nep-ban New Economics Papers
on Banking
Issue of 2019‒05‒06
fifteen papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. The transmission channels of unconventional monetary policy: Evidence from a change in collateral requirements in France By Delatte, Anne-Laure; Garg, Pranav; Imbs, Jean
  2. Taking regulation seriously: fire sales under solvency and liquidity constraints By Coen, Jamie; Lepore, Caterina; Schaanning, Eric
  3. Has regulatory capital made banks safer? Skin in the game vs moral hazard By Dautovic, Ernest
  4. Small Firms and Domestic Bank Dependence in Europe's Great Recession By Hoffmann, Mathias; Maslov, Egor; Sørensen, Bent E
  6. Financial cycles as early warning indicators - Lessons from the Nordic region By Önundur Páll Ragnarsson; Jón Magnús Hannesson; Loftur Hreinsson
  7. Money, credit, monetary policy, and the business cycle in the euro area: what has changed since the crisis? By Giannone, Domenico; Lenza, Michele; Reichlin, Lucrezia
  8. Banks Adjust Slowly: Evidence and Lessons for Modeling By Begenau, Juliane; Bigio, Saki; Majerovitz, Jeremy
  9. Bank Leverage, Welfare, and Regulation By Admati, Anat R.; Hellwig, Martin F.
  10. Mapping bank securities across euro area sectors: comparing funding and exposure networks By Hüser, Anne-Caroline; Kok, Christoffer
  11. Liquidity Funding Shocks : The Role of Banks' Funding Mix By Antonio Alvarez; Alejandro Fernandez; Joaquin Garcia-Cabo; Diana Posada
  12. Distressed Banks, Distorted Decisions? By Gareth Anderson; Rebecca Riley; Garry Young
  13. Have FSRs got news for you? Evidence from the impact of Financial Stability Reports on market activity By Harris, Richard; Karadotchev, Veselin; Sowerbutts, Rhiannon; Stoja, Evarist
  14. Capital Requirements, Risk Choice, and Liquidity Provision in a Business Cycle Model By Begenau, Juliane
  15. Institutional Investors, the Dollar, and U.S. Credit Conditions By Friederike Niepmann; Tim Schmidt-Eisenlohr

  1. By: Delatte, Anne-Laure; Garg, Pranav; Imbs, Jean
    Abstract: Using a bank-firm level credit registry combined with firm-level balance sheet data we establish the presence of heterogeneity in the effects of unconventional monetary policy transmission. We examine the consequences of a loosening in the collateral eligibility requirement for credit refinancing in France. The policy was designed to affect bank lending positively. We expect a linear increase in lending and an additional increase in loans to firms with newly acceptable rating. We find a large heterogeneity of the monetary policy transmission including the unexpected reduction of lending by the banks benefiting the most from the policy. These are small, risk-averse banks whose foremost concern after the recession was to strengthen their balance sheets. Banks least affected by the policy respond with a reduction in credit to low risk borrowers in reaction to the change in the market structure. Last we document heterogenous effects of the policy on firms depending on their size.
    Keywords: Corporate Finance; individual data; Real Effects Of Monetary Policy; Transmission Channels; Unconventional Monetary Policy
    JEL: C58 E44 E52 E58 G21 G28 G30 G32
    Date: 2019–04
  2. By: Coen, Jamie (London School of Economics); Lepore, Caterina (Bank of England); Schaanning, Eric (RiskLab, ETH ZÜrich and Norges Bank)
    Abstract: We build a framework for modelling fire sales where banks face both liquidity and solvency constraints and choose which assets to sell in order to minimise liquidation losses. Banks constrained by the leverage ratio prefer to first sell assets that are liquid and held in small amounts, while banks constrained by the risk-weighted capital ratio and the liquidity coverage ratio need to trade off assets’ liquidity with their regulatory weights. We calibrate the model to the UK banking system, and find that banks’ optimal liquidation strategies translate into moderate fire-sale losses even for extremely large solvency shocks. By contrast, severe funding shocks can generate significant losses. Thus models focusing exclusively on solvency risk may significantly underestimate the extent of contagion via fire sales. Moreover, when studying combined funding and solvency shocks, we find complementarities between the two shocks’ effects that cannot be reproduced by focusing on either shock in isolation.
