nep-ban New Economics Papers
on Banking
Issue of 2018‒12‒03
twenty-two papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Local banks, credit supply, and house prices By Blickle, Kristian S.
  2. Is Lending by Polish Cooperative Banks Procyclical? By Christophe GODLEWSKI; Dorota SKALA; Laurent WEILL
  3. Does Bank Efficiency Influence the Cost of Credit? By Anastasiya SHAMSHUR; Laurent WEILL
  4. The Effects of Competition in Consumer Credit Markets By Gissler, Stefan; Ramcharan, Rodney; Yu, Edison
  5. The leverage ratio, risk-taking and bank stability By Acosta-Smith, Jonathan; Grill, Michael; Lang, Jan Hannes
  6. Macroprudential margins: a new countercyclical tool? By O'Neill, Cian; Vause, Nicholas
  7. The Pro-Cyclicality of Risk Weights for Credit Exposures in the Czech Republic By Simona Malovana
  8. Does lender type matter for the pricing of loans? By Rajan, Aniruddha; Willison, Matthew
  9. The Unintended Consequences of Employer Credit Check Bans on Labor and Credit Markets By Cortes, Kristle Romero; Glover, Andrew; Tasci, Murat
  10. How do shocks to bank capital affect lending and growth? By Tölö, Eero; Miettinen, Paavo
  11. Does Collateral Reduce Loan-Size Credit Rationing? Survey Evidence By Chala, Alemu Tulu; Forssbaeck, Jens
  12. Lending relationships and the collateral channel By Anderson, Gareth; Bahaj, Saleem; Chavaz, Matthieu; Foulis, Angus; Pinter, Gabor
  13. Persistent and Transient Inefficiency: Explaining the Low Efficiency of Chinese Big Banks By Zuzana FUNGACOVA; Paul-Olivier KLEIN; Laurent WEILL
  14. La Gestion opportuniste du ratio de solvabilité bancaire via les ajustements réglementaires des fonds propres : Etude d'un échantillon de banques européennes By Diéne Mohamed Kamara
  15. Regulatory framework for the loan-based crowdfunding platforms By Olena Havrylchyk
  16. Politicians' Promotion Incentives and Bank Risk Exposure By Li Wang; Lukas Menkhoff; Michael Schröder; Xian Xu
  18. How do Capital Requirements Affect Loan Rates? Evidence from High Volatility Commercial Real Estate By David P. Glancy; Robert J. Kurtzman
  19. Women - The Microfinance Industry in the past, present and towards the future By Sigurdur Gudjonsson; Kari Kristinsson
  20. Four questions on the state of cyber resilience and endpoint security: remarks at the Clearing House and Bank Policy Institute's 2018 Annual Conference, New York City By Dzina, Richard
  21. Refinancing Risk and Debt Maturity Choice during a Financial Crisis By Chala, Alemu Tulu
  22. Syndicated Lending: The Role of Relationships for the Retained Share By Chala, Alemu Tulu

  1. By: Blickle, Kristian S. (Federal Reserve Bank of New York)
    Abstract: I study the effects of an increase in the supply of local mortgage credit on local house prices and employment by exploiting a natural experiment from Switzerland. In mid-2008, losses in U.S. security holdings triggered a migration of dissatisfied retail customers from a large, universal bank, UBS, to homogeneous local mortgage lenders. Mortgage lenders located close to UBS branches experienced larger inflows of deposits, regardless of their investment opportunities. Using variation in the geographic distance between UBS branches and local mortgage lenders as an instrument for deposit growth, I find that banks with an exogenous positive funding shock invest in strict accordance with their specialization (that is, local mortgage lending). Consequently, house price gains in neighborhoods around affected banks were more than 50 percent greater than those in neighborhoods around unaffected banks. I also find an increase in the number of employees at small firms, reliant on real estate collateral, in the former set of neighborhoods. My results show that local-mortgage-oriented banks affect house prices through the supply of credit and that bank specialization thereby plays an important role in the allocation of capital across sectors.
