nep-ban New Economics Papers
on Banking
Issue of 2019‒03‒25
fifteen papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. The Basel Capital Requirement, Lending Interest Rate, and Aggregate Economic Growth: An Empirical Study of Viet Nam By Minh Phi, Nguyet Thi; Hong Hoang, Hanh Thi; Taghizadeh-Hesary, Farhad; Yoshino, Naoyuki
  2. Establishment of the Credit Risk Database: Concrete Use to Evaluate the Creditworthiness of SMEs By Kuwahara, Satoshi; Yoshino, Naoyuki; Sagara, Megumi; Taghizadeh-Hesary, Farhad
  3. Monthly Payment Targeting and the Demand for Maturity By Bronson Argyle; Taylor D. Nadauld; Christopher Palmer
  4. The effect of possible EU diversification requirements on the risk of banks' sovereign bond portfolios By Craig, Ben; Giuzio, Margherita; Paterlini, Sandra
  5. Building Credit History with Heterogeneously Informed Lenders By Kovrijnykh, Natalia; Livshits, Igor; Zetlin-Jones, Ariel
  6. Market-Making Costs and Liquidity: Evidence from CDS Markets By Mark Paddrik; Stathis Tompaidis
  7. International Business Cycle and Financial Intermediation By Tamas Csabafi; Max Gillman; Ruthira Naraidoo
  8. A Theory of Housing Demand Shocks By Zheng Liu; Pengfei Wang; Tao Zha
  9. Shadow Banking and the Great Recession: Evidence from an Estimated DSGE Model By Fève, Patrick; Moura, Alban; Pierrard, Olivier
  10. Nonperforming Loans in Asia: Determinants and Macrofinancial Linkages By Rosenkranz, Peter; Lee, Junkyu
  11. Tracking Financial Fragility By Giordani, Paolo; Kwan, Simon H.
  12. The Role of Credit Rating Agencies in Addressing Gaps in Micro and Small Enterprise Financing: The Case of India By Shankar, Savita
  13. BBVA big data on online credit card transactions: The patterns of domestic and cross-border e-commerce By OECD
  14. The Ins and Outs of Collateral Re-use By Sebastian Infante; Charles Press; Jacob Strauss
  15. Effectiveness of policy and regulation in European sovereign credit risk markets: a network analysis By Buse, Rebekka; Schienle, Melanie; Urban, Jörg

  1. By: Minh Phi, Nguyet Thi (Asian Development Bank Institute); Hong Hoang, Hanh Thi (Asian Development Bank Institute); Taghizadeh-Hesary, Farhad (Asian Development Bank Institute); Yoshino, Naoyuki (Asian Development Bank Institute)
    Abstract: In recent years, the Vietnamese economy has shown signs of financial distress, and especially small banks have experienced serious liquidity and solvency problems. Based on the new policy of the State Bank of Vietnam, in order to ensure safe and effective banking operations, the Basel II accord will be widely applied to the whole banking system by 2018. This paper investigates the effects of the Basel II capital requirement implementation in Viet Nam on the bank lending rate and national output. The paper provides a theoretical framework as well as empirical model by developing a Vector Error Correction Model (VECM) over the period 2018 to 2016 by employing three groups of indicators (macroeconomics, banking, and monetary). The main finding of the paper is that at the bank level, a tightening of regulatory capital requirements does not induce a higher lending rate in the long run. Also, changes in micro-prudential capital requirements on banks have statistically significant spillovers on the GDP growth rate in the short term; yet, their effects significantly lessen over a longer period.
    Keywords: Basel II; regulatory capital requirements; bank capital; lending rate; aggregate growth
    JEL: G21 G28
    Date: 2019–01–18
  2. By: Kuwahara, Satoshi (Asian Development Bank Institute); Yoshino, Naoyuki (Asian Development Bank Institute); Sagara, Megumi (Asian Development Bank Institute); Taghizadeh-Hesary, Farhad (Asian Development Bank Institute)
    Abstract: The credit risk database (CRD) makes it possible to mitigate the problem of information asymmetry between small and medium-sized enterprises (SMEs) and financial institutions and contributes to improving SMEs’ access to finance by collecting a large number of financial statements through the mechanism of SME finances and establishing a robust statistical model. We use the CRD in Japan, confirm the situation in Japan, and highlight the CRD’s contribution to evaluating the creditworthiness of SMEs. We also explain how to establish the CRD as a financial infrastructure, while indicating that the CRD and the scoring model based on it have maintained their quality owing to their operating system. We hope our experience contributes to the introduction of a statistical credit risk database composed of a large number of anonymous financial statement data in other countries and that the CRD helps to improve SMEs’ access to finance as a financial infrastructure.
