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on Banking |
| By: | Gilbert Colletaz; Grégory Levieuge; Alexandra Popescu |
| Abstract: | As an extension to the literature on the risk-taking channel of monetary policy, this paper studies the existence of a systemic risk-taking channel (SRTC) in the Eurozone, through an original macroeconomic perspective based on causality measures. Because the SRTC is effective after an “incubation period”, we make a distinction between short and long-term causality, following the methodology proposed by Dufour and Taamouti (2010). We find that causality from monetary policy to systemic risk, while not significant in the very short term, robustly represents 75 to 100% of the total dependence between the two variables in the long run. Reverse causality is rejected: systemic risk did not influence the policy of the European Central Bank before the global financial crisis. However, central banks must be aware that a too loose monetary policy stance may be conducive to a build-up of systemic risk. |
| Keywords: | Monetary Policy, Systemic Risk-Taking, Long Run Causality, SRisk. |
| JEL: | E52 E58 G21 |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:bfr:banfra:694&r=ban |
| By: | Gehrig, Thomas; Iannino, Maria Chiara |
| Abstract: | This paper analyses the evolution of the safety and soundness of the European banking sector during the various stages of the Basel process of capital regulation. In the first part we document the evolution of various measures of systemic risk as the Basel process unfolds. Most strikingly, we find that the exposure to systemic risk as measured by SRISK has been steeply rising for the highest quintile, moderately rising for the second quintile and remaining roughly stationary for the remaining three quintiles of listed European banks. This observation suggests that the Basel process has succeeded in containing systemic risk for the majority of European banks but not for the largest and most risky institutions. In the second part we analyze the drivers of systemic risk. We find compelling evidence that the increase in exposure to systemic risk (SRISK) is intimately tied to the implementation of internal models for determining credit risk as well as market risk. Based on this evidence, the sub-prime crisis found especially the largest and more systemic banks ill-prepared and lacking resiliency. This condition has even aggravated during the European sovereign crisis. Banking Union has not restored aggregate resiliency to pre-crises levels. Finally, low interest rates considerably a ect the contribution to systemic risk for the safer banks. |
| JEL: | B26 E58 G21 G28 H12 N24 |
| Date: | 2018–09–27 |
| URL: | http://d.repec.org/n?u=RePEc:bof:bofrdp:2018_016&r=ban |
| By: | Dombret, Andreas R.; Foos, Daniel; Pliszka, Kamil; Schulz, Alexander |
| Abstract: | We analyze the impact of market liquidity on bank lending in the euro area for different segments over the period 2003 to 2016. Our results on the aggregate level show that market liquidity is positively related to loan volumes and negatively related to credit spreads. Particularly during the financial crisis of 2007-09 and the subsequent European debt crisis, lending was reduced and we observe that banks requested higher credit spreads. Of particular importance is that market liquidity has an asymmetric effect on bank lending: The negative impact of a reduction in liquidity is more significant than the positive impact of an increase in liquidity. This is particularly true for corporate loans where lending conditions would be restricted first in times of impaired market liquidity. The bank-level data confirm the strong impact of market liquidity on bank lending as well. More specifically, we show that non-listed banks, less profitable banks and banks which rely relatively more on net interest income, as well as banks with a high funding liquidity are particularly strongly exposed to market liquidity. Therefore, properly functioning and sufficiently liquid markets are necessary to avoid negative consequences of restrictions in bank lending which would eventually hamper the real economy. This is of the utmost importance against the background of the envisaged capital markets union in the European Union and the potential exit of the United Kingdom from the EU. |
| Keywords: | financial markets,bank lending,liquidity risk |
| JEL: | G15 G21 G32 |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubdps:342018&r=ban |
| By: | Toni Ahnert; James Chapman; Carolyn Wilkins |
| Abstract: | We present a simple model to study the risk sensitivity of capital regulation. A banker funds investment with uninsured deposits and costly capital, where capital resolves a moral hazard problem in the banker’s choice of risk. Investors are uninformed about investment quality, but a regulator receives a signal about it and imposes minimum capital requirements. With a perfect signal, capital requirements are risk sensitive and achieve the first-best levels of risk and intermediation: safer banks attract cheaper deposit funding and require less capital. With a noisy signal, risk-sensitive capital regulation can implement a separating equilibrium in which low-quality banks do not participate. We show that the degree of risk sensitivity is non-monotone in the precision of the signal and in investment characteristics. Without a signal, a leverage ratio still induces the efficient risk choice but leads to excessive or insufficient intermediation. |
| Keywords: | Financial institutions; Financial system regulation and policies |
| JEL: | G21 G28 |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:18-48&r=ban |
| By: | Neyer, Ulrike; Sterzel, André |
| Abstract: | This paper analyses the impact of different treatments of government bonds in bank liquidity regulation on financial stability. Using a theoretical model, we show that a sudden increase in sovereign default risk may lead to liquidity issues in the banking sector, implying the insolvency of a significant number of banks. Liquidity requirements do not contribute to a more resilient banking sector in the case of sovereign distress. However, the central bank acting as a lender of last resort can prevent illiquid banks from going bankrupt. Then, introducing liquidity requirements in general and repealing the preferential treatment of government bonds in liquidity regulation in particular actually undermines financial stability. The driving force is a regulation-induced change in bank investment behaviour. |
| Keywords: | bank liquidity regulation,government bonds,sovereign risk,financial contagion,lender of last resort |