    Keywords: credit supply; liquidity shock; house prices; local banking; employment
    JEL: G20 G21 R30
    Date: 2018–11–01
  2. By: Christophe GODLEWSKI (LaRGE Research Center, Université de Strasbourg); Dorota SKALA (WNEiZ, University of Szczecin); Laurent WEILL (LaRGE Research Center, Université de Strasbourg)
    Abstract: We investigate the lending cyclicality of Polish cooperative banks. Cooperative banks have an important role in the financing of the local economy and as such can contribute to amplify or moderate business cycles through their lending behavior. We use a rich dataset of 367 Polish cooperative banks over the period 2007-2013. We find that cooperative banks have a countercyclical lending behavior on the country level, with loan growth negatively linked to national business cycles. We observe that greater bank size contributes to reduce the countercyclical lending behaviour. The lending behavior of cooperative banks is also sensitive to local economic conditions, with some evidence for procyclicality versus the regional economy. Finally, we point out differences in cyclicality of lending across types of borrowers. Loans to non-financial clients and to banks are countercyclical, while we find procyclicality for loans to local government and public entities. These findings support the view that the cooperative banking sector should be preserved to mitigate bank lending procyclicality, usually observed in commercial banks.
    Keywords: cooperative banks, loan growth, cyclicality, local economy, business cycles.
    JEL: G21 R11
    Date: 2018
  3. By: Anastasiya SHAMSHUR (University of East Anglia); Laurent WEILL (LaRGE Research Center, Université de Strasbourg)
    Abstract: Using a large sample of firms from nine European countries, this study examines the relationship between bank efficiency and the cost of credit for borrowing firms. We hypothesize that bank efficiency – the ability of banks to operate at lower costs – is associated with lower loan rates and thus lower cost of credit. Combining firm-level and bank-level data, we find support for this prediction. The effect of bank efficiency on the cost of credit varies with firm and bank size. Bank efficiency reduces the cost of credit for SMEs, but does not exert a significant influence for either micro companies or large firms. Furthermore, the effect is driven by large banks, where improvements in bank efficiency tend to be strongly associated with lower cost of credit. We also find that lower bank competition facilitates the transmission of greater bank efficiency to lower cost of credit. Overall, our results indicate that measures that increase bank efficiency can foster access to credit.
    Keywords: bank efficiency, cost of credit. Classification-JEL G21, L11.
    Date: 2018
  4. By: Gissler, Stefan (federal reserve board of governors); Ramcharan, Rodney (University of Southern California); Yu, Edison (Federal Reserve Bank of Philadelphia)
    Abstract: Using changes in financial regulation that create exogenous entry in some consumer credit markets, we find that increased competition induces banks to become more specialized and efficient, while deposit rates increase and borrowing costs for riskier collateral decline. However, shadow banks change their credit policy when faced with more competition and aggressively expand credit to riskier borrowers at the extensive margin, resulting in higher default rates. These results show how the form of intermediation can shape economic fluctuations. They also suggest that increased competition can lead to large changes in credit policy at institutions outside the traditional supervisory umbrella, possibly creating a less stable financial system.
    Keywords: credit policies; consumer credit
    Date: 2018–10–23
  5. By: Acosta-Smith, Jonathan (Bank of England); Grill, Michael (European Central Bank); Lang, Jan Hannes (European Central Bank)
    Abstract: This paper addresses the trade-off between additional loss-absorbing capacity and potentially higher bank risk-taking associated with the introduction of the Basel III leverage ratio. This is addressed in both a theoretical and empirical setting. Using a theoretical micro model, we show that a leverage ratio requirement can incentivise banks that are bound by it to increase their risk-taking. This increase in risk-taking however, should be more than outweighed by the benefits of higher capital, thereby leading to more stable banks. These theoretical predictions are tested and confirmed in an empirical analysis on a large sample of EU banks. Our baseline empirical model suggests that a leverage ratio requirement would lead to a significant decline in the distress probability of highly leveraged banks.