    Keywords: credit risk database; CRD creditworthiness; SMEs in Japan
    JEL: G21 G28 G32
    Date: 2019–02–21
  3. By: Bronson Argyle; Taylor D. Nadauld; Christopher Palmer
    Abstract: In this paper, we provide evidence of the importance of monthly payments in the market for consumer installment debt. Auto debt in particular has grown rapidly since the Great Recession and has eclipsed credit cards in total debt outstanding. Auto-loan maturities have also increased such that most auto-loan originations now have a term of over 72 months. We document three phenomena we jointly refer to as monthly payment targeting. First, using data from 500,000 used auto loans and discontinuities in contract terms offered by hundreds of lenders, we show that demand is more sensitive to maturity than interest rate, consistent with consumers managing payment size when making debt decisions. Second, many consumers appear to employ segregated mental accounts, spending exogenous payment savings on larger loans. Third, consumers bunch at round-number monthly payment amounts, consistent with the use of budgeting heuristics. These patterns hold in subsamples of constrained and unconstrained borrowers, challenging liquidity constraints as a complete explanation. Our estimates suggest that borrower focus on payment size, combined with credit-supply shocks to maturity, could significantly affect aggregate outstanding debt.
    JEL: D14 D18 D91 E43 E51 G02 G21 H31 L62 M38
    Date: 2019–03
  4. By: Craig, Ben; Giuzio, Margherita; Paterlini, Sandra
    Abstract: Recent policy discussion includes the introduction of diversification requirements for sovereign bond portfolios of European banks. In this paper, we evaluate the possible effects of these constraints on risk and diversification in the sovereign bond portfolios of the major European banks. First, we capture the dependence structure of European countries' sovereign risks and identify the common factors driving European sovereign CDS spreads by means of an independent component analysis. We then analyze the risk and diversification in the sovereign bond portfolios of the largest European banks and discuss the role of “home bias”, i.e., the tendency of banks to concentrate their sovereign bond holdings in their domicile country. Finally, we evaluate the effect of diversification requirements on the tail risk of sovereign bond portfolios and quantify the system-wide losses in the presence of fire-sales. Under our assumptions about how banks respond to the new requirements, demanding that banks modify their holdings to increase their portfolio diversification may mitigate fire-sale externalities, but may be ineffective in reducing portfolio risk, including tail risk. JEL Classification: G01, G11, G21, G28
    Keywords: bank regulation, diversification, home bias, sovereign-bank nexus, sovereign risk
    Date: 2019–03
  5. By: Kovrijnykh, Natalia (Arizona State University); Livshits, Igor (Federal Reserve Bank of Philadelphia); Zetlin-Jones, Ariel (Carnegie Mellon University)
    Abstract: This paper examines a novel mechanism of credit-history building as a way of aggregating information across multiple lenders. We build a dynamic model with multiple competing lenders, who have heterogeneous private information about a consumer's creditworthiness, and extend credit over multiple stages. Acquiring a loan at an early stage serves as a positive signal | it allows the borrower to convey to other lenders the existence of a positively informed lender (advancing that early loan) | thereby convincing other lenders to extend further credit in future stages. This signaling may be costly to the least risky borrowers for two reasons. First, taking on an early loan may involve cross-subsidization from the least risky borrowers to more risky borrowers. Second, the least risky borrowers may take inefficiently large loans relative to the symmetric-information benchmark. We demonstrate that, despite these two possible costs, the least risky borrowers often prefer these equilibria to those without information aggregation. Our analysis offers an interesting and novel insight into debt dilution. Contrary to the conventional wisdom, repayment of the early loan is more likely when a borrower subsequently takes on a larger rather than a smaller additional loan. This result hinges on a selection effect: larger subsequent loans are only given to the least risky borrowers.
