nep-ban New Economics Papers
on Banking
Issue of 2018‒10‒15
eighteen papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. The Interaction Effect in a Nonlinear Specification of Bank Lending: A Reexamination of ``Unnatural Selection" By Inoue, Hitoshi; Nakashima, Kiyotaka; Takahashi, Koji
  2. Do banks adjust their liquidity to cope with environmental variation? A study of bank deregulation By Yaoyao Fan; Showyi Yuxiang Jiang; Kim Cuong Ly
  3. Does Political Influence Distort Banking Regulation? Evidence from the US By Panagiota Papadimitri; Fotios Pasiouras; Gioia Pescetto; Ansgar Wohlschlegel
  4. Reconstructing and stress testing credit networks By Ramadiah, Amanah; Caccioli, Fabio; Fricke, Daniel
  5. The effect of house prices on bank risk: empirical evidence from Hungary By Ádám Banai; Nikolett Vágó
  6. The performance of marketplace lenders: Evidence from lending club payment data By Kräussl, Roman; Kräussl, Zsofia; Pollet, Joshua; Rinne, Kalle
  7. The Emergence of A Parallel World: The Misperception Problem for Bank Balance Sheet Risk and Lending Behavior By Inoue, Hitoshi; Nakashima, Kiyotaka; Takahashi, Koji
  8. Macroprudential FX Regulations: Shifting the Snowbanks of FX Vulnerability? By Toni Ahnert; Kristin Forbes; Christian Friedrich; Dennis Reinhardt
  9. Macroprudential FX regulations: shifting the snowbanks of FX vulnerability? By Ahnert, Toni; Forbes, Kristin; Friedrich, Christian; Reinhardt, Dennis
  10. Macroprudential Policy with Leakages By Julien Bengui; Javier Bianchi
  11. Coordination failures, bank runs and asset prices By Bucher, Monika; Dietrich, Diemo; Tvede, Mich
  12. The Equilibrium Effects of Information Deletion: Evidence from Consumer Credit Markets By Andres Liberman; Christopher Neilson; Luis Opazo; Seth Zimmerman
  13. Search and Credit Frictions in the Housing Market By Miroslav Gabrovski; Victor Ortego-Marti
  14. Systemic liquidity concept, measurement and macroprudential instruments By Liquidity, ECB Task Force on Systemic; Bonner, Clemens; Wedow, Michael
  15. Technological Change and Financial Innovation in Banking: Some Implications for Fintech By Frame, W. Scott; Wall, Larry D.; White, Lawrence J.
  16. The effects of changes in local-bank health on household consumption By Cooper, Daniel H.; Peek, Joe
  17. The London Stock Exchange and the British shadow banking system By Andrew Odlyzko
  18. Consumer Credit Card Choice: Costs, Benefits and Behavioural Biases By Mary-Alice Doyle

  1. By: Inoue, Hitoshi; Nakashima, Kiyotaka; Takahashi, Koji
    Abstract: Peek and Rosengren (2005) suggested the mechanism of ``unnatural selection,'' where Japanese banks with impaired capital increase credit to low-quality firms because of their motivation to pursue balance sheet cosmetics. In this study, we reexamine this mechanism in terms of the interaction effect in a nonlinear specification of bank lending, using data from 1994 to 1999. We rigorously demonstrate that their estimation results imply that Japanese banks allocated lending from viable firms to unviable ones regardless of the degree of bank capitalization.
    Keywords: interaction effect; nonlinear specification; probit model; forbearance lending
    JEL: C25 C5 C51 G21 G28
    Date: 2018–03
  2. By: Yaoyao Fan (Glasgow School of Business and Society, Glasgow Caledonian University); Showyi Yuxiang Jiang (Leeds University Business School, University of Leeds); Kim Cuong Ly (School of Management, Swansea University)
    Abstract: The effect of bank deregulation on adjustment speed of bank liquidity is the focus of this paper. We find that banks tend to increase their adjustment speed of liquidity in response to bank deregulation. Banks tend to escape their current state and move to a state with less deregulation. Those banks that move to the less deregulated state reduce their adjustment speed. A strategic movement of headquarters helps banks to fend off competitive pressure. The environmental factors of population and personal income reduce the market-based focus flexibility of banks; however, higher interest expenses incentivise banks to increase their speed. Surviving banks and acquiring banks react as market-makers whereas target banks respond as market-takers. Failed banks lose their distinct competencies to react properly when environmental variation occurs. Banks affiliated with multi-bank holding companies holding a larger network and larger environment are able to increase their liquidity adjustment speed. The observable trends of how banks adjust liquidity in response to bank deregulation have important regulatory implications in reducing the environmental challenges faced by banks.
