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on Banking |
| By: | Dieter Wang; Iman van Lelyveld; Julia Schaumburg |
| Abstract: | This paper revisits the credit spread puzzle in bank CDS spreads from the perspective of information contagion. The puzzle, rst detected in corporate bonds, consists of two stylized facts: Structural determinants of credit risk not only have low explanatory power but also fail to capture a systematic common factor in the residuals (Collin-Dufresne et al., 2001). For the case of banks, we hypothesize that the puzzle exists because of omitted network effects. We therefore extend the structural models to account for information spillovers based on bank business model similarities. To capture this channel, we propose and construct a new intuitive measure for portfolio overlap using the complete asset holdings of the largest banks in the Eurozone. Incorporating the network information into the structural model for bank credit spreads increases explanatory power and explains the systemic common factor in the residuals. |
| Keywords: | Information contagion; credit spread puzzle; bank business model similarities; portfolio overlap measure; dynamic network effects model |
| JEL: | G01 G21 C32 C33 C38 |
| Date: | 2018–12 |
| URL: | http://d.repec.org/n?u=RePEc:dnb:dnbwpp:619&r=all |
| By: | Mikael Béatriz; Jérôme Coffinet; Théo Nicolas |
| Abstract: | Using a unique panel design that enables to control for bank, firm, market and loan heterogeneities, we confirm that relationship lenders charge higher rates in good times and lower rates in bad times. However, we show that risky single-bank firms do not benefit from this insurance mechanism and are "held-up" by relationship lenders. Local bankcompetition and higher non-bank finance dependence alleviate this information-monopolistic behavior. Finally, long-term loans and small, non-trading-oriented and well capitalized banks drive the benefits of relationship lending. |
| Keywords: | relationship lending, financial crisis, interest rates, bank lending channel, SME, competition. |
| JEL: | D82 E32 E51 G01 G21 |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:bfr:banfra:705&r=all |
| By: | Vincent Bouvatier (EconomiX - UPN - Université Paris Nanterre - CNRS - Centre National de la Recherche Scientifique); Laetitia Lepetit (LAPE - Laboratoire d'Analyse et de Prospective Economique - IR SHS UNILIM - Institut Sciences de l'Homme et de la Société - UNILIM - Université de Limoges); Pierre-Nicolas Rehault (LAPE - Laboratoire d'Analyse et de Prospective Economique - IR SHS UNILIM - Institut Sciences de l'Homme et de la Société - UNILIM - Université de Limoges); Frank Strobel (University of Birmingham [Birmingham]) |
| Abstract: | We highlight caveats arising in the application of traditional ROA-based Z-scores for the measurement of bank insolvency risk, develop alternative Z-score measures to resolve these issues , and make recommendations for best practice for the US/Europe based on the experience of the …nancial crisis of 2007-2008. Using a probabilistic approach (i) our novel regulatory capital Z-score dominates traditional Z-score measures for both US/Europe; (ii) Z-scores computed with exponentially weighted moments dominate those with moving moments for the US sample, but not for Europe. For both US/Europe, using a multivariate logit approach (i) allows computation of augmented Z-scores that provide probabilities of distress that better discriminate between distressed/surviving banks than the probabilistic approach; (ii) suggests that the ROA-based Z-score using current values of the capital-asset ratio is best, calculated either with moving or exponentially weighted moments. |
| Keywords: | bank,insolvency risk,Z-score,risk measure |
| Date: | 2018–11–28 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:hal-01937929&r=all |
| By: | Juan Ignacio Pe\~na |
| Abstract: | We present a limits-to-arbitrage model to study the impact of securitization, leverage and credit risk protection on the cyclicity of bank credit. In a stable bank credit situation, no cycles of credit expansion or contraction appear. Unlevered securitization together with mis-pricing of securitized assets increases lending cyclicality, favoring credit booms and busts. Leverage changes the state of affairs with respect to the simple securitization. First, the volume of real activity and banking profits increases. Second, banks sell securities when markets decline. This selling puts further pressure on falling prices. The mis-pricing of credit risk protection or securitized assets influences the real economy. Trading in these contracts reduces the amount of funding available to entrepreneurs, particularly to high-credit-risk borrowers. This trading decreases the liquidity of the securitized assets, and especially those based on investments with high credit risk. |
| Date: | 2019–01 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1901.00177&r=all |
| By: | Nicolas Bédard; Pierre-Carl Michaud |
