nep-ban New Economics Papers
on Banking
Issue of 2018‒11‒12
eighteen papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Going the Extra Mile: Distant Lending and Credit Cycles By João Granja; Christian Leuz; Raghuram Rajan
  2. Multibank Holding Companies and Bank Stability By Radoslav Raykov; Consuelo Silva-Buston
  3. Implications of bank regulation for loan supply and bank stability: A dynamic perspective By Bucher, Monika; Dietrich, Diemo; Hauck, Achim
  4. Bank Capital in the Short and in the Long Run By Caterina Mendicino; Kalin Nikolov; Javier Suarez; Dominik Supera
  5. U.S. Monetary Policy and Emerging Market Credit Cycles By Falk Bräuning; Victoria Ivashina
  6. The Procyclicality of Expected Credit Loss Provisions By Jorge Abad; Javier Suarez
  7. Banks are not intermediaries of loanable funds — facts, theory and evidence By Jakab, Zoltan; Kumhof, Michael
  8. Large Banks and Small Firm Lending By Vitaly M. Bord; Victoria Ivashina; Ryan D. Taliaferro
  9. Trade and Credit Reallocation: How Banks Help Shape Comparative Advantage By Keuschnigg, Christian; Kogler, Michael
  10. What are the consequences of global banking for the international transmission of shocks? A quantitative analysis By Fillat, José L.; Garetto, Stefania; Smith, Arthur
  11. Why political risk matters for banking flows? By Ana Mafalda Vasconcelos
  12. Bank Balance Sheet Capacity and the Limits of Shadow Banks By Greg Buchak; Gregor Matvos; Tomasz Piskorski; Amit Seru
  13. Banking regulation and the changing geography of off-balance sheet activities By Carmela D'Avino
  14. Non-Performing Loans, Fiscal Costs and Credit Expansion in China By Huixin Bi; Yongquan Cao; Wei Dong
  15. Markets, Banks, and Shadow Banks By David Martinez-Miera; Rafael Repullo
  16. Euro area unconventional monetary policy and bank resilience By Fernando Avalos; Emmanuel C Mamatzakis
  17. Monetary Easing, Investment and Financial Instability By Viral Acharya; Guillaume Plantin
  18. Bank Earnings Smoothing During Mandatory IFRS adoption in Nigeria By Ozili, Peterson K; Outa, Erick R

  1. By: João Granja; Christian Leuz; Raghuram Rajan
    Abstract: We examine the degree to which competition amongst lenders interacts with the cyclicality in lending standards using a simple measure, the average physical distance of borrowers from banks’ branches. We propose that this novel measure captures the extent to which lenders are willing to stretch their lending portfolio. Consistent with this idea, we find a significant cyclical component in the evolution of lending distances. Distances widen considerably when credit conditions are lax and shorten considerably when credit conditions become tighter. Next, we show that a sharp departure from the trend in distance between banks and borrowers is indicative of increased risk taking. Finally, we provide evidence that as competition in banks’ local markets increases, their willingness to make loans at greater distance increases. Since average lending distance is easily measurable, it is potentially a useful measure for bank supervisors.
    JEL: E32 E44 G01 G18 G21 G32 L14
    Date: 2018–10
  2. By: Radoslav Raykov; Consuelo Silva-Buston
    Abstract: This paper studies the relationship between bank holding company affiliation and the individual and systemic risk of banks. Using the 2005 hurricane season in the US as an exogenous shock to bank balance sheets, we show that banks that are part of a holding parent company are more resilient than independent banks. Examining the impact of the liquidity of the holding on resiliency shows that banks are more fragile when the liquidity of the holding is lower, consistent with internal capital markets playing a role in stabilizing banks. We also show that banks whose holdings display low liquidity levels rebalance their portfolios towards riskier activities, such as non-traditional banking activities.
    Keywords: Financial Institutions, Financial stability
    JEL: G1 G2
    Date: 2018
  3. By: Bucher, Monika; Dietrich, Diemo; Hauck, Achim
    Abstract: A bank's decision on loan supply and capital structure determines its immediate bankruptcy risk as well as the future availability of internal funds. These internal funds in turn determine a bank's future costs of external finance and future vulnerability to bankruptcy risks. We study these intra- and intertemporal links and analyze the influence of risk-weighted capital-to-asset ratios, liquidity coverage ratios and regulatory margin calls on the dynamics of loan supply and bank stability. Only regulatory margin calls or large liquidity coverage ratios achieve bank stability for all risk levels, but for large risks a bank will stop credit intermediation.
