nep-ban New Economics Papers
on Banking
Issue of 2019‒06‒17
twenty papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Risk-taking channel – does it operate in the Polish banking sector? By Tomasz Chmielewski; Tomasz Łyziak; Ewa Stanisławska
  2. Non-performing loans, governance indicators and systemic liquidity risk: evidence from Greece By Dimitrios Anastasiou; Zacharias Bragoudakis; Ioannis Malandrakis
  3. Target setting and Allocative Inefficiency in Lending: Evidence from Two Chinese Banks By Yiming Cao; Raymond Fisman; Hui Lin; Yongxiang Wang
  4. Testing the Quiet Life Hypothesis in the African Banking Industry By Simplice A. Asongu; Nicholas M. Odhiambo
  5. Optimally solving banks’ legacy problems By Segura, Anatoli; Suarez, Javier
  6. Pledged Collateral Market's Role in Transmission to Short-Term Market Rates By Manmohan Singh; Rohit Goel
  7. Do Interest Rate Controls Work? Evidence from Kenya By Emre Alper; Benedict J. Clements; Niko A Hobdari; Rafel Moyà Porcel
  8. Bank lending, financial frictions, and inside money creation By Lukas Altermatt
  9. Credit Supply and Productivity Growth By Francesco Manaresi; Nicola Pierri
  10. Tracking foreign capital: the effect of capital inflows on bank lending in the UK By Kneer, Christiane; Raabe, Alexander
  11. Non-performing loans and sovereign credit ratings By Periklis Boumparis; Costas Milas; Theodore Panagiotidis
  12. On the Instability of Banking and Other Financial Intermediation By Chao Gu; Cyril Monnet; Ed Nosal; Randall Wright
  13. Loan maturity aggregation in interbank lending networks obscures mesoscale structure and economic functions By Marnix Van Soom; Milan van den Heuvel; Jan Ryckebusch; Koen Schoors
  14. House Prices, (Un)Affordability and Systemic Risk By Efthymios Pavlidis; Ivan Paya; Alex Skouralis
  15. Affordability, financial innovation and the start of the housing boom By Dokko, Jane K.; Keys, Benjamin J.; Relihan, Lindsay
  16. Monetary Policy and Bank Profitability in a Low Interest Rate Environment: A Follow-up and a Rejoinder By Goodhart, Charles A; Kabiri, Ali
  17. Note on the Excess Entry Theorem in the Presence of Network Externalities By Tsuyoshi Toshimitsu
  18. Land as collateral in India By Sudha Narayanan; Judhajit Chakraborty
  19. Interest Rates and Investment Under Competitive Screening and Moral Hazard By Anastasios Dosis
  20. Policy issues on crypto-assets By Carlo Gola; Andrea Caponera

  1. By: Tomasz Chmielewski (Narodowy Bank Polski); Tomasz Łyziak (Narodowy Bank Polski); Ewa Stanisławska (Narodowy Bank Polski)
    Abstract: The aim of this paper is to test whether the risk-taking channel of monetary policy transmission mechanism is active in Poland, an emerging market economy. Based on confidential bank-level data we construct novel measures of risk taken by banks. These measures do not require access to loan-level data, nor rely on data from surveys among credit officers. We find some evidence of the risk-taking behaviour of Polish banks, however, only in the segment of large loans to non-financial corporations we are able to conclude that increased risk of new loans represent supply-side phenomenon. We show that the loosening of monetary policy has different effects depending on the initial level of interest rates – the lower the interest rate is, the larger the increase in risk that is generated by the lowering of interest rate. This response is different across banks, with stronger reaction displayed by banks that are large, with low liquidity and with deposits being the most important funding source. Our results contribute to ongoing discussion on consequences of conducting monetary policy in the low interest rate environment as currently observed in many advanced and emerging economies.
