nep-ban New Economics Papers
on Banking
Issue of 2019‒02‒25
24 papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. The Risk Spiral: The Effects of Bank Capital and Diversification on Risk Taking By Peleg Lazar, Sharon; Raviv, Alon
  2. Macroprudential Policy with Capital Buffers By Josef Schroth
  3. What drives the short-term fluctuations of banks' exposure to interest rate risk? By Memmel, Christoph
  4. Banks' Systemic Risk and Monetary Policy By Faia, Ester; Karau, Soeren
  5. The anatomy of the euro area interest rate swap market By Dalla Fontana, Silvia; Holz auf der Heide, Marco; Pelizzon, Loriana; Scheicher, Martin
  6. Monetary policy transmission to mortgages in a negative interest rate environment By Amzallag, Adrien; Calza, Alessandro; Georgarakos, Dimitris; Sousa, João
  7. Move a Little Closer? Information Sharing and the Spatial Clustering of Bank Branches By Qi, Shusen; De Haas, Ralph; Ongena, Steven; Straetmans, Stefan
  8. Model-based regulation and firms' access to finance By Tuuli, Saara
  9. Market power, efficiency and welfare performance of banks: evidence from the Ghanaian banking industry By Adeabah, David; Andoh, Charles
  10. Bank Bonus Pay as a Risk Sharing Contract By Matthias Efing; Harald Hau; Patrick Kampkötter; Jean-Charles Rochet
  11. Macroprudential Policy and Household Leverage: Evidence from Administrative Household-Level Data By Gabarro, Marc; Irani, Rustom M; Peydró, José Luis; van Bekkum, Sjoerd
  12. Endogenous Repo Cycles By Vyacheslav Arbuzov; Yu Awaya; Hiroki Fukai; Makoto Watanabe
  13. The effect and risks of ECB collateral framework changes By Christophe Blot; Jérôme Creel; Paul Hubert
  14. Central counterparty capitalization and misaligned incentives By Wenqian Huang
  15. Monetary Policy, Macroprudential Policy, and Financial Stability By Martinez-Miera, David; Repullo, Rafael
  16. The financial transmission of housing bubbles: evidence from Spain By Martin, Alberto; Moral-Benito, Enrique; Schmitz, Tom
  17. Quantifying Reduced-Form Evidence on Collateral Constraints By Sylvain Catherine; Thomas Chaney; Zongbo Huang; David Sraer; David Thesmar
  18. Debt overhang, rollover risk, and corporate investment: evidence from the European crisis By Kalemli-Ozcan, Sebnem; Laeven, Luc; Moreno, David
  19. Gender Diversity on Bank Board of Directors and Performance By Ann L. Owen; Judit Temesvary
  20. Quantitative Easing and the Hot Potato Effect: Evidence from Euro Area Banks By Ryan, Ellen; Whelan, Karl
  21. The Euro Crisis in the Mirror of the EMS: How Tying Odysseus to the Mast Avoided the Sirens but Led Him to Charybdis By Corsetti, Giancarlo; Eichengreen, Barry; Hale, Galina; Tallman, Eric
  22. Credit and Income By Delis, Manthos; Fringuellotti, Fulvia; Ongena, Steven
  23. What is the central bank of Wikipedia? By Denis Demidov; Klaus M. Frahm; Dima L. Shepelyansky
  24. Chinese Bond Market and Interbank Market By Marlene Amstad; Zhiguo He

  1. By: Peleg Lazar, Sharon; Raviv, Alon
    Abstract: We present a model where bank assets are a portfolio of risky debt claims and analyze stockholders' risk-taking behavior while considering the strategic interaction between debtors and creditors. We find that: (1) as the leverage of a bank increases, risk shifting by borrowers increases, even if their leverage is unchanged (zombie lending). (2) While the literature demonstrates that an increase in the co-movement of a loan portfolio increases the bank's cost of default directly, we find that the increase in co-movement causes an increase in risk shifting that further increases the cost of default (3) Risk shifting decreases with the diversification of a loan portfolio.
    Keywords: Risk taking, Banks, Comovements, Deposit insurance, Zombie lending
    JEL: G21 G28 G32 G38
    Date: 2019–02
  2. By: Josef Schroth
    Abstract: This paper studies optimal bank capital requirements in a model of endogenous bank funding conditions. I find that requirements should be higher during good times such that a macroprudential “buffer” is provided. However, whether banks can use buffers to maintain lending during a financial crisis depends on the capital requirement during the subsequent recovery. The reason is that a high requirement during the recovery lowers bank shareholder value during the crisis and thus creates funding-market pressure to use buffers for deleveraging rather than for maintaining lending. Therefore, buffers are useful if banks are not required to rebuild them quickly.