| Abstract: | Because retired households cannot adjust quickly to shocks, for example by working more, they represent a vulnerable group when credit conditions deteriorate. We analyze the evolution of debt among households nearing retirement in Canada over the period 1999-2016. First, we find that debt as a ratio of income has risen considerably over that period and debt as a fraction of assets has also doubled even tough assets remain roughly five times as large as debt. Second, we report that mortgage debt has risen the most but that average mortgage payments have remained relatively constant over the period due to the downward trend in borrowing costs. Finally, we find that a small but significant fraction households are playing with fire, being vul-nerable to a sudden rise on borrowing costs or a drop in house values which could jeopardize their standard of living in retirement. |
| Keywords: | Household debt,mortgages,credit,retirement, |
| JEL: | D14 D18 J14 |
| Date: | 2018–12–25 |
| URL: | http://d.repec.org/n?u=RePEc:cir:cirwor:2018s-42&r=all |
| By: | Lucia Cipolina-Kun; Ignacio Ruiz; Mariano Zero-Medina Laris |
| Abstract: | The use of CVA to cover credit risk is widely spread, but has its limitations. Namely, dealers face the problem of the illiquidity of instruments used for hedging it, hence forced to warehouse credit risk. As a result, dealers tend to offer a limited OTC derivatives market to highly risky counterparties. Consequently, those highly risky entities rarely have access to hedging services precisely when they need them most. In this paper we propose a method to overcome this limitation. We propose to extend the CVA risk-neutral framework to compute an initial margin (IM) specific to each counterparty, which depends on the credit quality of the entity at stake, transforming the effective credit rating of a given netting set to AAA, regardless of the credit rating of the counterparty. By transforming CVA requirement into IM ones, as proposed in this paper, an institution could rely on the existing mechanisms for posting and calling of IM, hence ensuring the operational viability of this new form of managing warehoused risk. The main difference with the currently standard framework is the creation of a Specific Initial Margin, that depends in the credit rating of the counterparty and the characteristics of the netting set in question. In this paper we propose a methodology for such transformation in a sound manner, and hence this method overcomes some of the limitations of the CVA framework. |
| Date: | 2018–12 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1812.09407&r=all |
| By: | Acosta-Smith, Jonathan (Bank of England) |
| Abstract: | Are low interest rates more likely to incentivise greater bank risk-taking? This is the question we seek to answer. Using a model in which banks raise funds from depositors to create an investment portfolio which can differ in its risk and return, we suggest so. In particular, we show that lowering the interest rate makes it more likely banks will make risky investments. This is because reducing the interest rate makes safer assets less attractive, while increasing the relative gains from gambling. We show that risk-taking is highly dependent on banks’ skin-in-the-game, as banks always ignore the full extent of losses on bankruptcy. Raising the interest rate has a similar effect. It reinforces this behaviour, as by increasing the yield on the portfolio, banks have more to lose on bankruptcy. |
| Keywords: | Banking; monetary policy; risk-taking; interest rates |
| JEL: | E44 E58 G21 |
| Date: | 2018–12–21 |
| URL: | http://d.repec.org/n?u=RePEc:boe:boeewp:0774&r=all |
| By: | William F. Bassett; Jose M. Berrospide |
| Abstract: | We investigate one channel through which the annual bank stress tests, as part of the Federal Reserve’s Comprehensive Capital Analysis and Review (CCAR) review, could unexpectedly affect the provision of bank credit. To quantify the impact of the stress tests on lending, we compare the capital implied by the supervisory stress tests with the level of capital implied by the banks’ own models, a measure we call the capital gap. We then study the impact of the capital gap on the loan growth of BHCs subject to supervisory or bank-run stress tests. Consistent with previous results in the bank capital literature, we find evidence that better capitalized banks have higher loan growth. The additional capital implied by the supervisory stress tests (capital gap) does not appear to unduly restrict loan growth. |
| Keywords: | Bank capital ; Bank lending ; Regulatory capital ; Stress tests |
| JEL: | G28 G21 |
| Date: | 2018–12–21 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2018-87&r=all |
| By: | Huayta, Katia (Superintendencia de Banca, Segurosy AFP); Garcia, Antonella (Superintendencia de Banca, Segurosy AFP); Sotomayor, Narda (Superintendencia de Banca, Segurosy AFP) |
| Abstract: | This paper examines the relationship between competition and financial stability for Peruvian microfinance institutions, during the 2002-2016 period. Using the Panzar and Rosse H-statistic as well as the Boone indicator for the evaluation of competition, and the Roy Z-score as a proxy for financial stability, we find a non-linear relationship (inverted U-shaped) between competition and financial stability, which validates the Martínez-Miera and Repullo approach. Furthermore, we find that competition in the Peruvian microfinance system might increase even when market concentration increases; and, according to the H-statistic, the market structure that best fits this system is monopolistic competition. |
