|
on Banking |
| By: | Herzberg, Valerie (Central Bank of Ireland); McQuade, Peter (Central Bank of Ireland) |
| Abstract: | Developments in cross-border banking and bank business models have implications for international risk sharing. During the European sovereign debt crisis, cross-border banks only provided limited risk sharing and even amplified shocks in some euro area Member States. Policymakers responded by introducing an array of prudential instruments to improve bank resilience. This successfully strengthened the euro area banking system, fostering certain bank business models while disincentivising others. Euro area banks are now: (i) more domestically oriented with less cross-border activity; (ii) smaller; (iii) less trading, more lending oriented; (iv) more deposit funded. Conservative business models have advantages from a financial stability perspective, but they may also mitigate the advantages of cross-border activities for banks and the economy. Reforms may be necessary if banks are to play a greater role as a shock absorber in the European banking union. |
| Date: | 2018–08 |
| URL: | http://d.repec.org/n?u=RePEc:cbi:fsnote:5/fs/18&r=all |
| By: | Gropp, Reint; Noth, Felix; Schüwer, Ulrich |
| Abstract: | We show that banks that are facing relatively high locally non-diversifiable risks in their home region expand more across states than banks that do not face such risks following branching deregulation in the 1990s and 2000s. These banks with high locally non-diversifiable risks also benefit relatively more from deregulation in terms of higher bank stability. Further, these banks expand more into counties where risks are relatively high and positively correlated with risks in their home region, suggesting that they do not only diversify but also build on their expertise in local risks when they expand into new regions. |
| Keywords: | banking,geographic expansion,deregulation,locally non-diversifiable risk,catastrophic risk |
| JEL: | G21 G28 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:safewp:246&r=all |
| By: | Santiago Fernández de Lis; Olga Gouveia |
| Abstract: | The emergence of cryptocurrencies is opening the way to Central Bank Digital Currencies (CBDCs). This paper highlights the pros and cons of issuing CBDCs under four different variants: from the more modest proposals where risk and reward are both relatively small, to the most ambitious ones where the ambitious aspiration of ending banking crises. |
| Keywords: | Working Paper , Central Banks , Financial regulation , Digital Regulation , Digital economy , Global |
| Date: | 2019–03 |
| URL: | http://d.repec.org/n?u=RePEc:bbv:wpaper:1904&r=all |
| By: | McCann, Fergal (Central Bank of Ireland); McGeever, Niall (Central Bank of Ireland) |
| Abstract: | Non-performing loan (NPL) balances in the Irish retail banking system declined from e85bn in 2013 to around e25bn in 2017. In this Note, we document how this decline came about using regulatory return data and loan-level data for all property-related lending segments. Firstly, we highlight that NPL resolution is a gradual process: the majority of NPL balances in one year remain as NPLs a year later. Secondly, we show that loan “cure” (the return of previously-defaulted balances to Performing Loan status) is the key driver of NPL reduction in the residential mortgage segment. This is particularly true for principal dwelling home mortgages, where loan restructuring has played a pivotal role. In contrast, loan exit —through liquidations, write-offs, and sales—accounts for a large majority of the NPL reduction in the commercial real estate segment, where concerns about borrowers’ access to housing are less central to the policy discussion. Buy-to-Let (BTL) mortgages, on the other hand, share some of the characteristics of each of the aforementioned asset classes: Exit plays a relatively more important role for BTLs than for PDH mortgages, while Cure plays a greater for BTLs than it does for CRE loans. |
| Date: | 2018–09 |
| URL: | http://d.repec.org/n?u=RePEc:cbi:fsnote:6/fs/18&r=all |
| By: | Galstyan, Vahagn (Central Bank of Ireland); Herzberg, Valerie (Central Bank of Ireland) |