    Keywords: Banks; financial regulation; fire sales; stress testing; systemic risk
    JEL: G18 G21
    Date: 2019–04–26
  3. By: Dautovic, Ernest
    Abstract: The paper evaluates the impact of macroprudential capital regulation on bank capital, risk taking behaviour, and solvency. The identification relies on the policy change in bank-level capital requirements across systemically important banks in Europe. A one percentage point hike in capital requirements leads to an average CET1 capital increase of 13 percent and no evidence of reduction in assets. The increase in capital comes at a cost. The paper documents robust evidence on the existence of substitution effects toward riskier assets. The risk taking behavior is predominantly driven by large and less profitable banks: large wholesale funded banks show less risk taking, and large banks relying on internal ratings based approach successfully disguise their risk taking. In terms of overall impact on solvency, the higher risk taking crowds out the positive effect of increased capital. JEL Classification: E51, G21, O52
    Keywords: capital requirements, macroprudential policy, moral hazard, risk-taking
    Date: 2019–05
  4. By: Hoffmann, Mathias; Maslov, Egor; Sørensen, Bent E
    Abstract: Abstract Small businesses (SMEs) depend on banks for credit. We show that the severity of the Eurozone crisis was worse in countries that borrowed more from domestic banks (``domestic bank dependence'') compared with countries that borrowed more from international banks. Eurozone banking integration in the years 2000-2008 involved cross-border lending between banks while foreign banks' lending to the real sector stayed flat. Hence, SMEs remained dependent on domestic banks and were vulnerable to global banking sector shocks. We confirm, using a calibrated quantitative model, that domestic bank dependence makes sectors and countries with many SMEs vulnerable to global banking shocks.
    Keywords: Banking integration; domestic bank dependence; International Transmission; Small and medium enterprises; sme access to finance
    JEL: F30 F36 F40
    Date: 2019–04
  5. By: Hughes, Joseph P. (Rutgers University); Jagtiani, Julapa (Federal Reserve Bank of Philadelphia); Moon, Choon-Geol (HANYANG UNIVERSITY)
    Abstract: We compare the performance of unsecured personal installment loans made by traditional bank lenders with that of LendingClub, using a stochastic frontier estimation technique to decompose the observed nonperforming loans into three components. The first is the best-practice minimum ratio that a lender could achieve if it were fully efficient at credit-risk evaluation and loan management. The second is a ratio that reflects the difference between the observed ratio (adjusted for noise) and the minimum ratio that gauges the lender’s relative proficiency at credit analysis and loan monitoring. The third is statistical noise. In 2013 and 2016, the largest bank lenders experienced the highest ratio of nonperformance, the highest inherent credit risk, and the highest lending efficiency, indicating that their high ratio of nonperformance is driven by inherent credit risk, rather than by lending inefficiency. LendingClub’s performance was similar to small bank lenders as of 2013. As of 2016, LendingClub’s performance resembled the largest bank lenders — the highest ratio of nonperforming loans, inherent credit risk, and lending efficiency — although its loan volume was smaller. Our findings are consistent with a previous study that suggests LendingClub became more effective in risk identification and pricing starting in 2015. Caveat: We note that this conclusion may not be applicable to fintech lenders in general, and the results may not hold under different economic conditions such as a downturn
    Keywords: marketplace lending; P2P lending; credit risk management; lending efficiency
    JEL: C58 G21 L25
    Date: 2019–04–02
  6. By: Önundur Páll Ragnarsson; Jón Magnús Hannesson; Loftur Hreinsson
    Abstract: Frameworks to handle cyclical systemic risk usually contain a wide selection of early warning indicators. Different indicators sometimes send diverging signals which can be hard to interpret. However, measures of aggregate financial cycles can serve as a way to synthesize information from many indicators. There are however many ways to construct a measure of such cycles. Many methods exist for cycle extraction, variable choice represents another dimension, and cycle aggregation the third. We tackle each step of the way by selecting the best out of six cycle extraction methods, then comparing variables from three groups: credit, house prices and bank funding, and lastly arguing for a simple method of cycle aggregation based on cycle correlation and frequency domain analysis. We then construct a trivariate financial cycle measure which outperforms the ’Basel gap’, all univariate cycles and all other multivariate combinations for the Nordic countries in terms of a noise-to-signal ratio. In addition, it peaks much closer to crisis onset and does relatively well at real-time turning point identification. The trivariate band-pass filtered measure contains the best variable from each group, and outperforms them all. This indicates that aggregate cycles can be more than the sum of their parts, as early warning indicators. Furthermore, we examine potential weaknesses of our analysis in terms of small-sample problems, spurious cycles and the timing of crisis onset. We conclude with 15 lessons from the Nordic countries.