    Keywords: bank lending,banking crisis,bank capital regulation,liquidity regulation
    JEL: G01 G21 G28 E32
    Date: 2018
  4. By: Caterina Mendicino (European Central Bank); Kalin Nikolov (European Central Bank); Javier Suarez (CEMFI); Dominik Supera (CEMFI, Centro de Estudios Monetarios y Financieros)
    Abstract: How far should capital requirements be raised in order to ensure a strong and resilient banking system without imposing undue costs on the real economy? Capital requirement increases make banks safer and are beneficial in the long run but carry transition costs because their imposition reduces aggregate demand on impact. Under accommodative monetary policy, increasing capital requirements addresses financial stability risks without imposing large transition costs on the economy. In contrast, when the policy rate hits the lower bound, monetary policy loses the ability to dampen the effects of the capital requirement increase on the real economy. The long-run benefits of higher capital requirements are larger and the transition costs are smaller when the risk that causes bank failure is high.
    Keywords: Macroprudential policy, bank fragility, financial frictions, default risk, effective lower bound, transition dynamics.
    JEL: E3 E44 G01 G21
    Date: 2018–08
  5. By: Falk Bräuning; Victoria Ivashina
    Abstract: Foreign banks’ lending to firms in emerging market economies (EMEs) is large and denominated predominantly in U.S. dollars. This creates a direct connection between U.S. monetary policy and EME credit cycles. We estimate that over a typical U.S. monetary easing cycle, EME borrowers experience a 32-percentage-point greater increase in the volume of loans issued by foreign banks than do borrowers from developed markets, followed by a fast credit contraction of a similar magnitude upon reversal of the U.S. monetary policy stance. This result is robust across different geographies and industries, and holds for U.S. and non-U.S. lenders, including those with little direct exposure to the U.S. economy. EME local lenders do not offset the foreign bank capital flows, and U.S. monetary policy affects credit conditions for EME firms, both at the extensive and intensive margin. Consistent with a risk-driven credit-supply adjustment, we show that the spillover is stronger for riskier EMEs, and, within countries, for higher-risk firms.
    JEL: E52 F34 F44 G21
    Date: 2018–10
  6. By: Jorge Abad (CEMFI, Centro de Estudios Monetarios y Financieros); Javier Suarez (CEMFI, Centro de Estudios Monetarios y Financieros)
    Abstract: The Great Recession has pushed accounting standards for banks' loan loss provisioning to shift from an incurred loss approach to an expected credit loss approach. IFRS 9 and the incoming update of US GAAP imply a more timely recognition of credit losses but also greater responsiveness to changes in aggregate conditions, which raises procyclicality concerns. This paper develops and calibrates a recursive ratings-migration model to assess the impact of different provisioning approaches on the cyclicality of banks' profits and regulatory capital. The model is used to analyze the effectiveness of potential policy responses to the procyclicality problem.
    Keywords: Credit loss allowances, expected credit losses, incurred losses, rating migrations, procyclicality.
    JEL: G21 G28 M41
    Date: 2018–08
  7. By: Jakab, Zoltan (International Monetary Fund); Kumhof, Michael (Bank of England)
    Abstract: In the loanable funds model that dominates the literature, banks are nonfinancial warehouses that receive physical commodity deposits from savers before lending the commodities to borrowers. In the financing model of this paper, banks are financial institutions whose loans create ledger-entry deposits that are essential in commodities exchange among nonbanks. This model predicts larger and faster changes in bank lending and greater real effects of financial shocks. Aggregate bank balance sheets exhibit very high volatility, as predicted by financing models. Alternative explanations of volatility in physical savings, net securities purchases or asset valuations have very little support in the data.
    Keywords: Banks; financial intermediation; loanable funds; money creation; bank lending; bank financing; money demand
    JEL: E41 E44 E51 G21
    Date: 2018–10–26
  8. By: Vitaly M. Bord; Victoria Ivashina; Ryan D. Taliaferro
    Abstract: We show that since 2007, there was a large and persistent shift in the composition of lenders to small firms. Large banks impacted by the real estate prices collapse systematically contracted their credit to all small firms throughout the U.S.. However, healthy banks expanded their operations and entered new banking markets. The market share gain of these banks was a standard deviation above the long-run historical market share growth and persists for years following the financial crisis. Despite this offsetting expansion, the net effect of the contraction in credit was negative, with lower aggregate credit and deposits growth, and lower entrepreneurial activity through 2015.
    JEL: G21
    Date: 2018–10
  9. By: Keuschnigg, Christian; Kogler, Michael
    Abstract: Trade and innovation cause structural change. Productive factors must flow from declining to growing industries. Banks play a major role in cutting credit to non-viable firms in downsizing sectors and provide new credit to finance investment in expanding, innovative sectors. Structural parameters of a country’s banking system thus influence comparative advantage and trade patterns. The analysis points to the importance of insolvency laws, minimum capital standards, and cost of bank equity to determine credit reallocation, sectoral expansion and trade patterns.