    Keywords: Credit and credit aggregates; Financial stability; Financial system regulation and policies; Business fluctuations and cycles; Credit risk management; Lender of last resort
    JEL: E13 E32 E44
    Date: 2019
  3. By: Memmel, Christoph
    Abstract: We investigate whether banks actively manage their exposure to interest rate risk in the short run. Using bank-level data of German banks for the period 2011Q4- 2017Q2, we find evidence that banks actively manage their interest rate risk exposure in their banking books: They take account of their regulatory situation and adjust their exposure to the earning opportunities of this risk. We also find that the customers' preferences predominantly determine the fixed-interest period of housing loans and that the fixed-interest period of these loans has an impact on the banks' overall exposure to interest rate risk. This last finding is not in line with active interest rate risk management.
    Keywords: interest rate risk in the banking book,fixed-interest period of housing loans,interest swaps,regulation of interest rate risk
    JEL: G21
    Date: 2019
  4. By: Faia, Ester; Karau, Soeren
    Abstract: The risk-taking channel of monetary policy acquires relevance only if it affects systemic risk. We find robust evidence of a systemic risk-taking channel using cross-country and time-series evidence in panel and proxy VARs for 29 G-SIBs from seven countries. We detect a significant role for pecuniary externalities by exploiting the differential impact of monetary policy shocks on book and market leverage. We rationalize these findings through a model in which a fall in interest rates induces banks to increase leverage and reduce monitoring. In an interacted VAR, we find that macro-prudential policy has a significant role in taming the un-intended consequences of monetary policy on systemic risk.
    Keywords: DeltaCoVaR; leverage; LRMES; macroprudential policy; monitoring intensity; panel VAR; policy complementarities; proxy VAR; Risk-taking channel of monetary policy
    JEL: E44 E52 G18 G21
    Date: 2019–01
  5. By: Dalla Fontana, Silvia; Holz auf der Heide, Marco; Pelizzon, Loriana; Scheicher, Martin
    Abstract: Using a novel regulatory dataset of fully identified derivatives transactions, this paper provides the first comprehensive analysis of the structure of the euro area interest rate swap (IRS) market after the start of the mandatory clearing obligation. Our dataset contains 1.7 million bilateral IRS transactions of banks and non-banks. Our key results are as follows: 1) The euro area IRS market is highly standardised and concentrated around the group of the G16 Dealers but also around a significant group of core ”intermediaries" (and major CCPs). 2) Banks are active in all segments of the IRS euro market, whereas non-banks are often specialised. 3) When using relative net exposures as a proxy for the “flow of risk" in the IRS market, we find that risk absorption takes place in the core as well as the periphery of the network. 4) Among the Basel III capital and liquidity ratios, the leverage ratio plays a key role in determining a bank's IRS trading activity. 5) Also, after mandatory central clearing, there is still a large dispersion in IRS transaction prices, which is partly determined by bank characteristics, such as the leverage ratio. JEL Classification: G21, E43, E44
    Keywords: banking, hedging, interest rate risk, network analysis, OTC derivatives, risk management
    Date: 2019–02
  6. By: Amzallag, Adrien; Calza, Alessandro; Georgarakos, Dimitris; Sousa, João
    Abstract: Do negative policy rates hinder banks’ transmission of monetary policy? To answer this question, we examine the behaviour of Italian mortgage lenders using a novel loan-level dataset. When policy rates turn negative, banks with higher ratios of retail overnight deposits to total assets charge more on new fixed rate mortgages. This suggests that the funding structure of banks may matter for the transmission of negative policy rates, especially for long-maturity illiquid assets. Nevertheless, the aggregate economic implications for households are small, suggesting that concerns about inefficient monetary policy transmission to households under modestly negative rates are likely overstated. JEL Classification: E40, E52, E58, G21
    Keywords: bank lending, monetary policy, mortgages, negative interest rates
    Date: 2019–02
  7. By: Qi, Shusen (xiamen university); De Haas, Ralph (european bank of reconstruction and development); Ongena, Steven (university of zuerich); Straetmans, Stefan (Finance)
    Abstract: We study how information sharing between banks influences the geographical clustering of branches. We construct a spatial oligopoly model with price competition that explains why bank branches cluster and how the introduction of information sharing impacts clustering. Dynamic data on 59,333 branches operated by 676 banks in 22 countries between 1995 and 2012 allow us to test the hypotheses derived from this model. Consistent with our model, we find that information sharing spurs banks to open branches in localities that are new to them but that are already relatively well served by other banks. Information sharing also allows firms to borrow from more distant banks.
