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on Banking |
| By: | Hans Degryse; Artashes Karapetyan; Sudipto Karmakar |
| Abstract: | We study the impact of higher capital requirements on banks' decisions to grant collateralized rather than uncollateralized loans. We exploit the 2011 EBA caital exercise, a quasi-natural experiment that required a number of banks to increase their regulatory capital but not others. This experiment makes secured lendng more attractive vis-à-vis unsecured lending for the affected banks as secured loans require less regulatory capital. Using a loan-level dataset covering all corporate loans in Portugal, we identify a novel channel of tighter capital requirements: relative to the control group and after the shock, treated banks require loans more often to be collateralized but less so for relationship borrowers. We further find this impact is stronger for collateral that saves more on regulatory capital. |
| JEL: | G21 G28 G32 |
| Date: | 2018–09 |
| URL: | http://d.repec.org/n?u=RePEc:ise:remwps:wp0492018&r=ban |
| By: | Bremus, Franziska; Schmidt, Kirsten; Tonzer, Lena |
| 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 partially. |
| Keywords: | bank levies,debt bias of taxation,bank capital structure |
| JEL: | G21 G28 L51 |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:iwhdps:162018&r=ban |
| By: | Stefan Avdjiev; Uluc Aysun; Ralf Hepp |
| Abstract: | We find that the lending behavior of global banks' subsidiaries throughout the world is more closely related to local macroeconomic conditions and their financial conditions than to those of their owner-specific counterparts. This inference is drawn from a panel dataset populated with bank-level observations from the Bankscope database. Using this database, we identify ownership structures and incorporate them into a unique methodology that identifies and compares the owner and subsidiary-specific determinants of lending. A distinctive feature of our analysis is that we use multi-dimensional country-level data from the BIS international banking statistics to account for exchange rate fluctuations and cross-border lending. |
| Keywords: | bankscope, G-SIB, bank-level data, global banks, BIS international banking statistics |
| JEL: | E44 F32 G15 G21 |
| Date: | 2018–09 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:746&r=ban |
| By: | Oliver Rehbein |
| Abstract: | I show that natural disasters transmit to firms in non-disaster areas via their banks. This spillover of non-financial shocks through the banking system is stronger for banks with less regulatory capital. Firms connected to a disaster-exposed bank with below median capital, reduce their employment by 11\% and their fixed assets by 20\% compared to firms in the same region without such a bank during the 2013 flooding in Germany. Low bank capital thus carries a negative externality because it amplifies regional shock spillovers. I show that bank liquidity, and firm capital and liquidity are less relevant to prevent shock transmission. |
| Keywords: | natural disaster, real effects, shock transmission, bank capital |
| JEL: | G21 G29 E44 E24 |
| Date: | 2018–09 |
| URL: | http://d.repec.org/n?u=RePEc:bon:boncrc:crctr224_043_2018&r=ban |
| By: | Gündüz, Yalin |
| Abstract: | This paper provides initial evidence on counterparty risk-mitigation activities of financial institutions on the basis of Depository Trust and Clearing Corporation's (DTCC) proprietary bilateral credit default swap transactions and positions. We show that financial institutions that are active buyers of protection from a specific counterparty undertake successive contracts and purchase protection written on them, even avoiding wrong-way risk mitigation. Higher stock return and CDS price volatility, lower past stock returns, and higher CDS prices of the counterparty are shown to have an increasing effect on the hedging behaviour against the counterparty. As the current regulatory frameworks explicitly formulate any protection purchase on the counterparty would diminish the required capital, this type of risk mitigation could follow regulatory capital relief motives and provides a viable hedging instrument beyond receiving coverage through collateral. |
| Keywords: | credit default swaps,DTCC,OTC markets,hedging,Basel III,CRR |
| JEL: | G11 G21 G23 |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubdps:352018&r=ban |
| By: | G. Chiesa; J. M. Mansilla-Fernández |
| Abstract: | This paper develops a theoretical model as a foundation of empirical analysis of the transmission channel of non-performing loans (NPLs) on bank cost of capital, credit and liquidity creation in the Eurozone. Empirical results confirm the model’s predictions and suggest that holding non-performing loans increases the cost of capital for banks in the short-term and the long-term. Moreover, the increased cost of capital reduces credit and liquidity creation, and the more so the less capitalized is the bank. This phenomenon is found to be economically more significant for European periphery country banks than for core country banks. The identification of the transmission channel is robust to the Granger predictability test. |
| JEL: | G11 G21 G32 H63 |
| Date: | 2018–10 |
| URL: | http://d.repec.org/n?u=RePEc:bol:bodewp:wp1124&r=ban |
| By: | Oliver Rehbein; Santiago Carbo-Valverde |
