nep-ban New Economics Papers
on Banking
Issue of 2019‒04‒22
twenty papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Enforcement of banking regulation and the cost of borrowing By Yota Deli; Manthos D. Delis; Iftekhar Hasan; Liuling Liu
  2. The rise of shadow banking: evidence from capital regulation By Rustom M. Irani; Rajkamal Iyer; Ralf R. Meisenzahl; José-Luis Peydró
  3. Macroprudential and monetary policy: Loan-level evidence from reserve requirements By Cecilia Dassatti Camors; José-Luis Peydró; Francesc Rodriguez-Tous
  4. Capital Regulation, Efficiency, and Risk Taking: A Spatial Panel Analysis of U.S. Banks By Ding, Dong; Sickles, Robin C.
  5. Impact of targeted credit easing by the ECB. Bank-level evidence By Joost Bats; Tom Hudepohl
  6. Negative monetary policy rates and portfolio rebalancing: Evidence from credit register data By Margherita Bottero; Camelia Minoiu; José-Luis Peydró; Andrea Polo; Andrea F. Presbitero; Enrico Sette
  7. The effect of TLTRO-II on bank lending By Laine, Olli-Matti
  8. The Marginal Effect of Government Mortgage Guarantees on Homeownership By Serafin J. Grundl; You Suk Kim
  9. Rethinking Capital Regulation: The Case for a Dividend Prudential Target By Manuel Muñoz
  10. The international bank lending channel of monetary policy rates and QE: Credit supply, reach-for-yield, and real effects By Bernardo Morais; José-Luis Peydró; Jessica Roldán-Peña; Claudia Ruiz-Ortega
  11. The benefits and costs of adjusting bank capitalisation: evidence from euro area countries By Budnik, Katarzyna; Affinito, Massimiliano; Barbic, Gaia; Ben Hadj, Saiffedine; Chretien, Edouard; Dewachter, Hans; Gonzalez, Clara Isabel; Hu, Jenny; Jantunen, Lauri; Jimborean, Ramona; Manninen, Otso; Martinho, Ricardo; Mencía, Javier; Mousarri, Elena; Naruševičius, Laurynas; Nicoletti, Giulio; O’Grady, Michael; Ozsahin, Selcuk; Pereira, Ana Regina; Rivera-Rozo, Jairo; Trikoupis, Constantinos; Venditti, Fabrizio; Velasco, Sofia
  12. The Limits of Lending? Banks and Technology Adoption across Russia By Bircan, Cagatay; de Haas, Ralph
  13. Distressed Banks, Distorted Decisions? By Gareth Anderson; Rebecca Riley; Garry Young
  14. Endogenous Repo Cycles By Makoto Watanabe; Vyacheslav Arbuzov; Yu Awaya; Hiroki Fukai
  15. Hedger of last resort: evidence from Brazilian FX interventions, local credit, and global financial cycles By Rodrigo Barbone Gonzalez; Dmitry Khametshin; José-Luis Peydró; Andrea Polo
  16. Frontier Efficiency, Capital Structure, and Portfolio Risk: An Empirical Analysis of U.S. Banks By Ding, Dong; Sickles, Robin C.
  17. Entrepreneurial finance, home equity, and monetary policy By Paul Jackson; Florian Madison
  18. Fragile New Economy: The Rise of Intangible Capital and Financial Instability By Li, Ye
  19. Affordability, Financial Innovation, and the Start of the Housing Boom By Campbell, Jeffrey R.; Ferroni, Filippo; Fisher, Jonas D. M.; Melosi, Leonardo
  20. The Financial Stability Board in 2019 : a speech at the Joint Conference of the European Central Bank and the Journal of Money, Credit, and Banking, Frankfurt, Germany, March 28, 2019. By Quarles, Randal K.

