basis trades requiring leverage. Documenting the financing cost and balance sheet impact on a broad array of basis trades for regulated institutions, we show that the implied return on equity on such trades is considerably lower under post-crisis regulation. In addition, although hedge funds would serve as natural alternative arbitrageurs, we document that funds reliant on leverage from a global systemically important bank suffer significant declines in assets and returns relative to unlevered funds. Thus, post-crisis regulation not only affects the targeted banks directly but also spills over to unregulated firms that rely on bank intermediation for their arbitrage strategies.
    Keywords: bank regulation; arbitrage; hedge funds
    JEL: G01 G21 G23 G28
    Date: 2018–06–01
  13. By: Egor A. Krivosheya (National Research University Higher School of Economics)
    Abstract: This article evaluates the efficiency of current MIF rates for the Russian market and identifies the effects of their changes. In order to estimate the demand of end users and end-user surpluses the study uses the adopted version of the Bedre-Defolie and Calvano (2013) model as well as representative samples of 800 traditional (offline) Russian merchants, 1500 Russian individuals and 7 banks from the top 20 that cover more than 80% of the Russian issuing and acquiring markets and the end-user benefits. Results confirm the efficiency of currently set MIF rates. Comparative statics analysis confirms that the changes in MIF rates never lead to a Pareto improvement, while the total surplus changes are asymmetric across different market parts. The article also shows that once the realistic assumptions are introduced to the models (e.g., information asymmetry, imperfect pass-through of changes) the end-user welfare is distorted more severely as a result of the MIF rates changes. The first-best policy for the Russian regulator and legislators is the use of alternative (non-tariff) stimulating measures for a cashless economy in order to isolate the effect of changes to the intended groups
    Keywords: Retail payments; payment cards; interchange fees; efficiency; optimal regulation
    JEL: G21 D53 E42 L14
    Date: 2018
  14. By: Juan Francisco Martínez; Daniel Oda
    Abstract: The latest financial crisis has posed several challenges for policymakers about prevention and mitigation measures regarding these episodes. In this respect, the Basel Committee of Banking Supervision (BCBS) has issued a set of recommendations of macro-prudential policies that have been applied in several economies by accommodating them to their local context. In particular, it emerges the Countercyclical Capital Buffer (CCyB) and the Credit-to-GDP gap as a reference for its activation. In this context, this paper describes the Chilean issues relevant to its application, such as the structure of the credit portfolio, changes in macroeconomic and financial cycles, and data restrictions. Then, a set of early warning indicators (EWI) which conforms to these local particularities is proposed. To do this, we analyze and solve some important limitations in the calculation of these metrics: information gaps, coherence to domestic financial structure, and excessive amplitude of local past episodes of fragility. Finally, we discuss some remaining challenges for the application of CCyB in Chile.
    Date: 2018–07
  15. By: Viral V. Acharya (New York University, Centre for Economic Policy Research (CEPR), and National Bureau of Economic Research (NBER)); Diane Pierret (University of Lausanne and Swiss Finance Institute); Sascha Steffen (Frankfurt School of Finance & Management)
    Abstract: We document channels of monetary policy transmission to banks following two interventions of the European Central Bank (ECB). As a lender of last resort via the long-term refinancing operations (LTROs), the ECB improved the collateral value of sovereign bonds of peripheral countries. This resulted in an elevated concentration of these bonds in the portfolios of domestic banks, increasing fire-sale risk and making both banks and sovereign bonds riskier. In contrast, the ECB’s announcement of being a potential buyer of last resort via the Outright Monetary Transaction (OMT) program attracted new investors and reduced fire-sale risk in the sovereign bond market.
    Keywords: Bank-sovereign nexus, ECB, fire sales, unconventional monetary policy
    JEL: G01 G21 G28
    Date: 2018–05
  16. By: Choi, Dong Boem (Federal Reserve Bank of New York); Holcomb, Michael R. (Federal Reserve Bank of New York); Morgan, Donald P. (Federal Reserve Bank of New York)
    Abstract: The supplementary leverage ratio (SLR) rule recently imposed on the very largest U.S. banks has revived the question of whether banks sidestep such rules by shifting toward riskier, higher-yielding assets. Using difference-in-difference analysis, we find that, after the SLR was finalized in 2014, covered banks shifted their portfolio toward riskier (risk-weighted) assets and higher-yielding securities compared to other large banks not subject to the rule. The shifts are sizable and tend to be larger at banks more constrained ex ante by the leverage limit. Despite increased asset risk, overall bank risk (book and market measures) did not increase, suggesting the higher capital required under the new rule offset the risk-shifting. Taken together, our findings reinforce regulators’ long-standing concerns about risk-shifting around leverage limits and suggest that the recent recalibration will curb those incentives without necessarily increasing bank risk.
    Keywords: Basel III regulation; bank risk; leverage limit; regulatory arbitrage; reaching for yield
    JEL: G20 G21 G28
    Date: 2018–06–01
  17. By: Fatica, Serena (European Commission – JRC); Wildmer, Gregori (European Commission – JRC)
    Abstract: We investigate profit shifting by the largest and systemically relevant European multinational banks using new data made available through country-by-country reporting for the financial years 2014-2016. We capture tax incentives for income shifting using a multilateral tax differential between the local tax rate and the tax rates in the other countries where the bank has operations. We find that profits - particularly those recorded in tax havens - are negatively affected by corporate taxation. Moreover, the bulk of income shifting seems to take place among subsidiaries, as foreign-to-foreign tax differences matter significantly more that home-to-foreign differentials. Simulation results suggest that the amount of shifted profits in tax havens is about 38% of true profits. The ratio between shifted and true profits drops to about 7% when selected non havens are considered.
    Keywords: banks, tax havens, regulation, tax avoidance, transparency
    JEL: G21 G28 H26 H87
    Date: 2018–06

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