| Abstract: | The decision to change or terminate a bank-firm relationship has been demonstrated to be crucial for firm performance following bank mergers. We find both competition and the available firm collateral to be important factors in enabling firms to switching banks, instead of dropping their bank relationships. We also provide novel evidence that firms who are able to \textit{add} a bank relationship following a merger exhibit much stronger post-merger performance. Our findings are consistent with the interpretation that bank-mergers cause a reduction in lending to most firms, leading them to search for alternative sources of finance. |
| Keywords: | bank mergers, relationship banking, competition |
| JEL: | G21 G34 |
| Date: | 2018–09 |
| URL: | http://d.repec.org/n?u=RePEc:bon:boncrc:crctr224_044_2018&r=ban |
| By: | Felipe Restrepo (Ivey Business School at Western University); Lina Cardona-Sosa (Banco de la República de Colombia); Philip E. Strahan (Boston College & NBER) |
| Abstract: | In 2011, Colombia instituted a tax on repayment of bank loans, thereby increasing the cost of shortterm bank credit more than long-term credit. Firms responded by cutting their short-term loans for liquidity management purposes and increasing their use of cash and trade credit. In industries where trade credit is more accessible (based on U.S. Compustat firms), we find substitution into accounts payable and little effect on cash and investment. Where trade credit is less available, firms increase cash and cut investment. Thus, trade credit offers a substitute source of liquidity that can insulate some firms from bank liquidity shocks. **** RESUMEN: En 2011, Colombia incluyó los desembolsos a terceros dentro de la base gravable a los movimientos financieros (o 4x1000), incrementando así los costos de los créditos de muy corto plazo con relación a los de muy largo plazo. Las firmas respondieron con una disminución en los créditos de corto plazo para solventar problemas de liquidez y con un aumento en el uso del efectivo y las cuentas por pagar. En industrias en donde las cuentas por pagar son más comunes se encuentra una sustitución por las mismas con poco efecto en el efectivo o inversión. Caso contrario a lo observado en industrias con menos uso de las cuentas por pagar. Es así como las cuentas por pagar ofrecen una fuente de liquidez sustituta frente a choques a la provisión de liquidez de los bancos. |
| Keywords: | short-term credit, trade Credit, bank loans, liquidity, difference in differences, crédito de corto plazo, cuentas por pagar, préstamos bancarios, liquidez, diferencias en diferencias. |
| JEL: | H81 D22 |
| Date: | 2018–10 |
| URL: | http://d.repec.org/n?u=RePEc:bdr:borrec:1056&r=ban |
| By: | Paul Embrechts; Alexander Schied; Ruodu Wang |
| Abstract: | In this paper, we study issues of robustness in the context of Quantitative Risk Management. Depending on the underlying objectives, we develop a general methodology for determining whether a given risk measurement related optimization problem is robust. Motivated by practical issues from financial regulation, we give special attention to the two most widely used risk measures in the industry, Value-at-Risk (VaR) and Expected Shortfall (ES). We discover that for many simple representative optimization problems, VaR generally leads to non-robust optimizers whereas ES generally leads to robust ones. Our results thus shed light from a new angle on the ongoing discussion about the comparative advantages of VaR and ES in banking and insurance regulation. Our notion of robustness is conceptually different from the field of robust optimization, to which some interesting links are discovered. |
| Date: | 2018–09 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1809.09268&r=ban |
| By: | Mathias Drehmann; James Yetman |
| Abstract: | The credit gap, defined as the deviation of the credit-to-GPD ratio from a Hodrick-Prescott (HP) filtered trend, is a powerful early warning indicator for predicting crises. Basel III therefore suggests that policymakers should use it as part of their countercyclical capital buffer frameworks. Hamilton (2017), however, argues that you should never use an HP filter as it results in spurious dynamics, has end-point problems and its typical implementation is at odds with its statistical foundations. Instead he proposes the use of linear projections. Some have also criticised the normalisation by GDP, since gaps will be negatively correlated with output. We agree with these criticisms. Yet, in the absence of clear theoretical foundations, all proposed gaps are but indicators. It is therefore an empirical question which measure performs best as an early warning indicator for crises - the question we address in this paper. We run a horse race using quarterly data from 1970 to 2017 for 42 economies. We find that no other gap outperforms the baseline credit-to-GDP gap. By contrast, credit gaps based on linear projections in real time perform poorly. |
| Keywords: | early warning indicators, credit gaps, HP filter |
| JEL: | E44 G01 |
| Date: | 2018–09 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:744&r=ban |
| By: | Herwartz, Helmut; Roestel, Jan |