  1. By: Yota Deli; Manthos D. Delis; Iftekhar Hasan; Liuling Liu
    Abstract: We show that borrowing firms benefit substantially from important enforcement actions issued on U.S. banks for safety and soundness reasons. Using hand-collected data on such actions from the main three U.S. regulators and syndicated loan deals over the years 1997–2014, we find that enforcement actions decrease the total cost of borrowing by approximately 22 basis points (or $4.6 million interest for the average loan). We attribute our finding to a competition-reputation effect that works over and above the lower risk of punished banks post-enforcement and survives in a number of sensitivity tests. We also find that this effect persists for approximately four years post-enforcement.
    Keywords: Bank supervision; Enforcement actions; Syndicated loans; Loan pricing
    JEL: E44 E51 G21 G28
    Date: 2019–01
  2. By: Rustom M. Irani; Rajkamal Iyer; Ralf R. Meisenzahl; José-Luis Peydró
    Abstract: We investigate the connections between bank capital regulation and the prevalence of lightly regulated nonbanks (shadow banks) in the U.S. corporate loan market. For identification, we exploit a supervisory credit register of syndicated loans, loan-time fixed-effects, and shocks to capital requirements arising from surprise features of the U.S. implementation of Basel III. We find that less-capitalized banks reduce loan retention and nonbanks step in, particularly among loans with higher capital requirements and at times when capital is scarce. This reallocation has important spillovers: loans funded by nonbanks with fragile liabilities experience greater sales and price volatility during the 2008 crisis.
    Keywords: Shadow banks; risk-based capital regulation; Basel III; interactions between banks and nonbanks; trading by banks; distressed debt
    JEL: G01 G21 G23 G28
    Date: 2018–04
  3. By: Cecilia Dassatti Camors; José-Luis Peydró; Francesc Rodriguez-Tous
    Abstract: We analyze the impact of reserve requirements on the supply of credit to the real sector. For identification, we exploit a tightening of reserve requirements in Uruguay during a global capital inflows boom, where the change affected more foreign liabilities, in conjunction with its credit register that follows all bank loans granted to non-financial firms. Following a difference-in-differences approach, we compare lending to the same firm before and after the policy change among banks differently affected by the policy. The results show that the tightening of the reserve requirements for banks lead to a reduction of the supply of credit to firms. Importantly, the stronger quantitative results are for the tightening of reserve requirements to bank liabilities stemming from non-residents. Moreover, more affected banks increase their exposure into riskier firms, and larger banks mitigate the tightening effects. Finally, the firm-level analysis reveals that the cut in credit supply in the loan-level analysis is binding for firms. The results have implications for global monetary and financial stability policies.
    JEL: E51 E52 G21 G28
    Date: 2019–03
  4. By: Ding, Dong (Rice U); Sickles, Robin C. (Rice U)
    Abstract: In this study, we empirically assess the impact of capital regulations on capital adequacy ratios, portfolio risk levels and cost efficiency for U.S. banks. Using a large panel data of U.S. banks between 2001-2016, we first estimate the model using two-step generalized method of moments (GMM) estimators. After obtaining residuals from the regressions, we propose a method to construct the network based on clustering of these residuals. The residuals capture the unobserved heterogeneity that goes beyond systematic factors and banks' business decisions that impact its level of capital, risk and cost efficiency and thus represent unobserved network heterogeneity across banks. We then re-estimate the model in a spatial error framework. The comparisons of Fixed Effects, GMM Fixed Effect models with spatial fixed effects models provide clear evidence of the existence of unobserved spatial effects in the interbank network. We find a stricter capital requirement causes banks to reduce investments in risk-weighted assets, but at the same time, increase holdings of non-performing loans, suggesting the unintended effects of higher capital requirements on credit risks. We also find the amount of capital buffers has an important impact on banks' management practices even when regulatory capital requirements are not binding.