    Keywords: Bank capital; risk-taking; leverage ratio; Basel III
    JEL: G01 G21 G28
    Date: 2018–09–14
  6. By: O'Neill, Cian (Bank of England); Vause, Nicholas (Bank of England)
    Abstract: We quantify the size of a fire-sale externality in the derivatives market in the absence of a macroprudential buffer on top of microprudential initial margin requirements. We show how this varies over the financial cycle with market volatility. We then assess the ability of a macroprudential buffer to reduce this externality. We find this depends critically on the release conditions of the buffer. A buffer could reduce or, if set appropriately, even eliminate the externality, as long as it was released when investors faced any significant collateral calls, regardless of whether these related to variation or initial margins. However, it could be harmful if it was released only with calls for additional initial margin. Predicated on ideal release conditions, we test the performance of macroprudential buffers based on ‘anti-procyclicality’ mechanisms in current regulations. These mechanisms can reduce the fire-sale externality in some market conditions, but not all. Conceptually, we devise alternative mechanismsthat eliminate the externality, although it may be difficult for policymakers to specify these in practice. Finally, as an alternative to quantity-based solutions, we investigate the ability of taxes to reduce the externality. We find that such a price-based solution could also eliminate the externality if set appropriately, but this would require a high tax rate and the redistribution of significant tax revenues.
    Keywords: Collateral; derivatives; externality; fire sales; macroprudential policy
    JEL: G18 G23
    Date: 2018–09–14
  7. By: Simona Malovana
    Abstract: This paper studies the pro-cyclicality of risk weights with respect to the business, credit and financial cycles using data for the Czech Republic. The empirical results indicate that risk weights behave pro-cyclically under the IRB approach and acyclically under the STA approach. The pro-cyclical behaviour of IRB risk weights for credit exposures is caused primarily by the procyclicality of risk weights for retail credit exposures, the strongest effects being in the highest and lowest quantiles of risk weights. The risk weights for retail exposures behave pro-cyclically not only with regard to the business cycle, but also with respect to the financial cycle and house price growth.
    Keywords: Housing market, internal ratings-based approach, procyclicality, quantile regression, risk weights
    JEL: C22 E32 G21 G28
    Date: 2018–10
  8. By: Rajan, Aniruddha (Bank of England); Willison, Matthew (Bank of England)
    Abstract: Loan markets often contain lenders with contrasting business models and ownership structures. But does that matter for outcomes in these markets? We examine whether it does using a loan-level data set of mortgage transactions in the United Kingdom. We find the type of lender can matter for pricing behaviour. The levels of interest rates, as well as the sensitivity of rates to funding costs and borrower risk, vary between lender types. Some of these differences are consistent with theories of how agency problems might vary between types of lenders and past empirical studies. But other differences are not consistent. The results suggest further research is needed to understand how, to what extent, and why lender types affect pricing in loan markets.
    Keywords: Banking; lending; business models; mutuals
    JEL: G21 G30 L21
    Date: 2018–11–16
  9. By: Cortes, Kristle Romero (Federal Reserve Bank of Cleveland); Glover, Andrew (Federal Reserve Bank of Cleveland); Tasci, Murat (Federal Reserve Bank of Cleveland)
    Abstract: Since the Great Recession, 11 states have restricted employers' access to the credit reports of job applicants. We document that county-level vacancies decline between 9.5 percent and 12.4 percent after states enact these laws. Vacancies decline significantly in affected occupations but remain constant in those that are exempt, and the decline is larger in counties with many subprime residents. Furthermore, subprime borrowers fall behind on more debt payments and reduce credit inquiries postban. The evidence suggests that, counter to their intent, employer credit check bans disrupt labor and credit markets, especially for subprime workers.
