nep-ban New Economics Papers
on Banking
Issue of 2018‒09‒17
seventeen papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Financial Access Under the Microscope By Camelia Minoiu
  2. The Spread of Deposit Insurance and the Global Rise in Bank Asset Risk since the 1970s By Charles W. Calomiris; Sophia Chen
  3. Foreign Expansion, Competition and Bank Risk By Faia, Ester; Laffitte, Sebastien; Ottaviano, Gianmarco
  4. When Losses Turn into Loans: The Cost of Undercapitalized Banks By Blattner, Laura; Farinha, Luisa; Rebelo, Francisco
  5. Clear and Close Competitors? : On the Causes and Consequences of Bilateral Competition between Banks By de Haas, Ralph; Lu, Liping; Ongena, S.R.G.
  6. The Risk-Taking Channel of Liquidity Regulations and Monetary Policy By Stephan Imhof; Cyril Monnet; Shengxing Zhang
  7. A Macroeconomic Model with Financial Panics By Mark Gertler; Andrea Prestipino; Nobuhiro Kiyotaki
  8. Model Secrecy and Stress Tests By Yaron Leitner; Basil Williams
  9. Insolvency After the 2005 Bankruptcy Reform By Stefania Albanesi; Jaromir Nosal
  10. Macroprudential Policy with Leakages By Bengui, Julien; Bianchi, Javier
  11. Too Much Skin-in-the-Game? The Effect of Mortgage Market Concentration on Credit and House Prices By Deeksha Gupta
  12. 'Credit Risk, Excess Reserves and Monetary Policy: The Deposits Channel' By George Bratsiotis
  13. The G-20 regulatory agenda and bank risk By Matías Cabrera; Gerald P. Dwyer; María J. Nieto
  14. Simulating financial contagion dynamics in random interbank networks By John Leventides; Kalliopi Loukaki; Vassilios Papavassiliou
  15. Banks' Liquidity Management and Financial Fragility By Luca Deidda; Ettore Panetti
  16. Bank Survival in European Emerging Markets By Kočenda, Evžen; Iwasaki, Ichiro
  17. Banks, money and the zero lower bound By Kumhof, Michael; Wang, Xuan

  1. By: Camelia Minoiu
    Abstract: We examine the impact of a large-scale microcredit expansion program on financial access and the transition of previously unbanked borrowers to commercial banks. Administrative data on the universe of loans to individuals show that the program improved access to credit, especially in underdeveloped areas. A sizeable share of first-time borrowers who need a second loan switch from microfinance institutions to commercial banks, which cream-skim low-risk borrowers and grant them larger, cheaper, and longer-term loans. These borrowers are not riskier than those already at commercial banks. The microfinance sector, together with well-functioning credit reference bureaus, help mitigate information frictions in credit markets.
    Keywords: Financial inclusion, microfinance, loan expansion programs, credit reference bureau
    JEL: G21 O12 O55
    Date: 2018–09
  2. By: Charles W. Calomiris; Sophia Chen
    Abstract: We construct a new measure of the changing generosity of deposit insurance for many countries, empirically model the international influences on the adoption and generosity of deposit insurance, and show that the expansion of deposit insurance generosity increased asset risk in banking systems. We consider three asset risk measures: higher loans-to-assets, a higher proportion of lending to households, and a higher proportion of mortgage lending. None of the observed increases in these indicators is offset by declines in banking system leverage. We show that increased asset risk explains at least part of the positive association between deposit insurance and the likelihood and severity of systemic banking crises.
    JEL: E32 F55 G01 G18 G21 G28
    Date: 2018–08
  3. By: Faia, Ester; Laffitte, Sebastien; Ottaviano, Gianmarco
    Abstract: Using a novel dataset on the 15 European banks classified as G-SIBs from 2005 to 2014, we find that the impact of foreign expansion on risk is always negative and significant for most individual and systemic risk metrics. In the case of individual metrics, we also find that foreign expansion affects risk through a competition channel as the estimated impact of openings differs between host countries that are more or less competitive than the source country. The systemic risk metrics also decline with respect to expansion, though results for the competition channel are more mixed, suggesting that systemic risk is more likely to be affected by country or business models characteristics that go beyond and above the differential intensity of competition between source and host markets. Empirical results can be rationalized through a simple model with oligopolistic/oligopsonistic banks and endogenous assets/liabilities risk.
