nep-ban New Economics Papers
on Banking
Issue of 2018‒10‒29
nineteen papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. The Role of Shadow Banking for Financial Regulation By Gebauer, Stefan; Mazelis, Falk
  2. Enforcement of banking regulation and the cost of borrowing By Deli, Yota; Delis, Manthos D.; Hasan, Iftekhar; Liu, Liuling
  3. Who bears interest rate risk? By Hoffmann, Peter; Langfield, Sam; Pierobon, Federico; Vuillemey, Guillaume
  4. Financial Inclusion Under the Microscope By Sumit Agarwal; Thomas Kigabo; Camelia Minoiu; Andrea Presbitero; Andre Silva
  5. Credit Default Swap Spreads: Funding Liquidity Matters! By Banti, Chiara; Kellard, Neil; Manac, Radu-Dragomir
  6. Credit Risk Analysis Using Machine and Deep Learning Models By Dominique Guegan; Peter Addo; Bertrand Hassani
  7. Sovereign risk and cross-country heterogeneity in the transmission of monetary policy to bank lending in the euro area By Pietro Grandi
  8. Risk-sensitive Basel Regulations and Firms' Access to Credit: Direct and Indirect Effects By Gopalakrishnan, Balagopal; Jacob, Joshy; Mohapatra, Sanket
  9. A structural model to assess the impact of bank capitalization changes conditional on a bail-in versus bail-out regime By Gross, Marco; Dubiel-Teleszynski, Tomasz; Población, Javier
  10. Debt restructuring with multiple bank relationships By Angelo Baglioni; Luca Colombo; Paola Rossi
  11. Financial Contracting with Enforcement Externalities By Drozd, Lukasz A.; Serrano-Padial, Ricardo
  12. Is there anything special about local banks as SME lenders? Evidence from bank corrective programs By Iftekhar Hasan; Krzysztof Jackowicz; Robert Jagiełło; Oskar Kowalewski; Łukasz Kozłowski
  13. The Effect of Common Ownership on Profits : Evidence From the U.S. Banking Industry By Jacob P. Gramlich; Serafin J. Grundl
  14. Managing the sovereign-bank nexus By Dell'Ariccia, Giovanni; Ferreira, Caio; Jenkinson, Nigel; Laeven, Luc; Martin, Alberto; Minoiu, Camelia; Popov, Alexander
  15. Competition and the pass-through of unconventional monetary policy: evidence from TLTROs By Matteo Benetton; Davide Fantino
  16. Natural catastrophes and bank lending: the case of flood risk in Italy By Ivan Faiella; Filippo Natoli
  17. The Effects of Higher Bank Capital Requirements on Credit in Peru By Xiang Fang; David Jutrsa; Maria Soledad Martinez Peria; Andrea Presbitero; Lev Ratnovski; Felix J Vardy
  18. Sustainable Debt By Bloise, Gaetano; Polemarchakis, Herakles; Vailakis, Yiannis
  19. A Probative Value for Authentication Use Case Blockchain By Dominique Guégan; Christophe Hénot

  1. By: Gebauer, Stefan; Mazelis, Falk
    Abstract: Macroprudential policies for financial institutions have received increasing prominence since the global financial crisis. These policies are often aimed at the commercial banking sector, while a host of other non-bank financial institutions, or shadow banks, may not fall under their jurisdiction. We study the effects of tightening commercial bank regulation on the shadow banking sector. For this purpose, we develop a DSGE model that differentiates between regulated, monopolistically competitive commercial banks and a shadow banking system that relies on funding in a perfectly competitive market for investments. After estimating the model using euro area data from 1999 – 2014 including information on shadow banks, we find that tighter capital requirements on commercial banks increase shadow bank lending, which may have adverse financial stability effects. In a counterfactual analysis we compare how a macroprudential policy implemented before the crisis on all financial institutions, or just on commercial banks, would have dampened the leverage cycle.
    Keywords: Macroprudential Regulation,Shadow Banking,Financial Frictions
    JEL: E12 E61 G23 G28
    Date: 2018
  2. By: Deli, Yota; Delis, Manthos D.; Hasan, Iftekhar; Liu, Liuling
    Abstract: We show that borrowing firms benefit substantially from important enforcement actions issued on U.S. banks for safety and soundness reasons. Using hand-collected data on such actions from the main three U.S. regulators and syndicated loan deals over the years 1997-2014, we find that enforcement actions decrease the total cost of borrowing by approximately 22 basis points (or $4.6 million interest for the average loan). We attribute our finding to a competition-reputation effect that forces banks to lower their cost of credit, irrespective of other changes in their business models after the enforcement action.
