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on Banking |
| By: | Pierre Durand |
| Abstract: | In response to the 2007-2008 global financial crisis, the G20 mandated the Basel Committee to put in place prudential regulations capable of ensuring financial stability: the Basel III agreements. This paper tackles this issue by investigating the impact of capital and liquidity ratios on financial stability for a sample of 1600 banks from 23 countries over the 2005-2016 period. We pay particular attention to the nonlinear character of this potential effect through the estimation of a polynomial model with interaction terms and a panel smooth transition regression. Distinguishing between different types of banks depending on their level of systemicity, we find evidence of a nonlinear effect of prudential ratios on financial stability: a low level of capital improves financial stability, but its effect tends to diminish for higher values. Finally, we show that bank profitability is a significant determinant of financial stability. |
| Keywords: | Basel III ratios ; financial stability ; interaction effects ; Panel Smooth Transition Regression |
| JEL: | C33 G21 G38 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:drm:wpaper:2019-4&r=all |
| By: | Chernykh, Lucy; Davydov, Denis; Sihvonen, Jukka |
| Abstract: | We use a novel, household opinions-based measure – Public Confidence in a Bank – to explore the role of bank-level and system-wide determinants of customers’ trust in banks. Our study covers a panel of approximately 260 large Russian commercial banks publicly monitored during 2010–2017. We find that public confidence in a bank is highly sensitive to the industry-level financial stability indicators, but less sensitive to bank-level risk characteristics. This result reveals an important role of overall banking sector stability in determining public perception of the safety and soundness of individual banks. |
| JEL: | G21 D14 |
| Date: | 2019–02–19 |
| URL: | http://d.repec.org/n?u=RePEc:bof:bofitp:2019_002&r=all |
| 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: | financial frictions, financial intermediation, regulation, counter-cyclical capital requirements, market discipline, access to funding |
| JEL: | E13 E32 E44 |
| Date: | 2019–02 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:771&r=all |
| By: | Sinha, Pankaj; Grover, Naina |
| Abstract: | Risk transformation and liquidity creation are the two key functions of a bank. Liquidity Creation plays a very important role in the economy, but there is no comprehensive measure of liquidity creation that exists in our country. This study estimates the notional value of liquidity created by Scheduled commercial banks in India during the period 2005 to 2018. We have developed four measures of liquidity creation by Indian Banks,following Berger and Bouwman (2009). We have estimated Liquidity created by Banks in India is Rs.41524096 million in FY 17-18, which is 27.2 percent of total assets of all Scheduled Commercial Banks (excluding Regional Rural Banks),as per broad measure. We found off-balance sheet activities play a significant role in liquidity creation, 25 percent of the total liquidity creation as per broad measure is found to be determined by the off-balance sheet activities. Recently, there have been discussions to privatize the nationalized banks, but our study found that for FY17-18, nationalized banks contributed around 68.2 percent of total liquidity creation whereas private banks and foreign banks contributed 29.7 percentand 2.0 percent, respectively. Nationalized banks are performing quite well in liquidity creation. Though the total number of foreign banks has increased from 31 in 2005 to 45 in 2018, we found a declining trend in creating liquidity by the foreign banks. We have also estimated liquidity creation based on size. The study finds that large banks are contributing significantly towards the liquidity creation, which constitutes 94% of total liquidity creation as per broad measure. |
| Keywords: | Risk transformation, liquidity creation, Scheduled commercial banks, Off-balance sheet activities |
| JEL: | G20 G21 G28 |
| Date: | 2019–03–05 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:92563&r=all |
| By: | Poeschl, Johannes; Zhang, Xue |
| Abstract: | We study the macroeconomic effects of bank capital requirements in an economy with two banking sectors. Banks are connected through a wholesale funding market. Anticipated banking crises occur endogenously in the form of self-fulfilling wholesale funding rollover crises. Retail bank capital requirements can reduce the frequency and severity of banking crises. Tightening retail bank capital requirements increases the size and leverage of the shadow banking sector through a novel channel that works through the anticipation of banking crises. A policy which corrects this spillover is more than twice as effective in reducing the frequency and severity of banking crises. |
| Keywords: | Bank capital regulation, shadow banking, anticipated bank runs. |
| JEL: | E44 G24 G28 |
| Date: | 2018–12–20 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:92529&r=all |
| By: | Christophe GODLEWSKI (LaRGE Research Center, Université de Strasbourg); Laurent WEILL (LaRGE Research Center, Université de Strasbourg) |
