nep-ban New Economics Papers
on Banking
Issue of 2018‒10‒22
twenty papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Banking Relationships and Holding-Up in REIT Lending: Empirical Evidence from Asian Markets By Yuan-Chen Chang; Yi-Ting Hsieh; Kiat Ying Seah; Tien Foo Sing
  2. Bank Regulation and Monetary Policy Transmission: Evidence from the U.S. States Liberalization By Lakdawala, Aeimit; Minetti, Raoul; Schaffer, Matthew
  3. The Differential Impact of Bank Size on Systemic Risk By Amy Lorenc; Jeffery Y. Zhang
  4. How do credit ratings affect bank lending under capital constraints? By Stijn Claessens; Andy Law; Teng Wang
  5. Private information and lender discretion across time and institutions By Ambrocio, Gene; Hasan, Iftekhar
  6. Trust and the household-bank relationship By Ampudia, Miguel; Palligkinis, Spyros
  7. Democratic development and credit : “Democracy doesn`t come Cheap” But at least credit to its corporations will be By Delis, Manthos D.; Hasan, Iftekhar; Ongena, Steven
  8. Assessing the Impact of Central Bank Digital Currency on Private Banks By Andolfatto, David
  9. Measuring Profit Efficiency of Colombian Banks: A Composite Nonstandard Profit Function Approach By Diego Restrepo-Tobón; Jim Sánchez-González
  10. The long-term effect of digital innovation on bank performance: an empirical study of SWIFT adoption in financial services By Scott, Susan V.; Van Reenen, John; Zachariadis, Markos
  11. Banking in a Steady State of Low Growth and Interest Rates By Qianying Chen; Mitsuru Katagiri; Jay Surti
  12. Whatever it takes. What's the impact of a major nonconventional monetary policy intervention? By Carlo Alcaraz; Stijn Claessens; Gabriel Cuadra; David Marques-Ibanez; Horacio Sapriza
  13. The pricing of FX forward contracts: micro evidence from banks’ dollar hedging By Abbassi, Puriya; Bräuning, Falk
  14. Inefficiency and Bank Failures: A Joint Bayesian Estimationof a Stochastic Frontier Model and a Hazards Model By Jim Sánchez González; Diego Restrepo Tobón; Andrés Ramírez Hassan
  15. Reconciling Orthodox and Heterodox Views on Money and Banking By Andolfatto, David
  16. Debt holder monitoring and implicit guarantees: Did the BRRD improve market discipline? By Cutura, Jannic Alexander
  17. Move a Little Closer? Information Sharing and the Spatial Clustering of Bank Branches By Qi, Shusen; de Haas, Ralph; Ongena, S.R.G.; Straetmans, Stefan
  18. Transmission of Monetary Policy and Bank Heterogeneity in Colombia By Carolina Ortega Londoño
  19. Discipline de marché par la dette subordonnée : Impact de l'opacité bancaire et des politiques de renflouement des banques By Isabelle Distinguin
  20. Systemic Banking Crises Revisited By Luc Laeven; Fabian Valencia

  1. By: Yuan-Chen Chang; Yi-Ting Hsieh; Kiat Ying Seah; Tien Foo Sing
    Abstract: Banking relationships and holding-up are two possible factors that influence the lending decisions by firms. As argued by Diamond (1984), financial intermediaries such as banks, play an important role of costly monitoring of loan contracts due to information asymmetries and moral hazard problems. Using a set of comprehensive cross-country dataset on REIT loan facilities containing past banking relationships, this paper empirically determines the relative importance of REIT-Bank lending relationship on credit supply and the cost of capital. We find that REITs with a stronger lending relationship enjoy the following favourable terms: lower cost loans, higher loan amount, and a less stringent collateral requirement. These terms persist throughout the Great Recession periods and remain even when we control for endogenous relationships.