    JEL: E44 E51 G21 G28
    Date: 2018–10–18
  3. By: Hoffmann, Peter; Langfield, Sam; Pierobon, Federico; Vuillemey, Guillaume
    Abstract: We study the allocation of interest rate risk within the European banking sector using novel data. Banks’ exposure to interest rate risk is small on aggregate, but heterogeneous in the cross-section. In contrast to conventional wisdom, net worth is increasing in interest rates for approximately half of the institutions in our sample. Cross-sectional variation in banks’ exposures is driven by cross-country differences in loan-rate fixation conventions for mortgages. Banks use derivatives to partially hedge on-balance sheet exposures. Residual exposures imply that changes in interest rates have redistributive effects within the banking sector. JEL Classification: G21, E43, E44
    Keywords: Banking, Hedging, Interest Rate Risk, Risk Management
    Date: 2018–09
  4. By: Sumit Agarwal; Thomas Kigabo; Camelia Minoiu; Andrea Presbitero; Andre Silva
    Abstract: We examine the impact of a large-scale microcredit expansion program on access to finance and the transition of first-time borrowers from microfinance institutions to the formal banking sector. Using administrative micro-data covering the universe of loans to individuals from a developing country, we show that the program significantly increased access to credit, particularly in less developed areas. This effect is driven by the newly set-up credit cooperatives (U-SACCOs), which grant loans to previously unbanked individuals. About 10\% of first-time U-SACCO borrowers that need a second loan switch to the formal banking sector, with commercial banks cream-skimming less risky borrowers from U-SACCOs and granting them larger, cheaper, and longer-term loans. These borrowers are not riskier than similar individuals already in the formal banking sector and only initially receive smaller loans. Our results suggest that the microfinance sector, together with a well functioning credit reference bureau, help mitigate information frictions in credit markets.
    Date: 2018–09–28
  5. By: Banti, Chiara; Kellard, Neil; Manac, Radu-Dragomir
    Abstract: This paper explores the relationship between funding liquidity and credit default swap (CDS) spreads, evidencing the effects of the regulatory changes brought about by the introduction of the CDS Small Bang reforms for CDS contracts on European reference entities in June 2009. Using panel estimations, this study provides evidence that a tightening of funding liquidity increases CDS spreads, an effect which is three times larger in magnitude for high-CDS entities compared to low-CDS firms. This relationship increases in magnitude and significance after the implementation of the CDS Small Bang reforms which introduced fixed coupons for trading CDSs, leading to the exchange of upfront fees between CDS contract parties.
    Date: 2018–10–19
  6. By: Dominique Guegan (UP1 - Université Panthéon-Sorbonne, CES - Centre d'économie de la Sorbonne - CNRS - Centre National de la Recherche Scientifique - UP1 - Université Panthéon-Sorbonne, Labex ReFi - UP1 - Université Panthéon-Sorbonne, IPAG Business School - IPAG BUSINESS SCHOOL PARIS, University of Ca’ Foscari [Venice, Italy]); Peter Addo (AFD - Agence française de développement, Labex ReFi - UP1 - Université Panthéon-Sorbonne); Bertrand Hassani (Labex ReFi - UP1 - Université Panthéon-Sorbonne, CES - Centre d'économie de la Sorbonne - CNRS - Centre National de la Recherche Scientifique - UP1 - Université Panthéon-Sorbonne, Capgemini Consulting [Paris], UCL-CS - Computer science department [University College London] - UCL - University College of London [London])
    Abstract: Due to the advanced technology associated with Big Data, data availability and computing power, most banks or lending institutions are renewing their business models. Credit risk predictions, monitoring, model reliability and effective loan processing are key to decision-making and transparency. In this work, we build binary classifiers based on machine and deep learning models on real data in predicting loan default probability. The top 10 important features from these models are selected and then used in the modeling process to test the stability of binary classifiers by comparing their performance on separate data. We observe that the tree-based models are more stable than the models based on multilayer artificial neural networks. This opens several questions relative to the intensive use of deep learning systems in enterprises.