    Keywords: environmental variation, bank liquidity, adjustment speed, bank deregulation, Basel III Net Stable Funding Ratio
    JEL: G20 G21 G38
    Date: 2018–10–08
  3. By: Panagiota Papadimitri (Portsmouth Business School); Fotios Pasiouras (Montpellier Business School); Gioia Pescetto (Portsmouth Business School); Ansgar Wohlschlegel (Portsmouth Business School)
    Abstract: This study examines the interplay between political influence and regulatory decisionmaking in the US banking industry. In particular, we assess whether elected officials with power in Congress impact regulatory decision making in the banking industry. Political influence is captured by whether a bank is headquartered in a state where an elected official holds a chair position on a congressional committee related to the banking and financial services industry. As a proxy for regulatory decisions, we take into account formal regulatory enforcement actions issued against US commercial banks over the period 2000-2015. We find an inverse relationship between our political influence variable and enforcement likelihood. In general, the results are robust to the use of alternative model specifications and the restriction of our sample. However, we find that various bank and environmental characteristics are important conditional factors.
    Keywords: Political influence, Congressional Committees, Banking supervision, Enforcement actions
    JEL: G21 G28
    Date: 2018–10–08
  4. By: Ramadiah, Amanah; Caccioli, Fabio; Fricke, Daniel
    Abstract: Financial networks are an important source of systemic risk, but often only partial network information is available. In this paper, we use data on bank-firm credit relationships in Japan and conduct a horse race between different network reconstruction methods in terms of their ability to reproduce the actual credit networks. We then compare the different reconstruction methods in terms of their implied systemic risk levels. In most instances we find that the observed credit network significantly displays the highest systemic risk level. Lastly, we explore different policies to improve the robustness of the system. JEL Classification: G11, G20, G21, G28, G32
    Keywords: aggregation level, bipartite credit network, network reconstruction, stress testing, systemic risk
    Date: 2018–09
  5. By: Ádám Banai (Magyar Nemzeti Bank); Nikolett Vágó (Magyar Nemzeti Bank)
    Abstract: Housing market is important from a macroprudential perspective because it has a strong effect on the banking sector. Changes in real estate prices may affect the level of bank risk through household mortgage lending, however, the literature has no clear conclusion on this impact mechanism. Using a bank-level database containing quarterly data from 1998 to 2016 we estimated dynamic fixed-effects panel models to examine how bank risk is influenced by housing prices via mortgage lending in the Hungarian banking system. According to the results (1) higher house prices lead to higher bank risk, (2) the higher the share of mortgage loans at a bank, the stronger the positive effect of house prices on bank risk. In the period following the onset of the crisis a much stronger positive relationship could be observed between house prices and bank risk than before the crisis. Using the house price gap which measures the deviation of house prices from their fundamental value we provide empirical evidence that the deviation hypothesis was stronger for Hungary. This suggests that both banks and households tend to undertake excessive risks during a housing market boom, which can be mitigated by macroprudential policy instruments.
