nep-ban New Economics Papers
on Banking
Issue of 2018‒11‒19
seventeen papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Bank capital constraints, lending supply and economic activity By Antonio M. Conti; Andrea Nobili; Federico M. Signoretti
  2. To Ask or Not To Ask? Collateral versus Screening in Lending Relationships By Artashes Karapetyan; Hans Degryse; Sudipto Karmakar
  3. Calibrating the Magnitude of the Countercyclical Capital Buffer Using Market-Based Stress Tests By Maarten van Oordt
  4. How do Banks Respond to NPLs? Evidence from the Euro Area By Brunella Bruno; Immacolata Marino
  5. Socialising the losses and privatising the gains The case of Cyprus five years after the bail-in of bank deposits By Savvakis C. Savvides; Glenn P. Jenkins
  6. Using the Countercyclical Capital Buffer: Insights from a structural model By Lozej, Matija; O'Brien, Martin
  7. Equity versus Bail-in Debt in Banking: An Agency Perspective By Caterina Mendicino; Kalin Nikolov; Javier Suarez
  8. Burning Money? Government Lending in a Credit Crunch By Jiménez, Gabriel; Peydró, José Luis; Repullo, Rafael; Saurina, Jesús
  9. Determinants of banks’ profitability and performance: an overview By FERROUHI, El Mehdi
  10. Credit card debt and consumer payment choice: what can we learn from credit bureau data? By Stavins, Joanna
  11. Value-at-Risk prediction using option-implied risk measures By Kai Schindelhauer; Chen Zhou
  12. Avoiding the fall into the loop: Isolating the transmission of bank-to-sovereign distress in the euro area and its drivers By Böhm, Hannes; Eichler, Stefan
  13. Exploring the implications of different loan-to-value macroprudential policy designs By Rita Basto; Diana Lima; Sandra Gomes
  14. How slow is the recovery of loans to firms in Italy? By Ginette Eramo; Roberto Felici; Paolo Finaldi Russo; Federico Signoretti
  15. Mortgagor Vulnerability and Deposit Affordability in New Zealand before and after the Loan-to-Value Restrictions By Cameron Haworth; Liam Gillies; Tobias Irrcher
  16. Markets, Banks, and Shadow Banks By Martinez-Miera, David; Repullo, Rafael
  17. Are Banking and Capital Markets Union Complements? Evidence from Channels of Risk Sharing in the Eurozone By Hoffmann, Mathias; Maslov, Egor; Sørensen, Bent E; Stewen, Iryna

  1. By: Antonio M. Conti (Bank of Italy); Andrea Nobili (Bank of Italy); Federico M. Signoretti (Bank of Italy)
    Abstract: We estimate a Bayesian VAR with a detailed characterization of the banking sector for Italy since the 1990s. We use conditional forecasting techniques to retrieve bank capital shocks related to regulatory and supervisory initiatives and quantify their impact on credit supply and economic activity. We study three episodes characterized by increased regulatory/supervisory pressure and large increases in the Tier 1 capital ratio (the discussion on the Basel III reform; the 2011 EBA stress test and capital exercise; and the ECB’s comprehensive assessment and the launch of the SSM). We find evidence of large and persistent shocks to bank capital in all three episodes, which had significant negative effects on loan supply and GDP. Our results are robust to taking account of possible instabilities in the estimated relationships. The analysis focuses on the potential short-run costs of the regulatory/supervisory initiatives and disregards the potentially much larger long-run benefits of high bank capitalization.
    Keywords: bank capital shocks, Bayesian VAR models, conditional forecasts, time variation
    JEL: C32 E32 F34
    Date: 2018–11
  2. By: Artashes Karapetyan; Hans Degryse; Sudipto Karmakar
    Abstract: We study the impact of higher capital requirements on banks' decisions to grant collateralized rather than uncollateralized loans. We exploit the 2011 EBA capital exercise, a quasi-natural experiment that required a number of banks to increase their regulatory capital but not others. This experiment makes secured lending more attractive vis-à-vis unsecured lending for the affected banks as secured loans require less regulatory capital. Using a loan-level dataset covering all corporate loans in Portugal, we identify a novel channel of tighter capital requirements: relative to the control group and after the shock, treated banks require loans more often to be collateralized but less so for relationship borrowers. We further nd this impact is stronger for collateral that saves more on regulatory capital.
