nep-ban New Economics Papers
on Banking
Issue of 2018‒12‒10
fifteen papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Credit Rationing in European SMEs and their Lending Infrastructure By Andrea Mc Namara; Pierluigi Murro
  2. To Ask or Not To Ask? Bank Capital Requirements and Loan Collateralization By Degryse, Hans; Karapetyan, Artashes; Karmakar, Sudipto
  3. Is the Traditional Banking Model a Survivor? By Chiorazzo, Vincenzo; D'Apice, Vincenzo; DeYoung, Robert; Morelli, Pierluigi
  4. Cooperative banks and income inequality: Evidence from Italian provinces By Pierluigi Murro; Valentina Peruzzi
  5. The Non-Bank Credit Cycle By Esti Kemp; Rene van Stralen; Alexandros Vardoulakis; Peter J. Wierts
  6. Testing the Quiet Life Hypothesis in the African Banking Industry By Simplice A. Asongu; Nicholas M. Odhiambo
  7. Credit supply and demand in unconventional times By Altavilla, Carlo; Boucinha, Miguel; Holton, Sarah; Ongena, Steven
  8. The Risk-Taking Channel of Liquidity Regulations and Monetary Policy By Stephan Imhof, Cyril Monnet, Shengxing Zhang
  9. The determinants of interest rates in microfinance: age, scale and organisational charter By Jacinta C. Nwachukwu; Aqsa Aziz; Uchenna Tony-Okeke; Simplice A. Asongu
  10. The Risk-Taking Channel of Monetary Policy in Macedonia: Evidence from Credit Registry Data By Mite Miteski; Ana Mitreska; Mihajlo Vaskov
  11. Government debt and banking fragility: the spreading of strategic uncertainty By Nikolov, Kalin; Cooper, Russell
  12. Lending standards and macroeconomic dynamics By Gete, Pedro
  13. Pockets of risk in European Housing Markets: then and now By Kelly, Jane; Le Blanc, Julia; Lydon, Reamonn
  14. Strategic fire-sales and price-mediated contagion in the banking system By Yann Braouezec; Lakshithe Wagalath
  15. An Early Warning System for Systemic Banking Crises: A Robust Model Specification By O'Brien, Martin; Wosser, Michael

  1. By: Andrea Mc Namara (National University of Ireland); Pierluigi Murro (LUISS University Author-Name: Sheila O'Donohoe; Waterford Institute of Technology)
    Abstract: We examine the influence of countries lending infrastructure on credit rationing for European SMEs. This lending infrastructure is comprised of countries information, legal, judicial, bankruptcy, social and regulatory environments. Using a sample of 13,957 SMEs from eleven European countries, we find that SMEs in countries in which there is greater information sharing, fewer legal rights, a more efficient judicial system and less efficient bankruptcy system are less likely to be credit rationed. Moreover, an efficient bankruptcy regime is more important for larger and more risky firms in reducing the likehood of they being credit rationed. Equally the impact of banks regulatory regime varies across firm riskiness; a stricter regime results in a greater likehood of credit rationing for more risky or finally weaker firms in contrast to stronger firms where less regulation sees more rationing.
    Keywords: SMEs, Lending Infrastracture, Credit Constraints.
    JEL: G20 G28
    Date: 2018
  2. By: Degryse, Hans; Karapetyan, Artashes; Karmakar, Sudipto
    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 higher capital requirements: relative to the control group, treated banks require loans to be collateralized more often after the shock, but less so for relationship borrowers. This applies in particular for collateral that saves more on regulatory capital.
    Keywords: Capital requirements; Collateral; Lending Technology; relationship lending
    JEL: G21 G28 G32
    Date: 2018–11
  3. By: Chiorazzo, Vincenzo; D'Apice, Vincenzo; DeYoung, Robert; Morelli, Pierluigi
    Abstract: We test whether small US commercial banks that use a traditional business model are more likely to survive than non-traditional banks during both good and bad economic climates. Our concept of bank survival is derived from Stigler (1958) and includes any bank that does not fail or is not acquired. We define traditional banking by four hallmark characteristics: Relationship loans, core deposit funding, revenue streams from traditional banking services, and physical bank branches. Banks that adhered more closely to this business strategy were an estimated 8 to 13 percentage points more likely to survive from 1997 through 2012 compared to other small banks using less traditional business strategies. This survival advantage approximately doubled during the financial crisis period.
