nep-ban New Economics Papers
on Banking
Issue of 2018‒12‒17
fifteen papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Cooperative banks and income inequality: Evidence from Italian provinces By Pierluigi Murro; Valentina Peruzzi
  2. Foreseen Risks By João F. Gomes; Marco Grotteria; Jessica Wachter
  3. Banks, debt and risk: assessing the spillovers of corporate taxes By Fatica, Serena; Heynderickx, Wouter; Pagano, Andrea
  4. Differentiated Impact of Spread Determinants by Personal Loan Category: Evidence from the Brazilian Banking Sector By José Valente; Mário Augusto; José Murteira
  5. Liquidity, Leverage, and Regulation Ten Years after the Global Financial Crisis By Adrian, Tobias; Kiff, John; Shin, Hyun Song
  6. Bank loan loss provisions, risk-taking and bank intangibles By Ozili, Peterson K
  7. Gross capital flows by banks, corporates and sovereigns By Stefan Avdjiev; Sebnem Kalemli-Ozcan; Luis Servén
  8. Does tax enforcement matter for the cost of bank loans? Evidence from the United States By Bermpei, Theodora; Kalyvas, Antonios Nikolaos
  9. Cross-Border Bank Flows and Monetary Policy By Ricardo Correa; Teodora Paligorova; Horacio Sapriza; Andrei Zlate
  10. The Agency of CoCos: Why Contingent Convertible Bonds Aren't for Everyone By Goncharenko, Roman; Ongena, Steven; Rauf, Asad
  11. Quantifying Cyber Risk in the Financial Services Industry By Santucci, Larry
  12. Freeze! Financial sanctions and bank responses By Efing, Matthias; Goldbach, Stefan; Nitsch, Volker
  13. Technological Innovation in Mortgage Underwriting and the Growth in Credit: 1985-2015 By Foote, Christopher L.; Loewenstein, Lara; Willen, Paul S.
  14. Uncertainty Shocks and Firm Creation: Search and Monitoring in the Credit Market By Thomas Brand; Marlène Isoré; Fabien Tripier
  15. Shock contagion, asset quality and lending behavior By Pham, Tho; Talavera, Oleksandr; Tsapin, Andriy

  1. By: Pierluigi Murro (LUISS University); Valentina Peruzzi (University of Trento and MoFiR, Italy)
    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
  2. By: João F. Gomes; Marco Grotteria; Jessica Wachter
    Abstract: Financial crises tend to follow rapid credit expansions. Causality, however, is far from obvious. We show how this pattern arises naturally when financial intermediaries optimally exploit economic rents that drive their franchise value. As this franchise value fluctuates over the business cycle, so too do the incentives to engage in risky lending. The model leads to novel insights on the effects of recent unconventional monetary policies in developed economies. We argue that bank lending might have responded less than expected to these interventions because they enhanced franchise value, inadvertently encouraging banks to pursue safer investments in low-risk government securities.
    JEL: G01 G18 G21 G32
    Date: 2018–11
  3. By: Fatica, Serena (European Commission – JRC); Heynderickx, Wouter (European Commission – JRC); Pagano, Andrea (European Commission – JRC)
    Abstract: Using bank balance sheet data, we find evidence that leverage and asset risk of European multinational banks in the crisis and post-crisis period is affected by corporate taxes in their host country as well as by the tax rates in all the jurisdictions where the banking group operates. Then, we evaluate the effects that establishing tax neutrality between debt and equity finance has on systemic risk. We show that the degree of coordination in implementing the hypothetical tax reform matters. In particular, a coordinated elimination of the tax advantage of debt would significantly reduce systemic losses in the event of a severe banking crisis. By contrast, uncoordinated tax reforms are not equally beneficial. This is because national tax policies generate spillovers through cross-border bank activities and tax-driven strategic allocation of debt and asset risk across group affiliates.
    Keywords: Corporate tax, Debt bias, Debt shifting, Multinational banks, Leverage
    JEL: E32 F41 F44
    Date: 2018–11
  4. By: José Valente (Faculty of Economics, University of Coimbra); Mário Augusto (CeBER and Faculty of Economics, University of Coimbra); José Murteira (CeBER and Faculty of Economics, University of Coimbra, and CEMAPRE)
    Abstract: The present article studies the determinants of banking spreads, allowing for the possibility that the impact of some of these determinants on spreads may differ according to the particular loan type. This concern is fostered by both theoretical and empirical evidence supporting the general idea that the hetero-geneity of banks’ loan portfolios should be taken into account when studying the drivers of spread. This approach is distinct from previous work in the liter-ature, usually utilizing a single interest margin per bank, in order to measure the impact of its determinants. Using a dataset of observations on various per-sonal loan categories and the Difference GMM approach, the present study es-timates that marginal effects of, respectively, banks’ risk aversion, credit risk, and market share on spreads differ significantly according to whether the loan is a consumer loan, a paycheck-linked credit line or a revolving credit line for individuals. These findings suggest, accordingly, that central banks and regula-tory agencies should observe the composition of banks’ loans portfolios when writing their policies aiming at spread reduction.