    Date: 2018–07
  5. By: Joost Bats; Tom Hudepohl
    Abstract: The interest rate in the second series of ECB targeted longer-term refinancing operations is conditional on a participant-specific lending benchmark. The restrictiveness of this benchmark varies between banks. We employ fixed effects estimations on a unique micro-dataset and investigate the relationship between the benchmark restrictiveness and net bank lending. We find that a more restrictive benchmark is associated with more total net lending and net lending to non-financial corporates by relatively large banks. Banks that are relatively large and face the most restrictive benchmark increase their lending to the real economy with 9 to 17 percent. We find no significant effects on net lending by relatively small banks. Furthermore, the restrictiveness of the benchmark does not affect net lending to households. Our findings suggest that the design of targeted lending benchmarks influences bank credit flows and that a more binding benchmark would have been even more effective in stimulating bank lending.
    Keywords: central bank; monetary policy; refinancing operations; credit easing; bank credit
    JEL: C23 E51 E58 G21
    Date: 2019–04
  6. By: Margherita Bottero; Camelia Minoiu; José-Luis Peydró; Andrea Polo; Andrea F. Presbitero; Enrico Sette
    Abstract: We study negative interest rate policy (NIRP) exploiting ECB’s NIRP introduction and administrative data from Italy, severely hit by the Eurozone crisis. NIRP has expansionary effects on credit supply—and hence the real economy—through a portfolio rebalancing channel. NIRP affects banks with higher ex-ante net short-term interbank positions or, more broadly, more liquid balance-sheets, not with higher retail deposits. NIRP-affected banks rebalance their portfolios from liquid assets to credit—especially to riskier and smaller firms—and cut loan rates, inducing sizable real effects. By shifting the entire yield curve downwards, NIRP differs from rate cuts just above the ZLB.
    Keywords: negative interest rates, portfolio rebalancing, bank lending channel of monetary policy, liquidity management, Eurozone crisis.
    JEL: E52 E58 G01 G21 G28
    Date: 2019–02
  7. By: Laine, Olli-Matti
    Abstract: This study applies a difference-in-differences approach to estimate the effect of the European Central Bank’s second series of targeted longer-term refinancing operations (TLTRO-II) on bank lending. Effects on corporate loans, loans for house purchase and loans for consumption are analysed separately. The results indicate that TLTRO-II increased lending to non-financial corporations. The cumulative effect of TLTRO-II on participating banks’ corporate lending is estimated to be about 30 per cent. The estimated effects for house purchase and consumption loans are positive, but statistically insignificant.
    JEL: E44 E51 E52 G21
    Date: 2019–04–08
  8. By: Serafin J. Grundl; You Suk Kim
    Abstract: The U.S. government guarantees a majority of residential mortgages, which is often justified as a means to promote homeownership. In this paper we use property-level data to estimate the effect of government mortgage guarantees on homeownership, by exploiting variation of the conforming loan limits (CLLs) along county borders. We find substantial effects on government guarantees, but find no robust effect on homeownership. This finding suggests that government guarantees could be considerably reduced with modest effects on homeownership, which is relevant for housing finance reform plans that propose to reduce the government’s involvement in the mortgage market by reducing the CLLs.
    Keywords: Federal Housing Administration ; Government mortgage guarantees ; Government-sponsored enterprises ; Homeownership
    JEL: G21 R31 R38
    Date: 2019–04–16
  9. By: Manuel Muñoz
    Abstract: The paper investigates the effectiveness of dividend-based macroprudential rules in complementing capital requirements to promote bank soundness and sustained lending over the cycle. First, some evidence on bank dividends and earnings in the euro area is presented. When shocks hit their profits, banks adjust retained earnings to smooth dividends. This generates bank equity and credit supply volatility. Then, a DSGE model with key financial frictions and a banking sector is developedto assess the virtues of what shall be called dividend prudential targets. Welfare-maximizing dividend-based macroprudential rules are shown to have importantproperties: (i) they are effective in smoothing the financial cycle by means of lessvolatile bank retained earnings, (ii) they induce welfare gains associated to a BaselIII-type of capital regulation, (iii) they mainly operate through their cyclical component,ensuring that long-run dividend payouts remain unaffected, (iv) they are flexible enough so as to allow bank managers to optimally deviate from the target, and (v) they act as an insurance scheme for the real economy. Keywords : macroprudential regulation, capital requirements, dividend prudential target, financial stability, bank dividends
    JEL: E44 E61 G21 G28 G35
  10. By: Bernardo Morais; José-Luis Peydró; Jessica Roldán-Peña; Claudia Ruiz-Ortega
    Keywords: monetary policy, financial globalization, quantitative easing (QE), credit supply, risk-taking, foreign banks.
