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on Banking |
| By: | Mikel Bedayo (Banco de España); Ángel Estrada (Banco de España); Jesús Saurina (Banco de España) |
| Abstract: | In this paper we analyze the effect of bank capital on lending expansion and contraction for nearly 150 years in Spain. We fi rst build up thoroughly a measure of bank leverage (i.e. the capital to assets ratio) for the Spanish banking sector starting in year 1880. Then, we run a proper econometric test to analyze the impact that bank capital levels have on lending cycles, controlling for other determinants of credit growth. We do fi nd robust empirical evidence of an asymmetric relationship between bank capital and credit cycle. In particular, an increase in the bank capital before expansions reduces credit growth while it increases credit growth when the recession arrives. Conversely, a too depleted level of bank capital when entering in a recession has a severe impact on lending (i.e. may bring about a deep credit crunch) with quite negative and lasting effects in the economy and the wellbeing of the society as a whole. The paper is particularly useful to support macroprudential policies (dynamic provisions and the countercyclical capital buffer) that have been very recently put in place as they will help to smooth the credit cycle. The experience of Spain over more than a century, with very marked lending cycles, provides a fertile ground for analyzing and supporting them, not only based on the last lending cycle, but also on those occurred in the more distant past. |
| Keywords: | lending cycles, bank crisis, capital ratio, leverage ratio, macroprudential tools. |
| JEL: | G01 G21 N23 N24 |
| Date: | 2018–12 |
| URL: | http://d.repec.org/n?u=RePEc:bde:wpaper:1847&r=all |
| By: | Anat R. Admati (Graduate School of Business, Stanford University); Martin F. Hellwig (Max Planck Institute for Research on Collective Goods) |
| Abstract: | We take issue with claims that the funding mix of banks, which makes them fragile and crisis-prone, is efficient because it reflects special liquidity benefits of bank debt. Even aside from neglecting the systemic damage to the economy that banks’ distress and default cause, such claims are invalid because banks have multiple small creditors and are unable to commit effectively to their overall funding mix and investment strategy ex ante. The resulting market outcomes under laissez-faire are inefficient and involve excessive borrowing, with default risks that jeopardize the purported liquidity benefits. Contrary to claims in the literature that “equity is expensive” and that regulation requiring more equity in the funding mix entails costs to society, such regulation actually helps create useful commitment for banks to avoid the inefficiently high borrowing that comes under laissez-faire. Effective regulation is beneficial even without considering systemic risk; if such regulation also reduces systemic risk, the benefits are even larger. |
| Keywords: | Liquidity in banking, leverage in banking, banking regulation, capital structure, capital regulations, agency costs, commitment, contracting, maturity rat race, leverage ratchet effect, Basel |
| JEL: | D53 D61 G01 G18 G21 G24 G28 G32 G38 H81 K23 |
| Date: | 2018–11 |
| URL: | http://d.repec.org/n?u=RePEc:mpg:wpaper:2018_13&r=all |
| By: | Hiroki Toyoda (Institute of Economic Research, Kyoto University) |
| Abstract: | To study the relationship between bank runs and asset prices, we consider a banking model that incorporates a secondary market for long-term assets. Adverse selection arises in this market because banks are better informed about the quality of their assets than other market participants. The model generates multiple equilibria. In one equilibrium, bank runs cannot occur. In another equilibrium, asset prices can be low and bank runs can occur. This can be interpreted as a financial crisis. In this framework, a liquidity requirement for banks might cause bank runs. |
| Keywords: | Bank runs, Asset market, Adverse selection |
| JEL: | D82 G01 G21 |
| Date: | 2018–03 |
| URL: | http://d.repec.org/n?u=RePEc:kyo:wpaper:988&r=all |
| By: | Dean Corbae; Pablo D'Erasmo |