    JEL: G01 G32 G38
    Date: 2019–03
  7. By: Giannone, Domenico (Federal Reserve Bank of New York and CEPR); Lenza, Michele (European Central Bank and ECARES-ULB); Reichlin, Lucrezia (London Business School and CEPR)
    Abstract: This paper studies the relationship between the business cycle and financial intermediation in the euro area. We establish stylized facts and study their stability during the global financial crisis and the European sovereign debt crisis. Long-term interest rates have been exceptionally high and long-term loans and deposits exceptionally low since the Lehman collapse. Instead, short-term interest rates and short-term loans and deposits did not show abnormal dynamics in the course of the financial and sovereign debt crisis.
    Keywords: money; loans; nonfinancial corporations; monetary policy; euro area
    JEL: C32 C51 E32 E51 E52
    Date: 2019–04–01
  8. By: Begenau, Juliane (Stanford GSB & NBER); Bigio, Saki (UCLA & NBER); Majerovitz, Jeremy (MIT)
    Abstract: We investigate the behavior of bank balance sheets in the United States during 2007-2015. The goal is to deepen the understanding of the behavior of banks. During this period, bank aggregate book-equity losses were entirely offset by equity issuances whereas market-value losses were catastrophic and never recovered. We find evidence that supports a theory where banks target market leverage, but where adjustments to a target are very gradual. We also find that, in contrast to the pre-crisis period, during the post-crisis banks relied more on retained earnings rather than on assets sales to adjust to a market leverage target. We present a heterogeneous-bank model that rationalizes these facts and can serve as a building block for future work.
    Date: 2018–09
  9. By: Admati, Anat R. (Graduate School of Business, Stanford University); Hellwig, Martin F. (Max Planck Institute for Research on Collective Goods, Bonn)
    Abstract: We take issue with claims that the funding mix of banks, which makes them fragile and crisis-prone, is efficient because it reflects special liquidity benefits of bank debt. Even aside from neglecting the systemic damage to the economy that banks’ distress and default cause, such claims are invalid because banks have multiple small creditors and are unable to commit effectively to their overall funding mix and investment strategy ex ante. The resulting market outcomes under laissez-faire are inefficient and involve excessive borrowing, with default risks that jeopardize the purported liquidity benefits. Contrary to claims in the literature that “equity is expensive†and that regulation requiring more equity in the funding mix entails costs to society, such regulation actually helps create useful commitment for banks to avoid the inefficiently high borrowing that comes under laissez-faire. Effective regulation is beneficial even without considering systemic risk; if such regulation also reduces systemic risk, the benefits are even larger.