    JEL: E52 E58 G01 G21 G28
    Date: 2018–10
  11. By: Budnik, Katarzyna; Affinito, Massimiliano; Barbic, Gaia; Ben Hadj, Saiffedine; Chretien, Edouard; Dewachter, Hans; Gonzalez, Clara Isabel; Hu, Jenny; Jantunen, Lauri; Jimborean, Ramona; Manninen, Otso; Martinho, Ricardo; Mencía, Javier; Mousarri, Elena; Naruševičius, Laurynas; Nicoletti, Giulio; O’Grady, Michael; Ozsahin, Selcuk; Pereira, Ana Regina; Rivera-Rozo, Jairo; Trikoupis, Constantinos; Venditti, Fabrizio; Velasco, Sofia
    Abstract: The paper proposes a framework for assessing the impact of system-wide and bank-level capital buffers. The assessment rests on a factor-augmented vector autoregression (FAVAR) model that relates individual bank adjustments to macroeconomic dynamics. We estimate FAVAR models individually for eleven euro area economies and identify structural shocks, which allow us to diagnose key vulnerabilities of national banking systems and estimate short-run economic costs of increasing banks’ capitalisation. On this basis, we run a fully-fledged cost-benefit assessment of an increase in capital buffers. The benefits are related to an increase in bank resilience to adverse shocks. Higher capitalisation allows banks to withstand negative shocks and moderates the reduction of credit to the real economy that ensues in adverse circumstances. The costs relate to transitory credit and output losses that are assessed both on an aggregate and bank level. An increase in capital ratios is shown to have a sharply different impact on credit and economic activity depending on the way banks adjust, i.e. via changes in assets or equity. JEL Classification: E51, G21, G28
    Keywords: banking system resilience, capital regulation, cost-benefit analysis, FAVAR
    Date: 2019–04
  12. By: Bircan, Cagatay; de Haas, Ralph
    Abstract: We exploit historically-determined variation in local credit markets to identify the impact of bank lending on firm innovation across Russia. We find that deeper credit markets increase firms' use of bank credit, their adoption of new products and technologies, and productivity growth. This relationship is more pronounced in industries further from the technological frontier; more exposed to import competition; and that export more. These impacts are also stronger for firms near historical R&D centers or railways, and in regions with supportive institutions. Consistent with these results, credit markets contribute to economic growth in such regions.
    Keywords: credit constraints; Firm innovation; institutions; Russia; Technological change
    JEL: D22 G21 O12 O31
    Date: 2019–04
  13. By: Gareth Anderson (University of Oxford); Rebecca Riley (NIESR; Centre for Macroeconomics (CFM)); Garry Young (NIESR; Centre for Macroeconomics (CFM))
    Abstract: Exploiting differences in pre-crisis business banking relationships, we present evidence to suggest that restricted credit availability following the 2008 financial crisis increased the rate of business failure in the United Kingdom. But rather than "cleansing" the economy by accelerating the exit of the least productive businesses, we find that tighter credit conditions resulted in some businesses failing despite being more productive than their surviving competitors. We also find evidence that distressed banks protected highly leveraged, low pro ductivity businesses from failure.