    Keywords: financial regulation,deep learning,Big data,data science,credit risk
    Date: 2018
  7. By: Pietro Grandi (Université Panthéon Assas (Paris 2), LEMMA - Laboratoire d'économie mathématique et de microéconomie appliquée - UP2 - Université Panthéon-Assas - Sorbonne Universités)
    Abstract: Is the transmission of monetary policy to bank lending heterogeneous across euro area countries? This paper employs annual bank level data to test whether the bank lending channel of monetary policy was heterogeneous in the euro area over the period 2007-2016. To do so it follows a simple procedure that allows direct testing of how monetary policy affected similar banks located in different countries. Results indicate that the transmission of monetary policy to bank lending was heterogeneous across countries that were differently exposed to the sovereign debt crisis. On average, the same 1% cut in the policy rate led to a 1.6% increase in lending by banks located in non-stressed countries as opposed to a 0.4% increase for banks located in countries under severe sovereign stress. Unconventional monetary policy – as captured by the ECB shadow rate – was also unevenly transmitted to bank lending. Exposure to sovereign risk is identified as a key source of heterogeneity. Within stressed countries, banks with larger sovereign exposures reacted to monetary easing by expanding lending by less than banks with smaller exposures. As a result, monetary accommodation was smoothly transmitted to lending only by banks with limited exposure to sovereign risk. In response to the same 1% policy rate cut, the credit expansion of highly exposed stressed countries banks was instead 2.75% weaker than that of banks in non-stressed countries. These findings support existing evidence on sovereign risk having direct adverse consequences for bank lending and highlight the extent to which sovereign risk aggravated heterogeneities in the transmission on monetary policy to the real economy via the banking system during the euro area debt crisis.
    Keywords: Bank lending channel,Monetary policy transmission,Cross-country heterogeneity,Sovereign risk,Financial structures,Banking integration
    Date: 2018–09–21
  8. By: Gopalakrishnan, Balagopal; Jacob, Joshy; Mohapatra, Sanket
    Abstract: This paper examines the impact of risk-sensitive Basel regulations on access to debt and cost of debt for firms with varying characteristics around the world, and investigates how firms cope through reliance on alternative financing sources and adjustments to their capital investments. We find that the implementation of Basel II regulations had a significant impact on the credit availability for firms. The results indicate that debt financing has become more difficult for the lower-rated firms in the post-Basel II period. Firms mitigate the shortage in bank credit induced by the regulation through a combination of higher trade credit, lower payouts, and reduced capital investments. In particular, lower-rated firms substitute reduced bank credit with increased reliance on accounts payables. Such firms also lower their payouts to shareholders, in an effort to maintain their liquidity. We also find that the lower-rated firms experience a significant decline in their capital investment in the post-Basel II period, implying an active response to the deterioration in access to credit. Our key results are robust to alternative estimations that control for changes in credit demand and credit supply shocks, and inclusion of bank-specific variables obtained from loan-level information. The findings of the paper substantially contribute to the understanding of the real effects of risk-sensitive bank capital regulations.
    Date: 2018–10–24
  9. By: Gross, Marco; Dubiel-Teleszynski, Tomasz; Población, Javier
    Abstract: We develop a structural model for valuing bank balance sheet components such as the equity and debt value, the value for the government when the bank is operated by private shareholders including the present value of a possible future bailout, the bailout value incurred by the government following the abandonment of the private shareholders, and, moreover, some price and risk parameters, including the funding cost spread and the banks’ probability of default. The structural model implies an abandonment threshold, at which if total income drops below this threshold, private shareholders abandon the bank. In this case, the shareholders lose part (or all) of the capital that they hold in the bank, the creditors lose part or all of their debt, and the government receives a portion (or all) of the capital and all of the debt that is not recovered by creditors. Hence, we assume that part of the capital can be lost due to financial distress or to cover bankruptcy costs. We use the model framework to assess the impact of capital-based macro-prudential policy measures and focus in particular on assessing the difference that an assumed bail-in as opposed to bail-out regime can make. JEL Classification: G21, G28, H81
    Keywords: abandonment trigger, bank bailout, capital-based macro-prudential policy, structural model
    Date: 2018–10
  10. By: Angelo Baglioni (Università Cattolica del Sacro Cuore); Luca Colombo (Università Cattolica del Sacro Cuore); Paola Rossi (Bank of Italy)
    Abstract: When the debt of distressed firms is dispersed, free riding makes it difficult to reach a restructuring agreement. We develop a multistage game in which banks come across each other frequently, allowing them to threaten punishment in case of free riding. As the number of banks grows, the chance of re-encountering a bank and of being punished for free riding increases, improving the likelihood of cooperation. Looking at Italian firms in distress, we find that the restructuring probability increases with the number of banks up to a threshold - around three banks - beyond which coordination problems prevail.