    Keywords: Spread; Personal loans; Financial sector.
    JEL: G21 C23 E44
    Date: 2018–12
  5. By: Adrian, Tobias; Kiff, John; Shin, Hyun Song
    Abstract: The financial system has undergone far-reaching changes since the global financial crisis of 2008. We cast those changes in terms of shifts in the manner in which financial intermediaries manage their balance sheets. We also discuss the regulatory reform agenda, and we review the impact of regulations on market liquidity and credit availability. The current evidence suggests that the financial system has become safer, at limited unintended cost.
    Date: 2018–12
  6. By: Ozili, Peterson K
    Abstract: This article investigates the relationship between discretionary loan loss provisions and bank intangibles among African banks. Prior studies have focused on how intangible assets affect firms’ profitability and valuation decisions with almost no focus on the role of loan loss provisions. We investigate whether banks increase (decrease) loan loss provisions in response to risks associated with investment in intangible assets. We find that discretionary loan loss provisions are inversely associated with bank intangible assets and change in intangible assets, but the inverse association is weakened in environments with strong investor protection. We observe that income smoothing is reduced among banks that have large intangible asset investment. Moreover, income smoothing is pronounced among banks that have few intangible asset investments but this behaviour is reduced for banks in environments with strong minority shareholders right protection.
    Keywords: banks; income smoothing; financial institutions; financial reporting; intangible assets; loan loss provisions; signalling; bank valuation; risk; Africa,
    JEL: G21 G28 M2 M41 M42 M48
    Date: 2019–01–01
  7. By: Stefan Avdjiev; Sebnem Kalemli-Ozcan; Luis Servén
    Abstract: We construct a new data set of quarterly international capital flows by sector, with an emphasis on debt flows. Using our new data set, we establish four facts. First, the co-movement of capital inflows and outflows is driven by inflows and outflows vis-à-vis the domestic banking sector. Second, the procyclicality of capital inflows is driven by banks and corporates, whereas sovereigns' external liabilities move acyclically in advanced and countercyclically in emerging countries. Third, the procyclicality of capital outflows is driven by advanced countries' banks and emerging countries' sovereigns (reserves). Fourth, capital inflows and outflows decline for banks and corporates when global risk aversion (VIX) increases, whereas sovereign flows show no response. These facts are inconsistent with a large class of theoretical models.
    Keywords: quarterly capital flows, business cycles, external corporate and bank debt, sovereign debt, VIX, systemic risk, emerging markets
    JEL: F21 F41 O1
    Date: 2018–11
  8. By: Bermpei, Theodora; Kalyvas, Antonios Nikolaos
    Abstract: We examine the relationship between the tax enforcement effort of the internal revenue service (IRS) and the cost of bank loans in the US syndicated market. We measure tax enforcement by the rate of IRS audits and find that it decreases bank loan spreads. This finding holds in a series of robustness and sensitivity tests such as the use of alternative IRS tax enforcement measures, instrumental variable regressions, panel data estimations and a quasi-experimental framework of the Section 404b of the Sarbanes-Oxley (SOX) Act. We also find that the negative effect of IRS tax enforcement on loan spreads strengthens for smaller corporations. In addition, we show that stringent IRS tax enforcement decreases the probability that loan contracts will contain covenants. Overall, these findings suggest that banks acknowledge the informational and monitoring role of tax enforcement in the private debt market.
    Date: 2018–12–04
  9. By: Ricardo Correa; Teodora Paligorova; Horacio Sapriza; Andrei Zlate
    Abstract: We analyze the impact of monetary policy on bilateral cross-border bank flows using the BIS Locational Banking Statistics between 1995 and 2014. We find that monetary policy in the source countries is an important determinant of cross-border bank flows. In addition, we find evidence in favor of a cross-border bank portfolio channel. As relatively tighter monetary conditions in source countries erode the net worth and collateral values of domestic borrowers, banks reallocate their claims toward safer foreign counterparties. The cross-border reallocation of credit is more pronounced for banks in source countries with weaker financial sectors, which are likely to be more risk averse. Lastly, the reallocation is directed toward borrowers in safer countries, such as advanced economies or economies with an investment grade sovereign rating. By highlighting the effect of domestic monetary policy on foreign credit, this study enhances our understanding of the monetary policy transmission mechanism through global banks.
