nep-ban New Economics Papers
on Banking
Issue of 2018‒09‒03
twenty papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Private credit creation in the modern financial market By Tingting Zhu
  2. A Model of Bank Credit Cycles By Jianxing Wei; Tong Xu
  3. Are the Largest Banks Valued More Highly? By Minton, Bernadette A.; Stulz, Rene M.; Taboada, Alvaro G.
  4. Bank Network Analysis in the ECCU By Balazs Csonto; Alejandro D Guerson; Alla Myrvoda; Emefa Sewordor
  5. Business Complexity and Risk Management: Evidence from Operational Risk Events in U.S. Bank Holding Companies By Anna Chernobai; Ali Ozdagli; Jianlin Wang
  6. Bank Competition, Risk Taking, and their Consequences: Evidence from the U.S. Mortgage and Labor Markets By Alan Xiaochen Feng
  7. Rollover Risk and Bank Lending Behavior: Evidence from Unconventional Central Bank Liquidity By Martina Jasova; Caterina Mendicino; Dominik Supera
  8. Bank Resolution and the Structure of Global Banks By Patrick Bolton; Martin Oehmke
  9. Bank Runs without Sequential Service By Andolfatto, David; Nosal, Ed
  10. Systematic Monetary Policy and the Macroeconomic Effects of Shifts in Loan-to-Value Ratios By Ruediger Bachmann; Sebastian Rueth
  11. The Real Effects of Credit Booms and Busts: A County-Level Analysis By Simon Gilchrist
  12. Transmission of monetary policy through global banks: whose policy matters? By Stefan Avdjiev; Catherine Koch; Patrick McGuire; Goetz von Peter
  13. Bank solvency risk and funding cost interactions in a small open economy: evidence from Korea By Iñaki Aldasoro; Kyounghoon Park
  14. External Credit Ratings and Bank Lending By Christophe Cahn; Mattia Girotti; Federica Salvadè
  15. A Profit-to-Provisioning Approach to Setting the Countercyclical Capital Buffer: The Czech Example By Lukas Pfeifer; Martin Hodula
  16. Who Pays for Financial Crises? Price and Quantity Rationing of Different Borrowers by Domestic and Foreign Banks By Allen N. Berger; Tanakorn Makaew; Rima Turk-Ariss
  17. A Contagion through Exposure to Foreign Banks during the Global Financial Crisis By Park, Cyn-Young; Shin, Kwanho
  18. Government Guarantees and the Valuation of American Banks By Andrew Atkeson; Adrien d'Avernas; Andrea Eisfeldt; Pierre-Olivier Weill
  19. Financial stability, monetary policy and the payment intermediary share By Moritz Lenel; Martin Schneider; Monika Piazzesi
  20. To Branch or not to Branch? A Quantitative Evaluation of the Consequences of Global Banks’ Organization By Jose Fillat; Arthur Smith; Stefania Garetto

  1. By: Tingting Zhu (Unversity of California, Davis)
    Abstract: The recent financial crisis started with subprime loan losses in the U.S. shadow banking sector, but why did this lead to a credit contraction by traditional banks? I study the macroeconomic implications of these aspects of the modern financial market. I provide a dynamic general equilibrium model with heterogeneous banking sectors and multiple mortgage loans. I highlight a novel contagion channel even without any direct ownership relationships between banks. A subprime loan shock causes shadow banks to fire sale mortgage loans. This depresses housing prices, inducing prime loans to default. The unexpected prime loan loss endogenously triggers a regime change in traditional banks’ value at risk constraints, thereby generating a market-wide lending freeze. This channel explains why traditional banks didn’t fill the gap created by the shrinking shadow banking sector during the crisis, but instead cut lending. Banks’ unwillingness to lend also accounts for the observed rise of excess reserves. An ex-ante tighter capital requirement on traditional banks has ambiguous effects on financial stability, by shifting lending to shadow banks. A combination of sector-specific capital requirements can mitigate the dilemma.