    Keywords: banks' risk-taking; Competition; Diversification; geographical expansion; Gravity; regulatory arbitrage; systemic risk
    JEL: G21 G32 L13
    Date: 2018–09
  4. By: Blattner, Laura (Stanford University); Farinha, Luisa (Bank of Portugal); Rebelo, Francisco (Boston College)
    Abstract: We provide evidence that a weak banking sector contributed to low productivity following the European debt crisis. An unexpected increase in capital requirements provides a natural experiment to study the effects of reduced capital adequacy on productivity. Affected banks respond by cutting lending but also by reallocating credit to distressed firms with underreported loan losses. We develop a method to detect underreported losses using loan-level data. We show that the credit reallocation leads to a reallocation of production factors across firms. We find that the resulting factor misallocation accounts for 20% of the decline in productivity in Portugal in 2012.
    JEL: D24 E44 E51 G21 G28 O47
    Date: 2018–06
  5. By: de Haas, Ralph (Tilburg University, Center For Economic Research); Lu, Liping (Tilburg University, Center For Economic Research); Ongena, S.R.G. (Tilburg University, Center For Economic Research)
    Abstract: We interview 361 European bank CEOs to identify their banks’ main competitors. We then provide evidence on the drivers of bilateral bank competition, construct a novel competition measure at the locality level, and assess how well it explains variation in firms’ credit constraints. We find that banks identify another bank as a main competitor in small-business lending when their branch networks overlap, when both are foreign owned or relationship oriented, or when the potential competitor has fewer hierarchical layers. Intense bilateral bank competition increases local credit constraints, especially for small firms, as competition may impede the formation of lending relationships.
    Keywords: bilateral bank competition; multimarket contact; credit constraints
    JEL: D22 D40 F36 G21
    Date: 2018
  6. By: Stephan Imhof; Cyril Monnet; Shengxing Zhang
    Abstract: We develop a theoretical model to study the implications of liquidity regulations and monetary policy on deposit-making and risk-taking. Banks give risky loans by creating deposits that firms use to pay suppliers. Firms and banks can take more or less risk. In equilibrium, higher liquidity requirements always lower risk at the cost of lower investment. Nevertheless, a positive liquidity requirement is always optimal. Monetary conditions affect the optimal size of liquidity requirements, and the optimal size is countercyclical. It is only optimal to impose a 100% liquidity requirement when the nominal interest rate is sufficiently low.
    Date: 2018
  7. By: Mark Gertler (New York University); Andrea Prestipino (Federal Reserve Board); Nobuhiro Kiyotaki (Princeton University)
    Abstract: This paper incorporates banks and banking panics within a conventional macroeconomic framework to analyze the dynamics of a financial crisis of the kind recently experienced. We are particularly interested in characterizing the sudden and discrete nature of the banking panics as well as the circumstances that makes an economy vulnerable to such panics in some instances but not in others. Having a conventional macroeconomic model allows us to study the channels by which the crisis affects real activity and the effects of policies in containing crises.
    Date: 2018
  8. By: Yaron Leitner (Federal Reserve Bank of Philadelphia); Basil Williams (New York University)
    Abstract: Conventional wisdom holds that the models used to stress test banks should be kept secret to prevent gaming. We show instead that secrecy can be suboptimal, because although it deters gaming, it may also deter socially desirable investment. When the regulator can choose the minimum standard for passing the test, we show that secrecy is suboptimal if the regulator is sufficiently uncertain regarding bank characteristics. When failing the bank is socially costly, then under some conditions, secrecy is suboptimal when the bank's private cost of failure is either sufficiently high or sufficiently low. Finally, we relate our results to several current and proposed stress testing policies.