    Keywords: bank risk, house price index, mortgage loan, real estate market
    JEL: G21 G28 G30 C23
    Date: 2018
  6. By: Kräussl, Roman; Kräussl, Zsofia; Pollet, Joshua; Rinne, Kalle
    Abstract: Direct financing of consumer credit by individual investors or non-bank institutions through an implementation of marketplace lending is a relatively new phenomenon in financial markets. The emergence of online platforms has made this type of financial intermediation widely available. This paper analyzes the performance of marketplace lending using proprietary cash flow data for each individual loan from the largest platform, Lending Club. While individual loan characteristics would be important for amateur investors holding a few loans, sophisticated lenders, including institutional investors, usually form broad portfolios to benefit from diversification. We find high risk-adjusted performance of approximately 40 basis points per month for these basic loan portfolios. This abnormal performance indicates that Lending Club, and similar marketplace lenders, are likely to attract capital to finance a growing share of the consumer credit market. In the absence of a competitive response from traditional credit providers, these loans lower costs to the ultimate borrowers and increase returns for the ultimate lenders.
    Keywords: marketplace lending,peer-to-peer,portfolio performance,household finance,financial innovation,finance and technology
    JEL: G12 G21
    Date: 2018
  7. By: Inoue, Hitoshi; Nakashima, Kiyotaka; Takahashi, Koji
    Abstract: We examine the reason that there have coexisted the two opposing views on distressed banks' lending behavior in Japan's post-bubble period: the one is the stagnant lending in a capital crunch and the other is the forbearance lending to low-quality borrowers. To this end, we address the measurement problem for bank balance sheet risk. We identify the credit supply and allocation effects of bank capital in the bank loan equation specified at loan level, thereby finding that the ``parallel worlds'', or the two opposing views, emerge because the regulatory capital does not reflect the actual condition of increased risk on bank balance sheet, while the market value of capital does. By uncovering banks' engagement in patching-up of the regulatory capital in the Japan's post-bubble period, we show that lowly market capitalized banks that had difficulty in building up adequate equity capital for their risk exposure decreased the overall supply of credits. The parallels world can emerge whenever banks are allowed to overvalue assets with their discretion, as in Japan' post-bubble period.
    Keywords: bank capital structure; capital crunch; forbearance lending; loan-level data; uncertainty; bank risk taking.
    JEL: G01 G21 G28
    Date: 2018–07–26
  8. By: Toni Ahnert; Kristin Forbes; Christian Friedrich; Dennis Reinhardt
    Abstract: Can macroprudential foreign exchange (FX) regulations on banks reduce the financial and macroeconomic vulnerabilities created by borrowing in foreign currency? To evaluate the effectiveness and unintended consequences of macroprudential FX regulations, we develop a parsimonious model of bank and market lending in domestic and foreign currency and derive four predictions. We confirm these predictions using a rich dataset of macroprudential FX regulations. These empirical tests show that FX regulations: (1) are effective in terms of reducing borrowing in foreign currency by banks; (2) have the unintended consequence of simultaneously causing firms to increase FX debt issuance; (3) reduce the sensitivity of banks to exchange rate movements, but (4) are less effective at reducing the sensitivity of corporates and the broader financial market to exchange rate movements. As a result, FX regulations on banks appear to be successful in mitigating the vulnerability of banks to exchange rate movements and the global financial cycle, but partially shift the snowbank of FX vulnerability to other sectors.
    JEL: F32 F34 G15 G21 G28
    Date: 2018–09
  9. By: Ahnert, Toni (Bank of Canada); Forbes, Kristin (MIT-Sloan School, NBER and CEPR); Friedrich, Christian (Bank of Canada); Reinhardt, Dennis (Bank of England)
    Abstract: Can macroprudential foreign exchange (FX) regulations on banks reduce the financial and macroeconomic vulnerabilities created by borrowing in foreign currency? To evaluate the effectiveness and unintended consequences of macroprudential FX regulations, we develop a parsimonious model of bank and market lending in domestic and foreign currency and derive four predictions. We confirm these predictions using a rich dataset of macroprudential FX regulations. These empirical tests show that FX regulations: (1) are effective in terms of reducing borrowing in foreign currency by banks; (2) have the unintended consequence of simultaneously causing firms to increase FX debt issuance; (3) reduce the sensitivity of banks to exchange rate movements, but (4) are less effective at reducing the sensitivity of corporates and the broader financial market to exchange rate movements. As a result, FX regulations on banks appear to be successful in mitigating the vulnerability of banks to exchange rate movements and the global financial cycle, but partially shift the snowbank of FX vulnerability to other sectors.