    Keywords: unemployment rate; credit score; credit check;
    JEL: J08 J23 J78
    Date: 2018–01–10
  10. By: Tölö, Eero; Miettinen, Paavo
    Abstract: We examine bank capital shocks using a recent new approach based on non-normal errors in vector autoregressive models. Using a sample of 14 European economies over January 2004 through March 2018 we identify two distinct classes of bank capital shocks, capital tightening shocks, and bank profitability shocks. We find that both bank capital shocks frequently lead to changes in lending volume and interest rates for new loans. In contrast to some recent similar studies, we find less evidence for impact on production. Bank capital shocks have further effects on the substitution between the bank and market-based financing and on credit allocation across different borrower sectors. Policymakers may find these results useful when considering counter-cyclical adjustments to the bank capital requirements.
    JEL: C11 C32 C54
    Date: 2018–11–28
  11. By: Chala, Alemu Tulu (Department of Economics, Lund University); Forssbaeck, Jens (Department of Economics, Lund University)
    Abstract: In theory, the use of collateral in credit contracting should mitigate the information problems that are widely held to be the primary cause of credit rationing. However, direct empirical evidence of the link between collateral use and credit rationing is scant. This paper examines the relationship between collateral and credit rationing using survey data that provides clean measures of quantity and loan size rationing. We find that selection problems arising from the loan application process and co-determination of loan terms significantly influence the link between collateral and rationing. Accounting for these problems, our results suggest that collateral reduces the likelihood of experiencing loan-size credit rationing by between 15 and 40 percentage points, and that collateral also decreases the relative loan amount rationed.
    Keywords: Loan-Size rationing; Collateral; Small business; Information asymmetry
    JEL: D82 G21 G39
    Date: 2018–11–23
  12. By: Anderson, Gareth (Oxford University); Bahaj, Saleem (Bank of England); Chavaz, Matthieu (Bank of England); Foulis, Angus (Bank of England); Pinter, Gabor (Bank of England)
    Abstract: This paper shows that lending relationships insulate corporate investment from fluctuations in collateral values. We construct a novel database covering the banking relationships of private and public UK firms and their individual directors. The sensitivity of corporate investment to changes in real estate collateral values is halved when the relationship between a bank and a firm or its board of directors increases by 11 years. The importance of long bank-firm relationships diminishes when directors have personal mortgage relationships with their firm’s lender. Our findings support theories where collateral and private information are substitutes in mitigating credit frictions over the cycle.
    Keywords: Collateral; lending relationships; SMEs; information frictions
    JEL: E22 E32 G32
    Date: 2018–11–16
  13. By: Zuzana FUNGACOVA (Bank of Finland); Paul-Olivier KLEIN (University of Aberdeen Business School); Laurent WEILL (LaRGE Research Center, Université de Strasbourg)
    Abstract: Considering the evidence that China’s five largest state-owned banks (the Big Five) suffer from low cost efficiency, this paper decomposes overall efficiency of Chinese banks into persistent efficiency and transient efficiency components. Low persistent efficiency reflects structural problems, while low transient efficiency is associated with short-term problems. Using the model of Kumbhakar, Lien and Hardaker (2014) based on the stochastic frontier approach, we measure persistent efficiency and transient efficiency for a large sample of 166 Chinese banks over the period 2008–2015. In line with existing evidence, we find a lower average cost efficiency of the Big Five banks compared to other Chinese banks. It is almost entirely due to low persistent cost efficiency. The Big Five banks transient efficiency is similar to other Chinese banks. Our findings support the view that major structural reforms are needed to enhance the efficiency of China’s Big Five banks.
    Keywords: banks, efficiency, China. Classification-JEL C23, D24, G21.
    Date: 2018
  14. By: Diéne Mohamed Kamara (Université Paris-Dauphine)
    Abstract: Through Earnings management practice applied to the banking industry, several studies have shown existence of capital adequacy ratio management. However, they are mainly focused mainly on loss loan provision manipulation's. This paper deals with the possibilities of banking industry to manage the prudential ratio via the regulatory adjustments. Such adjustments are based on accounting equities. They are composed of conventional adjustments and prudential filters induced by the application of IFRS. Adopting diachronic and instrumental approaches, the study is based on a sample of European banks and uses regression methods by panel data. The results obtained confirm the possibilities of manipulation of the Prudential ratio.