    Date: 2018
  2. By: Jianxing Wei (Universitat Pompeu Fabra); Tong Xu (SWUFE)
    Abstract: This paper develops a model of financial intermediation in which the dynamic interaction between regulator supervision and banks’ loophole innovation generates credit cycles. In the model, banks’ leverages are constrained due to a risk-shifting problem. The regulator supervises the banks to ease this moral hazard problem, and its expertise in supervision improves gradually through learning-by-doing. At the same time, banks can engage in loophole innovation to circumvent supervision, which acts as an endogenous opposing force diminishing the value of the regulator’s accumulated expertise. In equilibrium, banks’ leverage and loophole innovation move together with the regulator’s supervision ability. Our model generates pro-cyclical bank leverage and asymmetric credit cycles. We show that a crisis is more likely to occur and the consequences are more severe after a longer boom. In addition, we investigate the welfare implications of a maximum leverage ratio in the environment of loophole innovation.
    Date: 2018
  3. By: Minton, Bernadette A. (OH State U); Stulz, Rene M. (OH State U); Taboada, Alvaro G. (MS State U)
    Abstract: Some argue too-big-to-fail (TBTF) status increases the value of the largest banks. In contrast, we find that the value of the largest banks is negatively related to asset size in normal times, but not during the financial crisis when TBTF status was most valuable. Further, shareholders lose when large banks cross a TBTF threshold through acquisitions. The negative relation between bank value and bank size for the largest banks cannot be explained by differences in ROA, ROE, equity volatility, tail risk, distress risk, or equity discount rates, but it can be partly explained by the market*s discounting of trading activities.
    JEL: G21 G28
    Date: 2018–03
  4. By: Balazs Csonto; Alejandro D Guerson; Alla Myrvoda; Emefa Sewordor
    Abstract: This paper applies network analysis to assess the extent of systemic vulnerabilities in the ECCU banking system. It includes two sets of illustrative stress tests. First, solvency and liquidity shocks to each individual bank and the impact on other banks in the network through their biltareal net asset exposures. Second, country and region-wide tail shocks to GDP affecting capital and liquidity of all banks in the shocked jurisdictions, followed by the rippling effects through the regional network. The results identify systemic institutions that merit hightened attention by the regulator, as determined by the degree of connectivity with the rest of the system, and the extent to which they are vulnerable to the failure of other banks.
    Date: 2018–07–12
  5. By: Anna Chernobai (Syracuse University); Ali Ozdagli (Federal Reserve Bank of Boston); Jianlin Wang (University of California Berkeley)
    Abstract: Recent regulatory proposals tie a financial institution's systemic importance to its complexity. However, little is known about how complexity affects banks' risk management. Using the 1996-1999 deregulation of banks' nonbanking activities as a natural experiment, we show that U.S. banks' operational risk increased significantly with their business complexity. This trend is stronger for banks that were constrained by regulations beforehand, especially for those with a Section 20 subsidiary, compared to other banks and also to nonbank financial institutions that were never subject to these regulations. We provide evidence that this pattern results from managerial failure rather than strategic risk taking.
    Date: 2018
  6. By: Alan Xiaochen Feng
    Abstract: Bank competition can induce excessive risk taking due to risk shifting. This paper tests this hypothesis using micro-level U.S. mortgage data by exploiting the exogenous variation in local house price volatility. The paper finds that, in response to high expected house price volatility, banks in U.S. counties with a competitive mortgage market lowered lending standards by twice as much as those with concentrated markets between 2000 and 2005. Such risk taking pattern was associated with real economic outcomes during the financial crisis, including higher unemployment rates in local real sectors.
    Date: 2018–07–06
  7. By: Martina Jasova (Princeton University); Caterina Mendicino (European Central Bank); Dominik Supera (Wharton School, University of Pennsylvania)
    Abstract: How does a sudden extension of bank debt maturity affect bank lending in times of crisis? We use the provision of long-term funding by the 2011 European Central Bank's (ECB) very long-term refinancing operations (vLTRO) as a natural experiment to address this question. Our analysis employs a novel dataset that matches the ECB monetary policy and market operations data with the firm credit registry and banks' security holdings in Portugal. We show that lengthening of bank debt maturity in crisis times has a positive and economically sizable impact on bank lending to the real economy. The effects are stronger on the supply of credit to smaller, younger, riskier firms and firms with shorter lending relationships. We also find that loan-level results translate to real and credit effects at the rm level. Finally, we discuss policy side effects and show how the unrestricted liquidity provision provided incentives to banks to purchase more securities and partially substituted away from lending to the real economy.