    Keywords: Macroprudential policies; FX regulations; banking flows; international debt issuance
    JEL: F32 F34 G15 G21 G28
    Date: 2018–10–05
  10. By: Julien Bengui; Javier Bianchi
    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 macruprudential 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.
    JEL: E0 F0 F3 F32 F34
    Date: 2018–09
  11. By: Bucher, Monika; Dietrich, Diemo; Tvede, Mich
    Abstract: We study efficiency properties of competitive economies in which banks provide liquidity insurance and interact on secondary asset markets. While all banks are subject to extrinsic risk, a bank's portfolio choice determines whether it is prone to a bank run in one of the extrinsic states. Asset prices determine the value of bank assets and thus how to structure run-proof portfolios. Except for very large sunspot probabilities, equilibria with trivial sunspots exist, where asset prices are state-dependent, bank runs do not occur and the efficient allocation obtains. Interbank asset markets are also a new source of multiplicity of equilibrium. For low sunspot probabilities, there are equilibria in which all banks are run-prone. For high sunspot probabilities, there is no equilibrium with run-prone banks but consumption can be indeterminate. If the sunspot probability is neither high nor low, equilibria may exist in which some banks are run-prone and others are run-proof.
    Keywords: Banking,Interbank Asset Markets,Liquidity Insurance,Extrinsic Risk,Financial Stability
    JEL: G01 G21 D53
    Date: 2018
  12. By: Andres Liberman; Christopher Neilson; Luis Opazo; Seth Zimmerman
    Abstract: This paper exploits a large-scale natural experiment to study the equilibrium effects of information restrictions in credit markets. In 2012, Chilean credit bureaus were forced to stop reporting defaults for 2.8 million individuals (21% of the adult population). We show that the effects of information deletion on aggregate borrowing and total surplus are theoretically ambiguous and depend on the pre-deletion demand and cost curves for defaulters and non-defaulters. Using panel data on the universe of bank borrowers in Chile combined with the deleted registry information, we implement machine learning techniques to measure changes in lenders' cost predictions following deletion. Deletion reduces (raises) predicted costs the most for poorer defaulters (non-defaulters) with limited borrowing histories. Using a difference-in-differences design, we find that individuals exposed to increases in predicted costs reduce borrowing by 6.4%, while those exposed to decreases raise borrowing by 11.8% following the deletion, for a 3.5% aggregate drop in borrowing. Using the difference-in-difference estimates as inputs into the theoretical framework, we find evidence that deletion reduced aggregate welfare under a variety of assumptions about lenders' pricing strategies.
    JEL: D14 D82 G20
    Date: 2018–09
  13. By: Miroslav Gabrovski (University of Hawaii at Maona); Victor Ortego-Marti (University of California, Riverside)
    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, Mortgages
    JEL: E2 E32 R21 R31
    Date: 2018–10
  14. By: Liquidity, ECB Task Force on Systemic; Bonner, Clemens; Wedow, Michael
    Abstract: This study provides a conceptual and monitoring framework for systemic liquidity, as well as a legal assessment of the possible use of macroprudential liquidity tools in the European Union. It complements previous work on liquidity and focuses on the development of liquidity risk at the system-wide level. A dashboard with a total of 20 indicators is developed for the financial system, including banks and non-banks, to assess the build-up of systemic liquidity risk over time. In addition to examining liquidity risks, this study sheds light on the legal basis for additional macroprudential liquidity tools under existing regulation (Article 458 of the Capital Requirements Regulation (CRR), Articles 105 and 103 of the Capital Requirements Directive (CRD IV) and national law), which is a key condition for the implementation of macroprudential liquidity tools.