| Abstract: | We develop a model of banking industry dynamics to study the quantitative impact of capital requirements on equilibrium bank risk taking, commercial bank failure, interest rates on loans, and market structure. We propose a market structure where big banks with market power interact with small, competitive fringe banks. Banks face idiosyncratic funding shocks in addition to aggregate shocks to the fraction of performing loans in their portfolio. A nontrivial bank size distribution arises out of endogenous entry and exit, as well as banks' buffer stock of net worth. We show the model predictions are consistent with untargeted business cycle properties, the bank lending channel, and empirical studies of the role of concentration on financial stability. We then conduct a series of counterfactuals (including countercyclical and size contingent (e.g. SIFI) capital requirements). We find that regulatory policies can have an important impact on market structure in the banking industry which, along with selection effects, can generate changes in allocative efficiency. |
| JEL: | E44 G21 L11 |
| Date: | 2019–01 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:25424&r=all |
| By: | Simplice A. Asongu (Yaoundé/Cameroon); Nicholas M. Odhiambo (Pretoria, South Africa) |
| Abstract: | There is a growing body of evidence that interest rate spreads in Africa are higher for big banks compared to small banks. One concern is that big banks might be using their market power to charge higher lending rates as they become larger, more efficient, and unchallenged. In contrast, several studies found that when bank size increases beyond certain thresholds, diseconomies of scale are introduced that lead to inefficiency. In that case, we also would expect to see widened interest margins. This study examines the connection between bank size and efficiency to understand whether that relationship is influenced by exploitation of market power or economies of scale. Using a panel of 162 African banks for 2001–2011, we analyzed the empirical data using instrumental variables and fixed effects regressions, with overlapping and non-overlapping thresholds for bank size. We found two key results. First, bank size increases bank interest rate margins with an inverted U-shaped nexus. Second, market power and economies of scale do not increase or decrease the interest rate margins significantly. The main policy implication is that interest rate margins cannot be elucidated by either market power or economies of scale. Other implications are discussed. |
| Keywords: | Sub-Saharan Africa; banks; lending rates; efficiency; Quiet Life Hypothesis |
| JEL: | E42 E52 E58 G21 G28 |
| Date: | 2018–01 |
| URL: | http://d.repec.org/n?u=RePEc:agd:wpaper:18/056&r=all |
| By: | Anastasia Cozarenco; Valentina Hartarska; Ariane Szafarz |
| Abstract: | The costs and benefits of subsidized microfinance are still a controversial topic. We evaluate how subsidies affect the cost-efficiency of microfinance institutions (MFIs). At the same time, we account for endogenous self-selection into the business models of credit-only versus credit-plus-deposit MFIs. Our findings draw a contrasting picture. First, they suggest that unsubsidized credit-plus-deposit MFIs have achieved optimal capacity and therefore constitute the most cost-efficient group of institutions in our sample. Second, the unsubsidized credit-only MFIs are the farthest away from their minimum cost. Between the two polar cases, there are subsidized institutions, among which the credit-only ones are closer to optimal capacity. Our results reveal the redundancy between subsidization and deposit-taking in microfinance. In conclusion, combining funds from donors and depositors tends to harm cost-efficiency. |
| Keywords: | Microfinance; Cost efficiency; Scale economies; Subsidies; Deposit accounts |
| JEL: | O14 D24 G21 O16 F35 |
| Date: | 2019–01–07 |
| URL: | http://d.repec.org/n?u=RePEc:sol:wpaper:2013/280911&r=all |
| By: | Gietl, Daniel (LMU Munich) |
| Abstract: | Empirical evidence suggests that managerial overconfidence and government guarantees contribute substantially to excessive risk-taking in the banking industry. This paper incorporates managerial overconfidence and limited bank liability into a principal-agent model, where the bank manager unobservably chooses effort and risk. An overconfident manager overestimates the returns to effort and risk. We find that managerial overconfidence necessitates an intervention into banker pay. This is due to the bank\'s exploitation of the manager\'s overvaluation of bonuses, which causes excessive risk-taking in equilibrium. Moreover, we show that the optimal bonus tax rises in overconfidence, if risk-shifting incentives are sufficiently large. Finally, the model indicates that overconfident managers are more likely to be found in banks with large government guarantees, low bonus taxes, and lax capital requirements. |