| Abstract: | Large external imbalances have been a persistent feature of most advanced economies, including Ireland. This is despite significant deleveraging of the Irish banking sector since the financial crisis. Given the presence of internationally oriented activities with little Irelandrelated business, early-warning indicator metrics related to the international investment position require adjustments in order to serve as useful monitoring tools.We propose to focus on a metric related to the net external debt liabilities of a narrow set of domestic Irish banks: a closer monitoring of the external balance-sheet risk is warranted when the net external debt liabilities of domestic banks exceed 17 per cent of modified gross national income. |
| Date: | 2018–10 |
| URL: | http://d.repec.org/n?u=RePEc:cbi:fsnote:9/fs/18&r=all |
| By: | Kinghan, Christina (Central Bank of Ireland) |
| Abstract: | This note provides an overview of residential mortgage lending in Ireland in H1 2018. In total, 17,415 loans are covered with a value of e3.75 billion. The majority (97 per cent) of lending in-scope of the mortgage measures was for primary dwelling (PDH) loans. For firsttime buyers (FTBs), the average loan-to-value (LTV) and loan-to-income (LTI) were 79.6 per cent and 3.1 times gross income, respectively. Regarding the LTV limit, 16 per cent of the total value of second and subsequent buyers (SSB) lending in H1 2018 exceeded the 80 per cent LTV limit. Regarding the LTI limit, 23 per cent of the aggregate value of FTB lending exceeded the LTI limit, with 9 per cent of the value of SSB lending originated with an LTI above 3.5. On average, borrowers with an LTI allowance had larger loan sizes and loan terms, were more likely to be based in Dublin and be a single applicant compared to those borrowers without an LTI allowance. SSBs with an LTV allowance had larger loan sizes and incomes and were younger than those without an LTV allowance. These trends were similar to those observed in H1 2017. |
| Date: | 2018–10 |
| URL: | http://d.repec.org/n?u=RePEc:cbi:fsnote:8/fs/18&r=all |
| By: | O'Brien, Eoin (Central Bank of Ireland); O'Brien, Martin (Central Bank of Ireland); Velasco, Sofia (Central Bank of Ireland) |
| Abstract: | Following a number of years where the activation of the countercyclical capital buffer was limited, it is now becoming an increasingly relevant and actively used macroprudential policy tool across Europe. Against this background, this Note describes the high-level approach taken by the Central Bank of Ireland in setting the countercyclical capital buffer rate applicable to Irish exposures. In addition, the Note discusses issues around the identification of cyclical systemic risk in Ireland, and in particular the role of the credit-to-GDP gap as an appropriate reference indicator for countercyclical capital buffer rate decisions. The Note introduces work within the Central Bank of Ireland to develop a potential alternative reference indicator for informing countercyclical capital buffer decisions. In particular, an alternative measure of the national credit gap which looks to account for structural shifts in the economy and informs the estimation of the cycle through additional variables. This semi-structural measure of cyclical systemic risk addresses some of the main drawbacks of purely statistical methods such as excessively persistent trends, a feature that is particularly desirable in post-crisis circumstances. |
| Date: | 2018–07 |
| URL: | http://d.repec.org/n?u=RePEc:cbi:fsnote:4/fs/18&r=all |
| By: | Patrick Fève; Alban Moura; Olivier Pierrard |
| Abstract: | We argue that shocks to credit supply by shadow and retail banks were key to understand the behavior of the US economy during the Great Recession and the Slow Recovery. We base this result on an estimated DSGE model featuring a rich representation of credit flows. Our model selects the two banking shocks as the most important drivers of the crisis because they account simultaneously for the fall in real activity, the decline in credit intermediation and the rise in lending-borrowing spreads. On the other hand, in contrast with the existing literature, our results assign only a moderate role to productivity and investment efficiency shocks. |
| Keywords: | Shadow banking, Great Recession, slow recovery, estimated DSGE models. |
| JEL: | C32 E32 |
| Date: | 2019–03 |
| URL: | http://d.repec.org/n?u=RePEc:bcl:bclwop:bclwp125&r=all |
| By: | Grundke, Peter; Pliszka, Kamil; Tuchscherer, Michael |