    Abstract: Plusieurs études ont montré l'existence de la gestion opportuniste du ratio de solvabilité à travers les pratiques de « Earning Management ». Toutefois, elles se sont focalisées pour l'essentiel sur la manipulation des provisions. Cette étude examine la gestion opportuniste du ratio prudentiel bancaire via les ajustements réglementaires opérés sur les fonds propres. Ceux-ci sont composés d'ajustements classiques et de filtres prudentiels induits par l'application des IFRS. Adoptant une démarche diachronique et une approche instrumentale, l'étude se base sur un échantillon de banques européennes et utilise des méthodes de régression par données de panel. Les résultats obtenus confirment des possibilités de manipulation du ratio prudentiel.
    Keywords: Earnings Mangement,Ratio de solvabilité,Bâle 2,Ajustements réglementaires,IFRS
    Date: 2017–05–30
  15. By: Olena Havrylchyk
    Abstract: In a growing number of OECD countries policymakers are designing specific regulations for lending-based crowdfunding platforms. In March 2018, as a part of its Fintech action plan, the European Commission also presented its proposal for the EU-wide passporting regime. To evaluate these new regimes, this study collects information about the regulation of lending-based crowdfunding platforms in 17 OECD countries and proposes a theoretical framework to reflect about different regulatory regimes. In this context, we explore market failures in lending-based crowdfunding and identify regulatory challenges. Although lending-based crowdfunding platforms do not technically perform risk and maturity transformation, in some countries, flexible regulation allows them to experiment with different business models to provide services of credit risk management (via risk grades, provision funds, automated lending) and liquidity provision (via secondary markets). These platforms could perform the same functions as banks in the future, but there are theoretical reasons to believe that platform-based intermediation could be more stable than banking intermediation. The success of lending-based crowdfunding platforms hinges on their ability to solve moral hazard issues and overcome significant barriers to entry related to scale and scope economies, adverse selection, as well as funding cost advantage of incumbent large banks. There are also risks related to an excessive reliance on funding of leveraged and ‘too big to fail’ institutional investors that are prone to runs and moral hazard problems.
    Keywords: barriers to entry, financial regulation, Fintech, lending-based crowdfunding
    JEL: D40 G01 G21 G23 O33
    Date: 2018–11–16
  16. By: Li Wang; Lukas Menkhoff; Michael Schröder; Xian Xu
    Abstract: This paper shows that politicians’ pressure to climb the career ladder increases bank risk exposure in their region. Chinese local politicians are set growth targets in their region that are relative to each other. Growth is stimulated by debt-financed programs which are mainly financed via bank loans. The stronger the performance pressure the riskier the respective local bank exposure becomes. This effect holds for local banks which are under some control of local politicians, it has increased with the release of stimulus packages requiring local co-financing and it is stronger if politicians hold chairmen positions in bank boards.
    Keywords: Bank lending, bank risk exposure, local politicians, promotion pressure
    JEL: G21 G23 H74
    Date: 2018
    Abstract: The study examine the relationship between financial intermediation and economic growth in Nigeria after the consolidation of the banking sector reform in Nigeria. Augmented Dickey Fuller Unit root test was conducted as a pretest to avoid giving spurious results. Granger causality was also employed to look at the direction of relationship between the dependent variable and the independent variables, the result shows a bidirectional relationship between Money Supply (MoS) and Gross Domestic Product (GDP) while Credit to Private Sector (CPS) does not granger GDP and GDP does not granger cause CPS, a unidirectional relationship however exist between CPS and MoS all at 5% level of significance. The Ordinary least square (OLS) method of analysis with data spanning 13 years shows that the variables for financial intermediation significantly affect economic growth in Nigeria. CPS has a positive impact on economic growth and so does MoS even though MoS contributes more to GDP than CPS contributes to GDP. Thus the result provide evidence that financial intermediation role of Nigerian banks have increased during the period of study an indication that people are having increased confidence on Nigerian banks after the consolidation and hence depositing the money in the banks. The study therefore recommend increase in granting credit to the private sector, expansionary monetary policy and policies aimed at strengthening further the banks in Nigeria so that their intermediation function can improve hence economic growth.