    Keywords: Banking Relationships; Capital Structure; Holding-Up; Information Asymmetry; REIT
    JEL: R3
    Date: 2018–01–01
  2. By: Lakdawala, Aeimit (Michigan State University, Department of Economics); Minetti, Raoul (Michigan State University, Department of Economics); Schaffer, Matthew (Department of Economics, University of North Carolina)
    Abstract: This paper studies the impact of geographic banking restrictions on monetary policy transmission. Exploiting the staggered deregulation of U.S. banking from the late 1970s to the early 1990s, we find that interstate deregulation significantly increased the responsiveness of bank lending to monetary shocks. This effect occurred primarily for small and illiquid banks, pointing to a strengthening of the bank lending channel. Changes in bank market structure and loan portfolio composition are unlikely to explain the effect of deregulation. This instead reflects a reduced propensity of small banks affiliated with complex bank holding companies to insulate borrowers from monetary contractions.
    Keywords: Bank regulation; Bank lending channel; Monetary policy
    JEL: E44 E52 G21
    Date: 2018–10–15
  3. By: Amy Lorenc; Jeffery Y. Zhang
    Abstract: We examine whether financial stress at larger banks has a different impact on the real economy than financial stress at smaller banks. Our empirical results show that stress experienced by banks in the top 1 percent of the size distribution leads to a statistically significant and negative impact on the real economy. This impact increases with the size of the bank. The negative impact on quarterly real GDP growth caused by stress at banks in the top 0.15 percent of the size distribution is more than twice as large as the impact caused by stress at banks in the top 0.75 percent, and more than three times as large as the impact caused by stress at banks in the top 1 percent. These results are broadly informative as to how the stringency of regulatory standards should vary with bank size, and support the idea that the largest banks should be subject to the most stringent requirements while smaller banks should be subject to successively less stringent requirements.
    Keywords: Bank failures ; Bank size ; Financial regulation ; Systemic risk ; Tailoring
    JEL: G21 G28
    Date: 2018–09–28
  4. By: Stijn Claessens; Andy Law; Teng Wang
    Abstract: Through the lens of credit risk ratings, we investigate how banks determine loan terms under capital constraints. Using a unique and comprehensive supervisory dataset of individual corporate loans in the US, we show that unexpected adjustments to banks' internal rating systems, which only alter how outsiders assess the riskiness of borrowers, trigger changes in loan terms. The effects are asymmetric: downward adjustments to ratings increase spreads by some 40 bps and decrease committed loan sizes and maturities, but upward adjustments lead to much weaker (yet opposite) effects. Importantly, we find effects to be strong for smaller, riskier, and capital constrained banks as well as for borrowers with poorer credit quality and for non-guaranteed loans. Our findings, robust in several ways, highlight the important role of regulatory capital in loan terms.
    Keywords: ratings, bank capital, regulation, loan conditions
    JEL: G21 G28
    Date: 2018–09
  5. By: Ambrocio, Gene; Hasan, Iftekhar
    Abstract: We assess the extent to which discretion, unexplained variations in the terms of a loan contract, has varied across time and lending institutions and show that part of this discretion is due to private information that lenders have on their borrowers. We find that discretion is lower for secured loans and loans granted by a larger group of lenders, and is larger when the lenders are larger and more profitable. Over time, discretion is also lower around recessions although the private information content is higher. The results suggest that bank discretionary and private information acquisition behaviour may be important features of the credit cycle.
    JEL: D82 G14 G21 G28
    Date: 2018–10–10
  6. By: Ampudia, Miguel; Palligkinis, Spyros
    Abstract: We examine the role of trust in households’ decisions to hold a bank account and to switch to a new bank. We explore Italian household-level data that contain restricted information on the banks that the households are doing business with, as well as measures of trust in the households’ main bank and the banking sector. We find that households who distrust the banking sector are less likely to hold a bank account. Moreover, account holders are more likely to switch to a new main bank if they do not trust their current one. The estimated relationships persist over and above a range of socioeconomic variables. JEL Classification: G21, G28, D14
    Keywords: banking, household finance, trust
    Date: 2018–10
  7. By: Delis, Manthos D.; Hasan, Iftekhar; Ongena, Steven
    Abstract: Does democratization reduce the cost of credit? Using global syndicated loan data from 1984 to 2014, we find that democratization has a sizeable negative effect on loan spreads: a one-point increase in the zero-to-ten Polity IV index of democracy shaves at least 19 basis points off spreads, but likely more. Reversals to autocracy hike spreads more strongly. Our findings are robust to the comprehensive inclusion of relevant controls, to the instrumentation with regional waves of democratization, and to a battery of other sensitivity tests. We thus highlight the lower cost of loans as one relevant mechanism through which democratization can affect economic development.