| Abstract: | This paper investigates the propagation of instability through key asset markets of the US financial system - equity, real estate, banking and treasury - between 1/3/2000 and 12/26/2014. For this purpose, we develop an identification method to uncover characteristic financial market interrelations under distinguished scenarios of crises. It refers to the logic behind narrative sign restrictions and allows to extract time varying contemporaneous effects and volatility transmission from conventional reduced form volatility models with dynamic correlations. We find the market value of banking institutions to be highly sensitive to news originating in other markets, with those originating in the real estate market being most important. Under stress, in turn, the banking sector tends to dominate financial market (co)variation, where it exhibits a marked feedback relation with both the real estate and the equity market. |
| Keywords: | Identification,Contemporaneous effects,Causality,Impulse response analysis,GARCH,Volatility transmission,Financial crises |
| JEL: | C39 C32 E44 G01 |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:cauewp:201808&r=ban |
| By: | Marcela Eslava; Xavier Freixas |
| Abstract: | Which projects/firms should be the target of lending by a Public Development Bank (PDB)? What is the optimal design for the PDB’s loans, and the optimal structure for delivering them? We analyze these questions in the context of a model where screening is costly to banks and underprovision of credit results from the inability of banks to appropriate the full benefits of projects they finance, more pronounced for high value projects. PDB intervention arises as a natural alternative to alleviate this inefficiency, since it originates in a failure in the private provision of credit. Lending to commercial banks at subsidized rates or providing credit guarantees, targeting the firms that generate high added value, are valid policy alternatives. Though in normal times PDB lending and credit guarantees are shown to be equivalent, lending is preferred when banks are facing a liquidity shortage, while a credit guarantees program is preferred when banks are undercapitalized. Direct lending by the PDB to the targeted industries could be superior to these subsidies to private lending, but only if the PDB’s corporate governance is strong enough for public credit to respond to efficiency considerations rather than political concerns. PDB intervention naturally addresses credit underprovision stemming from failures directly affecting financial institutions, but it can also alleviate that arising from firm’s moral hazard or insufficient access to collateral. |
| Keywords: | Public development banks; governmental loans and guarantees; costly screening; credit rationing. |
| JEL: | H81 G20 G21 G23 |
| Date: | 2018–09–27 |
| URL: | http://d.repec.org/n?u=RePEc:col:000518:016726&r=ban |
| By: | Michael Brei; Ramon Moreno |
| Abstract: | The experience of a number of central banks in emerging economies indicates that capital flows can pose a dilemma. For example, raising policy rates can attract more capital inflows by raising deposit rates. It has been suggested, however, that raising reserve requirements instead of the policy rate can address this dilemma, as deposit rates will not necessarily increase, even if lending rates rise. To investigate this possibility, this paper examines how banks adjust loan and deposit rates in response to changes in reserve requirements. We use data on 128 banks from seven Latin American countries over the period 2000-14. Our results indicate that higher reserve requirements are associated with higher loan rates, whereas deposit rates remain unchanged during normal times and decrease during periods of large capital inflows. Reserve requirements may therefore be a way to mitigate the dilemma posed by capital inflows in some Latin American economies. |
| Keywords: | reserve requirements, monetary policy, capital flows |
| JEL: | C53 E43 E52 G21 |
| Date: | 2018–08 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:741&r=ban |
| By: | Victor Ortego-Marti (Department of Economics, University of California Riverside); Miroslav Gabrovski (University of Hawaii at Manoa) |
| Abstract: | This paper develops a model of the housing market with search and credit frictions. The interaction between the two frictions gives rise to a novel channel through which the financial sector affects prices and liquidity in the housing market. Furthermore, an interesting feature of the model is that both frictions combined lead to multiple equilibria. A numerical exercise suggests that credit shocks have a relatively larger impact on mortgage debt and liquidity than on prices. |
| Keywords: | Housing market; Credit Frictions; Search and Matching; Multiple Equilibria; Mort- gages |
| JEL: | E2 E32 R21 R31 |
| Date: | 2018–09 |
| URL: | http://d.repec.org/n?u=RePEc:ucr:wpaper:201816&r=ban |
| By: | Yu-Sin Chang |
| Abstract: | We propose a dynamic model of dependence structure between financial institutions within a financial system and we construct measures for dependence and financial instability. Employing Markov structures of joint credit migrations, our model allows for contagious simultaneous jumps in credit ratings and provides flexibility in modeling dependence structures. Another key aspect is that the proposed measures consider the interdependence and reflect the changing economic landscape as financial institutions evolve over time. In the final part, we give several examples, where we study various dependence structures and investigate their systemic instability measures. In particular, we show that subject to the same pool of Markov chains, the simulated Markov structures with distinct dependence structures generate different sequences of systemic instability. |