    Keywords: risk-taking channel, monetary policy, low interest rates
    JEL: E44 E52 G21
    Date: 2019
  2. By: Dimitrios Anastasiou (Athens University of Economics and Business and Alpha Bank); Zacharias Bragoudakis (Bank of Greece); Ioannis Malandrakis (Athens University of Economics and Business)
    Abstract: In this study we propose a new determinant of non-performing loans for the case of the Greek banking sector. We employ aggregate yearly data for the period 1996-2016 and we conduct a Principal Component Analysis for all the Worldwide Governance Indicators (WGI) for Greece, aiming to isolate the common component and thus to create the GOVERNANCE indicator. We find that the GOVERNANCE indicator is a significant determinant of Greek banks’ non-performing loans indicating that both political and governance factors impact on the level of the Greek non-performing loans. An additional variable that also has a statistically significant impact on the level of Greek non-performing loans, when combined with WGI in the dynamic specification of our model, is systemic liquidity risk. Our results could be of interest to policy makers and regulators as a macro prudential policy tool.
    Keywords: Credit risk; Greek banking sector; Non-performing loans; Systemic liquidity risk; Worldwide Governance Indicators.
    JEL: C51 G21 G2 G38
    Date: 2019–05
  3. By: Yiming Cao (Boston University); Raymond Fisman (Boston University and NBER); Hui Lin (Nanjing University); Yongxiang Wang (University of Southern California)
    Abstract: We study the consequences of month-end lending incentives for Chinese bank managers. Using data from two banks, one state-owned and the other partially privatized, we show a clear increase in lending in the final days of each month, resulting from both more loan issuance and higher value per loan. We estimate that daily lending is 92 percent higher in the last 5 days of each month as a result of loan targets, with only a small amount plausibly attributable to shifting loans forward from the following month. End-of-month loans are 1.6 percentage points (12 percent) more likely to be classified as bad in the years following issuance relative to mid-month loans. Our work highlights the distortionary effects of target-setting on capital allocation, in a context in which such concerns have risen to particular prominence in recent years.
    Keywords: Capital allocation; incentive design; Chinese banking
    JEL: G21 M52
    Date: 2018–10
  4. By: Simplice A. Asongu (Yaoundé/Cameroon); Nicholas M. Odhiambo (Pretoria, South Africa)
    Abstract: The Quiet Life Hypothesis (QLH) is the pursuit of less efficiency by firms. In this study, we assess if powerful banks in the African banking industry are increasing financial access. The QLH is therefore consistent with the pursuit of financial intermediation inefficiency by large banks. To investigate the hypothesis, we first estimate the Lerner index. Then, using Two Stage Least Squares, we assess the effect of the Lerner index on financial access proxied by loan price and loan quantity. The empirical evidence is based on a panel of 162 banks from 42 African countries for the period 2001-2011. The findings support the QLH, although quiet life is driven by the below-median Lerner index sub-sample. Policy implications are discussed.
    Keywords: Financial access; Bank performance; Africa
    JEL: D40 G20 G29 L10 O55
    Date: 2018–01
  5. By: Segura, Anatoli; Suarez, Javier
    Abstract: We characterize policy interventions directed to minimize the cost to the deposit guarantee scheme and the taxpayers of banks with legacy problems. Non-performing loans (NPLs) with low and risky returns create a debt overhang that induces bank owners to forego profitable lending opportunities. NPL disposal requirements can restore the incentives to undertake new lending but, as they force bank owners to absorb losses, can also make them prefer the bank being resolved. For severe legacy problems, combining NPL disposal requirements with positive transfers is optimal and involves no conflict between minimizing the cost to the authority and maximizing overall surplus. JEL Classification: G01, G20, G28
    Keywords: debt overhang, deposit insurance, non performing loans, optimal intervention, state aid
    Date: 2019–06
  6. By: Manmohan Singh; Rohit Goel
    Abstract: In global financial centers, short-term market rates are effectively determined in the pledged collateral market, where banks and other financial institutions exchange collateral (such as bonds and equities) for money. Furthermore, the use of long-dated securities as collateral for short tenors—or example, in securities-lending and repo markets, and prime brokerage funding—impacts the risk premia (or moneyness) along the yield curve. In this paper, we deploy a methodology to show that transactions using long dated collateral also affect short-term market rates. Our results suggest that the unwind of central bank balance sheets will likely strengthen the monetary policy transmission, as dealer balance-sheet space is now relatively less constrained, with a rebound in collateral reuse.