    Keywords: information sharing, branch clustering
    JEL: D43 G21 G28 L13 R51
    Date: 2019–02–12
  8. By: Tuuli, Saara
    Abstract: This paper investigates the impact of the model-based approach to bank capital regulation (i.e. the Internal Ratings Based Approach; IRBA) on firms' access to finance. A difference-in-differences methodology is used given that the IRBA, introduced as part of Basel II, was adopted by different banks in different times. The results suggest that firms indirectly affected by the new regulation via their main bank adopting the IRBA faced a 6-7 percentage point higher probability of facing a deterioration in their access to finance. When the sample is adjusted for the demand for credit, this estimate increases to 12-13 percentage points. The impact is found to come via increases in the cost of credit and to a smaller extent, reductions in the volume or size of loans. Around three-quarters of the effect is attributed to the sensitivity of the IRBA capital requirements to economic conditions, with adopting banks also found to specialize in low-risk lending.
    JEL: G21 G28 E51
    Date: 2019–02–15
  9. By: Adeabah, David; Andoh, Charles
    Abstract: The study analyses the welfare performance of banks’ lending services in the Ghanaian banking industry with emphasis on the role of market power and efficiency. We made use of pooled OLS regression with fixed effect model. For robustness, we adopted Prais–Winsten (1954) regression and two-stage least squares (2SLS) instrumental variables procedures on an unbalanced panel data of 24 banks for years 2009 through 2017. The results reveal that during our study period, there was a welfare loss of about 0.433 percent of observed total loans. Encouragingly, cost efficiency in the banking system fits well within the world’s mean efficiency but has been decreasing over time. Further, there is evidence that prices have not moved toward a competitive level. Cost efficiency estimates are found to be negatively associated with loss of consumer surplus estimates. Market power is found to be positively related to a loss in consumer surplus. Additional analysis shows that the market power effect is dominant in both domestic and large banks. Overall, the results indicate that market power and bank efficiency are competing interests for policymakers in their consideration of policy reforms geared toward an efficient and well-functioning banking system. An additional implication of these results suggests that antitrust enforcement may be socially beneficial to provide an incentive for competitive pricing in the lending business segment of banking. Other implications are also discussed.
    Keywords: Welfare Performance,Bank Efficiency,Market Power,Data Envelopment Analysis,Ghana
    JEL: D12 D18 D60 G21
    Date: 2019
  10. By: Matthias Efing; Harald Hau; Patrick Kampkötter; Jean-Charles Rochet
    Abstract: We argue that risk sharing motivates the bank-wide structure of bonus pay. In the presence of financial frictions that make external financing costly, the optimal contract between shareholders and employees involves some degree of risk sharing whereby bonus pay partially absorbs earnings shocks. Using payroll data for 1:26 million employee-years in all functional divisions of Austrian, German, and Swiss banks, we uncover several empirical patterns in bonus pay that are difficult to rationalize with incentive theories of bonus pay - but support an important risk sharing motive. In particular, bonuses respond to performance shocks that are outside the control of employees because they originate in other bank divisions or even outside the bank.
    Keywords: banker compensation, risk sharing, bonus pay, operating leverage
    JEL: G20 G21 D22
    Date: 2019
  11. By: Gabarro, Marc; Irani, Rustom M; Peydró, José Luis; van Bekkum, Sjoerd
    Abstract: We examine the effects of macroprudential policy for household leverage, liquidity, and default. For identification, we exploit the August 2011 introduction of a limit on mortgage loan-to-value ratios in the Netherlands, in conjunction with population tax-return and property ownership data linked to the universe of housing transactions. First-time homebuyers most affected by the policy shock substantially reduce household leverage and mortgage debt servicing costs by taking on less mortgage debt. Rather than buying more affordable homes or taking non-regulated loans, households consume greater liquidity in the year of home purchase to plug the funding gap. Improvements in household solvency are accompanied by a lower mortgage default rate; however, along the extensive margin, fewer households transition from renting into ownership. These effects are stronger among poorer households and those with fewer liquid assets.
