nep-ban New Economics Papers
on Banking
Issue of 2018‒07‒30
thirteen papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Why do banks target ROE? By Pennacchi, George; Santos, Joao A. C.
  2. Activity Strategies, Information Asymmetry, and Bank Opacity By Viet-Dung Tran; M. Kabir Hassan; Reza Houston
  3. Does CFPB oversight crimp credit? By Fuster, Andreas; Plosser, Matthew; Vickery, James
  4. A novel multivariate risk measure: the Kendall VaR By Matthieu Garcin; Dominique Guegan; Bertrand Hassani
  5. Requiem for the Interest-Rate Controls in China By Sun, Rongrong
  6. Resolving “Too Big to Fail” By Cetorelli, Nicola; Traina, James
  7. Testing the quiet life hypothesis in the African banking industry By Asongu, Simplice A; Odhiambo, Nicholas M.
  8. Shadow Banks and the Risk-Taking Channel of Monetary Policy Transmission in the Euro Area By Arina Wischnewsky; Matthias Neuenkirch
  9. Systemic Effects of Bank Equity Issues: Competition, Stabilization and Contagion By Valeriya Dinger; Vlad Marincas; Francesco Vallascas
  10. Cooperatives vs Traditional Banks: The impact of Interbank Market Exclusion By Raphael Bergoeing; Facundo Piguillem
  11. Effects of Fixed Nominal Thresholds for Enhanced Supervision By David Hou; Missaka Warusawitharana
  12. Payments, credit and asset prices By Monika Piazzesi; Martin Schneider
  13. The Effects of Political Reservations on Credit Access and Borrowing Composition: New Evidence from India By Ao, Chon-Kit; Chatterjee, Somdeep

  1. By: Pennacchi, George (University of Illinois); Santos, Joao A. C. (Federal Reserve Bank of New York)
    Abstract: Historically, nonfinancial corporations relied on performance targets linked to their EPS. Up until the 1970s, banks also appeared to follow a similar practice, but since then they have favored ROE. Equity investors seem to be aware of these differences because EPS growth is better at explaining nonfinancials’ stock market value while ROE is better at explaining banks’ market values. In this paper we present a model of a bank with fixed-rate deposit insurance that faces increasing competition that erodes its charter value. When under these conditions the bank chooses its capital to maximize shareholder value, its performance based on ROE is much better than its performance based on EPS. We argue that such a situation characterized the banking industry during the 1970s and explains why it adopted an ROE target.
    Keywords: banks; ROE; EPS
    JEL: G21 G28
    Date: 2018–06–01
  2. By: Viet-Dung Tran; M. Kabir Hassan; Reza Houston
    Abstract: Using a large panel of US bank holding companies from 2001 to 2015, we investigate the association between functional diversification and bank earnings management. We document a positive relationship between bank earnings management and bank diversification. Our findings are consistent with the hypothesis that diversification increases the asymmetric information of banks, leading to greater discretionary power by bank managers. This effect is most prevalent in smaller banks and non-dividend paying banks. The impact of diversification on earnings management is less pronounced during the crisis. Our study is of interest to regulators and other stakeholders who examine factors which affect behavior of bank managers.
    Keywords: bank earnings management; opacity; activity strategies; diversification; information asymmetry
    JEL: G21 G28 G34 G38
    Date: 2018–07
  3. By: Fuster, Andreas (Swiss National Bank); Plosser, Matthew (Federal Reserve Bank of New York); Vickery, James (Federal Reserve Bank of New York)
    Abstract: We study the effects of regulatory oversight by the Consumer Financial Protection Bureau (CFPB) on credit supply as well as bank risk-taking, growth, and operating costs. We use a difference-in-differences approach, making use of the fact that banks below a $10 billion size cutoff are exempt from CFPB supervision and enforcement activities. We find little evidence that CFPB oversight significantly reduces the overall volume of mortgage lending. However, we find some evidence of changes in the composition of lending—CFPB-supervised banks originated fewer loans to risky borrowers, offset by an increase in large “jumbo” mortgages. We find no clear evidence of substitution in lending between bank and nonbank subsidiaries, or effects on asset growth or bank noninterest expenses.