    Keywords: Credit History; Information Aggregation; Debt Dilution
    JEL: D14 D82 D83 D86 G21
    Date: 2019–03–13
  6. By: Mark Paddrik (Office of Financial Research); Stathis Tompaidis (University of Texas at Austin)
    Abstract: In over-the-counter markets, dealers facilitate trading by becoming market makers. The costs dealers face, including the cost of holding inventory on balance sheet, and the ease, or difficulty, of reducing their positions, determine the degree of liquidity they provide. We provide a stylized model to examine the implications of these costs on dealer behavior and market liquidity. We use the model to guide an empirical study of the single-name credit default swap (CDS) market between 2010-2016. We find that transaction prices between dealers and clients have progressively become more dependent on the inventories of individual dealers rather than on the aggregate inventory across all dealers. We also find that the volume between clients and dealers decreases across all clients, with larger declines for clients that are depository institutions. At the same time, the volume of interdealer trades decreases, dealer inventories decline, and dealers with large inventories are more likely to trade with clients. Our results are consistent with the view that regulatory reforms implemented following the 2007-09 financial crisis increased the cost of holding inventory for dealers, and the cost of interdealer trading.
    Keywords: credit default swaps, liquidity, market making, transaction costs
    Date: 2019–03–12
  7. By: Tamas Csabafi (Department of Economics, University of Missouri-St. Louis); Max Gillman (Department of Economics, University of Missouri-St. Louis); Ruthira Naraidoo (Department of Economics, University of Pretoria)
    Abstract: The paper extends a standard two-country international real business cycle model to include financial intermediation by banks of loans and government bonds. Taking in household deposits from home and abroad, the loans are produced by the bank in a Cobb-Douglas production approach such that a bank productivity shock can explain financial data moments. The paper contributes an explanation, for both the US relative to the Euro-area, and the US relative to China, of cross-country correlations of loan rates, deposit rates, and the loan premia. It provides a sense in which financial retrenchment resulted in the US following the 2008 bank crisis, and how the Euro-area and China reacted. The paper contributes evidence of how the Euro-area has been more Önancially integrated with the US, and China less financially integrated, with the Euro-area becoming more financially integrated after the 2008 crisis, and China becoming less so integrated.
    Keywords: international real business cycles, financial intermediation, credit spread, bank productivity, 2008 crisis.
    JEL: E13 E32 E44 F41
    Date: 2018–09
  8. By: Zheng Liu; Pengfei Wang; Tao Zha
    Abstract: Aggregate housing demand shocks are an important source of house price fluctuations in the standard macroeconomic models, and through the collateral channel, they drive macroeconomic fluctuations. These reduced-form shocks, however, fail to generate a highly volatile price-to-rent ratio that comoves with the house price observed in the data (the “price-rent puzzle”). We build a tractable heterogeneous-agent model that provides a microeconomic foundation for housing demand shocks. The model predicts that a credit supply shock can generate large comovements between the house price and the price-to-rent ratio. We provide empirical evidence from cross-country and cross-MSA data to support this theoretical prediction.
    JEL: E21 E44 G21
    Date: 2019–03
  9. By: Fève, Patrick; Moura, Alban; Pierrard, Olivier
    Abstract: We argue that shocks to credit supply by shadow and retail banks were key to understanding 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
  10. By: Rosenkranz, Peter (Asian Development Bank); Lee, Junkyu (Asian Development Bank)
    Abstract: The recent rise of nonperforming loans (NPLs) in some Asian economies calls for close analysis of the determinants, the potential macrofinancial feedback effects, and the implications for financial stability in the region. Using a dynamic panel model, we assess the determinants of the evolution of bankspecific NPLs in Asia and find that macroeconomic conditions and bank-specific factors—such as rapid credit growth and excessive bank lending—contribute to the buildup of NPLs. Further, a panel vector autoregression analysis of macrofinancial implications of NPLs in emerging Asia offers significant evidence for the feedback effects of NPLs on the real economy and financial variables. Impulse response functions demonstrate that a rising NPL ratio decreases gross domestic product growth and credit supply and increases unemployment rate. Our findings underline the importance of considering policy options to swiftly and effectively manage and respond to a buildup of NPLs. The national and regional mechanisms underlying NPL resolution are important for safeguarding financial stability in an increasingly interconnected global financial system.
