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on Banking |
| By: | Darracq Pariès, Matthieu; Körner, Jenny; Papadopoulou, Niki |
| Abstract: | This paper contributes to the debate on the macroeconomic effectiveness of expansionary non-standard monetary policy measures in a regulated banking environment. Based on an estimated DSGE model, we explore the interactions between central bank asset purchases and bank capital-based financial policies (regulatory, supervisory or macroprudential) through its influence on bank risk-shifting motives. We find that weakly-capitalised banks display excessive risk-taking which reinforces the credit easing channel of central bank asset purchases, at the cost of higher bank default probability and risks to financial stability. In such a case, adequate bank capital demand through higher minimum capital requirements curtails the excessive credit origination and restores a more efficient propagation of central bank asset purchases. As supervisors can formulate further capital demands, uncertainty about the supervisory oversight provokes precautionary motives for banks. They build-up extra capital buffer attenuating non-standard monetary policy. Finally, in a weakly-capitalised banking system, countercyclical macroprudential policy attenuates banks risk-taking and dampens the excessive persistence of the non-standard monetary policy impulse. On the contrary, in a well-capitalised banking system, macroprudential policy should look through the effects of central bank asset purchases on bank capital position, as the costs in terms of macroeconomic stabilisation seem to outweigh the marginal financial stability benefits. JEL Classification: E44, E52, F40 |
| Keywords: | asset purchases, bank capital regulation, effective lower bound, non-standard monetary policy, regulatory uncertainty, risk-taking |
| Date: | 2019–02 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20192237&r=all |
| By: | Wataru Hirata (Bank of Japan); Mayumi Ojima (Bank of Japan) |
| Abstract: | Bank competition and financial stability is a recurrent research issue, and researchers have begun to shed light on the competition effect on systemic-risk. Japan is an interesting case in this venue since its regional banking system has confronted intensified competition and there is growing evidence that the competition has led the portfolio of Japan's regional banks to be more overlapped, an indication of increased systemic risk. In this paper, we first examine the empirical relationship between competition and systemic-risk for Japan's regional banks. We find that the bank mark-up is negatively associated with the level of systemic risk, indicating that competition undermines the system-wide financial stability in Japan. However, this result is at odds with existing studies. To this end, we perform a theoretical analysis focusing on bank's portfolio diversification. We demonstrate that Japan's regional banks tend to diversify toward alternative lending when the profitability of the core business declines. This diversification results in the build-up of systemic risk through higher common exposure, a form of indirect interconnectedness. |
| Keywords: | Competition; Mark-up; Systemic-risk; Indirect interconnectedness |
| JEL: | G11 G21 L51 |
| Date: | 2019–01–31 |
| URL: | http://d.repec.org/n?u=RePEc:boj:bojwps:wp19e01&r=all |
| By: | Desislava C. Andreeva (European Central Bank); Miguel García-Posada (Banco de España) |
| Abstract: | We assess the impact of the Eurosystem’s Targeted Long-Term Refinancing Operations (TLTROs) on the lending policies of euro area banks. To guide our empirical research, we build a theoretical model in which banks compete à la Cournot in the credit and deposit markets. According to the model, we distinguish between direct and indirect effects. Direct effects take place because bidding banks expand their loan supply due to the lower marginal costs implied by the TLTROs. Indirect effects on non-bidders operate via changes in the competitive environment in banks’ credit and deposit markets and are a priori ambiguous. We then test these theoretical predictions with a sample of 130 banks from 13 countries and the confidential answers to the ECB’s Bank Lending Survey. Regarding direct effects on bidders, we find an easing impact on margins on loans to relatively safe borrowers, but no impact on credit standards. Regarding indirect effects, there is a positive impact on the loan supply on non-bidders but, contrary to the direct effects, the transmission of the TLTROs takes place through an easing of credit standards, and it is mainly concentrated in banks facing high competitive pressures. We also find evidence of positive funding externalities. |
| Keywords: | unconventional monetary policy, TLTROs, lending policies, competition |
| JEL: | G21 E52 E58 |
| Date: | 2019–02 |
| URL: | http://d.repec.org/n?u=RePEc:bde:wpaper:1903&r=all |
| By: | Ozili, Peterson K |
| Abstract: | We examine the impact of the reclassification of IAS 39 on income smoothing using loan loss provisions among European banks. We predict that the strict recognition and re-classification requirements of IAS 139 reduced banks' ability to smooth income using bank securities and derivatives, motivating them to rely more on loan loss provisions to smooth income. Our findings do not support the prediction for income smoothing through loan loss provisions. Also, there is no evidence for income smoothing in the pre- and post-IAS 39 reclassification period. The implication of the findings is that: (i) European banks did not use loan loss provisions to smooth income during the period examined, and rather rely on other accounting numbers to smooth income; (ii) the IASB’s strict disclosure regulation improved the reliability and informativeness of loan loss provision estimates among European banks during the period of analysis. |