| Abstract: | This paper deals with stress tests for credit risk and shows how exploiting the discretion when setting up and implementing a model can drive the results of a quantitative stress test for default probabilities. For this purpose, we employ several variations of a CreditPortfolioView-style model using US data ranging from 2004 to 2016. We show that seemingly only slightly differing specifications can lead to entirely different stress test results - in relative and absolute terms. That said, our findings reveal that the conversion of a shock (i.e., stress event) increases the (non-stress) default probability by 20% to 80% - depending on the stress test model selected. Interestingly, forecasts for non-stress default probabilities are less exposed to model and estimation risk. In addition, the risk horizon over which the stress default probabilities are forecasted and whether we consider mean stress default probabilities or quantiles seem to play only a minor role for the dispersion between the results of the different model specifications. Our findings emphasize the importance of extensive robustness checks for model-based credit risk stress tests. |
| Keywords: | credit risk,default probability,estimation risk,model risk,stress tests |
| JEL: | G21 G28 G32 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubdps:092019&r=all |
| By: | Marcel Br\"autigam; Michel Dacorogna; Marie Kratz |
| Abstract: | Since the introduction of risk-based solvency regulation, pro-cyclicality has been a subject of concerns from all market participants. Here, we lay down a methodology to evaluate the amount of pro-cyclicality in the way financial institutions measure risk, and identify factors explaining this pro-cyclical behavior. We introduce a new indicator based on the Sample Quantile Process (SQP, a dynamic generalization of Value-at-Risk), conditioned on realized volatility to quantify the pro-cyclicality, and evaluate its amount in the markets, considering 11 stock indices as realizations of the SQP. Then we determine two main factors explaining the pro-cyclicality: the clustering and return-to-the-mean of volatility, as it could have been anticipated but not quantified before, and, more surprisingly, the very way risk is measured, independently of this return-to-the-mean effect. |
| Date: | 2019–03 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1903.03969&r=all |
| By: | Lamas, Matías; Mencía, Javier |
| Abstract: | We study determinants of sovereign portfolios of Spanish banks over a long time-span, starting in 2008. Our findings challenge the view that banks engaged in moral hazard strategies to exploit the regulatory treatment of sovereign exposures. In particular, we show that being a weakly capitalized bank is not related to higher holdings of domestic sovereign debt. While a strong link is present between central bank liquidity support and sovereign holdings, opportunistic strategies or reach-for-yield behavior appear to be limited to the non-domestic sovereign portfolio of well-capitalized banks, which might have taken advantage of their higher risk-bearing capacity to gain exposure (via central bank liquidity) to the set of riskier sovereign bonds. Furthermore, we document that financial fragmentation in EMU markets has played a key role in reshaping sovereign portfolios of banks. Overall, our results have important implications for the ongoing discussion on the optimal design of the risk-weighted capital framework of banks. |
| Keywords: | banks´ sovereign holdings, central bank liquidity, EMU financial fragmentation, moral hazard, sovereign crisis |
| Date: | 2019–03 |
| URL: | http://d.repec.org/n?u=RePEc:srk:srkwps:201988&r=all |
| By: | Vivek Sharma (LUISS Guido Carli, Department of Economics and Finance); Edgar Silgado-Gómez (University of Rome "Tor Vergata" & European Central Bank) |
| Abstract: | Using structural vector autoregression augmented with stochastic volatility (SVAR-SV), we document that in late 2000s there were large spikes in volatility of spreads on peripheral eurozone government bonds. This increased volatility entailed a significant decline in bank credit to nonfinancial sector and real economic activity. We rationalize these results in a New Keynesian dynamic stochastic general equilibrium (DSGE) model with financial intermediation. In our framework, a rise in spread volatility erodes banks’ net worth and constrains their balance sheets. The banks respond by slashing their lending to real sector, dampening the economy as a whole. Results from the model match our empirical findings. |
| Keywords: | Sovereign Spread Volatility, Banks, SVAR-SV, NK-DSGE |