    Keywords: Financial Intermediation, Economic Growth, Banks
    JEL: G21 G32 G34
    Date: 2018–11
  18. By: David P. Glancy; Robert J. Kurtzman
    Abstract: We study how bank loan rates responded to a 50% increase in capital requirements for a subcategory of construction lending, High Volatility Commercial Real Estate (HVCRE). To identify this effect, we exploit variation in the loan terms determining whether a loan is classified as HVCRE and the time that a treated loan would be subject to the increased capital requirements. We estimate that the HVCRE rule increases loan rates by about 40 basis points for HVCRE loans, indicating that a one percentage point increase in required capital raises loan rates by about 9.5 basis points.
    Keywords: Basel III ; Capital Requirements ; Commercial Real Estate
    JEL: G38 G28 G21
    Date: 2018–11
  19. By: Sigurdur Gudjonsson (University of Akureyri); Kari Kristinsson (University of Iceland)
    Abstract: In this presentation the stage of the microfinance industry in Iceland will be accounted for. Short introduction of the industry in Iceland will be made. Many microfinance institutions have been set up in the developing world causing great success in decreasing poverty in the area. The popularity in these institutions have ben noticed in the developed world and now, many microfinance institutions have been established in the developed west, including in Iceland. While the situation is not the same in Iceland as in the developed world, I will try to answer the following question ,,have the microfinance institutions in Iceland brought prosperity to their borrowers or are they worse off after taking microfinance loans??.
    Keywords: microfinance, poverty, Iceland
    JEL: M10 M14
    Date: 2018–11
  20. By: Dzina, Richard (Federal Reserve Bank of New York)
    Abstract: Remarks at the Clearing House and Bank Policy Institute's 2018 Annual Conference, New York City.
    Keywords: Clearing House; financial market infrastructure (FMI); endpoint security; infrastructure security; resiliency; resilience; Wholesale Product Office; wholesale services; data integrity; 2-Hour recovery time objective; CPMI-IOSCO cyber guidance; Fedwire Funds Service; CHIPS; anomaly detection; assurance regimes
    Date: 2018–11–26
  21. By: Chala, Alemu Tulu (Department of Economics, Lund University)
    Abstract: This paper explores whether refinancing risk is an important determinant of maturity decisions by investigating how firms with refinancing risk choose the maturity of new loans they obtain during the 2007-2009 financial crisis. The firms' refinancing risk is measured by the maturing portion of outstanding long-term debt. The result shows that firms with a high refinancing risk choose longer maturities. This effect is stronger for speculative-grade and low-cash-flow firms. There is also evidence that firms with refinancing risk obtain longer maturities from their relationship lenders.
    Keywords: Refinancing risk; Debt maturity; financial crisis
    JEL: G01 G32 G39
    Date: 2018–11–13
  22. By: Chala, Alemu Tulu (Department of Economics, Lund University)
    Abstract: The finance literature offers ambiguous predictions about the impact of lending relationships on the share retained by lead arrangers in syndicated loans. While some literature indicates that lending relationships can help to alleviate post contractual agency conflicts, others imply that relationship lead arrangers may use their information advantage to exploit syndicate participants. Using syndicated loans made to U.S. firms, this article shows that lead arrangers retain a smaller share in lending relationships with firms. This result suggests that the agency-conflict-mitigating feature of a lending relationship outweighs the information-exploitation- facilitating feature. Consistent with the view that reputational concerns mitigate agency conflicts and make relationships less relevant, the impact on the retained share is stronger for non-top-tier and smaller lead arrangers. This article also shows that the effect of lending relationships is concentrated in loan contracts that include covenants.
    Keywords: Syndicated lending; Relationships; Retained share
    JEL: D82 G21 G32
    Date: 2018–11–13

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