| Keywords: | overconfidence; bailouts; banking regulation; bonus taxes; |
| JEL: | H20 H30 G28 |
| Date: | 2018–12–20 |
| URL: | http://d.repec.org/n?u=RePEc:rco:dpaper:132&r=all |
| By: | G. Gulsun Akin (Bogazici University); Ahmet Faruk Aysan; Ezgi Özer; Levent Yildiran |
| Abstract: | Using a discrete choice random utility model and unique data from a nationwide consumer survey, we show that consumers view credit cards as highly differentiated products with both bank-level and card-level nonprice features. They select their credit cards by predominantly considering these nonprice features. Although they charge higher prices, the majority of consumers choose private banks as issuers due to their bank-level and card-level nonprice benefits. Consumers who prioritize prices tend to choose participation or public banks. Product differentiation and bundling seem to underlie banks’ market power in the Turkish credit card market. Large private banks and public banks reap the benefits of bundling more than the other banks. Of card-level nonprice features, installments, bonuses/rewards/miles, and the prestige of the card seem to be particularly effective in consumers’ decisions. We argue that this highly differentiated nature of credit cards can be an alternative explanation for the credit card pricing puzzles. |
| Date: | 2018–11–19 |
| URL: | http://d.repec.org/n?u=RePEc:erg:wpaper:1258&r=all |
| By: | Gortner, Paul; Massenot, Baptiste |
| Abstract: | Higher capital ratios are believed to improve system-wide financial stability through three main channels: (i) higher loss-absorption capacity, (ii) lower moral hazard, (iii) stabilization of the financial cycle if capital ratios are increased during good times. We examine these mechanisms in a laboratory asset market experiment with indebted participants. We find support for the loss-absorption channel: higher capital ratios reduce the bankruptcy rate. However, we do not find support for the moral hazard channel. Higher capital ratios (insignificantly) increase asset price bubbles, an aggregate measure of excessive risk-taking. Additional evidence suggests that bankruptcy aversion explains this surprising result. Finally, the evidence supports the idea that higher capital ratios in good times stabilize the financial cycle. |
| JEL: | G28 E58 |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:safewp:239&r=all |
| By: | Stéphane Auray (ENSAI - Ecole Nationale de la Statistique et de l'Analyse de l'Information - Ensai, Ecole Nationale de la Statistique et de l'Analyse de l'Information, CREST - Centre de Recherche en Economie et Statistique [Bruz] - ENSAI - Ecole Nationale de la Statistique et de l'Analyse de l'Information [Bruz], ULCO - Université du Littoral Côte d'Opale); Aurélien Eyquem (GATE Lyon Saint-Étienne - Groupe d'analyse et de théorie économique - ENS Lyon - École normale supérieure - Lyon - UL2 - Université Lumière - Lyon 2 - UCBL - Université Claude Bernard Lyon 1 - Université de Lyon - UJM - Université Jean Monnet [Saint-Étienne] - Université de Lyon - CNRS - Centre National de la Recherche Scientifique); Xiaofei Ma (CREST - Centre de Recherche en Economie et Statistique [Bruz] - ENSAI - Ecole Nationale de la Statistique et de l'Analyse de l'Information [Bruz], UEVE - Université d'Évry-Val-d'Essonne) |
| Abstract: | We develop a two-country model with an explicitly microfounded interbank market and sovereign default risk. Calibrated to the core and the periphery of the Euro Area, the model gives rise to a debt-banks-credit loop that substantially amplifies the effects of financial shocks, especially for the periphery. We use the model to investigate the effects of a stylized public asset purchase program at the steady state and during a crisis. We find that it is more effective in stimulating the economy during a crisis, in particular for the periphery. |
| Keywords: | Recession,Interbank Market,Sovereign Default Risk,Asset Purchases |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:halshs-01942734&r=all |
| By: | Abu Taher, Sheikh; Uddin, Md. Kama |
