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on Banking |
| By: | Tarishi Matsuoka; Makoto Watanabe |
| Abstract: | This paper studies the role of a lender of last resort (LLR) in a monetary model where a shortage of bank’s monetary reserves (or a banking panic) occurs endogenously. We show that while a discount window policy introduced by the LLR is welfare improving, it reduces the banks’ ex ante incentive to hold reserves, which increases the probability of a panic, and causes moral hazard in asset investments. We also examine the combined effect of other related policies such as a penalty in lending rate, liquidity requirements and constructive ambiguity. |
| Keywords: | monetary equilibrium, banking panic, moral hazard, lender of last resort |
| JEL: | E40 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_7451&r=all |
| 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. |
| Keywords: | Unconventional Monetary Policy, TLTRO, credit supply, lending interest rates, bank-lending channel, Euro area, Portugal. |
| JEL: | C33 C87 E50 E51 E52 E58 |
| Date: | 2019–01 |
| URL: | http://d.repec.org/n?u=RePEc:ise:remwps:wp0652019&r=all |
| By: | Holden, Tom D.; Levine, Paul; Swarbrick, Jonathan M. |
| Abstract: | We present a model in which banks and other financial intermediaries face both occasionally binding borrowing constraints, and costs of equity issuance. Near the steady state, these intermediaries can raise equity finance at no cost through retained earnings. However, even moderately large shocks cause their borrowing constraints to bind, leading to contractions in credit offered to firms, and requiring the intermediaries to raise further funds by paying the cost to issue equity. This leads to the occasional sharp increases in interest spreads and the counter-cyclical, positively skewed equity issuance that are characteristic of the credit crunches observed in the data. |
| Keywords: | Occasionally binding constraints,Credit crunches,Financial crises,Spreads,Dividends,Equity,Banking |
| JEL: | E22 E32 E51 G2 |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubdps:572018&r=all |
| By: | Christian Grimme |
| Abstract: | How does uncertainty affect the costs of raising finance in the bond market and via bank loans? Empirically, this paper finds that heightened uncertainty is accompanied by an increase in corporate bond yields and a decrease in bank lending rates. This finding can be explained with a model that includes costly state verification and a special informational role for banks. To reduce uncertainty, banks acquire additional costly information about borrowers. More information increases the value of the lending relationship and lowers the lending rate. Bond investors demand compensation for the increased risk of firm default. |
| Keywords: | uncertainty shocks, financial frictions, relationship banking, bank loan rate setting, information acquisition |
| JEL: | E32 E43 E44 G21 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_7456&r=all |
| By: | Oliver de Groot (University of St Andrews) |
| Abstract: | This paper studies the effect of liquidity crises in short-term debt markets in a dynamic general equilibrium framework. Creditors (retail banks) receive imperfect signals regarding the profitability of borrowers (wholesale banks) and, based on these signals and their beliefs about other creditors actions, choose whether to rollover funding, or not. The uncoordinated actions of creditors cause a suboptimal incidence of rollover, generating an illiquidity premium. Leverage magnifies the coordination inefficiency. Illiquidity shocks in credit markets result in sharp contractions in output. Policy responses are analyzed. |
| Keywords: | Financial frictions, DSGE models, Global games, Bank runs, Unconventional monetary policy, Financial crises |
| JEL: | D82 E32 E44 G12 |
| Date: | 2019–01–31 |
| URL: | http://d.repec.org/n?u=RePEc:san:wpecon:1902&r=all |
| By: | Eickmeier, Sandra; Kolb, Benedikt; Prieto, Esteban |
| Abstract: | We use a newly constructed narrative measure of regulatory bank capital requirement tightening events (Eickmeier et al., 2018) to examine their effects on household income and expenditure inequality in the US. Income and expenditure inequality both decline (the latter decline being slightly less pronounced than the former). Financial income strongly drops after the regulatory events. Richer households tend to be more exposed to financial markets. Hence, their income and expenditures decline by more than those of poorer households. The monetary policy easing after the regulation is shown to contribute to the decline in inequality at longer horizons, as it cushions the negative effects of the capital requirement tightenings on wages and salaries in the medium run, which represent a considerable share of income for lower- to middle-income households. |
| Keywords: | Narrative Approach,Bank Capital Requirements,Local Projections,Inequality |
| JEL: | G28 G18 C32 E44 |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubdps:542018&r=all |
| By: | Möllmann, Johannes; Mußhoff, Oliver; Buchholz, Matthias; Kölle, Wienand |
