nep-ban New Economics Papers
on Banking
Issue of 2019‒02‒04
thirteen papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. The Leverage Ratio and Its Impact on Capital Regulation By Lukas Pfeifer; Martin Hodula; Libor Holub; Zdenek Pikhart
  2. Benign neglect of covenant violations: Blissful banking or ignorant monitoring? By Colonnello, Stefano; Koetter, Michael; Stieglitz, Moritz
  3. Bank shocks and firm performance: New evidence from the sovereign debt crisis By Marina-Eliza Spaliara; Serafeim Tsoukas; Luísa Farinha
  4. CoMap: mapping contagion in the euro area banking sector By Covi, Giovanni; Gorpe, Mehmet Ziya; Kok, Christoffer
  5. Bad Sovereign or Bad Balance Sheets? Euro Interbank Market Fragmentation and Monetary Policy, 2011-2015 By Gabrieli, Silvia; Labonne, Claire
  6. The transmission of unconventional monetary policy to bank credit supply: evidence from the TLTRO By António Afonso; Joana Sousa-Leite
  7. Fixed Sample Size as an Internal Control By Meirini, Dianita; Andari, Atik Tri; Aalin, Elmi Rakhma
  8. Foreign expansion, competition and bank risk By Faia, Ester; Laffitte, Sebastien; Ottaviano, Gianmarco I. P.
  9. Is the relation between lending interest rate and non-performing loans symmetric or asymmetric ? evidence from ARDL and NARDL By Bahruddin, Wan Athirah; Masih, Mansur
  10. Bank credit allocation and productivity: stylised facts for Portugal By Nuno Azevedo; Márcio Mateus; Álvaro Pina
  11. Off the Radar: Exploring the Rise of Shadow Banking in the EU By Martin Hodula
  12. Money, credit, monetary policy and the business cycle in the euro area: what has changed since the crisis? By Giannone, Domenico; Lenza, Michele; Reichlin, Lucrezia
  13. Transitioning to Alternative Structures for Housing Finance: An Update By Congressional Budget Office

  1. By: Lukas Pfeifer; Martin Hodula; Libor Holub; Zdenek Pikhart
    Abstract: The capital regulation reform package proposed for the EU banking sector envisages the introduction of a minimum leverage ratio as a (non-risk-weighted) prudential backstop. In this paper, we use Czech bank-level data to explore the implications of introducing a leverage ratio into the capital regulatory framework. Our results confirm that the capital and leverage ratios complement each other. On the other hand, if a minimum leverage ratio is binding on some institutions, the increase in macroprudential capital buffers does not necessarily lead to a real increase in the capital and resilience of those institutions. We therefore describe possible settings of the macroprudential leverage ratio that would maintain the effectiveness of macroprudential policy. Furthermore, we derive channels through which the capital and leverage ratios might be affected and test the functionality of those channels. We find that the leverage ratio is far less procyclical than the capital ratio.
    Keywords: Capital ratio, leverage ratio, macroprudential policy, regulation
    JEL: G21 G28
    Date: 2018–12
  2. By: Colonnello, Stefano; Koetter, Michael; Stieglitz, Moritz
    Abstract: Theoretically, bank's loan monitoring activity hinges critically on its capitalisation. To proxy for monitoring intensity, we use changes in borrowers' investment following loan covenant violations, when creditors can intervene in the governance of the firm. Exploiting granular bank-firm relationships observed in the syndicated loan market, we document substantial heterogeneity in monitoring across banks and through time. Better capitalised banks are more lenient monitors that intervene less with covenant violators. Importantly, this hands-off approach is associated with improved borrowers' performance. Beyond enhancing financial resilience, regulation that requires banks to hold more capital may thus also mitigate the tightening of credit terms when firms experience shocks.
    Keywords: bank monitoring,covenant violations,syndicated loans,business cycle
    JEL: G21 G32 G33 G34
    Date: 2019
  3. By: Marina-Eliza Spaliara; Serafeim Tsoukas; Luísa Farinha
    Abstract: Prior empirical investigations of corporate failures consider the effects of macroeconomic conditions and financial health, but the literature contains limited evidence of the real effects of the bank shocks caused by the sovereign debt crisis. Using a rich source of high-quality firm-bank matched data for 2005-2014, this study examines the real effects of bank shocks on firms’ survival prospects in Portugal. We first present evidence that a funding outflow is associated with a reduction in the credit supply. Furthermore, firms borrowing from banks exposed to the funding outflow are more likely to fail. We also uncover significant heterogeneity in firms’ financial positions and show that the negative effect of a funding shock is stronger for younger, higher-risk firms, and those that used their potential lines of bank credit.