    Keywords: bank business model; financial crisis; survivorship
    JEL: G01 G21
    Date: 2018–08
  4. By: Pierluigi Murro (LUISS University); Valentina Peruzzi (University of Trento)
    Abstract: The aim of this paper is to investigate whether different credit institutions, and in particular cooperative banks, have a different impact on the reduction of income inequalities. By analyzing Italian local credit markets, i.e. Italian provinces, over the period 2001-2011, we find that cooperative banks’ diffusion significantly reduces income inequality. This finding is robust to different measures of income inequality, different proxies of local banking structure (cooperative banks branches, popular banks branches, commercial banks branches), and different estimation techniques. When we study the channel of influence, we find that the diffusion of cooperative banks is particularly relevant for income distribution where loans to families and firms are larger, bank-firm relationships are tighter and the number of new firms over incumbent is larger.
    Keywords: Cooperative banks, income inequality, financial development.
    JEL: G21 G38 O15
    Date: 2018–11
  5. By: Esti Kemp; Rene van Stralen; Alexandros Vardoulakis; Peter J. Wierts
    Abstract: We investigate the cyclical properties of non-bank credit and its relevance for financial stability. We construct a measure of non-bank credit for a large sample of countries and find that its cyclical properties differ from those of bank credit. Non-bank credit cycles are highly correlated with bank credit cycles in some countries but not in others. Moreover, non-bank credit cycles are less synchronised than bank credit cycles across countries. Finally, non-bank credit cycles could act as a leading indicator for currency, but not for systemic banking, crises. The opposite is true for bank credit cycles. These findings highlight the value added of monitoring non-bank credit.
    Keywords: Credit cycle ; Financial crisis ; Leading indicator ; Non-bank credit
    JEL: G01 G23 F34
    Date: 2018–11–14
  6. By: Simplice A. Asongu (Yaoundé/Cameroon); Nicholas M. Odhiambo (University of South Africa, Pretoria, South Africa)
    Abstract: The Quiet Life Hypothesis (QLH) is the pursuit of less efficiency by firms. In this study, we assess if powerful banks in the African banking industry are increasing financial access. The QLH is therefore consistent with the pursuit of financial intermediation inefficiency by large banks. To investigate the hypothesis, we first estimate the Lerner index. Then, using Two Stage Least Squares, we assess the effect of the Lerner index on financial access proxied by loan price and loan quantity. The empirical evidence is based on a panel of 162 banks from 42 African countries for the period 2001-2011. The findings support the QLH, although quiet life is driven by the below-median Lerner index sub-sample. Policy implications are discussed.
    Keywords: Financial access; Bank performance; Africa
    JEL: D40 G20 G29 L10 O55
    Date: 2018–01
  7. By: Altavilla, Carlo; Boucinha, Miguel; Holton, Sarah; Ongena, Steven
    Abstract: Do borrowers demand less credit from banks with weak balance sheet positions? To answer this question we use novel bank-specific survey data matched with confidential balance sheet information on a large set of euro area banks. We find that, following a conventional monetary policy shock, bank balance sheet strength influences not only credit supply but also credit demand. The resilience of lenders plays an important role for firms when selecting whom to borrow from. We also assess the impact on credit origination of unconventional monetary policies using survey responses on the exposure of individual banks to quantitative easing and negative interest rate policies. We find that both policies do stimulate loan supply even after fully controlling for bank-specific demand, borrower quality, and balance sheet strength. JEL Classification: E51, G21
    Keywords: balance sheet strength, bank lending survey, credit demand and supply, non-standard monetary policy
    Date: 2018–11
  8. By: Stephan Imhof, Cyril Monnet, Shengxing Zhang
    Abstract: We study the implications of liquidity regulations and monetary policy on depositmaking and risk-taking. Banks give risky loans by creating deposits that firms use to pay suppliers. Firms and banks can take more or less risk. In equilibrium, higher liquidity requirements always lower risk at the cost of lower investment. Nevertheless, a positive liquidity requirement is always optimal. Monetary conditions affect the optimal size of liquidity requirements, and the optimal size is countercyclical. It is only optimal to impose a 100% liquidity requirement when the nominal interest rate is sufficiently low.