    JEL: G21 G28 G32
    Date: 2018
  3. By: Maarten van Oordt
    Abstract: This paper proposes a novel methodology to calibrate the magnitude of the cap on the countercyclical capital buffer (CCyB) using market-based stress tests. The macroprudential authority in our paper aims to contain the possibility of a breach of a minimum capital ratio in the event of a severe system-wide shock within a certain permissible failure probability. To meet its objective during periods of challenging macro-financial conditions, the macroprudential authority requires banks to build up the CCyB during credit booms. We show how market-based stress tests can be used to estimate the necessary magnitude of the CCyB. We apply the methodology to major banks in six advanced economies. Our estimates suggest a magnitude of the cap on the CCyB in a range from 1.4 to 1.7 per cent of total assets, depending on the ability of the macro-prudential authority to forecast macrofinancial conditions.
    Keywords: Financial Institutions, Financial stability, Financial system regulation and policies
    JEL: G10 G21 G28
    Date: 2018
  4. By: Brunella Bruno (Università Bocconi); Immacolata Marino (Università di Napoli Federico II and CSEF)
    Abstract: We study how asset quality deterioration influences the way Euro area banks adjust their balance sheets over 2010-2015. Findings from the fixed effect analysis report strong evidence of a negative correlation between asset quality and asset and lending growth. To explore the causality of the nexus, we exploit the 2014 ECB Asset Quality Review exercise in a diff-in-diff framework. We uncover a direct and negative effect of higher NPLs on banks' credit supply. Results are stronger for AQR banks plagued by high level of problem loans located in High-NPLs countries.
    Keywords: NPLs, non-performing loans, bank lending, asset quality, AQR
    JEL: G20 G21 G01
    Date: 2018–11–09
  5. By: Savvakis C. Savvides (JDINT’L Executive Programs, Department of Economics Queen's University, Kingston, Ontario, Canada); Glenn P. Jenkins (Department of Economics, Queen’s University, Kingston, Canada and Eastern Mediterranean University, North Cyprus)
    Abstract: Private sector indebtedness in Cyprus remains extremely high. Yet the Government and the banks in Cyprus continue to define the problem as being the non-performing loans (NPLs) and the proposed solution as being any tools and legislation which will improve repayment but also enable the banks to take these off their balance sheets. It is argued that reducing the NPLs in this manner is treating a symptom of the disease. Such sale of loans will not reduce the private debt which is the real problem of the Cyprus economy. On the contrary, it is likely to make private indebtedness a lot worse as the allowed provisions that the banks have been making will be used as discounts to entice the funds and other “investors” to buy them. This is likely to throw the country into a balance sheet recession. This means that because of the excessive and quite unprecedented levels of private debt (3 to 4 times the size of the country’s GDP) weighing on households and corporations alike, it is practically impossible for the country to overcome the recessionary effects of the austerity and forced repayment conditions that would be imposed through the adoption of such myopic and one sided Government policy. The article concludes that the government should not create a bad bank for the NPLs of the banks but rather should establish a reconstruction and development financing institution that will be able to provide solutions and spin back into the economy economically viable projects.
    JEL: D61 G17 G21 G32 G33 H43
    Date: 2018–02
  6. By: Lozej, Matija (Central Bank of Ireland); O'Brien, Martin (Central Bank of Ireland)
    Abstract: This Letter looks at what happens after a demand-induced economic expansion with and without the activation of the Countercyclical Capital Buffer (CCyB). The main findings are that without the activation of the CCyB, bank resilience is diminished for an extended period. A timely activation of the CCyB alleviates the short-run decrease in bank resilience and enhances it in the medium-to-long term without substantially reducing economic expansion. If the activation is delayed, the reduced bank resilience persists longer. The cost of incorrectly timing the tightening of the CCyB is small. The macroeconomic impact of tightening is smaller the further above banks’ actual capital ratios are from their regulatory minimum requirement.
    Date: 2018–07
  7. By: Caterina Mendicino (European Central Bank); Kalin Nikolov (European Central Bank); Javier Suarez (CEMFI)
    Abstract: We examine the optimal size and composition of banks’ total loss absorbing capacity (TLAC). Optimal size is driven by the trade-off between providing liquidity services through deposits and minimizing deadweight default costs. Optimal composition (equity vs. bail-in debt) is driven by the relative importance of two incentive problems: risk shifting (mitigated by equity) and private benefit taking (mitigated by debt). Our quantitative results suggest that TLAC size in line with current regulation is appropriate. However, an important fraction of it should consist of bail-in debt because such buffer size makes the costs of risk-shifting relatively less important at the margin.