    Keywords: Capital reallocation,banking,trade,comparative advantage
    JEL: F10 G21 G28
    Date: 2018
  10. By: Fillat, José L.; Garetto, Stefania; Smith, Arthur
    Abstract: The global financial crisis of 2008 was followed by a wave of regulatory reforms that affected large banks, especially those with a global presence. These reforms were reactive to the crisis. In this paper we propose a structural model of global banking that can be used proactively to perform counterfactual analysis on the effects of alternative regulatory policies. The structure of the model mimics the US regulatory framework and highlights the organizational choices that banks face when entering a foreign market: branching versus subsidiarization. When calibrated to match moments from a sample of European banks, the model is able to replicate the response of the US banking sector to the European sovereign debt crisis. Our counterfactual analysis suggests that pervasive subsidiarization, higher capital requirements, or ad hoc monetary policy interventions would have mitigated the effects of the crisis on US lending.
    Keywords: banking regulation; global banks; shock transmission
    JEL: F12 F23 F36 G21
    Date: 2018–10
  11. By: Ana Mafalda Vasconcelos (Università degli Studi di Torino and Collegio Carlo Alberto)
    Abstract: In this paper we rely on an extensive dataset on cross-border banking flows to understand the effect of political risk on international lending. Moreover, our paper is the first that analyses the effect of several factors of political risk in cross-border banking flows using a sample that is larger than that of previous studies, i.e. covering the period 1984 ? 2013. Moreover - and given the importance of the 9/11 attacks as a turning point both in the political atmosphere and on the global economy ? our paper sets out to investigate how the September 11, 2001 attacks shaped the importance of political risk as a determinant of cross-border banking flows.We find that political risk is an important consideration for foreign investors and that it is perceived differently in developed and non-developed countries. Moreover, we find that the 9/11/2001 attacks change the perception of political risk, and the factors of the aforementioned risk that drive international lending - both in developed and non-developed countries - also changed with the September 11, 2001 attacks.
    Keywords: political risk, cross-border banking flows, international lending, 9/11/2001 attacks
    JEL: G15 E00
    Date: 2018–07
  12. By: Greg Buchak; Gregor Matvos; Tomasz Piskorski; Amit Seru
    Abstract: We study which types of activities migrate to the shadow banking sector, why migration occurs in some sectors, and not others, and the quantitative importance of this migration. We explore this question in the $10 trillion US residential mortgage market, in which shadow banks account for more than half of new lending. Using micro data, we document a large degree of market segmentation in shadow bank penetration. They substitute for traditional—deposit taking—banks in easily securitized lending, but are limited from engaging in activities requiring on-balance sheet financing. Traditional banks adjust their financing and lending activities to balance sheet shocks, and behave more like shadow banks following negative shocks. Motivated by this evidence, we build a structural model. Banks and shadow banks compete for borrowers. Banks face regulatory constraints, but benefit from the ability to engage in balance sheet lending. Like shadow banks, banks can choose to access the securitization market. To evaluate distributional consequences, we model a rich demand system with income and house price differences across borrowers. The model is estimated using spatial pricing rules and bunching at the regulatory threshold for identification. We study the consequences of capital requirements, conforming credit limits, and unconventional monetary policy on lending volume and pricing, bank stability and the distribution of consumer surplus across rich and poor households. Our results suggest that a complete policy analysis of the credit market requires simultaneously analyzing the impact on banks and shadow banks, and accounting for their equilibrium interactions.
    JEL: G2 L5
    Date: 2018–10
  13. By: Carmela D'Avino (UEL - University of East London)
    Abstract: This paper investigates whether the substitute compliance framework under the new US regime for over-the-counter derivatives has stimulated regulatory arbitrage. Results point to increased post-regulatory concentration in exposure in those countries in which US banks comply with local derivative regulation.
    Keywords: US banks,interest rate swaps,derivatives regulation
    Date: 2017–08
  14. By: Huixin Bi; Yongquan Cao; Wei Dong
    Abstract: This paper studies how the credit expansion policy pursued by the Chinese government in an effort to stimulate its economy in the post-crisis period affects bank–firm loan contracts and the macroeconomy. We build a structural model with financial frictions in which the optimal loan contract reflects the trade-off between leverage and the probability of default. Credit expansion is introduced in the form of the government's partial guarantee on bank loans to (i) general production firms or (ii) infrastructure producers. We show that in the case of general credit expansion, more persistent credit shocks lead to higher credit multipliers at all horizons, as the benefits of persistently alleviating firms' borrowing constraint outweigh the costs associated with higher non-performing loans. We also show that a more persistent targeted credit expansion raises the production of infrastructure goods. However, higher infrastructure production not only boosts the public capital stock and generates positive externalities, it also crowds out private investment and consumption. With a short-lived targeted credit easing, the expansionary channel of public capital dominates, boosting output. As the credit expansion becomes more persistent, the contractionary channel of lower private investment starts to outweigh the expansionary channel in the medium term.