    Keywords: Bank lending ; Cross-border bank flows ; Monetary policy ; Portfolio rebalancing
    JEL: E52 F34 F36 G21
    Date: 2018–12–03
  10. By: Goncharenko, Roman; Ongena, Steven; Rauf, Asad
    Abstract: Most regulators grant contingent convertible bonds (CoCos) the status of equity. The theory, however, suggests that these securities can distort incentives via inducing debt overhang and risk shifting. In this paper, we therefore theoretically model how the degree of this distortion varies with bank risk. Our model predicts that riskier banks face higher debt overhang from CoCos. Next, analyzing a comprehensive database of CoCo issuance in Europe, we empirically test the predictions of our model. We find that banks with lower risk are more likely to issue CoCos than their riskier counterparts. Since in the current regulatory framework of Basel III banks are expected to raise equity prior to CoCo conversion, future debt overhang makes CoCos an expensive source of capital. Thus, riskier banks will opt for equity issuance over CoCos.
    Keywords: Bank Capital Structure; Basel III; CoCos; Contingent Convertible Bonds; Debt overhang
    JEL: G01
    Date: 2018–11
  11. By: Santucci, Larry (Federal Reserve Bank of Philadelphia)
    Abstract: The Consumer Finance Institute hosted a workshop in February 2017 featuring James Fox, partner and principal at PricewaterhouseCoopers (PwC) and a leading authority on cybersecurity in the financial services industry. He discussed the importance of measuring cyber risk, highlighted some challenges that financial institutions face in measuring cyber risk, and assessed several leading cyber-risk management methodologies. Fox also provided some recommendations for bank exams and insights into how federal agencies might begin to quantify systemic cyber risk. This paper summarizes Fox’s presentation and is supplemented by additional research.
    Keywords: cyber risk; cybersecurity; risk appetite; risk quantification
    JEL: G28 G32 L14
    Date: 2018–11–11
  12. By: Efing, Matthias; Goldbach, Stefan; Nitsch, Volker
    Abstract: We study the effects of financial sanctions on cross-border credit supply. Using a differences-in-differences approach to analyze eleven sanctions episodes between 2002 and 2015, we find that banks located in Germany reduce their positions in countries with sanctioned entities by 38%. The average German branch or subsidiary located outside Germany does not adjust its positions after the imposition of sanctions. For affiliated banks located in countries with low financial standards, we even observe a relative increase in credit supply. These effects are stronger if sanctions are only imposed by EU member states and not by the entire UN.
    Keywords: financial sanctions,law and finance,cross-border lending,international banking
    JEL: F51 G18 G28 G38 K33
    Date: 2018
  13. By: Foote, Christopher L. (Federal Reserve Bank of Boston); Loewenstein, Lara (Federal Reserve Bank of Cleveland); Willen, Paul S. (Federal Reserve Bank of Boston)
    Abstract: The application of information technology to finance, or “fintech,” is expected to revolutionize many aspects of borrowing and lending in the future, but technology has been reshaping consumer and mortgage lending for many years. During the 1990s computerization allowed mortgage lenders to reduce loan-processing times and largely replace human-based assessment of credit risk with default predictions generated by sophisticated empirical models. Debt-to-income ratios at origination add little to the predictive power of these models, so the new automated underwriting systems allowed higher debt-to-income ratios than previous underwriting guidelines would have typically accepted. In this way, technology brought about an exogenous change in lending standards, which helped raise the homeownership rate and encourage the conversion of rental properties to owner-occupied ones, but did not have large effects on housing prices. Technological innovation in mortgage underwriting may have allowed the 2000s housing boom to grow, however, because it enhanced the ability of both borrowers and lenders to act on optimistic beliefs about future house-price growth.
    Keywords: Mortgage underwriting; housing cycle; technological change; credit boom;
    JEL: D53 G21 L85 R21 R31
    Date: 2018–12–07
  14. By: Thomas Brand; Marlène Isoré; Fabien Tripier
    Abstract: We develop a business cycle model where endogenous firm creation stems from two credit market frictions. First, entrepreneurs search for a lending relationship with a bank. Second, an optimal debt contract with monitoring is implemented. We analyze the interplay between both frictions, and embed it into an otherwise standard business cycle model, which we estimate with Bayesian techniques. We find that uncertainty shocks are a prime contributor to business cycle fluctuations in the US, not only for macro-financial aggregates but also for firm creation. Moreover, we point out that the credit search friction dampens the financial accelerator mechanism because default may imply the end of the lending relationship.
    Keywords: Uncertainty;Financial frictions;Search and matching;Business cycle;Firm creation;Firm dynamics
    JEL: D8 E3 E4 E5
    Date: 2018–11
  15. By: Pham, Tho; Talavera, Oleksandr; Tsapin, Andriy
    Abstract: This paper exploits the geopolitical conflict in Eastern Ukraine as a negative shock to banking sector and examines the shock transmission. We find that banks with more loans in the conflict areas during the pre-conflict period face a higher level of bad loans in other markets after the shock. This effect is stronger in the regional markets which are closer to the conflict zone. We also find evidence for the “flight to headquarters” effect in post-conflict lending. Specifically, while more affected banks tend to cut their credit supply, the larger contraction is observed in regional markets located farther from headquarters.
    JEL: G01 G21
    Date: 2018–11–29

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