    Date: 2019–05–17
  7. By: Emre Alper; Benedict J. Clements; Niko A Hobdari; Rafel Moyà Porcel
    Abstract: This paper reviews the impact of interest rate controls in Kenya, introduced in September 2016. The intent of the controls was to reduce the cost of borrowing, expand access to credit, and increase the return on savings. However, we find that the law on interest rate controls has had the opposite effect of what was intended. Specifically, it has led to a collapse of credit to micro, small, and medium enterprises; shrinking of the loan book of the small banks; and reduced financial intermediation. We also show that interest rate caps reduced the signaling effects of monetary policy. These suggest that (i) the adverse effects could largely be avoided if the ceiling was high enough to facilitate lending to higher risk borrowers; and (ii) alternative policies could be preferable to address concerns about the high cost of credit.
    Date: 2019–05–31
  8. By: Lukas Altermatt
    Abstract: I build a general equilibrium model of the transmission of monetary policy on bank lending. Bank lending is done by individual banks that face random investment opportunities by creating inside money. Banks are subject to a reserve requirement and have access to the interbank money market. The model shows that lowering the money market rate relative to the inflation rate reduces investment and welfare. This is because the money market is an outside option for banks that face bad investment opportunities. Reducing the money market rate lowers the value of this outside option, which in turn reduces banks’ willingness to acquire reserves ex-ante. This leads to less aggregate reserves, which reduces the banking system’s ability to grant credit.
    Keywords: Monetary policy transmission, open market operations, channel system, interest rate pass-through
    JEL: E4 E5
    Date: 2019–05
  9. By: Francesco Manaresi; Nicola Pierri
    Abstract: We study the impact of bank credit on firm productivity. We exploit a matched firm-bank database covering all the credit relationships of Italian corporations, together with a natural experiment, to measure idiosyncratic supply-side shocks to credit availability and to estimate a production model augmented with financial frictions. We find that a contraction in credit supply causes a reduction of firm TFP growth and also harms IT-adoption, innovation, exporting, and adoption of superior management practices, while a credit expansion has limited impact. Quantitatively, the credit contraction between 2007 and 2009 accounts for about a quarter of observed the decline in TFP.
    Date: 2019–05–17
  10. By: Kneer, Christiane (Bank of England); Raabe, Alexander (Graduate Institute Geneva)
    Abstract: This paper examines how UK banks channel capital inflows to the individual sectors of the domestic economy and to overseas residents. Information on the source country of foreign capital deposited with UK banks allows us to construct a novel Bartik instrument for capital inflows. Our results suggest that foreign funds boost bank lending to the domestic economy. This result is due to the positive effect of capital inflows on bank lending to non-financial firms and to other domestic financial institutions. Banks do not channel capital inflows directly to households or the public sector. Much of the foreign capital is also channelled back abroad, reflecting the role of the UK as a global financial centre.