| Keywords: | SVARs, Competition, Panzar and Rosse H-statistic, Boone indicator, relevant market, financial stability, Z-score, microfinance |
| JEL: | L11 L22 L25 G21 |
| Date: | 2018–11 |
| URL: | http://d.repec.org/n?u=RePEc:rbp:wpaper:2018-005&r=all |
| By: | Sanjiv R. Das; Kris James Mitchener; Angela Vossmeyer |
| Abstract: | We employ a unique hand-collected dataset and a novel methodology to examine systemic risk before and after the largest U.S. banking crisis of the 20th century. Our systemic risk measure captures both the credit risk of an individual bank as well as a bank’s position in the network. We construct linkages between all U.S. commercial banks in 1929 and 1934 so that we can measure how predisposed the entire network was to risk, where risk was concentrated, and how the failure of more than 9,000 banks during the Great Depression altered risk in the network. We find that the pyramid structure of the commercial banking system (i.e., the network’s topology) created more inherent fragility, but systemic risk was nevertheless fairly dispersed throughout banks in 1929, with the top 20 banks contributing roughly 18% of total systemic risk. The massive banking crisis that occurred between 1930–33 raised systemic risk per bank by 33% and increased the riskiness of the very largest banks in the system. We use Bayesian methods to demonstrate that when network measures, such as eigenvector centrality and a bank’s systemic risk contribution, are combined with balance sheet data capturing ex ante bank default risk, they strongly predict bank survivorship in 1934. |
| JEL: | E42 E44 G01 G18 G21 L1 N12 N22 |
| Date: | 2018–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:25405&r=all |
| By: | Markus K. Brunnermeier; Yann Koby |
| Abstract: | The “reversal interest rate” is the rate at which accommodative monetary policy reverses its intended effect and becomes contractionary for lending. It occurs when banks' asset revaluation from duration mismatch is more than offset by decreases in net interest income on new business, lowering banks' net worth and tightening their capital constraints. The determinants of the reversal interest rate are 1) banks' fixed-income holdings, 2) the strictness of capital constraints, 3) the degree of pass-through to deposit rates, and 4) the initial capitalization of banks. Furthermore, quantitative easing increases the reversal interest rate and should only be employed after interest rate cuts are exhausted. Over time the reversal interest rate creeps up since asset revaluation fades out as fixed-income holdings mature while net interest income stays low. We calibrate a New Keynesian model that embeds our banking frictions and show that the economics behind the reversal interest rate carry through general equilibrium. |
| JEL: | E43 E44 E52 G21 |
| Date: | 2018–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:25406&r=all |
| By: | Asano, Koji |
| Abstract: | We study debt funding markets in which lenders can invest in financial expertise to reduce a cost of acquiring information about the underlying collateral. If the pledgeability of corporate income is low, lenders' information acquisition enhances liquidity, but they reduce expertise acquisition because of a hold-up problem. By contrast, if the pledgeability is high, information acquisition reduces liquidity, so that lenders can extract rents from firms by investing in expertise and creating fear of illiquidity. In this case, as information about collateral decays over time, there is growth in credit and expertise acquisition, making the economy more vulnerable to an aggregate shock. These results suggest that the growth of the financial sector is associated with prevalence of opaque assets and a subsequent crisis. |
| Keywords: | expertise, collateral, information acquisition, information sensitivity, liquidity |
| JEL: | D83 E44 G01 |
| Date: | 2018–12–25 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:90830&r=all |
| By: | Tamas Csabafi (University of Missouri-St. Louis - Department of Economics); Max Gillman (University of Missouri-St. Louis; IEHAS, Budapest; CERGE-EI, Prague); Ruthira Naraidoo (Department of Economics - University of Pretoria, South Africa) |
| Abstract: | The paper extends a standard two-country international real business cycle model to include financial intermediation by banks of loans and government bonds. Taking in household deposits from home and abroad, the loans are produced by the bank in a Cobb-Douglas production approach such that a bank productivity shock can explain financial data moments. The paper contributes an explanation, for both the US relative to the Euro-area, and the US relative to China, of cross-country correlations of loan rates, deposit rates, and the loan premia. It provides a sense in which financial retrenchment resulted in the US following the 2008 bank crisis, and how the Euro-area and China reacted. The paper contributes evidence of how the Euro-area has been more financially integrated with the US, and China less financially integrated, with the Euro-area becoming more financially integrated after the 2008 crisis, and China becoming less so integrated. |