    JEL: D22 D24 G21 G30 L10
    Date: 2019–04
  14. By: Makoto Watanabe (VU Amsterdam); Vyacheslav Arbuzov (University of Rochester); Yu Awaya (University of Rochester); Hiroki Fukai (Kyushu University)
    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
  15. By: Rodrigo Barbone Gonzalez; Dmitry Khametshin; José-Luis Peydró; Andrea Polo
    Abstract: We show that local central bank policies attenuate global financial cycle (GFC)’s spillovers. For identification, we exploit GFC shocks and Brazilian interventions in FX derivatives using three matched administrative registers: credit, foreign credit flows to banks, and employer-employee. After U.S. Federal Reserve Taper Tantrum (with strong Emerging Markets FX depreciation and volatility increase), Brazilian banks with larger ex-ante reliance on foreign debt strongly cut credit supply, thereby reducing firm-level employment. However, Brazilian FX large intervention supplying derivatives against FX risks—hedger of last resort—halves the negative effects. Finally, a 2008-2015 panel exploiting GFC shocks and local policies confirm the results.
    Keywords: foreign exchange, monetary policy, central bank, bank credit, hedging
    JEL: E5 F3 G01 G21 G28
    Date: 2018–10
  16. By: Ding, Dong (Rice U); Sickles, Robin C. (Rice U)
    Abstract: The measurement of firm performance is central to management research. Firms' ability to effectively allocate capital and manage risks are the essence of their production and performance. This study investigated the relationship between capital structure, portfolio risk levels and firm performance using a large sample of U.S. banks from 2001-2016. Stochastic frontier analysis (SFA) was used to construct a frontier to measure firm's cost efficiency as a proxy for firm performance. We further look at their relationship by dividing the sample into different size and ownership classes, as well as the most and least efficient banks. The empirical evidence suggests that more efficient banks increase capital holdings and take on greater credit risk while reducing risk weighted assets. Moreover, it appears that increasing the capital buffer impacts risk-taking by banks depending on their level of cost efficiency, which is a placeholder for how productive their intermediation services are performed. More cost efficient banks that are well-capitalized tend to maintain relatively large capital buffers versus banks that are not. An additional finding, which is quite important, is that the direction of the relationship between risk-taking and capital buffers differs depending on what measure of risk is used.
    Date: 2018–06
  17. By: Paul Jackson; Florian Madison
    Abstract: We model entrepreneurial finance using a combination of fiat money, traditional bank loans, and home equity loans. The banking sector is over-the- counter, where bargaining determines the pass-through from the nominal interest rate to the bank lending rate, characterizing the transmission channel of monetary policy. The results show that the strength of this channel depends on the combination of nominal and real assets used to finance investments, and thus declines in the extent to which housing is accepted as collateral. A calibration to the U.S. economy supports the theoretical results and provides novel insights on entrepreneurial finance between 2000 and 2016.
    Keywords: Entrepreneurial finance, money, housing, collateral, monetary policy
    JEL: E22 E40 E52 G31 R31
    Date: 2019–04
  18. By: Li, Ye (Ohio State University)
    Abstract: This paper analyzes the endogenous risk in economies where intangible capital is essential and its limited pledgeability induces firms' liquidity demand. Banks emerge to intermediate the liquidity supply by holding claims on firms' tangible capital and issuing deposits that firms hold to pay for intangible investment. A bubbly value of tangible capital arises and increases in banks' balance-sheet capacity. Its procyclicality induces firms' investment and savings waves, which feed into banks' risk-taking and amplify downside risks. The model produces stagnant crises and replicates several trends in the decades leading up to the Great Recession: (1) the rise of intangible capital; (2) the increase of firms' cash holdings; (3) the growth of financial intermediation; (4) the declining real interest rate; (5) the rising prices of collateral assets.
    JEL: D92 E10 E32 E41 E44 E51 G12 G20 G31
    Date: 2019–01
  19. By: Campbell, Jeffrey R. (Federal Reserve Bank of Chicago); Ferroni, Filippo (Federal Reserve Bank of Chicago); Fisher, Jonas D. M. (Federal Reserve Bank of Chicago); Melosi, Leonardo (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: monetary policy; forward guidance puzzle; central bank communication; business cycles; risk management
    JEL: E0 E52 F44
    Date: 2019–03–20
  20. By: Quarles, Randal K. (Board of Governors of the Federal Reserve System (U.S.))
    Date: 2019–03–28

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