    Keywords: Capital flows; bank lending; credit allocation; international finance; instrumental variables; international financial linkages
    JEL: F21 F30 F32 F34 G00 G21
    Date: 2019–06–14
  11. By: Periklis Boumparis (University of Liverpool, UK); Costas Milas (Management School, University of Liverpool, UK; Rimini Centre for Economic Analysis); Theodore Panagiotidis (Department of Economics, University of Macedonia, Greece; Rimini Centre for Economic Analysis)
    Abstract: This paper examines the joint behaviour of sovereign ratings and their macroeconomic/financial determinants (namely uncertainty, GDP growth, government debt-to-GDP ratio, investment-to-GDP ratio and the fiscal balance-to-GDP ratio) in a multivariate Panel Vector Autoregressive (PVAR) framework. We reveal another channel of interconnection between sovereign and banking credit risk by identifying a two-way relationship between non-performing loans (NPLs) and sovereign ratings. Generalized impulse response functions (GIRFs) provide evidence of significant effects from NPLs on sovereign rating decisions over and above the effects of the remaining economic/financial variables. At the same time, sovereign rating decisions impact on NPLs and all other variables.
    Keywords: Sovereign credit ratings, Non-performing loans, Panel VAR
    JEL: G24 E44 C33
    Date: 2019–06
  12. By: Chao Gu (University of Missouri); Cyril Monnet (University of Bern, Study Center Gerzensee, Swiss National Bank); Ed Nosal (FRB Atlanta); Randall Wright (University of Wisconsin, FRB Minneapolis)
    Abstract: Are financial intermediaries inherently unstable? If so, why? What does this suggest about government intervention? To address these issues we analyze whether model economies with financial intermediation are particularly prone to multiple, cyclic, or stochastic equilibria. Four formalizations are considered: a dynamic version of Diamond-Dybvig banking incorporating reputational considerations; a model with delegated investment as in Diamond; one with bank liabilities serving as payment instruments similar to currency in Lagos- Wright; and one with Rubinstein-Wolinsky intermediaries in a decentralized asset market as in Duffie et al. In each case we find, for different reasons, financial intermediation engenders instability in a precise sense.
    Date: 2019–05
  13. By: Marnix Van Soom; Milan van den Heuvel; Jan Ryckebusch; Koen Schoors
    Abstract: Since the 2007-2009 financial crisis, substantial academic effort has been dedicated to improving our understanding of interbank lending networks (ILNs). Because of data limitations or by choice, the literature largely lacks multiple loan maturities. We employ a complete interbank loan contract dataset to investigate whether maturity details are informative of the network structure. Applying the layered stochastic block model of Peixoto (2015) and other tools from network science on a time series of bilateral loans with multiple maturity layers in the Russian ILN, we find that collapsing all such layers consistently obscures mesoscale structure. The optimal maturity granularity lies between completely collapsing and completely separating the maturity layers and depends on the development phase of the interbank market, with a more developed market requiring more layers for optimal description. Closer inspection of the inferred maturity bins associated with the optimal maturity granularity reveals specific economic functions, from liquidity intermediation to financing. Collapsing a network with multiple underlying maturity layers or extracting one such layer, common in economic research, is therefore not only an incomplete representation of the ILN's mesoscale structure, but also conceals existing economic functions. This holds important insights and opportunities for theoretical and empirical studies on interbank market functioning, contagion, stability, and on the desirable level of regulatory data disclosure.
    Date: 2019–06
  14. By: Efthymios Pavlidis; Ivan Paya; Alex Skouralis
    Abstract: This is the first paper to examine the role of the real estate sector and housing unaffordability in the determination of systemic risk. We measure the systemic risk of the UK by employing the CoVaR method developed by Adrian and Brunnermeier (2011, 2016), and we explore both its cross-sectional and time series behaviour. Regarding the former, we show that when the real estate sector is under distress the tail risk of the entire financial system increases significantly. With respect to the latter, the findings of our dynamic model suggest that sustainable house prices positively contribute to the stability of the financial sector; whilst house price exuberance and rapid increases in housing unaffordability amplify systemic risk. Finally, we examine the conjecture that the banking sector comprises a transmission channel from the housing market to the systemic risk of the financial system. Our empirical results are in line with this argument and highlight the key role of housing unaffordability.
