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on Banking |
| By: | Heider, Florian; Saidi, Farzad; Schepens, Glenn |
| Abstract: | We show that negative policy rates affect the supply of bank credit in a novel way. Banks are reluctant to pass on negative rates to depositors, which increases the funding cost of high-deposit banks, and reduces their net worth, relative to low-deposit banks. As a consequence, the introduction of negative policy rates by the European Central Bank in mid-2014 leads to more risk taking and less lending by euro-area banks with greater reliance on deposit funding. Our results suggest that negative rates are less accommodative, and could pose a risk to financial stability, if lending is done by high-deposit banks. |
| Keywords: | bank balance-sheet channel; bank risk-taking channel; deposits; Negative Interest Rates; zero lower bound |
| JEL: | E44 E52 E58 G20 G21 |
| Date: | 2018–09 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:13191&r=ban |
| By: | Joseph Hughes (Rutgers University); Julapa Jagtiani (Federal Reserve Bank of Philadelphia); Choon-Geol Moon (Hanyang University) |
| Abstract: | Using 2013 and 2016 data, we compare the performance of unsecured consumer loans made by U.S. bank holding companies to that of the fintech lender, LendingClub. We focus on the volume of nonperforming unsecured consumer loans and apply a novel technique developed by Hughes and Moon (2017) that decomposes the observed rate of nonperforming loans into three components: a best-practice minimum ratio, a ratio that gauges nonperformance in excess of the best-practice (reflecting the relative proficiency of credit analysis and loan monitoring), and the statistical noise. Stochastic frontier techniques are used to estimate a minimum rate of nonperforming consumer loans conditioned on the volume of consumer loans and total loans, the average contractual lending rate on consumer loans, and market conditions (GDP growth rate and market concentration). This minimum gauges best-observed practice and answers the question, what ratio of nonperforming consumer loans to total consumer lending could a lender achieve if it were fully efficient at credit-risk evaluation and loan management? The frontier estimation eliminates the influence of luck (statistical noise) and gauges the systematic failure to obtain the minimum ratio. The conditional minimum ratio can be interpreted as a measure of inherent credit risk. The difference between the observed ratio, adjusted for statistical noise, and the minimum ratio gauges lending inefficiency. In 2013 and 2016, the largest bank holding companies with consolidated assets exceeding $250 billion experience the highest ratio of nonperforming consumer loans among the five size groups constituting the sample. Moreover, the inherent credit risk of their consumer lending is the highest among the five groups, but their lending efficiency is also the highest. Thus, the high ratio of consumer nonperformance of the largest financial institutions appears to result from assuming more inherent credit risk, not from inefficiency at lending. In 2016, LendingClub’s scale of unsecured consumer lending is slightly smaller than the scale of the largest banks. And like these large lenders, its relatively high nonperforming loan ratio is the result of a higher best-practice ratio of nonperforming consumer loans – i.e., higher inherent credit risk. As of 2016, LendingClub’s lending efficiency is similar to the high average efficiency of the largest bank lenders - a conclusion that may not be applicable to other fintech lenders. While the efficiency metric is well-accepted, widely used, and conceptually sound, it may be subject to some data limitations. For example, our data do not include lending performance during an economic downturn when delinquency rates would be higher and when lenders more experienced with downturns might achieve higher efficiency. |
| Keywords: | commercial banking, online lending, credit risk, lending efficiency |
| JEL: | G21 L25 C58 |
| Date: | 2018–11–19 |
| URL: | http://d.repec.org/n?u=RePEc:rut:rutres:201806&r=ban |
| By: | Mendicino, Caterina; Nikolov, Kalin; Suarez, Javier; Supera, Dominik |
| 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: | Bank Fragility; Default Risk; effective lower bound; Financial Frictions; macroprudential policy; Transition Dynamics |
| JEL: | E3 E44 G01 G21 |
| Date: | 2018–09 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:13152&r=ban |
| By: | Toni Ahnert; Kristin Forbes; Christian Friedrich; Dennis Reinhardt |
| Abstract: | Can macroprudential foreign exchange (FX) regulations on banks reduce the financial and macroeconomic vulnerabilities created by borrowing in foreign currency? To evaluate the effectiveness and unintended consequences of macroprudential FX regulations, we develop a parsimonious model of bank and market lending in domestic and foreign currency and derive four predictions. We confirm these predictions using a rich data set of macroprudential FX regulations. These empirical tests show that FX regulations (1) are effective in terms of reducing borrowing in foreign currency by banks; (2) have the unintended consequence of simultaneously causing firms to increase FX debt issuance; (3) reduce the sensitivity of banks to exchange rate movements; but (4) are less effective at reducing the sensitivity of corporates and the broader financial market to exchange rate movements. As a result, FX regulations on banks appear to be successful in mitigating the vulnerability of banks to exchange rate movements and the global financial cycle, but partially shift the snowbank of FX vulnerability to other sectors. |
| Keywords: | Financial system regulation and policies, Exchange rates, Financial institutions, International financial markets |
| JEL: | F32 F34 G15 G21 G28 |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:18-55&r=ban |
| By: | Langfield, Sam; Liu, Zijun; Ota, Tomohiro; Ferrara, Gerardo |
| Abstract: | We study systemic illiquidity using a unique dataset on banks’ daily cash flows, short-term interbank funding and liquid asset buffers. Failure to roll-over short-term funding or repay obligations when they fall due generates an externality in the form of systemic illiquidity. We simulate a model in which systemic illiquidity propagates in the interbank funding network over multiple days. In this setting, systemic illiquidity is minimised by a macroprudential policy that skews the distribution of liquid assets towards banks that are important in the network. JEL Classification: D85, E44, E58, G28 |
