nep-ban New Economics Papers
on Banking
Issue of 2018‒09‒24
fifteen papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. No Pain, No Gain. Multinational Banks in the Business Cycle By Qingqing Cao
  2. Interactions between Regulatory and Corporate Taxes: How Is Bank Leverage Affected? By Franziska Bremus; Kirsten Schmidt; Lena Tonzer
  3. The Procyclicality of Expected Credit Loss Provisions By Abad, Jorge; Suarez, Javier
  4. Why Have Negative Nominal Interest Rates Had Such a Small Effect on Bank Performance? Cross Country Evidence By Jose A. Lopez; Andrew K. Rose; Mark M. Spiegel
  5. Optimal Exclusion By Qingqing Cao
  6. Liquidity Requirements and Bank Deposits: Evidence from Ethiopia By Nicola Limodio; Francesco Strobbe
  7. Bank Holdings and Systemic Risk By Celso Brunetti; Jeffrey H. Harris; Shawn Mankad
  8. Target setting and Allocative Inefficiency in Lending: Evidence from Two Chinese Banks By Yiming Cao; Raymond Fisman; Hui Lin; Yongxiang Wang
  9. Loan-to-value ratio limits: an exploration for Greece By Hiona Balfoussia; Harris Dellas; Dimitris Papageorgiou
  10. Quantifying inertia in retail deposit markets By Deuflhard, Florian
  11. Retirement in the Shadow (Banking) By Ordoñez, Guillermo; Piguillem, Facundo
  12. Effects of bank capital requirement tightenings on inequality By Sandra Eickmeier; Benedikt Kolb; Esteban Prieto
  13. Improved Matching, Directed Search, and Bargaining in the Credit Card Market By Gajendran Raveendranathan
  14. Prudential Capital Controls and Risk Misallocation: Bank Lending Channel By Lorena Keller
  15. Factors Affecting Access to Formal Credit by Micro and Small Enterprises in Uganda By Faisal Buyinza; Anthony Tibaingana; John Mutenyo

  1. By: Qingqing Cao (Michigan State University)
    Abstract: We study the role of multinational banks in the propagation of business cycles in host countries. In our economy, multinational banks can transfer liquidity across borders through internal capital markets. However, their scarce knowledge of local firms' collateral hinders their allocation of liquidity to firms. We find that, through the interaction between the "liquidity origination" advantage and the "liquidity allocation" disadvantage, multinational banks can act as a short-run stabilizer in the immediate aftermath of domestic liquidity shocks but be a drag on the subsequent recovery. Structural and cyclical policies can ameliorate the trade-off induced by the presence of multinational banks.
    Date: 2018
  2. By: Franziska Bremus; Kirsten Schmidt; Lena Tonzer
    Abstract: Regulatory bank levies set incentives for banks to reduce leverage. At the same time, corporate income taxation makes funding through debt more attractive. In this paper, we explore how regulatory levies affect bank capital structure, depending on corporate income taxation. Based on bank balance sheet data from 2006 to 2014 for a panel of EU-banks, our analysis yields three main results: The introduction of bank levies leads to lower leverage as liabilities become more expensive. This effect is weaker the more elevated corporate income taxes are. In countries charging very high corporate income taxes, the incentives of bank levies to reduce leverage turn ineffective. Thus, bank levies can counteract the debt bias of taxation only
    Keywords: Bank levies, debt bias of taxation, bank capital structure
    JEL: G21 G28 L51
    Date: 2018
  3. By: Abad, Jorge; Suarez, Javier
    Abstract: The Great Recession has pushed accounting standards for banks' loan loss provisioning to shift from an incurred loss approach to an expected credit loss approach. IFRS 9 and the incoming update of US GAAP imply a more timely recognition of credit losses but also greater responsiveness to changes in aggregate conditions, which raises procyclicality concerns. This paper develops and calibrates a recursive ratings-migration model to assess the impact of different provisioning approaches on the cyclicality of banks' profits and regulatory capital. The model is used to analyze the effectiveness of potential policy responses to the procyclicality problem.
    Keywords: credit loss allowances; expected credit losses; incurred losses; procyclicality; rating migrations
    JEL: G21 G28 M41
    Date: 2018–08
  4. By: Jose A. Lopez; Andrew K. Rose; Mark M. Spiegel
    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: banks from regimes with 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. Banks also responded to negative rates by increasing lending activity, and raising the share of deposit funding. Overall, our results indicate surprisingly benign implications of negative rates for commercial banks thus far.