    Keywords: dynamic panel model; emerging Asia; financial stability; macrofinancial feedback effects; nonperforming loans; panel vector autoregression model
    JEL: C32 C33 E44 G21 O16
    Date: 2019–03–14
  11. By: Giordani, Paolo (Norwegian Business School, Oslo); Kwan, Simon H. (Federal Reserve Bank of San Francisco)
    Abstract: In constructing an indicator of financial fragility, the choice of which filter (or transformation) to apply to the data series that appear to trend in sample is often considered a technicality, but in fact turns out to matter a great deal. The fundamental assumption about the likely nature of observed trends in the data, for example, the ratio of credit to GDP, has direct effects on the measured gap or vulnerability. We discuss shortcomings of the most common filters used in the literature and policy circle, and propose a fairly simple and intuitive alternative - the local level filter. To the extent that validation will always be a challenge when the number of observed financial crises (in the US) is small, we conduct a simulation exercise to make the case. We also conduct a cross country analysis to show how qualitatively different the estimated credit gaps were as of 2017, and hence their policy implications in 29 countries. Finally, we construct an indicator of financial fragility for the US economy based on the view that systemic fragility stems mainly from high level of debts (among households and corporations) associated with high valuations for collateral assets (real estate, stocks). An indicator based on the local level filter signals elevated financial fragility in the US financial system currently, whereas the HP filter and the ten-year moving average provide much more benign readings.
    Date: 2019–02–28
  12. By: Shankar, Savita (Asian Development Bank Institute)
    Abstract: We describe the common financing challenges faced by micro, small, and medium-sized enterprises (MSMEs) in India and some important measures taken to address them, with a focus on the credit rating scheme implemented in 2000. We examine the usefulness as well as the limitations of the scheme, drawing on interviews with rating agencies and MSMEs. With credit rating being an expensive exercise, the availability of government subsidies under the scheme has been an important factor in encouraging MSMEs to get themselves rated, thereby reducing information asymmetry with banks and enabling access to credit. Given the large number of unbanked MSMEs in the country, leveraging the data generated by MSME lending and credit rating in the country through the creation of a credit risk database is necessary. Lenders will then be able to tap into the collective data generated to make more informed credit decisions with regard to MSMEs without relying on subsidies. Over 63 million micro, small, and medium-sized enterprises in India generate lending and credit rating data. How can lenders leverage these to make informed credit decisions?
    Keywords: micro; small; and medium-sized enterprises; India; credit rating
    JEL: G21 G28 G38
    Date: 2019–03–14
  13. By: OECD
    Abstract: This report uses a standard gravity setup to analyse the determinants of e-commerce, using data on online credit card payments by private Spanish customers of the multinational bank BBVA. The results show that the gravity model applies well to credit card payments, explaining up to 95% of the variation in the data. The analysis finds potentially large border effects for trade between any two regions or countries, implying that individuals tend to purchase more from their home region or domestically than from other places. The estimates also suggest that the effect of distance might be slightly less important for e-commerce transactions than for offline trade, although the death of distance hypothesis is clearly rejected by the data.
    Date: 2019–03–08
  14. By: Sebastian Infante; Charles Press; Jacob Strauss
    Abstract: In this article, we empirically document how primary dealers use and re-use collateral (that is, financial securities) in the United States.
    Date: 2018–12–21
  15. By: Buse, Rebekka; Schienle, Melanie; Urban, Jörg
    Abstract: We study the impact of changes in regulations and policy interventions on systemic risk among European sovereigns measured as volatility spillovers in respective credit risk markets. Our unique intraday CDS dataset allows for precise measurement of the effectiveness of these events in a network setting. In particular, it allows discerning interventions which entail significant changes in network cross-effects with appropriate bootstrap confidence intervals. We show that it was mainly regulatory changes with the ban of trading naked sovereign CDS in 2012 as well as the new ISDA regulations in 2014 which were most effective in reducing systemic risk. In comparison, we find that the effect of policy interventions was minor and generally not sustainable. In particular, they only had a significant impact when implemented for the first time and when targeting more than one country. For the volatility spillover channels, we generally find balanced networks with no fragmentation over time. JEL Classification: G20, G01, G17, C32, C55, G28
    Keywords: bootstrap spillover-measures, financial crises, financial stability and systemic risk in the Eurozone, high-frequency CDS, policy and regulation
    Date: 2019–03

This nep-ban issue is ©2019 by Christian Calmès. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
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