    Date: 2018–10
  15. By: Frame, W. Scott (Federal Reserve Bank of Atlanta); Wall, Larry D. (Federal Reserve Bank of Atlanta); White, Lawrence J. (New York University)
    Abstract: Financial intermediation has changed dramatically over the past 30 years, due in large part to technological change. The paper first describes the role of the financial system in a modern economy and how technological change and financial innovation can affect social welfare. We then survey the empirical literatures relating to several specific financial innovations, broadly categorized as new production processes, new products or services, or new organizational forms. In each case, we also include examples of significant fintech innovations that are transforming various aspects of banking. Drawing on the literature on innovations from the 1990s and 2000s informs what we might expect from recent developments.
    Keywords: financial innovation; technological change; banking; fintech
    JEL: G21 G23 O33
    Date: 2018–10–01
  16. By: Cooper, Daniel H. (Federal Reserve Bank of Boston); Peek, Joe (Federal Reserve Bank of Boston)
    Abstract: Focusing on localized measures of bank health and economic activity, and renters as well as homeowners, this paper uses an innovative approach to identifying households likely in need of credit to investigate the effect on household spending of a deterioration in local-bank health. The analysis shows that local-bank health tends to impact the expenditures of renters more than homeowners, with the strongest effects for households that likely need credit—those experiencing a negative income shock and having limited liquid wealth. These findings contribute to the discussion of the linkages between the financial sector and real economic activity.
    Keywords: consumption; local-bank health; credit constraints
    JEL: E21 G21
    Date: 2018–10–01
  17. By: Andrew Odlyzko (University of Minnesota)
    Abstract: "Previously unknown basic statistics are obtained about the opera- tions of the London Stock Exchange (LSE) in early Victorian times. Integration of data from the Bank of England Archive with price reports, press coverage, and other sources produces estimates for volume of transactions, distribution of earnings among dealers, efficiency of the market, and the coverage of avail- able price lists. For example, it is found that for some securities, prices were reported for under 20% of transactions. The LSE was surprisingly small and by some measures also surprisingly efficient. Much of its efficiency appears to have come from its deep involvement in the “shadow banking system” of that era, a connection that appears to have been misunderstood and almost com- pletely neglected in the past. The low levels of activity, the dominance of small investors, and low cost of the system show the very early stages of the “fi- nancialization” of the modern economy and provide interesting perspectives on modern developments."
    JEL: N00
    Date: 2017–04
  18. By: Mary-Alice Doyle (Reserve Bank of Australia)
    Abstract: The credit card market offers consumers a wide range of options when choosing a card. While many factors may influence this choice, this paper focuses on the main financial costs and benefits of holding a credit card. I summarise these costs and benefits as the net monetary benefit associated with a card. Theory might suggest that a rational consumer will choose a card that maximises their net monetary benefit. But in reality, consumers' decisions may be systematically biased, leading them to select higher-cost credit cards when lower-cost alternatives are available. To test this possibility, I first estimate the net monetary cost or benefit that individuals in a nationally representative survey obtain from their credit card. I then use these estimates to examine whether principles from behavioural economics – such as optimism bias, bounded rationality and present bias – can help to explain consumers' choice of credit card. I find that approximately 40 per cent of Australian credit card holders receive a positive net monetary benefit from their card (that is, they receive benefits from rewards points and their interest-free period that outweigh annual fees and interest payments). Generally these are higher-wealth and higher-income consumers. Of the remaining 60 per cent, around half break even, while half incur a net cost. Moreover, most cardholders, including those who receive a net benefit, appear not to choose cards that best suit their use patterns – for instance, I estimate that consumers who use their card to borrow and pay interest could reduce their annual costs by around $250 by choosing a more appropriate card. Behavioural explanations are consistent with some, but not all, of the patterns observed. Consumers appear to be subject to optimism bias, underestimating how much they will borrow on their card, and a subset of consumers tend to hold inflated estimates of the net monetary benefits that they receive from their card. In contrast, consumers do not appear to be present biased in responding to temporary sign-up offers. Finally, I find that around half of the respondents who made a net loss held high-cost cards, but had not considered switching to a lower-cost card; indicative evidence of cognitive, as well as practical, barriers to switching cards.
    Keywords: bounded rationality; switching behaviour; optimism bias; optimal credit card choice; present bias; retail payments
    JEL: D12 D30 D90 E42
    Date: 2018–10

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