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on Banking |
| By: | Todd Keister; Yuliyan Mitkov |
| Abstract: | We study the interaction between a government’s bailout policy during a bank- ing crisis and individual banks’ willingness to impose losses on (or “bail in†) their investors. Banks in our model hold risky assets and are able to write complete, state-contingent contracts with investors. In the constrained efficient allocation, banks experiencing a loss immediately bail in their investors and this bail-in removes any incentive for investors to run on the bank. In a competitive equi- librium, however, banks may not enact a bail-in if they anticipate being bailed out. In some cases, the decision not to bail in investors provokes a bank run, creating further distortions and leading to even larger bailouts. We ask what macroprudential policies are useful when bailouts crowd out bail-ins. |
| Keywords: | Financial Fragility, Bailouts, Bail-ins, Limited Commitment |
| JEL: | E61 G21 G28 |
| Date: | 2019–05 |
| URL: | http://d.repec.org/n?u=RePEc:bon:boncrc:crctr224_2019_091&r=all |
| By: | Żochowski, Dawid; Franch, Fabio; Nocciola, Luca |
| Abstract: | We analyse the cross-border propagation of prudential regulation in the euro area. Using the Prudential Instruments Database (Cerutti et al., 2017b) and a unique confidential database on balance sheets items of euro-area financial institutions we estimate panel models for 248 banks from 16 euro-area countries. We find that domestic banks reduce lending after the tightening of capital requirements in other countries, while they increase lending when loan-to-value (LTV) limits or reserve requirements are tightened abroad. We also find that foreign affiliates increase lending following the tightening of sector-specific capital buffers in the countries where their parent banks reside and that bank size and liquidity play a role in determining the magnitude of cross-border spillovers. JEL Classification: G21, F34, F36 |
| Keywords: | cross-border spillovers, international banking, prudential policy |
| Date: | 2019–05 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20192285&r=all |
| By: | Maddaloni, Angela; Scopelliti, Alessandro |
| Abstract: | Prior to the financial crisis, prudential regulation in the EU was implemented non-uniformly across countries, as options and discretions allowed national authorities to apply a more favorable regulatory treatment. We exploit the national implementation of the CRD and derive a country measure of regulatory flexibility (for all banks in a country) and of supervisory discretion (on a case-by-case basis). Overall, we find that banks established in countries with a less stringent prudential framework were more likely to require public support during the crisis. We instrument some characteristics of bank balance sheets with these prudential indicators to investigate how they affect bank resilience. The share of non-interest income explained by the prudential environment is always associated with an increase in the likelihood of financial distress during the crisis. Prudential frameworks also explain banks’ liquidity buffers even in absence of a specific liquidity regulation, which points to possible spillovers across regulatory instruments. JEL Classification: G01, G21, G28 |
| Keywords: | banking union, cross-country heterogeneities, European banking, prudential regulation and supervision, rules versus discretion |
| Date: | 2019–05 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20192284&r=all |
| By: | Jacinta C. Nwachukwu (Coventry University, UK); Aqsa Aziz (Coventry University, UK); Uchenna Tony-Okeke (Coventry University, UK); Simplice A. Asongu (Yaoundé, Cameroon) |
| Abstract: | This study compares the responsiveness of microcredit interest rates to age, scale of lending and organisational charter. It uses an unbalanced panel of 300 MFIs from 107 developing countries from 2005 to 2015. Three key trends emerge from the results of a 2SLS regression. First, the adoption of formal microbanking practices raises interest rates compared with other forms of microlending. Second, large scale lending lowers interest rates only for those MFIs that already hold legal banking status. Third, age of operation in excess of eight years exerts a negative impact on interest rates, regardless of scale and charter type of MFI. Collectively, our results indicate that policies which incentivise mature MFIs to share their knowledge will be more effective in helping the nascent institutions to overcome their cost disadvantages compared with reforms to transform them into licensed banks. For MFIs which already hold permits to operate as banks, initiatives to increase loan sizes are key strategic pricing decisions, irrespective of the institution’s age. This study is original in its differentiation of the impact on interest rates of regulations which promote formal banking principles, credit market extension vis-Ã -vis knowledge sharing between mature and nascent MFIs. |