    Keywords: affordability, real estate sector, systemic risk
    JEL: C21 C23 E44
    Date: 2019
  15. By: Dokko, Jane K.; Keys, Benjamin J.; Relihan, Lindsay
    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: housing policy; mortgage loans; subprime mortgage
    JEL: G22 R21 R22
    Date: 2019–03
  16. By: Goodhart, Charles A; Kabiri, Ali
    Abstract: There is a debate about the effect of the extremely low, or even negative, interest rate regime on bank profitability. On the one hand it raises demand and thereby adds to bank profits, while on the other hand it lowers net interest margins, especially at the Zero Lower Bound. In this paper we review whether the prior paper by Altavilla, Boucinha and Peydro (2018) on this question for the Eurozone can be generalized to other monetary blocs, i.e. USA and UK. While our findings have some similarity with their earlier work, we are more concerned about the possible negative effects of this regime, not only on bank profitability but also on bank credit extension more widely.
    Keywords: Bank profitability; credit extension; Low interest rates; Net interest margin
    JEL: E52 G18 G21 G28
    Date: 2019–05
  17. By: Tsuyoshi Toshimitsu (School of Economics, Kwansei Gakuin University)
    Abstract: We reconsider the excess entry theorem in the presence of network externalities under Cournot oligopoly. We demonstrate that if the strength of a network externality is larger (smaller) than a half, the number of firms under free entry is socially too small (too large), based on the second-best criteria.
    Keywords: Cournot oligopoly; free entry; excess entry theorem; network externality; a fulfilled equilibrium; passive expectations; responsive expectations
    JEL: D21 D43 D62 L15
    Date: 2019–06
  18. By: Sudha Narayanan (Indira Gandhi Institute of Development Research); Judhajit Chakraborty (Michigan State University)
    Abstract: Land is often regarded as a crucial factor enabling credit access because it serves as an ideal collateral, for both borrowers and lenders. Yet in reality, in developing countries like India land is not used as collateral for a variety of reasons. This paper maps the use of land as collateral for borrowings by Indian households using a nationally representative survey of households, the All India Debt and Investment Survey (AIDIS) of 2012-13. The goal of the paper is to document the extent and patterns of use of land as collateral. We supplement this with insights from a field survey in select talukas of Maharashtra that examines borrower perceptions of use of land as collateral.
    Keywords: Land, collateral, credit, India, household finance, land records
    JEL: Q15
    Date: 2019–02
  19. By: Anastasios Dosis (ESSEC Business School - Essec Business School)
    Abstract: This paper studies the effect of (market) interest rate changes on investment under competitive screening and moral hazard. Lower (higher) rates ease (hinder) the provision of incentives to entrepreneurs with positive NPV projects to invest in their best project but hinder (ease) banks' efforts to distinguish them from entrepreneurs with negative NPV projects. This might result in a hump-shaped investment curve. Under low rates, screening through limit pricing leaves insufficient profits to low-wealth entrepreneurs to invest in their best project, and consequently, several project qualities might co-exist in equilibrium. Several testable and other implications on the effectiveness of unconventional monetary policy to boost investment are discussed.
    Keywords: Interest rates,entrepreneurial wealth,investment,competitive screening,moral hazard
    Date: 2019–02–16
  20. By: Carlo Gola; Andrea Caponera
    Abstract: This paper describes the economic characteristics of crypto-assets and the regulation of the exchanges and custodian wallet providers adopted in various jurisdictions. The possible accounting and prudential treatments are then analysed. The paper provides a taxonomy of DLT digital tokens based on mutually exclusive classes. Bitcoin belongs to the class of private digital tokens with no underlining claim or liability against an issuer, exchangeable at a floating rate, which operate through an electronic protocol called permissionless distributed ledger technology (DLT). The literature on the subject shows that this type of crypto-assets do not fall within the category of money and financial instruments. The instability of their price must be considered when evaluating these instruments from an accounting and prudential point of view. The paper describes the basic features of initial coin offerings (ICOs), smart contracts, and other related aspects.
    Date: 2019–06

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