| Abstract: | The objective of the paper is to review the use of big data analytics (BDA) in banks and non-banks financial institutions (BNBFI) in Bangladesh. Since the advent of information technology (IT), data collection for BNBFI becomes easy through various channels. As BNBFI conduct business through information, data plays essential role to take an accurate decision. Besides, literature suggests use of big data helps BNBFI to reduce customer churn rate, enhance loyalty, manage risk and increase revenue. BNBFI are leveraging big data to transform their processes, their organizations and soon, the entire industry. For this, the study attempts to explore the effect of BDA on the efficiency of BNBFI in Bangladesh using an explorative study. Since no study has been conducted until now, collection of data becomes difficult. However, data has been collected from extensive literature review, company websites, annual reports and formal conversation with the bank employees. The primary observations suggests, some BNBFIs use data analytics regarding customer through ATM transactions, debit and credit card use, online banking and generate the data from Internet and computer that has better performance than the banks which do not use it. But the performance, however, is not identified in which specific functions BNBFI can emphasize the most to promote efficiency and growth. Besides, the observation is preliminary in nature and needs further study to provide recommendation. |
| Keywords: | big data analytics,finance,efficiency,innovation |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:itsb18:190348&r=all |
| By: | Nitzan Tzur-Ilan (Bank of Israel) |
| Abstract: | This paper examines the effects of a Loan-to-Value (LTV) limit on households’ choices in the credit and housing markets. Using a large and novel micro database from Israel, including rich information on loans, borrowers and acquired assets, and using matching techniques, I find that the LTV limit had an effect on the mortgage contract terms (higher interest rates), but did not lead to credit rationing (no segment of the population is excluded from the market). The LTV limit induced borrowers to buy cheaper assets and to move farther from high demand areas to lower graded neighborhoods. The conclusion is that the LTV limit, the most common macroprudential policy tool, has an impact not only from a financial stability perspective, by reducing the leverage of households, but also affected their choices in the housing market. |
| Keywords: | LTV, macroprudential, mortgages, housing, regulation, central, banks |
| JEL: | E58 R1 R2 R3 |
| Date: | 2017–03 |
| URL: | http://d.repec.org/n?u=RePEc:boi:wpaper:2017.03&r=all |
| By: | Iryna Okolelova; Jacob Bikker |
| Abstract: | This paper investigates the impact of the SSM's launch on the market power of banks in the large euro area economies. We employ the Lerner index and the Boone estimator, non-structural measures that capture different aspects of competition. Using the results of the Lerner index, we find evidence of the significant decrease in market power for the ECB supervised entities in Austria, France, Germany and Spain. In a similar vein, the Boone indicator points toward an increase in competition among significant supervised entities of Austria, France, Germany, Italy and Spain. The evidence on changes for the total banking sector are mixed, whereas no significant effect is found for the banks remaining under national supervision. We do not find any support for significant increases in the market power of banks in Italy or Spain, suggesting that large increases in concentration do not necessarily result in anticompetitive conduct. |
| Keywords: | Banking; SSM; competition; market structure; concentration; Lerner index; Boone indicator |
| JEL: | G21 G28 L1 |
| Date: | 2018–12 |
| URL: | http://d.repec.org/n?u=RePEc:dnb:dnbwpp:621&r=all |
| By: | Barbiero, Francesca; Popov, Alexander; Wolski, Marcin |
| Abstract: | Using a pan-European data set of 8.5 million firms, this paper finds that firms with high debt overhang invest relatively more than otherwise similar firms if they are operating in sectors facing good global growth opportunities. At the same time, the positive impact of a marginal increase in debt on investment efficiency disappears if firm debt is already excessive, if it is dominated by short maturities, and during systemic banking crises. The results are consistent with theories of the disciplining role of debt, as well as with models highlighting the negative link between agency problems at firms and banks and investment efficiency. |
| Keywords: | Investment effciency,Debt overhang,Banking crises |
| JEL: | E22 E44 G21 H63 |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:eibwps:201808&r=all |