    Keywords: Bail-in debt, loss absorbing capacity, risk shifting, agency problems, bank regulation.
    JEL: G21 G28 G32
    Date: 2017–05
  8. By: Jiménez, Gabriel; Peydró, José Luis; Repullo, Rafael; Saurina, Jesús
    Abstract: We analyze a small, new credit facility of a Spanish state-owned-bank during the crisis, using its continuous credit scoring system, firm-level scores, and credit register data. Compared to privately-owned banks, the state-owned bank faces worse applicants, softens (tightens) its credit supply to unobserved (observable) riskier firms, and has much higher defaults. In a regression discontinuity design, the supply of public credit causes: large positive real effects to financially-constrained firms (whose relationship banks reduced substantially credit supply); crowding-in of new private-bank credit; and positive spillovers to other firms. Private returns of the credit facility are negative, while social returns are positive.
    Keywords: Adverse Selection; credit crunch; credit scoring; crowding-in; Real effects of public credit; state-owned banks
    JEL: E44 G01 G21 G28
    Date: 2018–10
  9. By: FERROUHI, El Mehdi
    Abstract: The present paper aims to provide an overview of the theoretical and empirical studies and research on banks profitability and performance. Thus, we present the principles of evaluation and modeling of banking performance, we review theories and models related to banking profitability and performance and we present empirical studies of banks profitability.
    Keywords: Profitability, performance, camels, banks
    JEL: G17 G21 G32
    Date: 2018–04–01
  10. By: Stavins, Joanna (Federal Reserve Bank of Boston)
    Abstract: We estimate a two-stage Heckman selection model of credit card adoption and use with a unique dataset that combines administrative data from the Equifax credit bureau and self-reported data from the Survey of Consumer Payment Choice, a representative survey of US consumers. Even though the survey data from the borrowers vary somewhat from the data provided by the lenders, the results based on the merged data are qualitatively similar to those based exclusively on self-reported surveys. This finding suggests that if administrative data are not available, it might be sufficient to use survey data to estimate consumer behavior. We find that credit card revolvers have lower income and are less educated than other cardholders. Although consumers who carry credit card debt might be liquidity constrained and not have cheaper borrowing alternatives, the high cost of paying off credit card debt could exacerbate existing inequalities in disposable income among consumers.
    Keywords: credit card debt; consumer payments; consumer preferences
    JEL: D14 E21 G21
    Date: 2018–10–01
  11. By: Kai Schindelhauer; Chen Zhou
    Abstract: This paper investigates the prediction of Value-at-Risk (VaR) using option-implied information obtained by the maximum entropy method. The maximum entropy method provides an estimate of the risk-neutral distribution based on option prices. Besides commonly used implied volatility, we obtain implied skewness, kurtosis and quantile from the estimated risk-neutral distribution. We find that using the implied volatility and implied quantile as explanatory variables significantly outperforms considered benchmarks in predicting the VaR, including the commonly used GARCH(1,1)-model. This holds for all considered VaR prediction models and VaR probability levels. Overall, a simple quantile regression model performs best for all considered VaR probability levels and forecast horizons.
    Keywords: Implied Quantile; GARCH; Quantile Regression; Comparative Backtest
    JEL: C14 G17
    Date: 2018–10
  12. By: Böhm, Hannes; Eichler, Stefan
    Abstract: We isolate the direct bank-to-sovereign distress channel within the eurozone's sovereign-bank-loop by exploiting the global, non-eurozone related variation in stock prices. We instrument banking sector stock returns in the eurozone with exposure-weighted stock market returns from non-eurozone countries and take further precautions to remove any eurozone crisis-related variation. We find that the transmission of instrumented bank distress, while economically relevant, is significantly smaller than the corresponding coefficient in the unadjusted OLS framework, confirming concerns on reverse causality and omitted variables in previous studies. Furthermore, we show that the spillover of bank distress is significantly stronger for countries with poorer macroeconomic performances, weaker financial sectors and financial regulation and during times of elevated political uncertainty.
    Keywords: sovereign-bank-loop,bank distress,instrumental variable estimation,bank exposures,macroeconomic performance
    JEL: E44 F3 G15 G21 G28
    Date: 2018
  13. By: Rita Basto; Diana Lima; Sandra Gomes
    Abstract: This paper evaluates the macroeconomic effects of macroprudential policy measures consisting of changes in loan-to-value ratios in the euro area. The analysis is carried out within a fully structural, multi-country model, that prominently includes financial frictions and a banking sector. Our main findings suggest that a permanent LTV tightening in a small euro area economy leads to a long-run decline in lending to the private sector. The short-run impact depends crucially on the policy design, being less pronounced when the measure is phased-in. This is consistent with policy goals of curbing credit growth but avoiding an abrupt immediate contraction in lending. A policy measure introduced at the euro area level implies larger long-run effects but the short-run recessionary impact is attenuated by the monetary policy response.