    Keywords: banks, debt restructuring, number of creditors
    JEL: G21 G33
    Date: 2018–09
  11. By: Drozd, Lukasz A. (Federal Reserve Bank of Philadelphia); Serrano-Padial, Ricardo (Drexel University)
    Abstract: We study the negative feedback loop between the aggregate default rate and the efficacy of enforcement in a model of debt-financed entrepreneurial activity. The novel feature of our model is that enforcement capacity is accumulated ex ante and thus subject to depletion ex post. We characterize the effect of shocks that deplete enforcement resources on the aggregate default rate and credit supply. In the model default decisions by entrepreneurs are strategic complements, leading to multiple equilibria. We propose a global game selection to overcome equilibrium indeterminacy and show how shocks that deplete enforcement capacity can lead to a spike in the aggregate default rate and trigger credit rationing.
    Keywords: contract enforcement; default spillovers; credit crunch; credit cycles; global games; heterogeneity
    JEL: C72 D82 D84 D86 G21 O16
    Date: 2018–10–18
  12. By: Iftekhar Hasan (Fordham University, Bank of Finland and University of Sydney); Krzysztof Jackowicz (Department of Banking, Insurance and Risk, Kozminski University, Poland); Robert Jagiełło (Warsaw School of Economics and National Bank of Poland); Oskar Kowalewski (IÉSEG School of Management and LEM-CNRS (UMR 9221)); Łukasz Kozłowski (Department of Banking, Insurance and Risk, Kozminski University, Poland)
    Abstract: We re-investigate the special role of local banks in shaping the financial constraints of small and medium-sized enterprises (SMEs). Using a comprehensive dataset from an emerging economy, including the information on local bank corrective programs, we find that local banks remain privileged and, most importantly, difficult to replace lenders for SMEs. We show that the deterioration of a SME’s access to bank financing linked to local banks’ corrective programs depends on the presence of other healthy local banks in the SME’s vicinity. Furthermore, we demonstrate that healthy local banks, when their neighboring peers experience financial difficulties, substantially increase lending.
    Keywords: Smart Beta, strategic beta, factor investing, factor selection, Bayesian variable selection
    Date: 2018–10
  13. By: Jacob P. Gramlich; Serafin J. Grundl
    Abstract: Theory predicts that "common ownership" (ownership of rivals by a common shareholder) can be anticompetitive because it reduces the weight firms place on their own profits and shifts weight toward rival firms held by common shareholders. In this paper we use accounting data from the banking industry to examine empirically whether shifts in the profit weights are associated with shifts in profits. We present the distribution of a wide range of estimates that vary the specification, sample restrictions, and assumptions used to calculate the profit weights. The distribution of estimates is roughly centered around zero, but we find statistically significant estimates in either direction in some cases. Economically, most estimates are fairly small. Our interpretation of these findings is that there is little evidence for economically important effects of common ownership on profits in the banking industry.
    Keywords: Banking ; Common Ownership ; Competition ; Profits
    JEL: L10 L40 L20 G21 G34
    Date: 2018–10–03
  14. By: Dell'Ariccia, Giovanni; Ferreira, Caio; Jenkinson, Nigel; Laeven, Luc; Martin, Alberto; Minoiu, Camelia; Popov, Alexander
    Abstract: This paper identifies the various channels that give rise to a “sovereign-bank nexus” whereby the financial health of banks and sovereigns is intertwined. We find that banks and sovereigns are linked by three interacting channels: banks hold large amounts of sovereign debt; banks are protected by government guarantees; and the health of banks and governments affect and is affected by economic activity. Evidence suggests that all three channels are relevant. The paper concludes with a discussion of the policy implications of these findings. JEL Classification: E62, F34, G01, G21
    Keywords: financial crisis, financial stability, fiscal policy, sovereign-bank nexus, sovereign risk
    Date: 2018–09
  15. By: Matteo Benetton (Berkeley); Davide Fantino (Bank of Italy)
    Abstract: We make use of an allocation rule by the ECB for Targeted Longer-Term Refinancing Operations (TLTROs) to provide causal evidence on the effect of unconventional monetary policy on the cost of loans to firms. Using transaction-level data from Italy’s Central Credit Register and a difference-in-difference identification strategy, we show that treated banks decrease loan rates to the same firm by approximately 20 basis points compared with control banks. We then study how the effects of the liquidity injection vary according to the competition in the banking sector, exploiting the local nature of bank-firm lending relationships and exogenous variations in the number of pawnshops across Italian cities during the Renaissance. Our results suggest that banks' market power can significantly impair the effectiveness of unconventional monetary policy, especially for safer and smaller firms.