| Abstract: | This paper studies how future tense marking affects the terms of bank loans. We predict that languages that grammatically mark the future affect speakers’ intertemporal preferences and thereby reduce the perception of the risks associated with loan issuance. We test this hypothesis on a sample of 2,601 bank loans from 20 European countries. We observe that the use of a language with future tense marking is associated with lower loan spreads and lower collateral use in loan contracts. The results corroborate Chen (American Economic Review, 2013)’s hypothesis that future tense marking makes the future more distant than the present. They suggest that linguistic structure affects terms of loan contracts. |
| Keywords: | language, bank, loans. |
| JEL: | D83 G20 Z13 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:lar:wpaper:2019-02&r=all |
| By: | Kauko, Karlo; Tölö, Eero |
| Abstract: | The trend deviation of the Credit-to-GDP ratio (“Basel gap”) is a widely used early warning indicator of banking crises. It is calculated with the one-sided Hodrick-Prescott filter using an extremely large value of the smoothing parameter λ. We recalibrate the smoothing parameter with panel data covering almost one and a half centuries and 15 countries. The optimal λ is found to be much lower than previously suggested. The 2008 crisis does not dominate the results. The long sample almost eliminates filter initialisation problems. |
| JEL: | G01 E44 N20 |
| Date: | 2019–02–22 |
| URL: | http://d.repec.org/n?u=RePEc:bof:bofrdp:2019_006&r=all |
| By: | Dokko, Jane K. (Federal Reserve Bank of Chicago); Keys, Benjamin J. (University of Pennsylvania); Relihan, Lindsay E. (Federal Reserve Bank of Chicago) |
| Abstract: | At their peak in 2005, roughly 60 percent of all purchase mortgage loans originated in the United States contained at least one non-traditional feature. These features, which allowed borrowers easier access to credit through teaser interest rates, interest-only or negative amortization periods, and extended payment terms, have been the subject of much regulatory and popular criticism. In this paper, we construct a novel county-level dataset to analyze the relationship between rising house prices and non-traditional features of mortgage contracts. We apply a break-point methodology and find that in housing markets with breaks in the mid-2000s, a strong rise in the use of non-traditional mortgages preceded the start of the housing boom. Furthermore, their rise was coupled with declining denial rates and a shift from FHA to subprime mortgages. Our findings support the view that a change in mortgage contract availability and a shift toward subprime borrowers helped to fuel the rise of house prices during the last decade. |
| Keywords: | Housing-policy; mortgage loans; subprime mortgage |
| JEL: | G22 R21 R22 |
| Date: | 2019–01–31 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedhwp:wp-2019-01&r=all |
| By: | Asgharian, Hossein (Department of Economics, Lund University); Krygier, Dominika (Department of Economics, Lund University); Vilhelmsson, Anders (Department of Economics, Lund University) |
| Abstract: | We suggest that banks contribute extensively to systemic risk only if they are both "risky" and centrally placed in the financial network. To calculate systemic risk we apply the CoVaR measure of Adrian and Brunnermeier (2016) and measure centrality using detailed US loan syndication data. In agreement with our conjecture our main finding is that centrality is an important determinant of systemic risk but primarily not by its direct effect. Rather, its main influence is to make other firm specific risk measures more important for highly connected banks. A bank's contribution to systemic risk from a fixed level of Value-at-Risk is about four times higher for a bank with two standard deviations above average centrality compared to a bank with average network centrality. Neglecting this indirect moderation effect of centrality severely underestimates the importance of centrality for "risky" banks and overestimates the effect for "safer" banks. |
| Keywords: | systemic risk; network centrality; loan syndication; CoVaR |
| JEL: | G18 G21 |
| Date: | 2019–03–05 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:lunewp:2019_004&r=all |
| By: | Goldberg, Linda S. (Federal Reserve Bank of New York); Meehl, April (University of Wisconsin-Madison) |
| Abstract: | While both size and complexity are important for the largest U.S. bank holding companies (BHCs), specific types of complexity and their patterns across banks are not well understood. We introduce a range of measures of organizational, business, and geographic complexity. Comparing 2007 with 2017, we show that large U.S. BHCs remain very complex, with some declines along organizational and geographical complexity dimensions. The numbers of legal entities within some large BHCs have fallen. By contrast, the multiple industries spanned by legal entities within the BHCs have shifted more than they have declined, especially within the financial sector. Nonfinancial entities within U.S. BHCs still tilt heavily toward real-estate-related businesses and span numerous other industries. Fewer large BHCs have global affiliates, and the geographic span of the most complex has declined. Favorable tax treatment locations still attract a significant share of the foreign bank and nonbank entities, while fewer legal entities are present in informationally opaque locations. |
| Keywords: | bank; bank holding company; size; complexity; global bank |
| JEL: | F32 G11 G20 |
| Date: | 2019–02–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:880&r=all |