    Date: 2018
  8. By: Patrick Bolton; Martin Oehmke
    Abstract: We study the resolution of global banks by national regulators. Single-point-of-entry (SPOE) resolution, where loss-absorbing capital is shared across jurisdictions, is efficient but may not be implementable. First, when expected transfers across jurisdictions are too asymmetric, national regulators fail to set up SPOE resolution ex ante. Second, when required ex-post transfers are too large, national regulators ring-fence assets instead of cooperating in SPOE resolution. In this case, a multiple-point-of-entry (MPOE) resolution, where loss-absorbing capital is preassigned, is more robust. Our analysis highlights a fundamental link between efficient bank resolution and the operational structures and risks of global banks.
    JEL: G01 G18 G21 G33
    Date: 2018–06
  9. By: Andolfatto, David (Federal Reserve Bank of St. Louis); Nosal, Ed (Federal Reserve Bank of Atlanta)
    Abstract: Banking models in the tradition of Diamond and Dybvig (1983) rely on sequential service to explain belief-driven runs. But the run-like phenomena witnessed during the financial crisis of 2007–08 occurred in the wholesale shadow banking sector where sequential service is largely absent, suggesting that something other than sequential service is needed to help explain runs. We show that in the absence of sequential service runs can easily occur whenever bank-funded investments are subject to increasing returns to scale consistent with available evidence. Our framework is used to understand and evaluate recent banking and money market regulations.
    Keywords: bank runs; increasing returns to scale; echanism design
    JEL: G01 G21 G28
    Date: 2018–08–20
  10. By: Ruediger Bachmann (University of Notre Dame); Sebastian Rueth (Ghent University)
    Abstract: What are the macroeconomic consequences of changing aggregate lending standards in residential mortgage markets, as measured by loan-to-value (LTV) ratios? Using a structural VAR, we find that GDP and business investment increase following an expansionary LTV shock. Residential investment, by contrast, falls, a result that depends on the systematic reaction of monetary policy. We show that, in our sample, the Fed tended to respond directly to expansionary LTV shocks by raising the monetary policy instrument, and, as a result, mortgage rates increase and residential investment declines. The monetary policy reaction function in the US appears to include lending standards in residential markets, a finding we confirm in Taylor rule estimations. Without the endogenous monetary policy reaction residential investment increases. House prices and household (mortgage) debt behave in a similar way. This suggests that an exogenous loosening of LTV ratios is unlikely to explain booms in residential investment and house prices, or run ups in household leverage, at least in times of conventional monetary policy.
    Date: 2018
  11. By: Simon Gilchrist (New York University)
    Abstract: We use a comprehensive data set of home hortgage loan originations from HMDA matched with the banks’ income and balance sheet statements to analyze how fluctuations in the supply of mortgage credit affect county-level economic outcomes. To isolate fluctuations in the supply of mortgage credit, we use a variant of the shift-share identification approach of Greenstone et al. (2015), which exploits the fact that banks originate home mortgage loans across multiple coun- ties. Our results indicate that in “booms,” changes in the supply of home mortgage credit have no effect on a range of county-level economic outcomes, including house prices, employment, wages, and income. During “busts,” by contrast, a supply-induced contraction in mortgage lending has significant—in both economic and statistical terms—adverse effects on county-level economic performance: During the 2007–2010 period, counties that experienced a reduction in the supply of mortgage credit also saw large declines in house prices and building permits, a decline in the employment-population ratio, an increase in the unemployment rate, and a drop in average wages and income per capita. Consistent with the presence of financial frictions, the pullback in the supply of mortgage credit led to a particularly severe job losses at small and young firms.