    JEL: E43 G21
    Date: 2018–09
  5. By: Qingqing Cao (Michigan State University)
    Abstract: In a canonical model of borrowing and lending, an exclusion technology that features full exclusion for a deterministic number of periods following default maximizes stationary equilibrium welfare. This exclusion policy maximizes the stationary volume of mutually beneficial lending transactions. It also maximizes the average welfare of the excluded. The optimal length of exclusion depends on fundamentals such as borrower patience and the direct cost of default. It also depends on incentives to default for strategic rather stabilizer in the immediate aftermath of domestic liquidity shocks but be a drag on the subsequent recovery. Structural and cyclical policies can ameliorate the trade-off induced by the presence of multinational banks.
    Date: 2018
  6. By: Nicola Limodio; Francesco Strobbe
    Abstract: Liquidity requirements can stimulate deposit growth by increasing depositor repayment in bad states, which can also promote lending and branching. We study an unexpected policy change which fostered the liquid assets of Ethiopian banks by 33% in 2011, and present three findings in line with this hypothesis. First, a panel of bank depositors shows deposit growth among wealthy and highly educated individuals. Second, a survey reports higher deposits in branches opened after the policy and in university cities. Third, bank balance sheets and two sources of bank exposure to the policy highlight an increase in deposits, loans and branches.
    Keywords: Banking, Liquidity Requirements, Financial Development
    JEL: G21 G38 O16
    Date: 2018
  7. By: Celso Brunetti; Jeffrey H. Harris; Shawn Mankad
    Abstract: The recent financial crisis has focused attention on identifying and measuring systemic risk. In this paper, we propose a novel approach to estimate the portfolio composition of banks as function of daily interbank trades and stock returns. While banks’ assets are reported to regulators and/or the public at relatively low frequencies (e.g. quarterly or annually), our approach estimates bank asset holdings at higher frequencies which allows us to derive precise estimates of (i) portfolio concentration within each bank—a measure of diversification—and (ii) common holdings across banks—a measure of market susceptibility to propagating shocks. We find evidence that systemic risk measures derived from our approach lead, in a forecasting sense, several commonly used systemic risk indicators.
    Keywords: Systemic risk ; Concentration index ; Bank holdings ; Similarity index
    JEL: G21 C11 G11
    Date: 2018–09–04
  8. By: Yiming Cao; Raymond Fisman; Hui Lin; Yongxiang Wang
    Abstract: We study the consequences of month-end lending incentives for Chinese bank managers. Using data from two banks, one state-owned and the other partially privatized, we show a clear increase in lending in the final days of each month, a result of both more loan issuance and higher value per loan. We estimate that daily end-of-month lending is 95 percent higher in the last 5 days of each month as a result of loan targets, with only a small amount plausibly attributable to shifting loans forward from the following month. End-of-month loans are 2.1 percentage points (more than 16 percent) more likely to be classified as bad in the years following issuance; a back-of-the-envelope calculation suggests that the incremental loans made in order to hit targets are 26 percent more likely to eventually turn bad. Our work highlights the distortionary effects of target-setting on capital allocation, in a context in which such concerns have risen to particular prominence in recent years.
    JEL: G21 M52
    Date: 2018–08
  9. By: Hiona Balfoussia (Bank of Greece); Harris Dellas (University of Bern, CEPR); Dimitris Papageorgiou (Bank of Greece)
    Abstract: We study the role of the loan-to-value (LTV) ratio instrument in a DSGE model with a rich set of financial frictions (Clerc et al., 2015). We find that a binding LTV ratio limit in the mortgage market leads to lower credit and default rates in that market as well as lower levels of investment and output, while leaving other sectors and agents largely unaffected. Interestingly, when the level of capital requirements is in the neighborhood of its optimal value, implementing an LTV ratio cap has a negative impact on welfare, even if it leads to greater macroeconomic stability. Furthermore, the availability of the LTV ratio instrument does not impact on the optimal level of capital requirements. It seems that once capital requirements have been optimally deployed to tame banks’ appetite for excessive risk, the use of the LTV ratio could prove counterproductive from a welfare point of view.