| Keywords: | Microfinance, microbanks, non-bank financial institutions |
| JEL: | G21 G23 G28 E43 N20 |
| Date: | 2018–01 |
| URL: | http://d.repec.org/n?u=RePEc:abh:wpaper:18/006&r=all |
| By: | Ouafa Ouyahia |
| Abstract: | This paper compares the profitability of European cooperative banks with that of non-cooperative banks over the period 2005-2014 using the generalized method of moments (SYS-GMM). We consider traditional measures of bank performance which are: return on assets (ROA), return on equity (ROE), and net interest margin (NIM). Even if these measures are not adapted to cooperative banks, they remain the most used in the literature. Our results show that cooperative banks are no more or less performant than the rest of banks when the entire period is considered. However, the sovereign debt crisis in Europe had a relatively greater effect on the performance of cooperative banks as a whole, unlike the 2008 crisis. Conversely, systemic co-operative banks appear to be relatively more performant during the sovereign debt crisis. However, no distinction is made between systemic cooperative banks and other banks during the 2008 financial crisis. |
| Keywords: | Performance, cooperative banks, the 2008 financial crisis, the sovereign debt crisis in Europe |
| JEL: | G21 P13 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:drm:wpaper:2019-9&r=all |
| By: | Mendicino, Caterina; Nikolov, Kalin; Suarez, Javier; Supera, Dominik |
| Abstract: | How far should capital requirements be raised in order to ensure a strong and resilient banking system without imposing undue costs on the real economy? Capital requirement increases make banks safer and are beneficial in the long run but also entail transition costs because their imposition reduces credit supply and aggregate demand on impact. In the baseline scenario of a quantitative macro-banking model, 25% of the long-run welfare gains are lost due to transitional costs. The strength of monetary policy accommodation and the degree of bank riskiness are key determinants of the trade-off between the short-run costs and long-run benefits from changes in capital requirements. JEL Classification: E3, E44, G01, G21 |
| Keywords: | default risk, effective lower bound, macroprudential policy, transitional dynamics |
| Date: | 2019–05 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20192286&r=all |
| By: | Makram El-Shagi (Center for Financial Development and Stability at Henan University, and School of Economics at Henan University, Kaifeng, Henan); Jarko Fidrmuc (Zeppelin University, Friedrichshafen, Germany); Steven Yamarik (California State University Long Beach, CA) |
| Abstract: | We test the Rajan hypothesis using data for 75 highly heterogeneous Russian regions between the Russian crisis and the introduction of international sanctions (2000-2012). Applying static as well as dynamic panel data models, we show that a rise in income inequality measured by regional Gini indices is significantly correlated with the growth of personal loans. Thus, the rising inequality in Russia is likely to have implications on financial staiblity and occurrence of banking crises. Moreover, the correlation of inequality and corporate loans indicates that inequality affects loans growth across more channels than those implied by the Rajan hypothesis. |
| Keywords: | Income inequality, bank loans, Rajan hypothesis, Russia |
| JEL: | E51 G01 R11 |
| Date: | 2019–06 |
| URL: | http://d.repec.org/n?u=RePEc:fds:dpaper:201906&r=all |
| By: | Lorella Fatone; Francesca Mariani |