    Date: 2018
  12. By: Stefan Avdjiev; Catherine Koch; Patrick McGuire; Goetz von Peter
    Abstract: This paper explores the basic question of whose monetary policy matters for banks' international lending. In the international context, monetary policies from several countries could come into play: the lender's, the borrower's, and that of a third country, the issuer of the currency in which cross-border lending is denominated. Using the rich dimensionality of the BIS international banking statistics, we find significant effects for all three policies. US monetary easing fuels cross-border lending in US dollars, as befits a global funding currency. At the same time, a tightening in the lender or the borrower country reinforces international dollar lending as global banks turn to the greenback for cheaper funding and toward borrowers abroad. Our results also show that stronger capitalization and better access to funding sources mitigate the frictions underpinning the transmission channels. Analogous results for euro-denominated lending confirm that global funding currencies play a key role in international monetary policy transmission.
    Keywords: international banking, dollar lending, global funding currency, monetary policy transmission, international spillovers
    JEL: E59 F42 G21
    Date: 2018–08
  13. By: Iñaki Aldasoro; Kyounghoon Park
    Abstract: Using proprietary balance sheet data for Korean banks and a simultaneous equation model, we document that increased marginal funding costs lead to larger solvency risk (as measured by the Tier 1 regulatory capital ratio), which, in turn, leads to larger marginal funding costs. A 100 bp increase in marginal funding costs (solvency risk) is associated with a 155 (77) bp increase in solvency risk (marginal funding costs). The findings of an economically and statistically significant relationship are robust to considering different proxies for solvency risk, types of banks, interest rate regimes, and interest margin management strategies. They also hold irrespective of the funding profile considered. FX-related macroprudential policies can affect the negative feedback loop by muting the effect of marginal funding costs on solvency risk. Our findings can inform the calibration of macroprudential stress tests.
    Keywords: solvency risk, funding cost, simultaneous equation model, stress testing, macroprudential policy, bank business models
    JEL: C50 G00 G10 G21
    Date: 2018–08
  14. By: Christophe Cahn; Mattia Girotti; Federica Salvadè
    Abstract: We study how third-party rating information influences firms' access to bank financing and real outcomes. We exploit a refinement in the rating scale that occurred in France in 2004. The new rules made some firms within each rating class receive a positive rating surprise. We find that such firms enjoy greater and cheaper access to bank credit. In particular, they obtain more credit from previously less informed lenders, and start new bank relationships more easily. Consequently, they rely on equity to a lower extent and invest more. These findings suggest that credit ratings help reducing the hold-up problem and increase competition among banks.
    Keywords: Credit Ratings, Banks, Lending Technology, Corporate Financing, Real Effects, Holdup problem.
    JEL: G21 G32
    Date: 2018
  15. By: Lukas Pfeifer; Martin Hodula
    Abstract: Over the last few years, national macroprudential authorities have developed different strategies for setting the countercyclical capital buffer (CCyB) rate in the banking sector. The existing approaches are based on various indicators used to identify the current phase of the financial cycle. However, to our knowledge, there is no approach that directly takes into consideration banks' prudential behavior over the financial cycle as well as cyclical risks in the banking sector. In this paper, we propose a new profit-to-provisioning approach that can be used in the macroprudential decision-making process. We construct a new set of indicators that largely capture the risk of cyclicality of profit and loan loss provisions. We argue that banks should conserve a portion of the cyclically overestimated profit (non-materialized expected loss) in their capital during a financial boom. We evaluate the performance of our newly proposed indicators using two econometric exercises. Overall, they exhibit good statistical properties, are relevant to the CCyB decision-making process, and may contribute to a more precise assessment of both systemic risk accumulation and risk materialization. We believe that the relevance of the profit-to-provisioning approach and the related set of newly proposed indicators increases under IFRS 9.