    Keywords: Credit and credit aggregates, Fiscal Policy, International topics
    JEL: E62 E44
    Date: 2018
  15. By: David Martinez-Miera (Universidad Carlos III de Madrid); Rafael Repullo (CEMFI, Centro de Estudios Monetarios y Financieros)
    Abstract: We analyze the effect of bank capital requirements on the structure and risk of a financial system where markets, regulated banks, and shadow banks coexist. Banks face a moral hazard problem in screening entrepreneurs' projects, and they choose whether to be regulated or not. If regulated, a supervisor certifies their capital; if not, they have to rely on more expensive private certification. Under both risk-insensitive and risk-sensitive requirements, safer entrepreneurs borrow from the market and riskier entrepreneurs borrow from banks. But risk-insensitive (sensitive) requirements are especially costly for relatively safe (risky) entrepreneurs, which may shift from regulated to shadow banks.
    Keywords: Bank regulation, bank supervision, capital requirements, credit screening, credit spreads, loan defaults, optimal regulation, market finance, shadow banks.
    JEL: G21 G23 G28
    Date: 2018–10
  16. By: Fernando Avalos; Emmanuel C Mamatzakis
    Abstract: This paper examines whether euro area unconventional monetary policies have affected the loss-absorbing buffers (that is the resilience) of the banking industry. We employ various measures to capture the effect of the broad array of programmes used by the ECB to implement balance sheet policies, while we control for the effect of conventional and negative (or very low) interest rate policy. The results suggest that, above and away from the zero-lower bound, looser interest rate policy tends to weaken our measure of euro area banks' loss-absorbing buffers. On the contrary, further lowering interest rates near and below the zero lower bound seems to strengthen (or weaken less) such buffers, which points towards non-linearities arising in the vicinity of the lower bound. Moreover, balance sheet easing policies enhance bank level resilience overall. However, unconventional monetary policies seem to have increased the fragility of banks in the member states hardest hit by the 2011 sovereign debt crisis. In fact, the evidence presented in this paper suggest that the resilience gains of unconventional monetary policies have accrued mostly to banks headquartered in the so-called core euro area countries (Austria, Belgium, Finland, France, Germany, Luxembourg and Netherlands). Finally, unconventional monetary policies seem to have enhanced more the resilience of banks that were relatively stronger, i.e. that were in the higher deciles of the distribution of loss-absorbing buffers.
    Keywords: unconventional monetary policy, ECB, asset purchases, loss-absorbing buffer
    JEL: G21 E52 E43
    Date: 2018–11
  17. By: Viral Acharya (Reserve Bank of India); Guillaume Plantin (Département d'économie)
    Abstract: This paper studies a model of the interest-rate channel of monetary policy in which a low policy rate lowers the cost of capital for firms thereby spurring investment, but also induces destabilizing “carry trades” against their assets. If the public sector does not have sufficient fiscal capacity to cope with the large resulting private borrowing, then carry trades and productive investment compete for scarce funds, and so the former crowd out the latter. Below an endogenous lower bound, monetary easing generates only limited investment at the cost of large and socially wasteful financial risk taking.
    Keywords: Monetary policy; Financial stability; Shadow banking; Carry trades
    JEL: E52 E58 G01 G21 G23 G28
    Date: 2018–07
  18. By: Ozili, Peterson K; Outa, Erick R
    Abstract: We examine the extent of bank earnings smoothing during mandatory IFRS adoption in Nigeria, to determine whether mandatory IFRS adoption increased or decreased income smoothing among Nigerian banks. We find that the mandatory adoption of International Financial Reporting Standards (IFRS) is associated with lower earnings smoothing among Nigerian banks, which implies that Nigerian banks do not use loan loss provisions to smooth reported earnings during the mandatory IFRS adoption period. We find evidence for earnings smoothing via LLP during voluntary IFRS adoption. Earnings smoothing is not significantly associated with listed and non-listed Nigerian banks during voluntary and mandatory IFRS adoption. Overall, the findings indicate that mandatory IFRS adoption improves the informativeness and reliability of loan loss provisions estimate by discouraging Nigerian banks from influencing loan loss provisions for earnings smoothing purposes during the mandatory IFRS adoption. The findings of this paper are relevant to the debate on whether IFRS reporting improves the quality of financial reporting among firms in Nigeria. The implication of the study is that IFRS has higher accounting quality than local GAAP in Nigeria as it improves the quality and informativeness of accounting numbers (LLPs and earnings) reported by Nigerian banks during the period examined
    Keywords: Loan Loss Provisions, Discretionary Accruals, Income Smoothing, Earnings Management, Nigeria, Banks, IFRS.
    JEL: G2 G21 G28 M41 M42 M48
    Date: 2018

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.
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