| Keywords: | Earnings Management; Income Smoothing; Loan loss provisions, IFRS, IAS 39; Financial Crises |
| JEL: | G20 G21 G28 M40 M41 M42 M48 |
| Date: | 2019–02–01 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:92098&r=all |
| By: | John Leventides; Kalliopi Loukaki; Vassilios G. Papavassiliou |
| Abstract: | The purpose of this study is to assess the resilience of financial systems to exogenous shocks using techniques drawn from the theory of complex networks. We investigate by means of Monte Carlo simulations the fragility of several network topologies using a simple default model of contagion applied on interbank networks of varying sizes. We trigger a series of banking crises by exogenously failing each bank in the system and observe the propagation mechanisms that take effect within the system under different scenarios. Finally, we add to the existing literature by analyzing the interplay of several crucial drivers of interbank contagion, such as network topology, leverage, interconnectedness, heterogeneity and homogeneity across bank sizes and interbank exposures. |
| Keywords: | Interbank congtagion; Random networks; Financial stability; Interconectedness; Systemic risk |
| Date: | 2018–12 |
| URL: | http://d.repec.org/n?u=RePEc:rru:oapubs:10197/9601&r=all |
| By: | Jose L. Fillat (Federal Reserve Bank of Boston); Stefania Garetto (Boston University, CEPR, and NBER); Arthur V. Smith (Boston University) |
| Abstract: | The global financial crisis of 2008 was followed by a wave of regulatory reforms that affected large banks, especially those with a global presence. These reforms were reactive to the crisis. In this paper we propose a structural model of global banking that can be used proactively to perform counterfactual analysis on the effects of alternative regulatory policies. The structure of the model mimics the US regulatory framework and highlights the organizational choices that banks face when entering a foreign market: branching versus subsidiarization. When calibrated to match moments from a sample of European banks, the model is able to replicate the response of the US banking sector to the European sovereign debt crisis. Our counterfactual analysis suggests that pervasive subsidiarization, higher capital requirements, or ad hoc monetary policy interventions would have mitigated the effects of the crisis on US lending. |
| Keywords: | global banks, banking regulation, shock transmission. |
| JEL: | F12 F23 F36 G21 |
| Date: | 2018–07 |
| URL: | http://d.repec.org/n?u=RePEc:bos:wpaper:wp2019-001&r=all |
| By: | Petr Jansky (Institute of Economic Studies, Faculty of Social Sciences, Charles University in Prague, Smetanovo nabrezi 6, 111 01 Prague 1, Czech Republic) |
| Abstract: | Banks in the European Union recently started publicly reporting data on profit, number of employees, turnover and tax on a country-by-country basis. I introduce the largest, hand-collected data set of its kind, which covers almost 50 banks for up to 5 years between 2013 and 2017. I identify the main locations of European bank's profits, which include the largest European economies as well as tax havens. I focus on answering the question of how geographically aligned these profits are with economic activity. I find that some of the tax havens have maintained high shares of profits in contrast with their much lower shares of employees. These results indicate that banks are likely shifting their profits to tax havens, but for the profit shifting to be directly observed, regulators will need to ask banks to publish even better data. |
| Keywords: | country-by-country reporting; banks; tax havens; profit shifting; financial transparency; European Union |
| JEL: | F21 F23 G21 G28 H25 H87 |
| Date: | 2018–12 |
| URL: | http://d.repec.org/n?u=RePEc:fau:wpaper:wp2018_38&r=all |
| By: | Antonio Falato; Diana A. Iercosan; Filip Zikes |
| Abstract: | This paper uses detailed high-frequency regulatory data to evaluate whether trading increases or decreases systemic risk in the U.S. banking sector. We estimate the sensitivity of weekly bank trading net profits to a variety of aggregate risk factors, which include equities, fixed-income, derivatives, foreign exchange, and commodities. We find that U.S. banks had large trading exposures to equity market risk before the introduction of the Volcker Rule in 2014 and that they curtailed these exposures afterwards. Pre-rule equity risk exposures were large across the board of the main asset classes, including fixed-income. There is also evidence of smaller exposures to credit and currency risk. We corroborate the main finding on equity risk with a quasi-natural experiment that exploits the phased-in introduction of reporting requirements to refine identification, and an optimal changepoint regression that estimates time-varying exposures to address rebalancing. A stress-test calibration indicates that the Volcker Rule was an effective financial-stability regulation, as even a 5% drop in stock market returns would have led to material aggregate trading losses for banks in the pre-Volcker period, as large as about 3% (1.5%) of sector-wide market risk weighted assets (tier 1 capital). |
| Keywords: | Bank trading ; Regulation ; Risk exposures ; Systemic risk |
| JEL: | G38 G32 G21 |
| Date: | 2019–02–07 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2019-05&r=all |
| By: | Saka, Orkun |