    Date: 2018–07
  9. By: Jacinta C. Nwachukwu (Coventry University, UK); Aqsa Aziz (Coventry University, UK); Uchenna Tony-Okeke (Coventry University, UK); Simplice A. Asongu (Yaoundé, Cameroon)
    Abstract: This study compares the responsiveness of microcredit interest rates to age, scale of lending and organisational charter. It uses an unbalanced panel of 300 MFIs from 107 developing countries from 2005 to 2015. Three key trends emerge from the results of a 2SLS regression. First, the adoption of formal microbanking practices raises interest rates compared with other forms of microlending. Second, large scale lending lowers interest rates only for those MFIs that already hold legal banking status. Third, age of operation in excess of eight years exerts a negative impact on interest rates, regardless of scale and charter type of MFI. Collectively, our results indicate that policies which incentivise mature MFIs to share their knowledge will be more effective in helping the nascent institutions to overcome their cost disadvantages compared with reforms to transform them into licensed banks. For MFIs which already hold permits to operate as banks, initiatives to increase loan sizes are key strategic pricing decisions, irrespective of the institution’s age. This study is original in its differentiation of the impact on interest rates of regulations which promote formal banking principles, credit market extension vis-Ã -vis knowledge sharing between mature and nascent MFIs.
    Keywords: Microfinance, microbanks, non-bank financial institutions
    JEL: G21 G23 G28 E43 N20
    Date: 2018–01
  10. By: Mite Miteski (National Bank of Republic of Macedonia); Ana Mitreska (National Bank of Republic of Macedonia); Mihajlo Vaskov (National Bank of Republic of Macedonia)
    Abstract: The last global crisis brought the monetary policy risk-taking channel to the fore, arguing that lingering low interest rates might affect not only the quantity, but the quality of credit extended as well. In line with this debate, this paper is the first effort to empirically investigate the potential existence of the monetary policy risk-taking channel in Macedonia. For this purpose we use a rather unique database of corporate loans, taken from the Credit Registry of the National Bank of the Republic of Macedonia (NBRM), which is complemented with data from banks’ balance sheets. By using pooled OLS on semi-annual data for the 2010-2017 period, our study points to an inverse relationship between the policy rate and the ex-ante risk rating assigned by the banks, a finding that is supportive to the existence of the risk-taking channel, although the effect is relatively small. The results prove to be robust after controlling for several bank, loan and time specific variables. We also test for possible difference in the risk-taking by banks conditioned on the capitalization level, but the results do not confirm difference in the reaction. The findings of the study are policy-relevant, as they confirm the need for policy makers to be mindful on financial stability impact when making monetary decisions.
