nep-ban New Economics Papers
on Banking
Issue of 2019‒05‒27
fourteen papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Liquidation, bailout, and bail-in: Insolvency resolution mechanisms and bank lending. By Lambrecht, Bart; Tse, Alex
  2. Non-performing loans in European systemic and non-systemic banks By Ozili, Peterson K
  3. The Effect of Emergency Liquidity Assistance (ELA) on Bank Leading during the Euro Area Crisis. By Stephen G. Hall; Heather D. Gibson; Pavlos Petroulas; George S. Tavlas
  4. Negative interest rates, excess liquidity and retail deposits: banks’ reaction to unconventional monetary policy in the euro area By Demiralp, Selva; Eisenschmidt, Jens; Vlassopoulos, Thomas
  5. The Real Effects of the Bank Lending Channel By Gabriel Jiménez; Atif Mian; José-Luis Peydró; Jesús Saurina
  7. The Rise of Shadow Banking: Evidence from Capital Regulation By Rustom M. Irani; Rajkamal Iyer; Ralf R. Meisenzahl; José-Luis Peydró
  8. The Geographic Flow of Bank Funding and Access to Credit: Branch Networks, Local Synergies, and Competition By Victor Aguirregabiria; Robert Clark; Hui Wang
  9. Robust estimation of cost efficiency in non-parametric frontier models By Galina Besstremyannaya; Jaak Simm; Sergei Golovan
  10. Capital Flows: The Role of Bank and Nonbank Balance Sheets By Yuko Hashimoto; Signe Krogstrup
  11. Measuring Assessing the Resilience of the Canadian Banking System By Charles Gaa; Xuezhi Liu; Cameron MacDonald; Xiangjin Shen
  12. What are the consequences of global banking for the international transmission of shocks? A quantitative analysis∗ By Jose L. Fillat; Stefania Garetto; Arthur V. Smith
  13. How does the interaction of macroprudential and monetary policies affect cross-border bank lending? By Előd Takáts; Judit Temesvary
  14. Heterogeneity and Asymmetric Macroeconomic Effects of Changes in Loan-to-Value Limits By Jasper de Jong; Emmanuel de Veirman

  1. By: Lambrecht, Bart; Tse, Alex
    Abstract: We present a dynamic, continuous-time model in which risk averse inside equityholders set a bank's lending, payout, and financing policies, and the exposure of bank assets to crashes. We study how the prevailing insolvency resolution mechanism affects these policies, the insolvency rate, loss in default, value at risk (VaR), and the net value created by the bank. VaR depends non-trivially on jump (crash) risk, diffusion risk and the horizon. We examine the commonplace assertion that bailouts encourage excessive lending and risk-taking compared to the liquidation and bail-in regimes, and explore whether bailouts could be financed by banks without taxpayers' money.
    Keywords: agency; asset sale; bail-in; bailout; Liquidation
    JEL: G32 G33 G34 H81
    Date: 2019–05
  2. By: Ozili, Peterson K
    Abstract: The distinction between GSIBs (systemic banks) and non GSIBs (non-systemic banks) is driven by policy reasons. I examine the behaviour of non-performing loans in European systemic and non-systemic banks, and find that more profitable banks witness higher non-performing loans regardless of whether they are systemic or non-systemic. Systemic banks have fewer non-performing loans during economic booms and during periods of increased lending while non-systemic banks experience higher NPLs during periods of increased lending. I also observe that European non-systemic banks that exceed regulatory capital requirements have higher NPLs. In the post-2007 financial crisis period, the NPL of systemic banks is negatively associated with the economic cycle which imply that the NPL of systemic banks is procyclical with the state of the economy, and the NPL of systemic banks are positively associated with loan supply and bank profitability. On the other hand, the NPL of non-systemic banks is negatively associated with regulatory capital ratios, and is positively associated with bank profitability for non-systemic banks in the post-2007 financial crisis period. The findings have implications.
    Keywords: credit risk, nonperforming loans, systemic banks, systemic risk, impaired loans, asset quality; European banks, Europe, bank profitability.
    JEL: G01 G02 G18 G21 G23 G28 G32
    Date: 2019
  3. By: Stephen G. Hall; Heather D. Gibson; Pavlos Petroulas; George S. Tavlas
    Abstract: We examine the impact of Emergency Liquidity Assistance (ELA) on bank lending in eleven euro area countries. With the intensification of the financial crisis, ELA came to take on an almost systemic role in some countries (notably Greece), with either the whole or large parts of national banking systems depending on it. Despite this crucial role, assessments of the quantitative impact of ELA in the literature are non-existent. This paper aims to fill this gap. We estimate a structural panel model for the determination of bank lending, which includes the amount of ELA received by each bank, allowing us to investigate the direct effect of ELA on bank lending. Our model corrects a key mis-specification found in the prototype model used in the literature on bank lending. We then undertake a VAR analysis, which allows us to address the effect of ELA on GDP. Finally, we examine spillover effects among banks. Our results suggest that the provision of ELA generated positive spillovers to other banks.