| Keywords: | International Real Business Cycles, Financial Intermediation, Credit Spread, Bank Productivity, 2008 Crisis |
| JEL: | E13 E32 E44 F41 |
| Date: | 2018–11 |
| URL: | http://d.repec.org/n?u=RePEc:has:discpr:1830&r=all |
| By: | Guillaume Rocheteau; Tsz-Nga Wong; Cathy Zhang |
| Abstract: | We study optimal monetary policy in a monetary model of internal and external finance with bank entry and endogenous formation of lending relationships through search and bargaining. Following an unanticipated destruction of relationships, optimal monetary policy under com- mitment lowers the interest rate in the aftermath of the shock and uses forward guidance to promote bank entry and rebuild relationships. Absent commitment, forward guidance fails to anchor inflation expectations and optimal policy is subject to a deflationary bias that delays recovery. If there is a temporary freeze in relationship creation, the interest rate is set at the zero lower bound for some period of time. |
| Keywords: | credit relationships, banks, optimal monetary policy |
| JEL: | D83 E32 E51 |
| Date: | 2018–12 |
| URL: | http://d.repec.org/n?u=RePEc:pur:prukra:1306&r=all |
| By: | Nadine M Walters; Conrad Beyers; Gusti van Zyl; Rolf van den Heever |
| Abstract: | We present a network-based framework for simulating systemic risk that considers shock propagation in banking systems. In particular, the framework allows the modeller to reflect a top-down framework where a shock to one bank in the system affects the solvency and liquidity position of other banks, through systemic market risks and consequential liquidity strains. We illustrate the framework with an application using South African bank balance sheet data. Spikes in simulated assessments of systemic risk agree closely with spikes in documented subjective assessments of this risk. This indicates that network models can be useful for monitoring systemic risk levels. The model results are sensitive to liquidity risk and market sentiment and therefore the related parameters are important considerations when using a network approach to systemic risk modelling. |
| Date: | 2018–11 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1811.04223&r=all |
| By: | Kyungmin Kim; Antoine Martin; Ed Nosal |
| Abstract: | Large-scale asset purchases by the Federal Reserve as well as new Basel III banking regulations have led to important changes in U.S. money markets. Most notably the interbank market has essentially disappeared with the dramatic increase in excess reserves held by banks. We build a model in the tradition of Poole (1968) to study whether interbank market activity can be revived if the supply of excess reserves is decreased sufficiently. We show that it may not be possible to revive the market to pre-crisis volumes due to costs associated with recent banking regulations. Although the volume of interbank trading may initially increase as excess reserves continue to decline, the new regulations may engender changes in market structure that result in interbank trading being completely replaced by non-bank lending to banks when excess reserves become scarce. This non-monotonic response of interbank trading volume to reductions in excess reserves may lead to misleading forecasts about future fed funds prices and quantities when/if the Fed begins to normalize their balance sheet by reducing excess reserves. |
| Keywords: | Balance sheet costs ; Interbank market ; Monetary policy implementation |
| JEL: | E42 E58 |
| Date: | 2018–12–21 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2018-88&r=all |
| By: | International Monetary Fund |
| Abstract: | The financial system has been resilient through the severe recession. Banks and investment funds dominate Brazil’s financial system landscape. The banking sector has continued to be well-capitalized, profitable, and liquid. Profitability has been supported by prudent lending standards, high interest margins and robust fee income, despite record loan losses. Outstanding nonperforming loans have increased marginally during the recession largely because banks have actively written off bad loans. The investment fund industry has also been solid, enjoying a steady growth of assets under management without experiencing net outflows, in aggregate, during the recession. Market-based indicators point to relatively low levels of systemic risk in 2017. However, the outlook for the nonbank sector will become more challenging in the environment of lower interest rates, as lower returns will affect investment income and a search for yield may increase risk-taking. |
| Date: | 2018–11–30 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfscr:18/344&r=all |
| By: | Leo de Haan; Robert Vermeulen |