| Date: | 2018–09 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1809.03425&r=ban |
| By: | Marius Pfeuffer; Goncalo dos Reis; Greig smith |
| Abstract: | This paper focuses on estimating, in Markov and non-Markov setups, rating transition probabilities crucial in financial regulation. We first deal with the estimation of a continuous time Markov chain using discrete (missing) data and derive a simpler expression for the Fisher information matrix, reducing the computation time of Wald confidence intervals to less than half of the current standard. We provide an efficient procedure to transfer such uncertainties to the rating migrations and probabilities of default, which is of usefulness for practitioners. When a full data set is available, we propose a tractable and parsimonious model based on self-exciting marked point processes that captures the non-Markovian effect of rating momentum. Compared to the Markov model, the non-Markov model yields higher probabilities of default in the investment grades, but also lower default probabilities in some speculative grades. This agrees with empirical observations and has clear practical implications. We illustrate all methods using data from Moody's proprietary corporate credit ratings data set. Implementations are available in the R package ctmcd. |
| Date: | 2018–09 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1809.09889&r=ban |
| By: | Epstein, Brendan; Finkelstein Shapiro, Alan |
| Abstract: | The degree of bank competition as well as firms’ and households’ participation in the domestic banking system differ considerably in emerging economies (EMEs) relative to advanced economies (AEs). We build a small-open-economy model with endogenous firm entry, monopolistic banks, household and firm heterogeneity in par- ticipation in the banking system, and labor search to analyze the labor market and aggregate consequences of financial participation and banking reforms in EMEs. We find that there is a pre-reform threshold of firm participation in the banking system below which reform implementation leads to sharper unemployment and aggregate fluctuations amid foreign interest rate and aggregate productivity shocks. Our find- ings suggest that comprehensive banking reforms that foster household participation and bank competition in tandem can reduce labor market and aggregate volatility, but only under a high-enough pre-reform level of firm participation in the banking system and a non-negligible increase in bank competition. |
| Keywords: | Emerging economies, structural reforms, foreign interest rate shocks, business cycles, banking sector, unemployment, financial participation. |
| JEL: | E24 E32 E44 F41 G21 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:88697&r=ban |
| By: | Björn Richter; Moritz Schularick; Ilhyock Shim |
| Abstract: | Central banks increasingly rely on macroprudential measures to manage the financial cycle, but the effects of such policies on the core objectives of monetary policy to stabilise output and inflation are largely unknown. In this paper, we quantify the effects of changes in maximum loan-to-value (LTV) ratios on output and inflation. We rely on a narrative identification approach based on detailed reading of policymakers' objectives when implementing the measures. We find that over a four-year horizon, a 10 percentage point decrease in the maximum LTV ratio leads to a 1.1% reduction in output. As a rule of thumb, the impact of a 10 percentage point LTV tightening can be viewed as roughly comparable to that of a 25 basis point increase in the policy rate. However, the effects are imprecisely estimated and the effect is only present in emerging market economies. We also find that tightening LTV limits has larger economic effects than loosening them. At the same time, we show that changes in maximum LTV ratios have substantial effects on credit and house price growth. Using inverse propensity weights to re-randomise LTV actions, we show that these effects are likely causal. |
| Keywords: | macroprudential policy, loan-to-value ratios, local projections, narrative approach |
| JEL: | E58 G28 |
| Date: | 2018–08 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:740&r=ban |
| By: | Djimoudjiel, Djekonbe |
| Abstract: | Chadian government’s decision to integrate officials in 2009 to banking sectors should promote financial development firstly and then to give visibility in the government expenditures. The purpose of this article is to highlight the implications of capitalization and bank risk management on financial development in Chad before and after the banking (financial inclusion) of Chadian officials. To achieve this goal, we used Generalized Method of moment (GMM) and the Seemingly Unrelated Regression (SUR) estimators on truncate data from Chadian banks during the period 2000-2015. As result, Chadian banks recapitalize to reduce bank risks, while risks negatively affect financial development before the start of the banking process. During the period of the mass banking and despite the risk inherent to Chadian customers, the recapitalization of the banks however improved in weak proportion the financial development in Chad. |
| Keywords: | banking capitalization, financial development, banking risk, GMM, SUR |
| JEL: | G32 O10 O55 |
| Date: | 2018–09–06 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:88875&r=ban |