    Keywords: Euro area financial crisis, Emergency Liquidity Assistance (ELA), European banks, spatial panel model
    JEL: E3 G01 G14 G21
    Date: 2019–01
  4. By: Demiralp, Selva; Eisenschmidt, Jens; Vlassopoulos, Thomas
    Abstract: Negative monetary policy rates are associated with a particular friction because the remuneration of retail deposits tends to be floored at zero. We investigate whether this friction affects banks’ reactions when the policy rate is lowered to negative levels, compared to a standard rate cut in the euro area. We exploit the cross-sectional variation in banks’ funding structures jointly with that in their excess liquidity holdings. We find evidence that banks highly exposed to the policy tend to grant more loans. This confirms studies that point to higher risk taking by banks as a reaction to negative rates. It, however, contrasts some earlier research associating negative rates with a contraction in loans. We illustrate that the difference is likely driven by the broader coverage of our loan data, longer time span of our sample and, importantly, the explicit consideration of the role of excess liquidity in our analysis. JEL Classification: E43, E52, G11, G21
    Keywords: bank balance sheets, monetary transmission mechanism, negative rates
    Date: 2019–05
  5. By: Gabriel Jiménez; Atif Mian; José-Luis Peydró; Jesús Saurina
    Abstract: We study bank credit booms, exploiting the Spanish matched credit register over 2001-2009. We extend Khwaja and Mian (2008)’s loan-level estimator by incorporating firm-level general equilibrium adjustments. Higher ex-ante bank real-estate exposure increases credit supply to non-real-estate firms, but effects are neutralized by firm-level adjustments for firms with existing banking relationships. However, higher bank real-estate exposure increases risk-taking, by relaxing standards of existing borrowers (cheaper, longer-term and less collateralized credit), and by expanding credit on the extensive margin to first-time borrowers that default substantially more. Results suggest that the mechanism at work is greater liquidity via securitization of real-estate assets.
    Keywords: bank lending channel, real effects of credit, credit supply booms, real estate, securitization
    JEL: E32 E44 G01 G21 G28
    Date: 2019–04
  6. By: Elien Meuleman; Rudi Vander Vennet (-)
    Abstract: This paper investigates the effectiveness of macroprudential policy to contain the systemic risk of European banks between 2000 and 2017. We use a new database (MaPPED) collected by experts at the ECB and national central banks with narrative information on a broad range of instruments which are tracked over their life cycle. Using a dynamic panel framework at a monthly frequency enables us to assess the impact of macroprudential tools and their design on the banks’ systemic risk both in the short and the long run. We furthermore decompose the systemic risk measure in an individual bank risk component and a systemic linkage component. This is of particular interest because microprudential policy focuses on the tail risk of an individual bank while macroprudential policy targets systemic risk by addressing the interlinkages and common exposures across banks. On average, all banks benefit from macroprudential tools in terms of their individual risk. We find that credit growth tools and exposure limits exhibit the most pronounced downward effect on the individual risk component. However, we find evidence for a risk-shifting effect which is more pronounced for retail-oriented banks. The effects are heterogeneous across banks with respect to the systemic linkage component. Liquidity tools and measures aimed at increasing the resilience of banks decrease the systemic linkage of banks. However, these tools appear to be most effective for distressed banks. Our results have implications for the optimal design of macroprudential instruments.
    Keywords: European banks, macroprudential policy, systemic risk
    JEL: E58 G18 G28
    Date: 2019–05
  7. 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: 2019–04
  8. By: Victor Aguirregabiria; Robert Clark; Hui Wang
    Abstract: Geographic dispersion of depositors, borrowers, and banks may prevent funding from flowing to areas of high loan demand, limiting credit access. We provide evidence of geographic imbalance of deposits and loans, and develop a methodology for investigating the contribution to this imbalance of (i) branch networks, (ii) market power, and (iii) scope economies, using US bank-county-year level data. Results are based on a novel measure of deposits and loans imbalance, and estimation of a structural model of bank competition that admits interconnections across locations and between deposit and loan markets, thereby permitting counterfactuals highlighting the role of the three factors.