    Keywords: Consumer Financial Protection Bureau; credit; mortgage; regulation
    JEL: D18 G21 G28
    Date: 2018–06–01
  4. By: Matthieu Garcin (Natixis Asset Management and LabEx ReFi); Dominique Guegan (Centre d'Economie de la Sorbonne and LabEx ReFi); Bertrand Hassani (Grupo Santander and Centre d'Economie de la Sorbonne and LabEx ReFi)
    Abstract: The definition of multivariate Value at Risk is a challenging problem, whose most common solutions are given by the lower- and upper-orthant VaRs, which are based on copulas: the lower-orthant VaR is indeed the quantile of the multivariate distribution function, whereas the upper-orthant VaR is the quantile of the multivariate survival function. In this paper we introduce a new multivariate Value at Risk, referred to as the Kendall Value at Risk, which linkd the copula approach to an alternative definition of multivariate quantiles, known as the quantile surface, which is not used in finance, to our knowledge. We more precisely transform the notion of orthant VaR tanks to the Kendall function so as to get a multivariate VaR, that is to say a set of loss vectors, with some advantageous properties compared to the standard orthant VaR: i/ it is based on a total order, ii/ the probability level of the VaR is consistent with the probability measure of the set of the more severe loss vectors, iii/ the d-dimensional Vars based on the distribution function or on the survival function have vectors in common, which conciliate both upper- and lower-orthant approaches. We quantify the differences between this new Kendall VaR and orthant VaRs. In particular, we show that Kendall VaRs are less (respectively more) conservative than lower-orthant (resp. upper-orthant) VaRs. the definition and the properties of the Kendall VaR are illustrated using Gumbel and Clayton copulas with lognormal marginal distributions and several levels of risk
    Keywords: Value at Risk; multivariate quantile; risk measure; Kendall function; copula; total order
    JEL: C1 C6
    Date: 2017–01
  5. By: Sun, Rongrong
    Abstract: This paper reviews the retail interest-rate-control deregulation in China over the 1993-2015 period and provides a preliminary assessment of the PBC's replacement monetary framework. I show that the interest-rate controls triggered the development of deposit substitutes that banks used to circumvent the restrictions, which in turn drove deposits out of commercial banks.This gave rise to concerns about deterioration of bank profits and build-up of financial frangibility, which have pushed up the PBC's deregulation acceleration over the post-2012 period. I quantify the distortionary effects of these controls: disintermediation, a rising shadow banking system and financial repression. Despite the official lift-off of the controls, the retail interest rates are still subject to the PBC’s window guidance and other pricing mechanism guidance. The interest-rate corridor does not function well in confining money market rates. This suggests that the PBC adopt a target money market rate system.
    Keywords: interest-rate control, deregulation, China, financial repression, interest-rate corridor
    JEL: E52 E58
    Date: 2018–06
  6. By: Cetorelli, Nicola (Federal Reserve Bank of New York); Traina, James (University of Chicago)
    Abstract: Using a synthetic control research design, we find that “living will” regulation increases a bank’s annual cost of capital by 22 basis points, or 10 percent of total funding costs. This effect is stronger in banks that were measured as systemically important before the regulation’s announcement. We interpret our findings as a reduction in “too big to fail” subsidies. The size of this effect is large: a back-of-the-envelope calculation implies a subsidy reduction of $42 billion annually. The impact on equity costs drives the main effect. The impact on deposit costs is statistically indistinguishable from zero, representing a good placebo test for our empirical strategy.
    Keywords: cost of capital; time consistency; too big to fail; resolution plans; Dodd-Frank
    JEL: G21 G28
    Date: 2018–06–01
  7. By: Asongu, Simplice A; Odhiambo, Nicholas M.
    Abstract: The Quiet Life Hypothesis (QLH) is the pursuit of less efficiency by firms. In this study, we assess if powerful banks in the African banking industry are increasing financial access. The QLH is therefore consistent with the pursuit of financial intermediation inefficiency by large banks. To investigate the hypothesis, we first estimate the Lerner index. Then, using Two Stage Least Squares, we assess the effect of the Lerner index on financial access proxied by loan price and loan quantity. The empirical evidence is based on a panel of 162 banks from 42 African countries for the period 2001-2011. The findings support the QLH, although quiet life is driven by the below-median Lerner index sub-sample. Policy implications are discussed.