| Abstract: | We consider the problem of governing systemic risk in an assets-liabilities dynamical model of banking system. In the model considered each bank is represented by its assets and its liabilities.The capital reserves of a bank are the difference between assets and liabilities of the bank. A bank is solvent when its capital reserves are greater or equal to zero otherwise the bank is failed.The banking system dynamics is defined by an initial value problem for a system of stochastic differential equations whose independent variable is time and whose dependent variables are the assets and the liabilities of the banks.The banking system model presented generalizes those discussed in [4],[3] and describes a homogeneous population of banks. The main features of the model are a cooperation mechanism among banks and the possibility of the (direct) intervention of the monetary authority in the banking system dynamics. We call systemic risk or systemic event in a bounded time interval the fact that in that time interval at least a given fraction of the banks fails. The probability of systemic risk in a bounded time interval is evaluated using statistical simulation. The systemic risk governance pursues the goal of keeping the probability of systemic risk in a bounded time interval between two given thresholds.The monetary authority is responsible for the systemic risk governance.The governance consists in the choice of the assets and of the liabilities of a kind of "ideal bank" as functions of time and in the choice of the rules that regulate the cooperation mechanism among banks.These rules are obtained solving an optimal control problem for the pseudo mean field approximation of the banking system model. The governance induces the banks of the system to behave like the "ideal bank". Shocks acting on the assets or on the liabilities of the banks are simulated. |
| Date: | 2019–05 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1905.12431&r=all |
| By: | Adrian, Tobias (International Monetary Fund); Duarte, Fernando M. (Federal Reserve Bank of New York); Grinberg, Federico (International Monetary Fund); Mancini-Griffoli, Tommaso (International Monetary Fund) |
| Abstract: | Loose financial conditions forecast high output growth and low output volatility up to six quarters into the future, generating time-varying downside risk to the output gap, which we measure by GDP-at-Risk (GaR). This finding is robust across countries, conditioning variables, and time periods. We study the implications for monetary policy in a reduced-form New Keynesian model with financial intermediaries that are subject to a Value at Risk (VaR) constraint. Optimal monetary policy depends on the magnitude of downside risk to GDP, as it impacts the consumption-savings decision via the Euler constraint, and financial conditions via the tightness of the VaR constraint. The optimal monetary policy rule exhibits a pronounced response to shifts in financial conditions for most countries in our sample. Welfare gains from taking financial conditions into account are shown to be sizable. |
| Keywords: | monetary policy; financial conditions; financial stability |
| JEL: | E52 |
| Date: | 2019–06–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:890&r=all |
| By: | Craig, Ben R. (Federal Reserve Bank of Cleveland); Giuzio, Margherita (European Central Bank); Paterlini, Sandra (University of Trento) |
| 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 it may be ineffective in reducing portfolio risk, including tail risk. |
| Keywords: | Bank regulation; sovereign-bank nexus; sovereign risk; home bias; diversification; |
| JEL: | G01 G11 G21 G28 |
| Date: | 2019–05–28 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedcwq:191200&r=all |
| By: | Carlo Altavilla; Miguel Boucinha; José-Luis Peydró |
| Abstract: | We analyse the impact of standard and non-standard monetary policy on bank profitability. We use both proprietary and commercial data on individual euro area bank balance-sheets and market prices. Our results show that a monetary policy easing – a decrease in short-term interest rates and/or a flattening of the yield curve – is not associated with lower bank profits once we control for the endogeneity of the policy measures to expected macroeconomic and financial conditions. Accommodative monetary conditions asymmetrically affect the main components of bank profitability, with a positive impact on loan loss provisions and non-interest income offsetting the negative one on net interest income. A protracted period of low monetary rates has a negative effect on profits that, however, only materialises after a long time period and is counterbalanced by improved macroeconomic conditions. Monetary policy easing surprises during the low interest rate period improve bank stock prices and CDS. |
| Keywords: | E52, E43, G01, G21, G28 |
| Date: | 2019–05 |
| URL: | http://d.repec.org/n?u=RePEc:bge:wpaper:1101&r=all |
| By: | Ranaldo, Angelo (University of St. Gallen); Schaffner, Patrick (Bank of England); Vasios, Michalis (Norges Bank Investment Management) |