    Keywords: Geographic flow of credit; Access to credit; Bank oligopoly competition; Branch networks; Economies of scope between deposits and loans
    JEL: L13 L51 G21
    Date: 2019–05–16
  9. By: Galina Besstremyannaya (CEFIR at New Economic School); Jaak Simm (University of Leuven); Sergei Golovan (New Economic School)
    Abstract: The paper proposes a bootstrap methodology for robust estimation of cost efficiency in data envelopment analysis. Our algorithm re-samples "naive" input-oriented efficiency scores, rescales original inputs to bring them to the frontier, and then re-estimates cost efficiency scores for the rescaled inputs. We consider the cases with absence and presence of environmental variables. Simulation analyses with multi-input multi-output production function demonstrate consistency of the new algorithm in terms of the coverage of the confidence intervals for true cost efficiency. Finally, we offer real data estimates for Japanese banking industry. Using the nationwide sample of Japanese banks in 2009, we show that the bias of cost efficiency scores may be linked to the bank charter and the presence of the environmental variables in the model. A package `rDEA', developed in the R language, is available from the GitHub and CRAN repository.
    Keywords: data envelopment analysis, cost efficiency, bias, bootstrap, banking
    JEL: C44 C61 G21
    Date: 2017–12
  10. By: Yuko Hashimoto; Signe Krogstrup
    Abstract: This paper assesses the role of bank and nonbank financial institutions’ balance sheet foreign exposures and risk management practices in driving capital flow responses to global risk. Using a unique and previously unexplored dataset on domestic and cross border balance sheet positions of financial institutions collected by the IMF, we show that the response of overall capital flows to global risk shocks is associated with the on-balance sheet foreign exposures of nonbanks, but not with that of banks. A possible interpretation is that risk-averse and dynamically optimizing nonbanks reduce their foreign risk exposure when global risk perceptions increase, leading to capital flows, while banks tend to be hedged against these risks off balance sheet. In advanced countries, the findings suggest that nonbank portfolio adjustment to changing risk conditions may take place through derivatives transactions with banks, the hedging practices of which trigger bank related capital flows rather than portfolio flows.
    Date: 2019–04–29
  11. By: Charles Gaa; Xuezhi Liu; Cameron MacDonald; Xiangjin Shen
    Abstract: The stability of the Canadian financial system, as well as its ability to support the Canadian economy, depends on the ability of financial institutions to absorb and manage major shocks. This is especially true for large banks, which perform services essential to the Canadian economy.
    Keywords: Financial Institutions; Financial stability
    JEL: C63 E27 E37 E44 G01 G21
    Date: 2019–05
  12. By: Jose L. Fillat (Federal Reserve Bank of Boston); Stefania Garetto (Boston University, CEPR, and NBER); Arthur V. Smith (Boston University)
    Abstract: The global financial crisis of 2008 was followed by a wave of regulatory reforms that affected large banks, especially those with a global presence. These reforms were reactive to the crisis. In this paper we propose a structural model of global banking that can be used proactively to perform counterfactual analysis on the effects of alternative regulatory policies. The structure of the model mimics the US regulatory framework and highlights the organizational choices that banks face when entering a foreign market: branching versus subsidiarization. When calibrated to match moments from a sample of European banks, the model is able to replicate the response of the US banking sector to the European sovereign debt crisis. Our counterfactual analysis suggests that pervasive subsidiarization, higher capital requirements, or ad hoc monetary policy interventions would have mitigated the effects of the crisis on US lending.
    Keywords: global banks, banking regulation, shock transmission.
    JEL: F12 F23 F36 G21
    Date: 2018–07
  13. By: Előd Takáts; Judit Temesvary
    Abstract: We combine a rarely accessed BIS database on bilateral cross-border lending flows with cross-country data on macroprudential regulations. We study the interaction between the monetary policy of major international currency issuers (USD, EUR and JPY) and macroprudential policies enacted in source (home) lending banking systems. We find significant interactions. Tighter macroprudential policy in a home country mitigates the impact on lending of monetary policy of a currency issuer. For instance, macroprudential tightening in the UK mitigates the negative impact of US monetary tightening on USD-denominated cross-border bank lending outflows from UK banks. Vice-versa, easier macroprudential policy amplifies impacts. The results are economically significant.
    Keywords: monetary policy, macroprudential policy, cross-border claims, diff-in-diff analysis
    JEL: F34 F42 G21 G38
    Date: 2019–05
  14. By: Jasper de Jong; Emmanuel de Veirman
    Abstract: We estimate the macroeconomic effects of changes in loan-to-value limits using an approach that involves the cross-sectional loan-to-value distribution and does not require that a limit is actually in place. We show that the effects are asymmetric and non-linear as tighter limits constrain a larger fraction of borrowers. Symmetry is a good approximation when the limit is tight but not at other points. We find that an increase in heterogeneity can substantially increase the effects of a change in loan-to-value caps. We document that if one abstracts from borrower heterogeneity, one understates the size of the effects of LTV limits when the limit lies above the average LTV.
    Keywords: Credit constraints; macroprudential policy; loan-to-value ratio
    JEL: C32 E21 E32 E44
    Date: 2019–05

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