    JEL: G21 G30 P16 P26 P27 P47
    Date: 2018–10–11
  8. By: Andolfatto, David (Federal Reserve Bank of St. Louis)
    Abstract: In this paper, I investigate the impact of central bank digital currency (CBDC) on banks in a model where the banking sector that is not perfectly competitive. The theoretical framework combines the Diamond (1965) model of government debt with the Klein (1971) and Monti (1972) model of a monopoly bank. There are two main results. First, the introduction of interest-bearing CBDC increases financial inclusion and diminishes the demand for cash. Second, the introduction of interest-bearing CBDC need not disintermediate banks in any way and may, in fact, expand their depositor base if the added competition compels banks to raise their deposit rates.
    Keywords: Digital Currency; Central Banks; Monopoly; Markups
    JEL: E4 E5
    Date: 2018–10–05
  9. By: Diego Restrepo-Tobón; Jim Sánchez-González
    Abstract: We analyze the profit efficiency of the Colombian banking industry during theperiod 2001 - 2013. Unlike previous studies, we estimate revenue and cost efficiencyseparately and then compute profit efficiency as a composite measure of both costand revenue efficiency. This approach overcomes the mis-specification problems ofthe traditional nonstandard profit function approach used in most of the literatureregarding profit efficiency. We find that profit efficiency improved during the periodunder analysis mainly because gains in revenue efficiency. In addition, and in contrastwith previous studies but in line with economic intuition, we find that while revenue andcost efficiency tend to be negatively correlated, each correlates positively with profitefficiency. Thus, improving either revenue efficiency or cost efficiency has a positiveimpact on profit efficiency.
    Keywords: Profit Efficiency; Revenue Efficiency; Cost Efficiency; Nonstandard Profit Function; Stochastic Frontier
    JEL: D24 G21 G34 L13
    Date: 2018–08–27
  10. By: Scott, Susan V.; Van Reenen, John; Zachariadis, Markos
    Abstract: We examine the impact on bank performance of the adoption of SWIFT, a network-based technological infrastructure for worldwide interbank telecommunication. We construct a new longitudinal dataset of 6,848 banks in 29 countries in Europe and the Americas with the full history of adoption since SWIFT’s initial operations in 1977. Our results suggest that the adoption of SWIFT (i) has large effects on profitability in the long-term; (ii) is greater for small than for large banks; and (iii) exhibits significant network effects on performance. We use an in-depth field study to better understand the mechanisms underlying the effects on profitability.
    Keywords: technology adoption; bank performance; financial services; network innovation; SWIFT
    JEL: N20 O33
    Date: 2017–06–01
  11. By: Qianying Chen; Mitsuru Katagiri; Jay Surti
    Abstract: A prolonged low-interest-rate environment presents a significant challenge to banks and is likely to entail major changes to their business models over the long-run. Lower returns to maturity transformation in the face of flatter yield curves and an inability to offer deposit rates significantly below zero combine to compress bank earnings in this environment. Smaller, deposit-funded, less diversified banks are hurt most, increasing consolidation pressures and reach-for-yield incentives, presenting new financial stability challenges.To the extent that such an economic environment reflects a new, steady-state with lower equilibrium growth driven by population aging and slower productivity growth, lower credit demand is likely to drive banking toward provision of fee-based, utility services.
    Keywords: Banking;Interest rates;Growth, Low-for-Long, Prolonged Low Interest Rates, Monetary Policy (Targets, Instruments, and Effects), Firm Performance: Size, Diversification, and Scope
    Date: 2018–08–27
  12. By: Carlo Alcaraz; Stijn Claessens; Gabriel Cuadra; David Marques-Ibanez; Horacio Sapriza
    Abstract: We assess how a major, unconventional central bank intervention, Draghi's "whatever it takes" speech, affected lending conditions. Similar to other large interventions, it responded to adverse financial and macroeconomic developments that also influenced the supply and demand for credit. We avoid such endogeneity concerns by comparing credit granted and its conditions by individual banks to the same borrower in a third country. We show that the intervention reversed prior risk-taking - in volume, price, and risk ratings - by subsidiaries of euro area banks relative to other local and foreign banks. Our results document a new effect of interventions and are robust along many dimensions.