    Keywords: Banking prudence indicators, countercyclical capital buffer, financial stability, macroprudential policy, profit-to-provisioning approach
    JEL: E58 G21 G28
    Date: 2018–05
  16. By: Allen N. Berger; Tanakorn Makaew; Rima Turk-Ariss
    Abstract: Financial crises result in price and quantity rationing of otherwise creditworthy business borrowers, but little is known about the relative severity of these two types of rationing, which borrowers are rationed most, and the roles of foreign and domestic banks. Using a dataset from 50 countries containing over 18,000 business loans with information on the lender, the borrower, and contract terms, we find that publicly-listed borrowers are rationed more by prices or interest rates, whereas privately-held borrowers are rationed more by the number of loans. Also, the global financial crisis appears to have changed how banks price borrower risk. Further, there are important differences between foreign and domestic banks and between U.S. and non-U.S. loans.
    Keywords: Central banks and their policies;Western Hemisphere;Chile;Monetary policy;Credit Rationing, Foreign Banks, Financial Crises, Relationship Lending, central bank communication, central bank predictability, Financial Markets and the Macroeconomy, General, inflation forecast dispersion, Monetary Policy (Targets, Instruments, and Effects), monetary policy shocks, proxy VAR
    Date: 2018–07–10
  17. By: Park, Cyn-Young (Asian Development Bank); Shin, Kwanho (Korea University)
    Abstract: Although the global financial crisis of 2008 took root in the advanced countries, its shocks spread through the emerging economies, reflecting the increasingly interconnected global financial system. This paper develops an empirical methodology to test the contagion effect at the country level using bilateral data on bank claims between countries. It measures the direct and indirect exposures of emerging economies to crisis countries and tests whether these matter for capital outflows from emerging economies. The paper measures these exposures to the crisis-affected countries by using bilateral foreign claims sourced from Bank for International Settlements (i) consolidated banking statistics foreign claims on immediate counterparty and ultimate risk bases and (ii) locational banking statistics cross-border total claims. Findings show that emerging market economies more exposed directly or indirectly to banks in the crisis-affected countries suffered more capital outflows during the global financial crisis.
    Keywords: capital outflows; contagion; direct/indirect exposures; global financial crisis; interconnectedness
    JEL: E44 F15 F21 F34 F42
    Date: 2017–07–31
  18. By: Andrew Atkeson (University of California); Adrien d'Avernas (Stockholm School of Economics); Andrea Eisfeldt (University of California, Los Angeles); Pierre-Olivier Weill (University of California, Los Angeles)
    Abstract: Banks’ ratio of market equity to book equity was close to one until the 1990s, then more than doubled during the 1996-2007 period, and fell again to values close to one 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 the market to book ratio is the sum of two components: franchise value, and 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.
    Date: 2018
  19. By: Moritz Lenel (University of Chicago); Martin Schneider (Stanford University); Monika Piazzesi (Stanford University)
    Abstract: The payment intermediary share is the share of fixed income claims held by financial intermediaries with money-like liabilities. It is higher in times of higher risk premia, such as during the 1970s and in recent recessions. This paper proposes a model of a modern monetary economy that accounts for the valuation of fixed income claims as well as their allocation inside vs outside the payment intermediaries. While all assets are valued for their risk and return properties, those held inside payment intermediaries are also valued as collateral that backs inside money. The payment-intermediary share depends on the transactions demand for inside money as well as portfolio responses to uncertainty shocks. It determines the quantitative impact of monetary policy and macro-prudential regulation on asset prices.
    Date: 2018
  20. By: Jose Fillat (Federal Reserve Bank of Boston); Arthur Smith (Boston University); Stefania Garetto (Boston University)
    Abstract: This paper starts by establishing a set of stylized facts about global banks with operations in the United States. First, we show evidence of selection into foreign markets: the parent banks of global conglomerates tend to be larger than national banks. Second, selection by size is related to the mode of foreign operations: foreign subsidiaries of global banks and their parents are systematically larger than foreign branches and their parents, in terms of deposits, loans, and overall assets. Third, the mode of foreign operations affects the response of global banks to shocks and how those shocks are transmitted across countries. To explain these facts, we develop a structural model global banking whose assumptions mimic the institutional details of the regulatory framework in the US. The model sheds light on the relationship between market access, regulation, and capital flows, and is used as a laboratory to perform counterfactual analysis on the effects of alternative regulatory policies.
    Date: 2018

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