    Date: 2018
  9. By: Stefania Albanesi; Jaromir Nosal
    Abstract: The 2005 Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) is the most important reform of personal bankruptcy in the United States in recent years. This legislation overhauled eligibility requirements and increased monetary costs of filing for bankruptcy. Using administrative credit file data from a nationally representative panel, we quantify the effects of the reform on bankruptcy, insolvency, and foreclosure, we explore the mechanism generating these responses and examine the consequences for households. We find that the reform caused a 50% permanent drop in Chapter 7 filings, a 25% permanent rise in insolvency, but had no effect on Chapter 13 filings. Exploiting the cross-district variation in filing costs resulting from the reform, we show that these responses are driven by liquidity constraints associated with the higher monetary cost of filing for bankruptcy. We show that insolvency is associated with worse outcomes than bankruptcy, in terms of access to credit and credit scores, suggesting that BAPCPA may have removed an important form of relief for financially distressed borrowers.
    JEL: E21 E49 G18 K35
    Date: 2018–08
  10. By: Bengui, Julien (University of Montreal); Bianchi, Javier (Federal Reserve Bank of Minneapolis)
    Abstract: The outreach of macroprudential policies is likely limited in practice by imperfect regulation enforcement, whether due to shadow banking, regulatory arbitrage, or other regulation circumvention schemes. We study how such concerns affect the design of optimal regulatory policy in a workhorse model in which pecuniary externalities call for macroprudential taxes on debt, but with the addition of a novel constraint that financial regulators lack the ability to enforce taxes on a subset of agents. While regulated agents reduce risk taking in response to debt taxes, unregulated agents react to the safer environment by taking on more risk. These leakages undermine the effectiveness of macroprudential taxes but do not necessarily call for weaker interventions. A quantitative analysis of the model suggests that aggregate welfare gains and reductions in the severity and frequency of financial crises remain, on average, largely unaffected by even significant leakages.
    Keywords: Macroprudential policy; Regulatory arbitrage; Financial crises; Limited regulation enforcement
    JEL: D62 E32 E44 F32 F41
    Date: 2018–09–11
  11. By: Deeksha Gupta (University of Pennsylvania)
    Abstract: During the housing boom, mortgage markets became increasingly concentrated with the government-sponsored enterprises (GSEs) being exposed to over 40 percent of U.S. mortgages in the 2000s. Research on the causes of the pre-crisis rise in risky lending has largely overlooked this trend. I develop a theory where this concentration in mortgage holdings can explain key features of the housing boom and bust. In the model, large lenders with many outstanding mortgages have incentives to extend risky credit to prop up house prices. An increase in concentration can lead to a credit boom with worsening credit quality and a subsequent bust with widespread defaults. The model can generate a negative correlation between credit and income growth across areas (such as ZIP codes) while maintaining a positive correlation between them across borrowers reconciling empirical evidence that has previously seemed contradictory.
    Date: 2018
  12. By: George Bratsiotis
    Abstract: This paper examines the role of precautionary liquidity (reserves) and the interest on reserves as two potential determinants of the deposits channel that can help explain the role of monetary policy, particularly at the near zero-bound. Through the deposits channel and balance sheet channel either of these determinants can explain a number of effects including, (i) zero-bound optimal policy rates, (ii) a negative deposit rate spread, but also (iii) determinacy at the lower-zero bound. Similarly, through its effect on the deposits channel and balance sheet channel the interest on reserves can act as the main tool of monetary policy, that is shown to provide higher welfare gains in relation to a simple Taylor rule. This result is shown to hold at the zero-bound and it is independent of precautionary liquidity, or the fiscal theory of the price level.
    Date: 2018
  13. By: Matías Cabrera (BBVA Research); Gerald P. Dwyer (Clemson University, Clemson SC); María J. Nieto (Banco de España)
    Abstract: Using international listed banks from the United States, Europe, Japan and China from 2004 to 2014, we analyse the effect on bank risk of some of the most relevant new elements of the prudential regulatory framework proposed in the wake of the Great Financial Crisis. We measure risk by a market measure, namely the volatility of banks’ stock returns. We also examine the effect of government support during the financial crisis and of designation as a G-SIB. We find little support for an association with government support and none for a negative relationship. We find support for a positive effect of designation as a G-SIB on risk. We find a positive association with securities trading and a negative association with capital. Banks’ chosen liquidity is unimportant for this measure of risk.