    JEL: E44 F32 F34 G15 G21
    Date: 2018
  4. By: Covi, Giovanni; Gorpe, Mehmet Ziya; Kok, Christoffer
    Abstract: This paper presents a novel approach to investigate and model the network of euro area banks’ large exposures within the global banking system. Drawing on a unique dataset, the paper documents the degree of interconnectedness and systemic risk of the euro area banking system based on bilateral linkages. We then develop a Contagion Mapping (CoMap) methodology to study contagion potential of an exogenous default shock via counterparty credit and funding risks. We construct contagion and vulnerability indices measuring respectively the systemic importance of banks and their degree of fragility. Decomposing the results into the respective contributions of credit and funding shocks provides insights to the nature of contagion which can be used to calibrate bank-specific capital and liquidity requirements and large exposures limits. We find that tipping points shifting the euro area banking system from a less vulnerable state to a highly vulnerable state are a non-linear function of the combination of network structures and bank-specific characteristics. JEL Classification: D85, G17, G33, L14
    Keywords: interconnectedness, large exposures, macroprudential policy, network analysis, stress test, systemic risk
    Date: 2019–01
  5. By: Gabrieli, Silvia (Banque de France); Labonne, Claire (Federal Reserve Bank of Boston)
    Abstract: We measure the relative role of sovereign-dependence risk and balance sheet (credit) risk in euro area interbank market fragmentation from 2011 to 2015. We combine bank-to-bank loan data with detailed supervisory information on banks’ cross-border and cross-sector exposures. We study the impact of the credit risk on banks’ balance sheets on their access to, and the price paid for, interbank liquidity, controlling for sovereign-dependence risk and lenders’ liquidity shocks. We find that (i) high non-performing loan ratios on the GIIPS portfolio hinder banks’ access to the interbank market throughout the sample period; (ii) large sovereign bond holdings are priced in interbank rates from mid-2011 until the announcement of the OMT; (iii) the OMT was successful in closing this channel of cross-border shock transmission; it reduced sovereign-dependence and balance sheet fragmentation alike.
    Keywords: interbank market; credit risk; fragmentation; sovereign risk; country risk; credit rationing; market discipline
    JEL: E43 E58 G01 G15 G21
    Date: 2018–07–12
  6. By: António Afonso; Joana Sousa-Leite
    Abstract: We assess the transmission of the Targeted Longer-Term Refinancing Operations (TLTRO) to the bank credit supply for the Euro area (2014:05-2018:01) and for Portugal (2011:01-2018:01), using a panel data setup. For the Euro area, we find a positive relationship between the TLTRO and the amount of credit granted to the real economy. For the vulnerable countries, the effects of the TLTRO on the stock of credit increased from 2016 to 2017. Among the group of small banks, the effects are stronger in less vulnerable countries. We also find that competition has no statistically significant impact on the transmission of the TLTRO to the bank credit supply for the Euro area. For Portugal, using a difference-in-differences model, we find no statistically significant impact of the TLTRO on credit granted by banks. Finally, bidding banks set lower interest rates than non-bidding banks and the difference seems to be larger in 2017. In Portugal, the effects of the TLTRO on loan interest rates also increased from 2016 to 2017 and are stronger for small banks.
    JEL: C33 C87 E50 E51 E52 E58
    Date: 2019
  7. By: Meirini, Dianita; Andari, Atik Tri; Aalin, Elmi Rakhma
    Abstract: This study aims to analyze the effectiveness of internal control on two existing Community Banks in Tulungagung. According to Bank Indonesia rank, Tulungagung occupies the 1st position of the highest NPL in 2016. The effectiveness analysis of internal control is performed on the second Community Bank crediting system that includes qualitative and quantitative aspects analysis. Qualitative aspect analysis is based on Audit Standard applicable in Indonesia (AS) Section 319 Consideration of Internal Control in Audit of Financial Statements paragraph 07. Quantitative aspect analysis using Fixed Sample Size with a 95% confidence level and fault tolerance / DUPL (Desired Upper Precision Limit) = 5%. The result of the qualitative aspect shows the internal control system in both Community Banks is effective. It’s based on conformity between AS Section 319 and its implementation on both Community Bank. Total 20 questions for conformity analysis, 1st Community Bank for the next called BPR A is 80% appropriate, 2nd Community Bank for the next called BPR B is 60% appropriate. The rest questions are used as an attribute on quantitative analysis. The result of the quantitative aspect shows the internal control system in both Community Banks is not effective. This is because the AUPL (Achieved Upper Precision Limit) from three attribute samples analyzed exceed specified DUPL, that is: a) Authorization of credit approval documents AUPL = 18%, b) Completeness of supporting documents attached AUPL = 28%, and c) Verification of transaction correctness and correctness of ceiling calculation AUPL credit = 29%.