| Abstract: | Farmers' vulnerability to adverse weather events, which are likely to increase in frequency and magnitude due to climate change, is a major impediment to a sufficient credit supply. Smallholder farmers' access to credit is, among other factors, crucial for productivity and out-put growth. Index insurance could help lenders to compensate for lacking installment payments in years with severe weather conditions and, thus, is considered to accelerate agricultural lending. Using a unique borrower dataset provided by a Microfinance Institution (MFI) in Madagascar, we analyze whether remotely-sensed vegetation health indices can explain the credit risk of the MFI's agricultural loan portfolio. Therefore, we utilize sequential logit models and quantile regressions. More specifically, we consider the remotely-sensed Vegetation Condition Index, Temperature Condition Index and the Vegetation Health Index as independent variables at the individual branch and the aggregated bank level. These indices are available globally and can potentially enhance the effectiveness of index insurance by reducing basis risk, a major drawback of index insurance. Moreover, we consider loan- and socio-demographic variables of the borrowers as additional independent variables. Our results show that the credit risk of the MFI is explained, to a large extent, by the vegetation health indices. Moreover, the results from quantile regressions show that the explanatory power of the vegetation health indices increases with increasing credit risk. Thus, utilizing remotely-sensed vegetation health indices for index insurance designs might be particularly valuable for MFIs to hedge the credit risk of their agricultural loan portfolio. Facing lower default rates, MFIs could reduce interest rates. Remotely-sensed index insurance could therefore enhance access to credit, contributing to sustainable development in the study region. |
| Keywords: | Remotely-sensed data,Vegetation Health Indices,Credit risk,Microcredit,Index insurance |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:daredp:1902&r=all |
| By: | TengTeng Xu; Kun Hu; Udaibir S Das |
| Abstract: | We analyze how bank profitability impacts financial stability from both theoretical and empirical perspectives. We first develop a theoretical model of the relationship between bank profitability and financial stability by exploring the role of non-interest income and retail-oriented business models. We then conduct panel regression analysis to examine the empirical determinants of bank risks and profitability, and how the level and the source of bank profitability affect risks for 431 publicly traded banks (U.S., advanced Europe, and GSIBs) from 2004 to 2017. Results reveal that profitability is negatively associated with both a bank’s contribution to systemic risk and its idiosyncratic risk, and an over-reliance on non-interest income, wholesale funding and leverage is associated with higher risks. Low competition is associated with low idiosyncratic risk but a high contribution to systemic risk. Lastly, the problem loans ratio and the cost-to-income ratio are found to be key factors that influence bank profitability. The paper’s findings suggest that policy makers should strive to better understand the source of bank profitability, especially where there is an over-reliance on market-based non-interest income, leverage, and wholesale funding. |
| Date: | 2019–01–11 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:19/5&r=all |
| By: | Kurz, Michael (Finance); Kleimeier, Stefanie (Finance) |
| Abstract: | Do banks that heavily engage in proprietary trading reduce credit supply relative to their non-trading peers? We answer this question by looking at credit provided by the 135 leading banks in the global corporate loan market between 2003 and 2016. We find that banks with greater trading expertise supply less credit during economically stable times than their non-trading peers and even less during crisis times. This double effect can be attributed to US banks. International banks only reduce their credit supply during crises. We show that these spillovers from trading to credit supply have adverse consequences for the real economy as firms’ ability to invest in capital and expand their workforce is reduced. During a crisis, firms that rely on banks with high trading expertise are most severely affected. Overall, our results suggest that the mandates by global regulators to separate trading from commercial banking are well advised. |
| Keywords: | credit supply, proprietary trading, international lending, banking, corporate loans |
| JEL: | G01 G21 G28 |
| Date: | 2019–02–07 |
| URL: | http://d.repec.org/n?u=RePEc:unm:umagsb:2019005&r=all |
| By: | Sylvain Catherine; Thomas Chaney (Département d'économie); Zongbo Huang (Chinese University of Hong Kong (CUHK)); David Sraer (Princeton University); David Thesmar (Sloan School of Management (MIT Sloan)) |
| Abstract: | While a mature literature shows that credit constraints causally affect firm level investment, this literature provides little guidance to quantify the economic effects implied by these findings. Our paper attempts to fill this gap in two ways. First, we use a structural model of firm dynamics with collateral constraints, and estimate the model to match the firm-level sensitivity of investment to collateral values. We estimate that firms can only pledge about 19% of their collateral value. Second, we embed this model in a general equilibrium framework and estimate that, relative to first-best, collateral constraints are responsible for 11% output losses. |
| Date: | 2018–05 |
| URL: | http://d.repec.org/n?u=RePEc:spo:wpecon:info:hdl:2441/5e3g19l1fn9thpq7ldd8kqr3vu&r=all |