    Keywords: financial regulation; household finance; household leverage; Liquidity vs. Solvency; macroprudential policy; Residential Mortgages
    JEL: D14 D31 E21 E58 G21 G28
    Date: 2019–02
  12. By: Vyacheslav Arbuzov; Yu Awaya; Hiroki Fukai; Makoto Watanabe
    Abstract: This paper presents a simple and tractable equilibrium model of repos, where collateralized credit emerges under limited commitment. We show that even if there is no time variation in fundamentals, repo markets can fluctuate endogenously over time. In our theory, repo market fragilities are associated with endogenous fluctuations in trade probabilities, collateral values, and debt limits. We show that the collateral premium of a durable asset will become the lowest right before a recession and the highest right after the recession, and that secured credit is acyclical.
    Keywords: collateral, search, endogenous credit market fluctuations
    JEL: E30 E50 C73
    Date: 2019
  13. By: Christophe Blot (Observatoire français des conjonctures économiques); Jérôme Creel (Observatoire français des conjonctures économiques); Paul Hubert (Observatoire français des conjonctures économiques)
    Abstract: During the crisis, the ECB modified its collateral framework to face increased liquidity needs of commercial banks. This has taken two forms: the minimum required rating for different classes of assets has been reduced and the haircut associated to these assets has evolved conditional on the default risks of these assets. The benefits in terms of cushioning a liquidity crisis and enhancing monetary policy transmission have most probably exceeded the costs in terms of riskier central bank balance sheet and potential capital losses. This document was provided by Policy Department A at the request of the Economic and Monetary Affairs Committee.
    Date: 2018–07
  14. By: Wenqian Huang
    Abstract: Financial stability depends on the effective regulation of central counterparties (CCPs), which must take account of the incentives that drive CCP behavior. This paper studies the incentives of a for-profit CCP with limited liability. It faces a trade-off between fee income and counterparty credit risk. A better-capitalized CCP sets a higher collateral requirement to reduce potential default losses, even though it forgoes fee income by deterring potential traders. I show empirically that a 1% increase in CCP capital is associated with a 0.6% increase in required collateral. Limited liability, however, creates a wedge between its capital and collateral policy and the socially optimal solution to this trade-off. The optimal capital requirements should account for clearing fees.
    Keywords: central counterparties (CCPs), capital requirement, financial stability
    JEL: G01 G12 G21 G22
    Date: 2019–02
  15. By: Martinez-Miera, David; Repullo, Rafael
    Abstract: This paper reexamines from a theoretical perspective the role of monetary and macroprudential policies in addressing the build-up of risks in the financial system. We construct a stylized general equilibrium model in which the key friction comes from a moral hazard problem in firms' financing that banks' equity capital serves to ameliorate. Tight monetary policy is introduced by open market sales of government debt, and tight macroprudential policy by an increase in capital requirements. We show that both policies are useful, but macroprudential policy is more effective in terms of financial stability and leads to higher social welfare.
    Keywords: Bank monitoring; Capital requirements; Financial Stability; intermediation margin; macroprudential policy; monetary policy
    JEL: E44 E52 G21 G28
    Date: 2019–02
  16. By: Martin, Alberto; Moral-Benito, Enrique; Schmitz, Tom
    Abstract: How do housing bubbles affect other economic sectors? We show that in the presence of collateral constraints, a bubble initially raises housing credit demand and crowds out credit to non-housing firms. If the bubble lasts, however, housing credit repayments raise banks’ net worth and expand credit supply, so that crowding-out eventually gives way to crowding-in. This is consistent with evidence from the recent Spanish housing bubble. Initially, credit growth of non-housing firms was lower at banks with higher bubble exposure, and firms relying on these banks exhibited lower credit and output growth. During the bubble’s last years, these effects reversed. JEL Classification: E32, E44, G21
    Keywords: credit, financial frictions, financial transmission, housing bubble, investment, Spain
    Date: 2019–02
  17. 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
  18. By: Kalemli-Ozcan, Sebnem; Laeven, Luc; Moreno, David
    Abstract: We quantify the role of financial factors behind the sluggish post-crisis performance of European firms. We use a firm-bank-sovereign matched database to identify separate roles for firm and bank balance sheet weaknesses arising from changes in sovereign risk and aggregate demand conditions. We find that firms with higher debt levels and a higher share of short-term debt reduce their investment more after the crisis. This negative effect is stronger for firms linked to weak banks with exposures to sovereign risk, signifying increased rollover risk. These financial channels explain about 60% of the decline in aggregate corporate investment. JEL Classification: E22, E32, E44, F34, F36, G32
    Keywords: bank-sovereign nexus, debt maturity, firm investment, rollover risk
    Date: 2019–02
  19. By: Ann L. Owen; Judit Temesvary
    Abstract: Many papers have studied the effects of boards' gender composition on firm performance and a few have studied it in the banking industry specifically. In this Note, we study this issue using a newly compiled annual dataset on bank boards and financial performance.