    Keywords: Financial access; Bank performance; Africa
    Date: 2018–05–07
  8. 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
  9. By: Valeriya Dinger (University of Osnabrueck, Rolandstr. 8, DE and University of Leeds); Vlad Marincas (University of Osnabrueck, Rolandstr. 8, DE and University of Leeds); Francesco Vallascas (University of Leeds, Maurice Keyworth Building, Leeds LS2 9JT, UK)
    Abstract: We evaluate the abnormal returns of issuing and non-issuing banks around the announcement of Seasoned Equity Offerings (SEOs) and explore how the market reaction is influenced by aggregate systemic conditions and by the systemic risk contribution and exposure of banks. While we find evidence of negative abnormal returns for issuers, non-issuing banks benefit from positive abnormal returns around the SEO announcement. We show that these positive returns are not entirely explained by the competition channel, which has been well documented for non-financial firms. In contrast, we demonstrate that they also depend on a so far undocumented system-stabilizing channel. Furthermore, under certain circumstances, the system-stabilizing channel contributes to mitigating the negative reaction to SEO announcements for the issuing banks.
    Keywords: SEOs, Banking Regulation, Banking Crises, Contagion, Systemic Risk
    JEL: G21 G28 G32
    Date: 2018–01–24
  10. By: Raphael Bergoeing; Facundo Piguillem
    Abstract: In this paper, we analyze the desirability of allowing cooperative banks to participate in the interbank market in Chile. We find that it is desirable, as long as the quality of the cooperative’s governance is not too deficient relative to traditional commercial banks. On the one side, when cooperative banks do participate in the interbank market, both, the probability of financial crisis and the volatility of GDP, raise; but on the other, because the cooperative’s inclusion generates large efficiency gains in the financial sector, GDP and aggregate welfare substantially increase. We conclude that there is no policy reason to exclude cooperatives from the Chilean interbank market. Key words:
    Date: 2018
  11. By: David Hou; Missaka Warusawitharana
    Abstract: Following the financial crisis, the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) and the implementation of Basel III significantly changed the regulatory landscape in the U.S. This note discusses how the use of such fixed nominal thresholds impacts the extent of enhanced prudential supervision. Section 1 presents the various thresholds that are in place as of May 15, 2018. Section 2 analyzes the effect of these thresholds on the number and total assets of the affected banks, and examines whether the thresholds have caused any bunching of banks. Section 3 discusses possible changes that may help address some of these effects.
    Date: 2018–07–19
  12. By: Monika Piazzesi; Martin Schneider
    Abstract: This paper studies a modern monetary economy: trade in both goods and securities relies on money provided by intermediaries. While money is valued for its liquidity, its creation requires costly leverage. In ation, security prices and the transmission of monetary policy then depend on the institutional details of the payment system. The price of a security is higher if it helps back inside money, and lower if more inside money is used to trade it. In ation can be low in security market busts if bank portfolios suffer, but also in booms if trading absorbs more money. The government has multiple policy tools: in addition to the return on outside money, it affects the mix of securities used to back inside money.
    Keywords: payments, monetary policy, liquidity trap, liquidity, asset prices, collateral premium, leverage, leverage costs, convenience yield, banking, scarce reserves, abundant reserves
    JEL: E00 E13 E41 E42 E43 E44 E51 E52 E58 G1 G12 G21
    Date: 2018–07
  13. By: Ao, Chon-Kit; Chatterjee, Somdeep
    Abstract: We estimate the impacts of mandated political reservation for minorities on household credit access and borrowing behavior. To identify causal effects, we exploit the exogenous state-time variation in the allocation of constituencies (electoral districts) to the two reserved minority groups in Indian states. Using a household level panel data with observations before and after the redistricting, we find that the effect is concentrated on the disadvantaged population groups. Political reservation for Scheduled Tribes (STs) increases household probability of getting a loan by 3.7 percentage points, while political reservation for Scheduled Castes (SCs) has no effect on the likelihood of getting a loan. However, conditional on having a loan, reservation for SCs does lead to fewer but larger loans. We also find considerable changes in household borrowing composition.
    Keywords: Affirmative action,Political reservation,Credit access,Borrowing composition
    JEL: D78 J15 J78 O12
    Date: 2018

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