    JEL: E58 E61 F42
    Date: 2018
  14. By: Ginette Eramo (Bank of Italy); Roberto Felici (Bank of Italy); Paolo Finaldi Russo (Bank of Italy); Federico Signoretti (Bank of Italy)
    Abstract: This paper studies the characteristics of the recent evolution of loans to non-financial firms in Italy from an historical perspective, with the aim of ascertaining whether the ongoing recovery is creditless; the main demand- and supply-side determinants of credit are also discussed. We find the following results. First, bank loan dynamics have been weak compared to the universe of recoveries in 13 euro-area countries since 1980; however, credit has evolved in line with the median pattern in the restricted sample of recoveries following deep and long recessions and/or recessions associated with banking crises. Second, the reduction in loans has been common to firms of all sizes, though it has been more pronounced for smaller ones. Third, based on a review of credit market indicators, survey evidence and econometric studies, the weakness of lending to firms has been in line with subdued dynamics of demand; the stringency of lending criteria has also contributed, in particular for smaller and riskier firms.
    Keywords: creditless recovery, credit demand, credit supply, small firms financing
    JEL: E32 E50 G20
    Date: 2018–11
  15. By: Cameron Haworth; Liam Gillies; Tobias Irrcher (Reserve Bank of New Zealand)
    Abstract: Market discipline is a key pillar of the regulatory framework for prudential regulation in New Zealand, yet comparatively little empirical work has been done on how market discipline manifests itself in the marketplace. The purpose of this paper is to measure how market discipline operates among banks in New Zealand. To our knowledge, this is the first study of its kind in New Zealand, at least in recent years. We hope that we have set a base for more studies in this area to be carried out and we include thoughts on how to enhance the measurement of market discipline in New Zealand. It is our intention to extend the present work but we also invite other researchers to contribute to this effort. We employ methods commonly used overseas to measure market discipline, as well as a few novel measures mostly relating to how media interacts with market discipline. There are limitations to our data and our results should be interpreted with caution. While this paper focuses on banks, it also includes some tentative work on insurers. To measure the risk sensitivity of bondholders, we use bond spreads (here calculated as the return on a given bank’s bonds less the return on New Zealand Government-issued 10-year bonds). Our results indicate that bank bondholders respond to balance sheet risk indicators and idiosyncratic risk events in the expected way. That is, bond spreads rise when these indicators signal an increase in risk and vice versa. We cannot characterise the response of depositors to changes in bank risk, because we lack data on both deposit volumes and account switching between banks. Unfortunately, we are very limited in terms of the analysis we can do on the movement of equity prices and the reaction of shareholders in New Zealand. As is commonly known, our main banks are owned by Australian parent banks and only one bank, Heartland, listed on the New Zealand stock market. Based on the limited analysis we were able to do, we conclude that shareholders did react in a manner that is in line with the theory on market discipline prior to a change in the ownership structure of the bank. Since the change in the ownership structure, the picture has become less clear. We caution against drawing any strong conclusion from this evidence.
    Date: 2018–11
  16. By: Martinez-Miera, David; Repullo, Rafael
    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; market finance; optimal regulation; Shadow banks
    JEL: G21 G23 G28
    Date: 2018–10
  17. By: Hoffmann, Mathias; Maslov, Egor; Sørensen, Bent E; Stewen, Iryna
    Abstract: The interplay of equity market and banking integration is of first-order importance for risk sharing in the EMU. While EMU created an integrated interbank market, "direct'' banking integration (in terms of direct cross-border bank-to-real sector flows or cross-border banking-consolidation) and equity market integration remained limited. We find that direct banking integration is associated with more risk sharing, while interbank integration is not. Further, interbank integration proved to be highly procyclical, which contributed to the freeze in risk sharing after 2008. Based on this evidence, and a stylized DSGE model, we discuss implications for banking union. Our results show that real banking integration and capital market union are complements and robust risk sharing in the EMU requires both.
    Keywords: Banking Union; Capital Union
    JEL: F15 F36
    Date: 2018–10

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