    Date: 2019–01
  10. By: Hüser, Anne-Caroline; Kok, Christoffer
    Abstract: We present new evidence on the structure of euro area securities markets using a multilayer network approach. Layers are broken down by key instruments and maturities as well as the secured nature of the transaction. This paper utilizes a unique dataset of banking sector crossholdings of securities to map these exposures among banks and economic and financial sectors. We can compare and contrast funding and exposure networks among banks themselves and of banks, non-banks and the wider economy. The analytical approach presented here is highly relevant for the design of appropriate prudential measures, since it supports the identification of counterparty risk, concentration risk and funding risk within the interbank network and the wider macro-financial network. JEL Classification: D85, E44, G21, L14
    Keywords: Interbank networks, macro-financial networks, macroprudential analysis., market microstructure, multilayer networks
    Date: 2019–04
  11. By: Antonio Alvarez; Alejandro Fernandez; Joaquin Garcia-Cabo; Diana Posada
    Abstract: This study attempts to evaluate the impact of an increase in banks' funding stress and its transmission to the real economy, taking into account different funding sources banks can rely on. Using aggregate data from eight Euro area financial systems, we find that following a liquidity funding shock, both credit and GDP decline in different amounts and lengths. GDP reverts faster than credit. Furthermore, periphery countries experience a more pronounced fall in deposits and credit growth and the negative effects from the shock last longer than in core countries. Banks' funding seems to play a relevant role as periphery countries rely more on wholesale funding during normal times.
    Keywords: Liquidity funding shocks ; ECB policy ; Euro Area
    JEL: E50 E58
    Date: 2019–04–22
  12. By: Gareth Anderson; Rebecca Riley; Garry Young
    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 productivity businesses from failure.
    JEL: D22 D24 G21 G30 L10
    Date: 2019–05
  13. By: Harris, Richard (Xfi Centre for Finance and Investment, University of Exeter); Karadotchev, Veselin (Bank of England); Sowerbutts, Rhiannon (Bank of England); Stoja, Evarist (School of Economics, Finance and Management, University of Bristol)
    Abstract: We investigate the impact that the publication of the Bank of England’s Financial Stability Report (FSR) has on the stock returns and credit default swap spreads of UK financial institutions. Examining a sample of 73 UK-listed banks and other financial institutions, we find that publication of the FSR is, on average, associated with no abnormal returns. We extend our analysis to examine the extent to which policies and the sentiment in the FSR are predictable, which would explain the observed lack of abnormal returns. We find that both sentiment and announced policies are predictable. We also examine the extent to which the release of the FSR reduces information asymmetry in financial markets, but do not find strong evidence.
    Keywords: Event studies; Financial Stability Reports; central bank communication; market reaction.
    JEL: G14 G18 G21 G22 G23 G24
    Date: 2019–04–18
  14. By: Begenau, Juliane (Stanford GSB)
    Abstract: This paper develops a quantitative dynamic general equilibrium model in which households’ preferences for safe and liquid assets constitute a violation of Modigliani and Miller. I show that the scarcity of these coveted assets created by increased bank capital requirements can reduce overall bank funding costs and increase bank lending. I quantify this mechanism in a two-sector business cycle model featuring a banking sector that provides liquidity and has excessive risk-taking incentives. Under reasonable parametrizations, the marginal benefit of higher capital requirements related to this channel significantly exceeds the marginal cost, indicating that US capital requirements have been sub-optimally low.
    JEL: E44 G21 G28
    Date: 2019–01
  15. By: Friederike Niepmann; Tim Schmidt-Eisenlohr
    Abstract: This paper documents that an appreciation of the U.S. dollar is associated with a reduction in the supply of commercial and industrial loans by U.S. banks. An increase in the broad dollar index by 2.5 points (one standard deviation) reduces U.S. banks' corporate loan originations by 10 percent. This decline is driven by a reduction in the demand for loans on the secondary market where prices fall and liquidity worsens when the dollar appreciates, with stronger effects for riskier loans. Today, the main buyers of U.S. corporate loans---and, hence, suppliers of funding for these loans---are institutional investors, in particular mutual funds, which experience outflows when the dollar appreciates. A shift of traditional financial intermediation to these relatively unregulated entities, which are more sensitive to global developments, has led to the emergence of this new channel through which the dollar affects the U.S. economy, which we term the secondary market channel.
    Keywords: Leveraged loan market ; Commercial and industrial loans ; U.S. dollar exchange rate ; Credit standards ; Institutional investors
    JEL: E44 F31 G15 G21 G23
    Date: 2019–04–22

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