| Keywords: | liquidity regulation, macroprudential policy, systemic risk |
| Date: | 2018–11 |
| URL: | http://d.repec.org/n?u=RePEc:srk:srkwps:201886&r=ban |
| By: | Roy Cerqueti; Gian Paolo Clemente; Rosanna Grassi |
| Abstract: | In this article we propose a novel measure of systemic risk in the context of financial networks. To this aim, we provide a definition of systemic risk which is based on the structure, developed at different levels, of clustered neighbours around the nodes of the network. The proposed measure incorporates the generalized concept of clustering coefficient of order $l$ of a node $i$ introduced in Cerqueti et al. (2018). Its properties are also explored in terms of systemic risk assessment. Empirical experiments on the time-varying global banking network show the effectiveness of the presented systemic risk measure and provide insights on how systemic risk has changed over the last years, also in the light of the recent financial crisis and the subsequent more stringent regulation for globally systemically important banks. |
| Date: | 2018–10 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1810.13250&r=ban |
| By: | Krzysztof Echaust (Pozna? University of Economics and Business) |
| Abstract: | Accurate risk prediction plays a key role in effective risk management process. A conditional GARCH-EVT approach combines Extreme Value Theory and GARCH methodology and it allows us to estimate Value at Risk with high accuracy. The approach requires to pre-specify a threshold indicating distribution tails. In this paper we use an optimal tail selection algorithm of Caeiro and Gomes (2016) to estimate out-of-sample VaR forecasts. Unlike other studies we update the optimal fraction of the tail for each rolling window of the data set. Results are presented for a long and a short position applying ten U.S. blue chips. The GARCH-EVT model enables us to estimate risk precisely. However, it is not possible to notice the improvement of VaR accuracy relative to conservative approach taking the 95th or 90th quantile of returns as a threshold. |
| Keywords: | Value-at-Risk, optimal tail selection, Extreme Value Theory, GARCH-EVT |
| JEL: | C22 C53 |
| Date: | 2018–10 |
| URL: | http://d.repec.org/n?u=RePEc:sek:iefpro:6910151&r=ban |
| By: | Christine Laudenbach; Jenny Pirschel; Stephan Siegel |
| Abstract: | We examine the effect of personal, two-way communication on the behavior of borrowers, who have fallen behind on their consumer loan payments. While the lender has informed all borrowers about the delinquency through an automatically generated letter, some borrowers also receive a phone call from a randomly assigned bank agent. We find that borrowers, who speak with a bank agent typically for only a few minutes, are significantly more likely to make timely payments and significantly less likely to default. This finding holds in a subset of hard-to-reach borrowers as well as when we instrument for the call with exogenous variation in borrowers’ reachability. The effect of the call is also persistent. Borrowers, who receive a call, are significantly less likely to become delinquent again. Personal aspects of the call, such as the likeability of the agent’s voice, significantly affect payment behavior, while the surprise element of the call does not. Our results suggest that the form of communication significantly affects borrowers’ payment behavior. |
| Keywords: | Fintech, communication, guilt aversion, prosocial behavior |
| JEL: | D03 D10 D14 G20 |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_7295&r=ban |
| By: | Esida Gila-Gourgoura (Department of Economics, Faculty of Commerce, University of Cape Town); Eftychia Nikolaidou (Department of Economics, Faculty of Commerce, University of Cape Town) |
| Abstract: | This study uses the ARDL approach to cointegration to identify the factors affecting credit risk in the Italian banking system over the period 1997Q4?2017Q1. The ratio of new bad loans to the outstanding amount of performing loans in the previous period is the selected proxy of credit risk whereas a wide range of explanatory variables are included in the study. Compared to the previous studies, a wider timeframe is investigated, which captures the booming period, the global financial crisis and the ongoing Eurozone sovereign debt crisis. The findings suggest that macroeconomic cyclical, bank-specific, and financial market variables affect the flow of new bad loans in the Italian banking system. The high significance of the sovereign debt crisis risk proxy signals the important link between banking and sovereign debt crisis. |
| Keywords: | Credit risk, macroeconomic determinants, bank-specific variables, sovereign debt crisis, Italian banking systemcredit risk, Italian banking system, sovereign debt crisis |
| JEL: | C32 G17 G21 |
| Date: | 2018–10 |
| URL: | http://d.repec.org/n?u=RePEc:sek:iefpro:6909750&r=ban |
| By: | Friederike Niepmann; Tim Schmidt-Eisenlohr |
| Abstract: | This paper documents that an appreciation of the U.S. dollar is associated with a reduction in the supply of commercial and industrial loans by U.S. banks. An increase in the broad dollar index by 2.5 points (one standard deviation) reduces U.S. banks’ corporate loan originations by 10 percent. This decline is driven by a reduction in the demand for loans on the secondary market where prices fall and liquidity worsens when the dollar appreciates, with stronger effects for riskier loans. Today, the main buyers of U.S. corporate loans—and, hence, suppliers of funding for these loans—are institutional investors, in particular mutual funds, which experience outflows when the dollar appreciates. A shift of traditional financial intermediation to these relatively unregulated entities, which are more sensitive to global developments, has led to the emergence of this new channel through which the dollar affects the U.S. economy, which we term the secondary market channel. |
| Keywords: | leveraged loan market, commercial and industrial loans, U.S. dollar exchange rate, credit standards, institutional investors |
| JEL: | E44 F31 G15 G21 G23 |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_7288&r=ban |