| JEL: | G28 G21 G01 |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:dicedp:301&r=ban |
| By: | Haotian Xiang (Wharton School of the University of Pennsylvania) |
| Abstract: | I investigate the impact of bank capital requirements in a business cycle model with corporate debt choice. Compared to non-bank investors, banks provide restructurable loans that reduce firm bankruptcy losses and enhance production efficiency. Raising capital requirements eliminates deposit insurance distortions but also deposit tax shields. As a result, firms cut back on both bank and non-bank borrowing while going bankrupt more frequently. Implementing an optimal capital ratio of 11 percent in the US produces limited marginal impacts on aggregate quantities and welfare. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:327&r=ban |
| By: | Lewis, Vivien; Roth, Markus |
| Abstract: | We study the equilibrium properties of a business cycle model with financial frictions and price adjustment costs. Capital-constrained entrepreneurs finance risky projects by borrowing from banks. Banks, in turn, make loans using equity and deposits. Because financial contracts are not contingent on aggregate risk, bank balance sheets are hit when entrepreneurial defaults are higher than expected. Macroprudential policy imposes a positive response of the bank capital ratio to lending. Our main result is that the Taylor Principle is violated when this response is too weak. Then macroprudential policy is ineffective in stabilizing debt and monetary policy is subject to 'financial dominance'. A too aggressive response of the interest rate to inflation can lead to debt disinflation dynamics that destabilize the financial sector. |
| Keywords: | bank capital,financial dominance,interest rate rule,macroprudential policy,Taylor Principle |
| JEL: | E32 E44 E52 E58 E61 |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubdps:292018&r=ban |
| By: | Óscar Arce (Banco de España); Miguel García-Posada (Banco de España); Sergio Mayordomo (Banco de España); Steven Ongena (University of Zurich, SFI, KU LEUVEN and CEPR) |
| Abstract: | What is the impact of negative interest rates on bank lending and risk-taking? To answer this question we study the changes in lending policies using both the Euro area Bank Lending Survey and the Spanish Credit Register. Banks whose net interest income is adversely affected by negative rates are concurrently lowly capitalized, take less risk and adjust loan terms and conditions to shore up their risk weighted assets and capital ratios. These banks also increase non-interest charges more. But, importantly, we find no differences in banks’ credit supply or standard setting, neither in the Euro area nor in Spain. These findings suggest that negative rates do not necessarily contract the supply of credit and that the so-called “reversal rate” may not have been reached yet. |
| Keywords: | negative interest rates, risk taking, lending policies |
| JEL: | G21 E52 E58 |
| Date: | 2018–09 |
| URL: | http://d.repec.org/n?u=RePEc:bde:wpaper:1832&r=ban |
| By: | Nymoen, Ragnar (Dept. of Economics, University of Oslo); Pedersen, Kari (The Financial Supervisory Authority of Norway); Sjåberg, Jon Ivar (The Financial Supervisory Authority of Norway) |
| Abstract: | We analyse a quarterly panel data set consisting of ten advanced open economies that have introduced macroprudential policy measures: caps on loan to value and income (LTV and LTI), and debt service to income (DSTI) requirements in particular, but also risk weights (RW), amortization (Amort) and, less used, countercyclical buffer (CCyB). Estimation of dynamic panel data models, that also include the central bank rate, and controls for common nominal and real trends, gives support to the view that several of the measures may have reduced credit growth when they were introduced.The estimated impact effects are most significant for LTV, LTI and RW. For Amort, the long-run effect on credit growth is significant, and the same is found for RW. The estimation results when house price growth is the dependent variable are in the main consistent with the results for credit growth. The results do not support that CCyB has reduced lending (as a consequence of higher financing costs), and we suggest that the variable is mainly a control in our data set. In that interpretation, it is interesting that the estimated coefficients of the other five instruments are robust with respect to exclusion of CCyB from the empirical models. The results are also robust to controls in the form of impulse indicator saturation (IIS). |
| Keywords: | Macroprudential policy measures; house prices; credit growth; open economics; macro panel; impulse indicator saturation; robust estimation |
| JEL: | C23 C44 C58 G28 G38 |
| Date: | 2018–09–14 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:osloec:2018_005&r=ban |
| By: | Zsolt Darvas; David Pichler |
| Abstract: | This Policy Contribution was prepared for the European Parliament’s Committee on Economic and Monetary Affairs (ECON) as an input to the Monetary Dialogue of 24 September 2018 between ECON and the President of the European Central Bank. Copyright remains with the European Parliament at all times. Excess liquidity (defined as all kinds of commercial bank deposits held by the Eurosystem minus the minimum reserve requirements) in the euro area exceeded €1,900 billion, or 17 percent of euro-area GDP, in September 2018. Holding such excess liquidity is costly for commercial banks, given that the currently negative (-0.4 percent) deposit facility interest rate applies on excess liquidity holdings. The current stock of excess liquidity implies an annual €7.6 billion cost in total for those banks that hold this liquidity. More generally, the European Central Bank’s negative deposit interest rate and asset purchases further reduced market interest rates, with a negative impact on banks’ net interest income and thus profitability. This could incentivise a reach-for-yield race among banks. Additionally, the access to liquidity eased significantly and removed the liquidity constraint for most banks’ lending activities. These factors might incentivise banks to engage in risky lending in order to improve their profits. This in turn might create financial stability risks. The authors clarify the definition of excess liquidity, to highlight the reasons why such a large amount of it is being held, and to assess its financial stability implications. |
| Date: | 2018–09 |
| URL: | http://d.repec.org/n?u=RePEc:bre:polcon:27593&r=ban |