    Keywords: Macroprudential Policy; General Equilibrium; Greece
    JEL: E3 E44 G01 G21 O52
    Date: 2018–07
  10. By: Deuflhard, Florian
    Abstract: This paper investigates inertia within and across banks in retail deposit markets using detailed panel data on consumer choices and account characteristics. In a structural choice model, I find that costs of inertia are around one third higher for switching accounts across compared to switching within banks. Observable proxies of bank-level switching costs (number and type of additional financial products) explain most of this cost premium, while online banking usage reduces inertia. Consistent with theory, I provide evidence that banks incorporate inertia in their pricing as older accounts pay lower rates than comparable newer accounts. Counterfactual policies reducing inertia shift market share to more competitive smaller banks, but only eliminating inertia within banks already results in high potential gains in consumer surplus. This suggests that facilitating bank switching alone might be insufficient to improve consumer choices.
    Date: 2018
  11. By: Ordoñez, Guillermo; Piguillem, Facundo
    Abstract: The U.S. economy has recently experienced a large increase in life expectancy and in shadow banking activities. We argue that these two phenomena are intimately related. Agents rely on financial intermediaries to insure consumption during their uncertain life spans after retirement. When they expect to live longer, they rely more heavily on financial intermediaries that are riskier but offer better insurance terms - including shadow banks. We calibrate the model to replicate the level of financial intermediation in 1980, introduce the observed change in life expectancy and show that the demographic transition is critical in accounting for the boom in both shadow banking and credit that preceded the recent U.S. financial crisis. We compare the U.S. experience with a counterfactual without shadow banks and show that they may have contributed around 0.6GDP to output, four times larger than the estimated costs of the crisis.
    Keywords: Ageing Population; financial crisis; shadow banking
    JEL: E21 E44
    Date: 2018–08
  12. By: Sandra Eickmeier; Benedikt Kolb; Esteban Prieto
    Abstract: We use a newly constructed narrative measure of regulatory bank capital requirement tightening events (Eickmeier et al., 2018) to examine their effects on household income and expenditure inequality in the US. Income and expenditure inequality both decline (the latter decline being slightly less pronounced than the former). Financial income strongly drops after the regulatory events. Richer households tend to be more exposed to financial markets. Hence, their income and expenditures decline by more than those of poorer households. The monetary policy easing after the regulation is shown to contribute to the decline in inequality at longer horizons, as it cushions the negative effects of the capital requirement tightenings on wages and salaries in the medium run, which represent a considerable share of income for lower- to middle-income households.
    Keywords: Narrative Approach, Bank Capital Requirements, Local Projections, Inequality
    JEL: G28 G18 C32 E44
    Date: 2018–09
  13. By: Gajendran Raveendranathan (McMaster University)
    Abstract: I build a model of revolving credit in which consumers face idiosyncratic earnings risk, and credit card firms target consumers with credit offers. Upon a match, they bargain over borrowing limits and borrowing interest rates -- fixed for the duration of the match. Using the model, I show that improved matching between consumers and credit card firms quantitatively accounts for the rise in revolving credit and consumer bankruptcies in the U.S. I also provide empirical evidence consistent with the key features in my model: directed search and bargaining. The lifetime consumption gains from improved matching are substantially large (3.55 percent).
    Date: 2018
  14. By: Lorena Keller (Northwestern University)
    Abstract: I identify a novel impact of managing capital flows in emerging markets: Prudential capital controls encourage domestic firms to take more dollar liabilities. This occurs because banks in emerging markets have a fundamental risk problem: households save partially in dollars while firms borrow in local currency. Absent capital controls, banks hedge the associated currency risk with foreign investors. When capital controls are present, banks respond by lending in dollars to domestic firms. I exploit heterogeneity in the strictness of capital controls across Peruvian banks to provide causal evidence of this mechanism and show that it has sizable effects on employment.
    Date: 2018
  15. By: Faisal Buyinza; Anthony Tibaingana; John Mutenyo
    Abstract: This article investigates the factors affecting access to formal credit by micro and small enterprises in Uganda using the Gender Enterprise Survey that was funded by the IDRC. The study employed a probit model. The findings show that firm sales, owner's education level, belonging to a business association, belonging to business group, use of internet, owning a personal and business bank account, and gender of the owner are positively associated with access to formal credit. We also find that experienced firms are less likely to apply for credit hence reduce the probability to receive formal bank credit. Our results provide insights on the existing gaps in designing supportive policies for micro and small enterprise to enable them increase their access to credit especially from the formal financial institutions.
    Keywords: Credit constraint, micro and small enterprises, sample selection, Uganda
    Date: 2018–08

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