| Abstract: | This paper documents how sovereign debt ratings shape euro area cross-border holdings of euro area sovereign debt, using granular sectoral security holdings statistics for the period 2009Q4 until 2016Q1. Credit risk is the main risk for bond investors when investing in bonds that are issued in the same currency as the currency of the investor's home country. Sovereign debt ratings provided by rating agencies give investors key information on the creditworthiness of governments. The results in this paper show that investors respond differently to credit ratings. In particular, we find that investors from core euro area countries respond more to credit ratings than investors from peripheral euro area countries. The results show that banks, insurance companies, pension funds and investment funds in core countries all significantly increase their bond holdings when credit ratings improve. In peripheral countries we document only a positive effect for pension funds and find no relationship between ratings and bond holdings for the other investor sectors. Finally, we find non-linearities in the relationship between bond holdings and credit ratings. |
| Keywords: | euro area; asset allocation; sovereign debt; sovereign debt rating |
| JEL: | F3 G11 G15 G2 |
| Date: | 2018–12 |
| URL: | http://d.repec.org/n?u=RePEc:dnb:dnbwpp:620&r=all |
| By: | Matías Lamas (Banco de España); Javier Mencía (Banco de España) |
| Abstract: | We study determinants of sovereign portfolios of Spanish banks over a long time-span, starting in 2008. Our findings challenge the view that banks engaged in moral hazard strategies to exploit the regulatory treatment of sovereign exposures. In particular, we show that being a weakly capitalized bank is not related to higher holdings of domestic sovereign debt. While a strong link is present between central bank liquidity support and sovereign holdings, opportunistic strategies or reach-for-yield behavior appear to be limited to the non-domestic sovereign portfolio of well-capitalized banks, which might have taken advantage of their higher risk-bearing capacity to gain exposure (via central bank liquidity) to the set of riskier sovereign bonds. Furthermore, we document that financial fragmentation in EMU markets has played a key role in reshaping sovereign portfolios of banks. Overall, our results have important implications for the ongoing discussion on the optimal design of the risk-weighted capital framework of banks. |
| Keywords: | banks’ sovereign holdings, sovereign crisis, moral hazard, central bank liquidity, EMU financial fragmentation |
| JEL: | G01 G21 H63 |
| Date: | 2018–12 |
| URL: | http://d.repec.org/n?u=RePEc:bde:wpaper:1843&r=all |
| By: | Qiang Zhang; Rui Luo; Yaodong Yang; Yuanyuan Liu |
| Abstract: | Volatility is a quantity of measurement for the price movements of stocks or options which indicates the uncertainty within financial markets. As an indicator of the level of risk or the degree of variation, volatility is important to analyse the financial market, and it is taken into consideration in various decision-making processes in financial activities. On the other hand, recent advancement in deep learning techniques has shown strong capabilities in modelling sequential data, such as speech and natural language. In this paper, we empirically study the applicability of the latest deep structures with respect to the volatility modelling problem, through which we aim to provide an empirical guidance for the theoretical analysis of the marriage between deep learning techniques and financial applications in the future. We examine both the traditional approaches and the deep sequential models on the task of volatility prediction, including the most recent variants of convolutional and recurrent networks, such as the dilated architecture. Accordingly, experiments with real-world stock price datasets are performed on a set of 1314 daily stock series for 2018 days of transaction. The evaluation and comparison are based on the negative log likelihood (NLL) of real-world stock price time series. The result shows that the dilated neural models, including dilated CNN and Dilated RNN, produce most accurate estimation and prediction, outperforming various widely-used deterministic models in the GARCH family and several recently proposed stochastic models. In addition, the high flexibility and rich expressive power are validated in this study. |
| Date: | 2018–11 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1811.03711&r=all |
| By: | Matyas Barczy; Adam Dudas; Jozsef Gall |
| Abstract: | We derive new approximations for the Value at Risk and the Expected Shortfall at high levels of loss distributions with positive skewness and excess kurtosis, and we describe their precisions for notable ones such as for exponential, Pareto type I, lognormal and compound (Poisson) distributions. Our approximations are motivated by extensions of the so-called Normal Power Approximation, used for approximating the cumulative distribution function of a random variable, incorporating not only the skewness but the kurtosis of the random variable in question as well. We show the performance of our approximations in numerical examples and we also give comparisons with some known ones in the literature. |
| Date: | 2018–11 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1811.06361&r=all |