    Keywords: internal control; mixed method; fixed sample size
    JEL: E58 G21
    Date: 2019–01–05
  8. By: Faia, Ester; Laffitte, Sebastien; Ottaviano, Gianmarco I. P.
    Abstract: Using a novel dataset on the 15 European banks classified as G-SIBs from 2005 to 2014, we find that the impact of foreign expansion on risk is always negative and significant for most individual and systemic risk metrics. In the case of individual metrics, we also find that foreign expansion affects risk through a competition channel as the estimated impact of openings differs between host countries that are more or less competitive than the source country. The systemic risk metrics also decline with respect to expansion, though results for the competition channel are more mixed, suggesting that systemic risk is more likely to be affected by country or business models characteristics that go beyond and above the differential intensity of competition between source and host markets. Empirical results can be rationalized through a simple model with oligopolistic/oligopsonistic banks and endogenous assets/liabilities risk.
    Keywords: banks’ risk-taking; systemic risk; geographical expansion; gravity; diversification; competition; regulatory arbitrage
    JEL: G21 G32 L13
    Date: 2018–08
  9. By: Bahruddin, Wan Athirah; Masih, Mansur
    Abstract: Lending interest rate has an inherent implicit cost on the credit issued by banks with implication on loan defaults. In this regard, high level of non-performing loans ( NPLs) will depress economic growth owing to many banks refusing to lend. This paper makes the initial attempt to test the non-linear asymmetric relationships between lending interest rate and NPLs by using the NARDL approach and provides a direction of Granger causality between the lending interest rate and NPLs. Malaysia is used as a case study. The finding tends to indicate that lending interest rate and NPLs has an asymmetric relationship in the short-run and symmetric relationship in the long-run. This paper suggests that banks can improve their quality credit management by streamlining their collection process and the quality of customers in order to reduce the number of NPLs in the short-run. Besides, banks can keep their total risk low by diversifying their loan portfolios.
    Keywords: Lending interest rates, non-performing loans, ARDL, NARDL, Malaysia
    JEL: C22 C58 E44
    Date: 2018–12–31
  10. By: Nuno Azevedo; Márcio Mateus; Álvaro Pina
    Abstract: With a dataset covering 95% of total outstanding credit to non-financial corporations recorded in the Portuguese credit register, we investigate whether outstanding loans by resident banks to 64 economic sectors have been granted to the most productive firms. We find evidence of misallocation, which reflects the joint effects of credit supply and credit demand decisions taken over the course of time, and the adverse cyclical developments following the accumulation of imbalances in the Portuguese economy for a protracted period. In 2008-2016, the share of outstanding credit granted to firms with very low productivity (measured or inferred) was always substantial, peaking at 44% in 2013, and declining afterwards with the rebound in economic activity and the growing allocation of new loans towards lower risk firms and away from higher risk firms. Furthermore, we find that misallocation is associated with slower reallocation. The responsiveness of credit growth to firm relative productivity is much lower in sectors with relatively more misallocated credit and when banks have a high share of such credit in their portfolios.
    JEL: D24 G21 O16 O40 O47
    Date: 2018
  11. By: Martin Hodula
    Abstract: This paper uses novel ECB/Eurosystem data on non-bank financial intermediation to investigate the potential factors of shadow banking growth for a panel of 24 EU countries. Consistent with several strands of literature, the EU shadow banking system is found to be highly procyclical and positively related to increasing demand of long-term institutional investors, more stringent capital regulation, and faster financial development. In addition, the paper offers two findings that have not been reported in the literature. First, it shows that the relationship between monetary policy and shadow banking growth is level-dependent and may be determined by the relative magnitude of interest rates in the economy. In this respect, two main motives driving the relationship are identified - the "funding cost" motive and the "search for yield" motive. Second, the driving forces of shadow banking differ between the old and new EU countries, largely due to the missing legal framework for securitization in the new members.
    Keywords: European Union, monetary policy, panel data analysis, shadow banking
    JEL: E44 E52 G21 G23
    Date: 2018–12
  12. By: Giannone, Domenico; Lenza, Michele; Reichlin, Lucrezia
    Abstract: This paper studies the relationship between the business cycle and financial intermediation in the euro area. We establish stylized facts and study their stability during the global financial crisis and the European sovereign debt crisis. Long-term interest rates have been exceptionally high and long-term loans and deposits exceptionally low since the Lehman collapse. Instead, short-term interest rates and short-term loans and deposits did not show abnormal dynamics in the course of the financial and sovereign debt crisis. JEL Classification: E32, E51, E52, C32, C51
    Keywords: euro area, loans, monetary policy, money, non-financial corporations
    Date: 2019–01
  13. By: Congressional Budget Office
    Abstract: Fannie Mae and Freddie Mac currently help finance the majority of home loans in the United States by purchasing and securitizing new mortgages. Alternative proposals for the secondary mortgage market involve different choices about whether the federal government should continue to guarantee payment on certain types of mortgage-backed securities—and if so, what the scope, structure, and pricing of those guarantees should be. Policymakers also face choices about how the secondary market should be structured.
    JEL: G21 G28
    Date: 2018–08–23

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