    Keywords: Monetary policy, risk taking, ex-ante credit risk, leverage, POLS
    JEL: E43 E44 E52 G21
    Date: 2018
  11. By: Nikolov, Kalin; Cooper, Russell
    Abstract: This paper studies the interaction of government debt and financial markets. This interaction, termed a ‘diabolic loop’, is driven by government choice to bail out banks and the resulting incentives for banks to hold government debt rather than self-insure through equity buffers. We highlight the role of bank equity issuance in determining whether the ‘diabolic loop’ is a Nash Equilibrium of the interaction between banks and the government. When equity is issued, no diabolic loop exists. In equilibrium, banks’ rational expectations of a bailout ensure that no equity is issued and the sovereign-bank loop is operative. JEL Classification: G01, G28, E44
    Keywords: sovereign-banking loop, sovereign default
    Date: 2018–11
  12. By: Gete, Pedro
    Abstract: This paper proposes a tractable way to incorporate lending standards ("credit qualification thresholds") into macro models of financial frictions. Banks can reject borrowers whose risk is above an endogenous threshold at which no lending rate sufficiently compensates banks for the borrowers’ default risk. Firms denied credit cut employment and labor reallocates mostly towards safer producers. Lending standards propagate bank capital shortfalls through labor misallocation causing deeper and more persistent real effects. The paper also shows that lending spreads are insufficient indicators of credit supply disruptions. That is, for the same increase in credit spreads, output falls faster when denial rates are increasing. Finally, with endogenous lending standards, first-moment bank capital shocks look like second-moment shocks. JEL Classification: E32, E44, E47, G2
    Keywords: bank capital, bank losses, extensive margin, labor reallocation, lending standards, misallocation
    Date: 2018–11
  13. By: Kelly, Jane (Central Bank of Ireland); Le Blanc, Julia (Deutsche Bundesbank, Research Centre); Lydon, Reamonn (Central Bank of Ireland)
    Abstract: Using household survey data, we document evidence of a loosening of credit standards in Euro area countries that experienced a property price boom-and-bust cycle. Borrowers in these countries exhibited significantly higher loan-to-value (LTV) and loan-to-income (LTI) ratios in the run up to the financial crisis, and an increasing tendency towards longer-term loans compared to borrowers in other countries. In recent years, despite the long period of historically low interest rates and substantial house price increases in some countries, we do not find similar credit easing as before the crisis. Instead, we find evidence of a considerable change in borrower characteristics since 2010: new borrowers are older and have higher incomes than before the crisis.
    Keywords: real estate markets, macroprudential policy, systemic risk, financial crises, bubbles, financial regulation, financial stability indicators.
    JEL: E5 G01 G17 G28 R39
    Date: 2018–10
  14. By: Yann Braouezec (IESEG School of Management (LEM-CNRS-UMR 9221)); Lakshithe Wagalath (IESEG School of Management (LEM-CNRS-UMR 9221))
    Abstract: We consider a price-mediated contagion framework in which each bank, after an exogenous shock, may have to sell assets in order to comply with regulatory constraints. Interaction between banks takes place only through price impact. We characterize the equilibrium of the strategic deleveraging problem and we calibrate our model to publicly-available data, the US banks that were part of the 2015 regulatory stress-tests. We then consider a more sophisticated model in which each bank is exposed to two risky assets (marketable and not marketable) and is only able to sell the marketable asset. We calibrate our model using the six banks with signi˝cant trading operations and we show that, depending on the price impact, the contagion of failures may be signi˝cant. Our results may be used to re˝ne current stress testing frameworks by incorporating potential contagion mechanisms between banks
    Keywords: Fire sales, price-mediated contagion, Nash equilibrium with strategic complemen-tarities, CCAR 2015, macro-prudential stress-tests
    Date: 2017–09
  15. By: O'Brien, Martin (Central Bank of Ireland); Wosser, Michael (Central Bank of Ireland)
    Abstract: Using a panel dataset of 27 developed economies, estimated quarterly from 1980-2016, we develop a flexible systemic banking crisis early warning system (EWS). Evidence is provided that fitted multivariate logit probabilities, estimated recursively against documented crises, yield more informative crisis signals than any single macroeconomic, credit aggregate or asset price variable does independently. When the model robustness techniques of Young and Holsteen (2017) are applied, even stronger crisis signals are generated. Deciding which variables to include in the model is determined by adopting a signals-based approach to each prospective indicator, with the most informative yet robust variables identified in terms of their performance according to noise-to-signal ratios, weighted noise-to-signal ratios and an Alessi and Detken (2011) “usefulness” measure. The latter takes policy-makers’ preferences for false versus missed signals into account. The approach ensures a parsimonious yet effective EWS yielding forwardlooking indicators that outperform all raw input indicators in crisis-signaling terms.
    Keywords: early warning system, systemic banking crises, macroprudential policy, model robustness, financial stability
    JEL: G01 G21 G28 E58
    Date: 2018–09

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