    Keywords: Unconventional monetary policy, bank competition, pass-through.
    JEL: E51 E52 L11
    Date: 2018–07
  16. By: Ivan Faiella (Bank of Italy); Filippo Natoli (Bank of Italy)
    Abstract: We investigate the relationship between bank lending and catastrophe risk by analyzing the exposure of banks to Italian firms located in areas at risk of flooding. By matching a new map of flood risk areas with proprietary data on bank loans at municipal level we find that, on controlling for sectoral- and province-level fixed effects, lending to non-financial firms is negatively correlated with their flood risk exposure. A province-level analysis, which also allows us to control for bank- and firm-specific factors, confirms this finding when the borrowers are small and medium-sized enterprises. This investigation gives an initial insight into the relationship between the risk of natural catastrophes - exacerbated by climate change - and lending decisions.
    Keywords: catastrophe risk, climate change, rare disasters, bank lending, flooding, Italy
    JEL: G21 P48 Q54
    Date: 2018–10
  17. By: Xiang Fang; David Jutrsa; Maria Soledad Martinez Peria; Andrea Presbitero; Lev Ratnovski; Felix J Vardy
    Abstract: This paper offers novel evidence on the impact of raising bank capital requirements in the context of an emerging market: Peru. Using quarterly bank-level data and exploiting the adoption of bank-specific capital buffers, we find that higher capital requirements have a short-lived, negative impact on bank credit in Peru, although this effect becomes statistically insignificant in about half a year. This finding is robust to estimating different specifications to address concerns about the exogeneity of capital requirements. The fact that the reform was gradual and pre-announced and that banks were highly profitable at the time could explain the short-lived effects on credit.
    Date: 2018–09–28
  18. By: Bloise, Gaetano (Yeshiva University); Polemarchakis, Herakles (University of Warwick); Vailakis, Yiannis (University of Glasgow)
    Abstract: Debt is sustainable at a competitive equilibrium due solely to the reputation of debtors for repayment; that is, even absent collateral or legal sanctions available to creditors. Under incomplete markets, when the rate of interest (net of growth) is recurrently negative, self-insurance is more costly than borrowing, and repayments on loans are enforced by he implicit threat of loss of risk-sharing advantages of debt contracts. Private debt credibly circulates as a form of inside money and, in general, is not valued as a speculative bubble; it is distinct from outside money. Competitive equilibria with self-enforcing debt exist under a suitable hypothesis of gains from trade.
    Keywords: Rate of interest ; self-enforcing debt ; reputational debt ; incomplete
    Date: 2018
  19. By: Dominique Guégan (UP1 - Université Panthéon-Sorbonne, CES - Centre d'économie de la Sorbonne - CNRS - Centre National de la Recherche Scientifique - UP1 - Université Panthéon-Sorbonne, Labex ReFi - UP1 - Université Panthéon-Sorbonne, University of Ca’ Foscari [Venice, Italy], IPAG BUSINESS SCHOOL - IPAG BUSINESS SCHOOL PARIS); Christophe Hénot (UP1 - Université Panthéon-Sorbonne, PRISM - Pôle de recherche interdisciplinaire en sciences du management - UP1 - Université Panthéon-Sorbonne)
    Abstract: The Fintech industry has facilitated the development of companies using blockchain technology. The use of this technology inside banking system and industry opens the route to several questions regarding the business activity, legal environment and insurance devices. In this paper, considering the creation of small companies interested to develop their business with a public blockchain, we analyse from different aspects why a company (in banking or insurance system, and industry) decides that a blockchain protocal is more legitimate than another one for the business it wants to develop looking at the legal (in case of dispute) points of view. We associate to each blockchain a probative value which permits to assure in case of dispute that a transaction has been really done. We illustrate our proposal using thirteen blockchains providing in that case a ranking between these blockchains for their use in business environment. We associate to this probative value some main characteristics of any blockchain as market capitalization and log returns volatilities that the investors need to take also into account with the new probative value for their managerial strategy.
    Keywords: volatility,Regulation,Proof of work,Mining,Attack,Blockchain,Crypto-currency,probative-value,evidential-value,Hash rate,Immutability
    Date: 2018–09

This nep-ban issue is ©2018 by Christian Calmès. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.