    Keywords: unconventional monetary policy, credit conditions, spillovers
    JEL: E51 F34 G21
    Date: 2018–09
  13. By: Abbassi, Puriya (Deutsche Bundesbank); Bräuning, Falk (Federal Reserve Bank of Boston)
    Abstract: We use transaction-level data on foreign exchange (FX) forward contracts for the period 2014 through 2016 in conjunction with supervisory balance sheet information to study the drivers of banks’ dollar hedging costs. Comparing contracts of the same maturity that are initiated during the same hour of the same day, we find large heterogeneity in banks’ hedging costs. We show that these costs (i) are higher for banks with a larger FX funding gap, (ii) depend on banks’ FX funding composition in terms of the source (interbank versus retail) and rollover structure (long-term versus short-term), (iii) are lower for banks with deeper internal dollar capital markets, and (iv) increase with banks’ shadow cost of capital. Our results are important for understanding how shocks are transmitted internationally through the FX hedging market.
    Keywords: FX markets; foreign exchange; dollar hedging; price determination; global banks; international financial shocks
    JEL: D40 E43 F30 F31 G15
    Date: 2018–03–01
  14. By: Jim Sánchez González; Diego Restrepo Tobón; Andrés Ramírez Hassan
    Abstract: In modeling bank failure, estimating inefficiency separately from the hazards modelresults in inefficient, biased, and inconsistent estimators. We develop a method to si-multaneously estimate a stochastic frontier model and a hazards model using Bayesiantechniques. This method overcomes issues related to two-stage estimation methods,allows for computing the marginal effects of the inefficiency over the probability offailure, and facilitates statistical inference of the functions of the parameters such aselasticities, returns to scale, and individual inefficiencies. Simulation exercises showthat our proposed method performs better than two-stage maximum likelihood, spe-cially in small samples. In addition we find that inefficiency plays a statistically and economically significant role in determining the time to failure of U.S. commercial banks during 2001 to 2010.
    Keywords: Technical Inefficiency; Proportional Hazards Model; Bank Failures
    JEL: C11 G21 G33
    Date: 2018–08–27
  15. By: Andolfatto, David (Federal Reserve Bank of St. Louis)
    Abstract: A wide range of heterodox theories claim that banks are special because they create money in the act of lending. Put another way, banks can create the funding they need ex nihilo, whereas all other agencies must first acquire the funding they need from other parties. Mainstream economic theory largely agrees with this assessment, but questions its theoretical and empirical relevance, preferring to view banks as one of many potentially important actors in the financial market. In this paper, I develop a formal economic model in an attempt to make these ideas precise. The model lends some support to both views on banking.
    Keywords: Heterodox view; Money; Banking
    JEL: E4 E5
    Date: 2018–10–09
  16. By: Cutura, Jannic Alexander
    Abstract: This paper argues that the introduction of the Banking Recovery and Resolution Directive (BRRD) improved market discipline in the European bank market for unsecured debt. The different impact of the BRRD on bank bonds provides a quasi-natural experiment that allows to study the effect of the BRRD within banks using a difference-in-difference approach. Identification is based on the fact that (otherwise identical) bonds of a given bank maturing before 2016 are explicitly protected from BRRD bail-in. The empirical results are consistent with the hypothesis that debt holders actively monitor banks and that the BRRD diminished bail-out expectations. Bank bonds subject to BRRD bail-in carry a 10 basis points bail-in premium in terms of the yield spread. While there is some evidence that the bail-in premium is more pronounced for non-GSIB banks and banks domiciled in peripheral European countries, weak capitalization is the main driver.