| Abstract: | European banks have been criticized for holding excessive domestic government debt during economic downturns, which may have intensified the diabolic loop between sovereign and bank credit risks. By using a novel bank-level dataset covering the entire timeline of the Eurozone crisis, I first re-confirm that the crisis led to the reallocation of sovereign debt from foreign to domestic banks. This reallocation was only visible for banks as opposed to other domestic private agents and it cannot be explained by the banks' risk-shifting tendency. In contrast to the recent literature focusing only on sovereign debt, I show that banks' private sector exposures were (at least) equally affected by a rise in home bias. Finally, consistent with these patterns, I propose a new debt reallocation channel based on informational frictions and show that informationally closer foreign banks increase their relative exposures when sovereign risk rises. The effect of informational closeness is economically meaningful and robust to the use of different information measures and controls for alternative channels of sovereign debt reallocation. |
| JEL: | F21 F34 F36 G01 G11 G21 |
| Date: | 2019–02–05 |
| URL: | http://d.repec.org/n?u=RePEc:bof:bofrdp:2019_003&r=all |
| By: | Mohammad Ali Elminejad (Institute of Economic Studies, Faculty of Social Sciences, Charles University in Prague, Smetanovo nabrezi 6, 111 01 Prague 1, Czech Republic) |
| Abstract: | This paper investigates systemic risk and contagion processes in the inter-bank network using network science methods. The inter-bank network consisting 10 banks, similar to the real world inter-bank networks, is studied to understand the contagion process in the network regarding changes in the network structure, as well as changes in the characteristics of components. Simulations support the claim that heterogeneous networks are more resilient to contagious shocks, while systemic shocks are more problematic in homogeneous networks. The study also shows that more interconnections among banks could accelerate or block contagion proces depending on the structure of the network and seniority of debts in the inter-bank network as well. |
| Keywords: | Complex Networks, Systemic Risk, Contagion, Default Risk, Epidemic Modeling |
| JEL: | G01 G21 |
| Date: | 2018–12 |
| URL: | http://d.repec.org/n?u=RePEc:fau:wpaper:wp2018_39&r=all |
| By: | Serge Ky (LAPE - Laboratoire d'Analyse et de Prospective Economique - IR SHS UNILIM - Institut Sciences de l'Homme et de la Société - UNILIM - Université de Limoges); Clovis Rugemintwari (LAPE - Laboratoire d'Analyse et de Prospective Economique - IR SHS UNILIM - Institut Sciences de l'Homme et de la Société - UNILIM - Université de Limoges); Alain Sauviat (LAPE - Laboratoire d'Analyse et de Prospective Economique - IR SHS UNILIM - Institut Sciences de l'Homme et de la Société - UNILIM - Université de Limoges) |
| Abstract: | Access to and usage of formal financial services are important determinants of financial inclusion and yet, informal mechanisms still dominate the financial system in developing countries. In this context, the purpose of our paper is to investigate how the growing effort to harness mobile money may play a role to overcome barriers that prevent people to access formal financial services. Using a unique dataset obtained from an individual-level survey conducted in Burkina Faso, we explore the interplay between mobile money innovation as a deposit instrument and pre-existing formal and informal financial instruments. Our main findings show that, overall, the use of mobile money is not associated with deposits using formal and/or informal financial instruments. However, a closer investigation reveals suggestive evidence that it increases the probability of participants in informal mechanisms to make deposits in a bank account. Moreover, considering disadvantaged groups, we find for women, irregular income and less educated individuals that mobile money may increase their probability to make deposits in a bank and/or credit union accounts. Given the low access to formal financial services in developing countries, our findings taken together indicate how the increasing adoption of mobile money may act as a stepping-stone towards financial inclusion. |
| Keywords: | developing countries †,financial inclusion,mobile money,formal finance,informal finance,deposit behavior |
| Date: | 2019–02–06 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:hal-02000982&r=all |
| By: | ODA Keiichiro |
| Abstract: | By extending the basic framework of Boyer and Laffont (1997) to an incomplete contracting model, where a bank with "lender liability" and a firm under an unlimited liability constraint play bargaining games in using option contracts, we show that environmental damages as externalities caused by the firm can be reduced to the socially desirable level through the provision of monitoring, insurance and credit by the bank interacting with the financial market. |
| Date: | 2018–12 |
| URL: | http://d.repec.org/n?u=RePEc:eti:rdpsjp:18033&r=all |
| By: | Aytul Ganioglu |
| Abstract: | Does the external position of a country that is conditioned on financial development impact the likelihood of a systemic banking crisis? We address this question using data from 149 developing and advanced countries from 1970 to 2011, as well as a variety of statistical tools. Our findings are twofold. First, we find that the net external position of a country significantly affects its likelihood of a systemic crisis depending on the level of financial development. Conditional on low to moderate financial development, countries can lower the risk of banking crises significantly by maintaining a net foreign creditor status. Second, we find that the level of financial development raises a country’s crisis risk significantly while its impact depends on the net asset position. This indicates a potential amplification effect in which countries with more developed and complex financial systems that are also debtor countries have a higher potential of incurring a systemic banking crisis. |
| Keywords: | Banking crisis, Net external position, Financial development, Probit |
| JEL: | E44 F34 G15 H63 |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:tcb:wpaper:1814&r=all |