    Keywords: banks, regulation, financial crisis.
    JEL: G21 G38 G01
    Date: 2018–09
  14. By: John Leventides (Department of Economics, University of Athens, Greece); Kalliopi Loukaki (Department of Economics, University of Athens, Greece); Vassilios Papavassiliou (UCD Michael Smurfit Graduate Business School, University College Dublin, Ireland; Rimini Centre for Economic Analysis)
    Abstract: The purpose of this study is to assess the resilience of financial systems to exogenous shocks using techniques drawn from the theory of complex networks. We investigate by means of Monte Carlo simulations the fragility of several network topologies using a simple default model of contagion applied on interbank networks of varying sizes. We trigger a series of banking crises by exogenously failing each bank in the system and observe the propagation mechanisms that take effect within the system under different scenarios. Finally, we add to the existing literature by analyzing the interplay of several crucial drivers of interbank contagion, such as network topology, leverage, interconnectedness, heterogeneity and homogeneity across bank sizes and interbank exposures.
    Keywords: Interbank contagion, random networks, financial stability, interconnectedness, systemic risk
    Date: 2018–09
  15. By: Luca Deidda (Università di Sassari); Ettore Panetti (Banco de Portugal)
    Abstract: We study the interaction of banks' liquidity management and financial fragility, in an environment where banks hold a portfolio of liquidity and partially-illiquid productive assets, to insure their depositors against fundamental uncertainty, and liquidity and maturity transformation might trigger a depositors’ self-fulfilling run, modelled as a ``global game''. Under some sufficient conditions, there exists a unique recovery rate, associated with early liquidation of the productive assets, below which the banks first deplete liquidity and then liquidate, to finance depositors' withdrawals during a run. In equilibrium, the banks hoard liquidity in anticipation of a run, and narrow banking is not viable.
    Date: 2018
  16. By: Kočenda, Evžen; Iwasaki, Ichiro
    Abstract: We analyze bank survival on large dataset covering 17 European emerging markets during the period of 2007-2015 by estimating the Cox proportional hazards model. We group banks across countries and according to their financial soundness. Our results show that progress in banking reforms positively affects bank survival. The economic impact of various determinants is largest for average banks measured by their soundness. Financial indicators predict bank survival rate with intuitively expected impact that is economically less significant in comparison to other factors. Specifically, ownership structure and legal form are the key economically significant factors that exhibit strongest economic effect on bank survival. We further document importance of banks being listed with respect to their survival. We also show that probability of exit increases after number of directors increases beyond a threshold. The results are robust no matter how bank are grouped, with respect to alternative specifications as well as alternative assumptions on survival distribution.
    Keywords: Bank survival, Banking reform, European emerging markets, Survival and exit determinants, Hazards model
    JEL: C14 D02 D22 G33
    Date: 2018–08
  17. By: Kumhof, Michael (Bank of England); Wang, Xuan (University of Oxford)
    Abstract: We study a New Keynesian model where banks create deposits through loans, subject to increasing marginal cost of lending. Banks do not intermediate commodity deposits between savers and borrowers, instead they offer a payment system that intermediates ledger-entry deposits between different spenders. We discuss three implications. First, non-banks’ aggregate purchasing power consists not only of their income but also of new loans/deposits. Second, near the ZLB policy rate reductions compress spreads, and thereby reduce bank profitability, deposit creation and output. Third, near the ZLB Phillips curves are flatter, because lower factor cost inflation is partly offset by inflationary credit rationing.
    Keywords: Banks; financial intermediation; endogenous money creation; bank loans; bank deposits; money demand; deposits-in-advance; Phillips curve; zero lower bound; monetary policy rules.
    JEL: E41 E44 E51 G21
    Date: 2018–08–24

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