    Date: 2019–02–12
  20. By: Ryan, Ellen; Whelan, Karl
    Abstract: We use a bank-level data set to examine the behaviour of central bank reserves in the euro area banking system over the course of the ECB QE programme. Previous research on QE has generally paid little attention to the role of reserve dynamics within the banking system and some have assumed that the system passively absorbs additional reserves generated by asset purchases. However, with a negative deposit rate in place throughout the sample we study, euro area banks have had a disincentive to hold excess reserves and thus could wish to treat them as a "hot potato" that is preferably passed on to other banks. We find evidence for this hot potato effect, reporting substantial month-to-month churn in bank reserves as well as evidence that banks are responding to high reserve balances by pushing them off their balance sheets. Unlike in the traditional money multiplier model, where excess reserves are used in loan creation, banks appear to be primarily managing reserves through debt security purchases. As such, this hot potato effect seems likely to have had an effect on European bond yields that is distinct from the portfolio rebalancing effect emphasised in the QE literature thus far.
    Keywords: central banks; Quantitative easing; Reserves
    JEL: E4 E5 G21
    Date: 2019–02
  21. By: Corsetti, Giancarlo (Cambridge University); Eichengreen, Barry (University of California, Berkeley); Hale, Galina (Federal Reserve Bank of San Francisco); Tallman, Eric (Federal Reserve Bank of San Francisco)
    Abstract: Why was recovery from the euro area crisis delayed for a decade? The explanation lies in the absence of credible and timely policies to backstop financial intermediaries and sovereign debt markets. In this paper we add light and color to this analysis, contrasting recent experience with the 1992-3 crisis in the European Monetary System, when national central banks and treasuries more successfully provided this backstop. In the more recent episode, the incomplete development of the euro area constrained the ability of the ECB and other European institutions to do likewise.
    Date: 2019–02–01
  22. By: Delis, Manthos; Fringuellotti, Fulvia; Ongena, Steven
    Abstract: Using a unique data set of business loan applications to a single bank from individuals who are majority owners of small firms, we study how bank credit origination or denial affects individuals' income. The bank cutoff rule based on the applicants' credit score creates a sharp discontinuity in the decision to originate loans or not. We show that loan origination increases recipients' income five years onward by more than 10% compared to denied applicants. The effect is more pronounced in rural and low-income areas. Our results suggest an important role for banks` credit decisions on the distribution of income.
    Keywords: Business loans; credit constraints; Income; Income inequality; regression discontinuity design
    JEL: D31 E24 G21
    Date: 2019–01
  23. By: Denis Demidov; Klaus M. Frahm; Dima L. Shepelyansky
    Abstract: We analyze the influence and interactions of 60 largest world banks for 195 world countries using the reduced Google matrix algorithm for the English Wikipedia network with 5 416 537 articles. While the top asset rank positions are taken by the banks of China, with China Industrial and Commercial Bank of China at the first place, we show that the network influence is dominated by USA banks with Goldman Sachs being the central bank. We determine the network structure of interactions of banks and countries and PageRank sensitivity of countries to selected banks. We also present GPU oriented code which significantly accelerates the numerical computations of reduced Google matrix.
    Date: 2019–02
  24. By: Marlene Amstad; Zhiguo He
    Abstract: Over the past twenty years, especially the past decade, China has taken enormous strides to develop its bond market as an integral step of financial reform. This paper aims to provide the most up-to-date overview of Chinese bond markets, by highlighting two distinct and largely segmented markets: Over-the-Counter based interbank market, and centralized exchange market. We explain various bond instruments traded in these two markets, highlighting their inherent connection with the banking system, and many multi-layer regulatory bodies who are interacting with each other in an intricate way. We also covers the credit ratings and rating agencies in Chinese market, and offer an account of ever-rising default incidents in China starting 2014. Finally, we discuss the recent regulatory tightening of shadow banking since late 2017 and its impact on bond investors, and the forces behind the internalization of Chinese bond markets in the near future.
    JEL: F4 G2 O16 O2 O53
    Date: 2019–02

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