| JEL: | E32 E44 F30 |
| Date: | 2019–03–08 |
| URL: | http://d.repec.org/n?u=RePEc:rtv:ceisrp:454&r=all |
| By: | Ellen Ryan; Karl Whelan |
| 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: | Quantitative easing; Reserves; Central banks |
| JEL: | E4 E5 G21 |
| Date: | 2019–01 |
| URL: | http://d.repec.org/n?u=RePEc:ucn:wpaper:201901&r=all |
| By: | Young Sik Kim (Department of Economics, Seoul National University); Ohik Kwon (Economic Research Institute, Bank of Korea) |
| Abstract: | We examine the implications of central bank digital currency (CBDC) for financial stability using a monetary general equilibrium model in which (i) banks provide liquidity in the form of fiat currency, and (ii) commercial bank deposits compete with the central bank deposits in CBDC account. CBDC is a national currency-denominated, interest-bearing and account-based claim on the central bank. People have access to CBDC via direct deposit at the central bank. Claims on specific agents cannot be traded across locations due to limited communication and hence in the event of relocation an agent needs to withdraw deposits in the form of universally verified paper currency. Claims on interest-bearing CBDC is not subject to limited communication problem in the sense that it is also universally verified across locations as an account-based legal tender. The introduction of deposits in CBDC account essentially decreases supply of private credit by commercial banks, which raises the nominal interest rate and hence lowers a commercial bank's reserve-deposit ratio. This has negative effects on financial stability by increasing the likelihood of bank panic in which commercial banks are short of cash reserves to pay out to depositors. However, once the central bank can lend all the deposits in CBDC account to commercial banks, an increase in the quantity of CBDC which does not require reserve holdings can enhance financial stability by essentially increasing supply of private credit and hence lowering nominal interest rate. |
| Keywords: | banking, central bank, digital currency, liquidity |
| JEL: | E31 E42 F33 |
| Date: | 2019–02–08 |
| URL: | http://d.repec.org/n?u=RePEc:bok:wpaper:1906&r=all |
| By: | Francesco Cordoni; Luca Di Persio; Luca Prezioso |
| Abstract: | We derive a closed form solution for an optimal control of interbank lending subject to terminal probability constraints on the failure of a bank. The solution can be applied to a network of banks providing a general solution when aforementioned probability constraints are assumed for all the banks in the system. We also show a direct method to compute the systemic relevance of any node within the financial network itself. Such a parameter being the fundamental one in deciding the accepted probability of failure, hence modifying the final optimal strategy adopted by a financial supervisor aiming at controlling the system. |
| Date: | 2019–03 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1903.06042&r=all |
| By: | Pablo D'Erasmo; Igor Livshits; Koen Schoors (-) |
| Abstract: | Banking regulation routinely designates some assets as safe and thus does not require banks to hold any additional capital to protect against losses from these assets. A typical such safe asset is domestic government debt. There are numerous examples of banking regulation treating domestic government bonds as “safe,” even when there is clear risk of default on these bonds. We show, in a parsimonious model, that this failure to recognize the riskiness of government debt allows (and induces) domestic banks to “gamble” with depositors’ funds by purchasing risky government bonds (and assets closely correlated with them). A sovereign default in this environment then results in a banking crisis. Critically, we show that permitting banks to gamble this way lowers the cost of borrowing for the government. Thus, if the borrower and the regulator are the same entity (the government), that entity has an incentive to ignore the riskiness of the sovereign bonds. We present empirical evidence in support of the key mechanism we are highlighting, drawing on the experience of Russia in the run-up to its 1998 default and on the recent Eurozone debt crisis. |
| Keywords: | Banking; Sovereign default; Prudential regulation; Financial crisis |
| JEL: | G01 G28 F34 |
| Date: | 2019–03 |
| URL: | http://d.repec.org/n?u=RePEc:rug:rugwps:19/964&r=all |