    JEL: G18 G21 H81
    Date: 2018
  17. By: Qi, Shusen; de Haas, Ralph (Tilburg University, Center For Economic Research); Ongena, S.R.G. (Tilburg University, Center For Economic Research); Straetmans, Stefan
    Abstract: We study how information sharing between banks influences the geographical clustering of branches. We construct a spatial oligopoly model with price competition that explains why bank branches cluster and how the introduction of information sharing impacts clustering. Dynamic data on 59,333 branches operated by 676 banks in 22 countries between 1995 and 2012 allow us to test the hypotheses derived from our model. We find that information sharing spurs banks to open branches in localities that are new to them, but that are already well served by other banks. Information sharing also allows firms to borrow from more distant banks.
    Keywords: branch clustering; informatio sharing; spatial oligolopy model
    JEL: D43 G21 G28 L13 R51
    Date: 2018
  18. By: Carolina Ortega Londoño
    Abstract: This study provides evidence of bank heterogeneity in Colombiafor the period 2002-2014 and analyzes how bank-specific character-istics determine the bank-lending channel for monetary policy. Toanalyze bank heterogeneity, this study estimates technical (cost) effi-ciency using Stochastic Frontier Analysis, which also allows for themeasurement of Returns to Scale and a Lerner Index to proxy mar-ket power in the loans market. This study also provides measuresof capitalization, liquidity, and the commonly used ratios of financialand operational efficiency with bank’s balance-sheet data. Further-more, using a long and unbalanced panel, this study finds evidence ofthe existence of a bank-lending channel and finds that this transmis-sion mechanism is determined by bank-specific characteristics. Theresults suggest higher technical and operational efficiency, capitaliza-tion, liquidity and market power, increase the sensitivity of loans dis-bursements to monetary policy shocks, while higher returns to scalelowers this sensitivity.
    Keywords: monetary policy transmission; bank lending channel; bank heterogeneity; bank efficiency
    JEL: G21 E52 E59
    Date: 2018–06–01
  19. By: Isabelle Distinguin (LAPE - Laboratoire d'Analyse et de Prospective Economique - IR SHS UNILIM - Institut Sciences de l'Homme et de la Société - UNILIM - Université de Limoges)
    Abstract: Nous analysons l'impact de l'opacité des banques et de la crédibilité de l'absence d'intervention des autorités en cas de défaillance d'une banque sur l'efficacité de la discipline de marché. Nous montrons que pour les banques les plus opaques, pour celles perçues comme "too-big-to-fail" ou en période de forte incertitude, la mise en place d'une politique de dette subordonnée peut s'avérer contreproductive et conduire la banque à choisir un monitoring insuffisant. Pour favoriser la discipline de marché, les régulateurs devraient imposer plus de transparence et faire en sorte que des créanciers soient, de manière crédible, soumis à des pertes potentielles. L'utilisation de la dette subordonnée convertible pourrait ainsi être une solution. Market discipline and subordinated debt: The impact of bank opacity and bail-out policies Abstract: We construct a theoretical model to analyse the impact of bank opacity and the credibility of no bail-out policies on the effectiveness of market discipline exerted by subordinated debt holders. We find that for the most opaque banks, for banks perceived as too-big-to-fail and in periods of high uncertainty like in crisis, mandatory subordinated debt can be counterproductive and lead to lower monitoring. To ensure the effectiveness of market discipline, regulators should impose more transparency and ensure that subordinated debt holders are at risk. For this purpose, we argue that contingent capital might be an effective instrument. Mots clés : Banque, discipline de marché, risque bancaire, dette subordonnée, dette convertible
    Keywords: Bank,Market Discipline,Bank Risk,Subordinated Debt
    Date: 2018–09–27
  20. By: Luc Laeven; Fabian Valencia
    Abstract: This paper updates the database on systemic banking crises presented in Laeven and Valencia (2008, 2013). Drawing on 151 systemic banking crises episodes around the globe during 1970-2017, the database includes information on crisis dates, policy responses to resolve banking crises, and the fiscal and output costs of crises. We provide new evidence that crises in high-income countries tend to last longer and be associated with higher output losses, lower fiscal costs, and more extensive use of bank guarantees and expansionary macro policies than crises in low- and middle-income countries. We complement the banking crises dates with sovereign debt and currency crises dates to find that sovereign debt and currency crises tend to coincide or follow banking crises.
    Date: 2018–09–14

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