| Abstract: | We analyse the effects of EMIR and Basel III regulations on short-term interest rates. EMIR requires central clearing houses (CCP) to continually acquire safe assets, thus expanding the lending supply of repurchase agreements (repo). Basel III, in contrast, disincentivises the borrowing demand by tightening banks’ balance sheet constraints. Using unique datasets of repo transactions and CCP activity, we find compelling evidence for both supply and demand channels. The overall effects are decreasing short-term rates and increasing market imbalances in various forms, all of which entail unintended consequences originated from the new regulatory framework. |
| Keywords: | Repo; central clearing; financial infrastructure; leverage ratio; EMIR; regulatory effects |
| JEL: | G28 |
| Date: | 2019–05–31 |
| URL: | http://d.repec.org/n?u=RePEc:boe:boeewp:0801&r=all |
| By: | Ross Levine; Chen Lin; Qilin Peng; Wensi Xie |
| Abstract: | We investigate how communication within banks affects small business lending. Using travel time between a bank’s headquarters and its branches to proxy for the costs of communicating soft information, we exploit shocks to these travel times to evaluate the impact of within bank communication costs on small business loans. Consistent with Stein’s (2002) model of the transmission of soft information across a bank’s hierarchies, we find that reducing headquarters-branch travel time boosts small business lending in the branch’s county. Several extensions suggest that new airline routes facilitate the transmission of soft information, boosting small firm lending. |
| JEL: | D83 G21 G30 |
| Date: | 2019–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:25872&r=all |
| By: | Jonathan Chiu; Mohammad Davoodalhosseini; Janet Hua Jiang; Yu Zhu |
| Abstract: | Many central banks are considering whether to issue a new form of electronic money that would be accessible to the public. This new form is usually called a central bank digital currency (CBDC). Issuing a CBDC would have implications on the financial system and more broadly on the wider economy. The effects of a CBDC on the banking sector, output and welfare depend crucially on the level of competition in the market for bank deposits. We show that when banks have no market power, issuing a deposit-like CBDC (that people can use like a debit card in transactions) would crowd out private banking. It would shift deposits away from the banking system, reducing bank lending. However, in a more realistic scenario, when banks have market power in the deposit market, issuing a deposit-like CBDC with a proper interest rate would encourage banks to pay higher interest or offer better services to keep their customers. They can do so because they earn a positive profit. As a result, banks would attract more deposits and extend more loans. In this case, issuing a CBDC would not necessarily crowd out private banking. In fact, the CBDC would serve as an outside option for households, thus limiting banks’ market power, and improve the efficiency of bank intermediation. We show quantitatively that the effects of a CBDC on lending, deposits, output and welfare can be sizable. We also analyze how different designs of a CBDC affect our results, including whether the CBDC is deposit-like or cash-like and whether the CBDC can be used to satisfy banks’ reserve requirements. |
| Keywords: | Digital Currencies and Fintech; Market structure and pricing; Monetary Policy; Monetary policy framework |
| JEL: | E50 E58 |
| Date: | 2019–05 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:19-20&r=all |
| By: | Paola Boel (Sveriges Riksbank); Gabriele Camera (Economic Science Institute, Chapman University & University of Bologna) |
| Abstract: | We investigate the effects of banks’ operating costs on allocations and welfare in a low interest rate environment. We introduce an explicit production function for banks in a microfounded model where banks employ labor resources, hired on a competitive market, to run their operations. In equilibrium, this generates a spread between interest rates on loans and deposits, which naturally reflects the underlying monetary policy and the efficiency of financial intermediation. In a deflation or low inflation environment, equilibrium deposits yield zero returns. Hence, banks end up soaking up labor resources to offer deposits that do not outperform idle balances, thus reducing aggregate efficiency. |
| Keywords: | banks; frictions; matching |
| JEL: | C70 D40 E30 J30 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:chu:wpaper:19-12&r=all |