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on Banking |
| By: | Cappelletti, Giuseppe; Peeters, Jonas; Budrys, Žymantas; Varraso, Paolo; Marques, Aurea Ponte |
| Abstract: | We study the impact of higher bank capital buffers, namely of the Other Systemically Important Institutions (O-SII) buffer, on banks' lending and risk-taking behaviour. The O-SII buffer is a macroprudential policy aiming to increase banks' resilience. However, higher capital requirements associated with the policy may likely constrain lending. While this may be a desired effect of the policy, it could, at least in the short-term, pose costs for economic activity. Moreover, by changing the relative attractiveness of different asset classes, a higher capital requirement could also lead to risk-shifting and therefore promote the build-up (or deleverage) of banks' risk-taking. Since the end of 2015, national authorities, under the EBA framework, started to identify banks as O-SII and impose additional capital buffers. The identification of the O-SII is mainly based on a cutoff rule, ie. banks whose score is above a certain threshold are automatically designated as systemically important. This feature allows studying the effects of higher capital requirements by comparing banks whose score was close to the threshold. Relying on confidential granular supervisory data, between 2014 and 2017, we find that banks identified as O-SII reduced, in the short-term, their credit supply to households and financial sectors and shifted their lending to less risky counterparts within the non-financial corporations. In the medium-term, the impact on credit supply is defused and banks shift their lending to less risky counterparts within the financial and household sectors. Our findings suggest that the discontinuous policy change had limited effects on the overall supply of credit although we find evidence of a reduction in the credit supply at the inception of the macroprudential policy. This result supports the hypothesis that the implementation of the O-SII's framework could have a positive disciplining effect by reducing banks' risk-taking while having only a reduced adverse impact JEL Classification: E44, E51, E58, G21, G28 |
| Keywords: | bank capital-based measures, bank risk-shifting, credit supply, macroprudential policy, systemic risk |
| Date: | 2019–06 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20192292&r=all |
| By: | Sarmiento Paipilla, Miguel (Tilburg University, School of Economics and Management) |
| Abstract: | Banks interact across different markets in order to diversify their risk exposure and to obtain funding from alternative sources. While this can increase bank efficiency and alleviate financial intermediation costs, it makes more difficult the effective regulation and supervision of banks and can expose them to liquidity shocks and contagion risk, as evidenced during the Global Financial Crisis of 2007-08. This Ph.D. dissertation consists of four chapters on banking, financial intermediation, and financial markets. The main objective of the thesis is to analyze the behavior of banks across different financial markets, and to explore the role of risk-taking, regulation, and liquidity shocks. Chapter 2 proposes an alternative approach to study the allocation of central bank liquidity among the participants of the unsecured interbank market. Chapter 3 examines the heterogeneous effects of risk-taking on bank efficiency. Chapter 4 evaluates the impact of idiosyncratic and aggregate liquidity shocks on the access and pricing of liquidity in the unsecured interbank funds market. Lastly, chapter 5 analyses the determinants of loan pricing in the cross-border syndicated market and the potential de-risking role of multilateral development banks. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:tiu:tiutis:0ad63b91-b3f1-432a-8dfd-443f2112474c&r=all |
| By: | Muñoz, Manuel |
| 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 developed to assess the virtues of what shall be called dividend prudential targets. Welfare-maximizing dividend-based macroprudential rules are shown to have important properties: (i) they are effective in smoothing the financial and the business cycle by means of less volatile bank retained earnings, (ii) they induce welfare gains associated to a Basel III-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 (conditional on the payment of a sanction), and (v) they are associated to a sanctions regime that acts as an insurance scheme for the real economy. JEL Classification: E44, E61, G21, G28, G35 |
| Keywords: | bank dividends, capital requirements, dividend prudential target, financial stability, macroprudential regulation |
| Date: | 2019–07 |
| URL: | http://d.repec.org/n?u=RePEc:srk:srkwps:201997&r=all |
| By: | Kelly, Robert; Byrne, David |
| Abstract: | The funding mix of European firms is weighted heavily towards bank credit, which underscores the importance of efficient pass-through of monetary policy actions to lending rates faced by firms. Euro area pass-through has shifted from being relatively homogenous to being fragmented and incomplete since the financial crisis. Distressed loan books are a crisis hangover with direct implications for profitability, hampering banks ability to supply credit and lower loan pricing in response to reductions in the policy rate. This paper presents a parsimonious model to decompose the cost of lending and highlight the role of asset quality in diminishing pass-through. Using bank-level data over the period 2008-2014, we empirically test the implications of the model. We show that a one percentage point increase in the impairment ratio lowering short run pass-through by 3 percent. We find that banks with severely impaired balance sheets do not adjust their loan pricing in response to changes in the policy rate at all. We derive a measure of the hidden bad loan problem, the NPL gap, which we define as the excess of non-performing loans over impaired loans. We show that it played a significant role in the fragmentation of euro area pass-through post-crisis. JEL Classification: D43, E51, E52, E58, G21 |
| Keywords: | impaired loans, interest rates, monetary policy pass-through, non-performing loans |
| Date: | 2019–07 |
| URL: | http://d.repec.org/n?u=RePEc:srk:srkwps:201998&r=all |
| By: | Donaldson, Jason, Roderick; Micheler, Eva |
| Abstract: | Many debt claims, such as bonds, are resaleable, whereas others, such as repos, are not. There was a fivefold increase in repo borrowing before the 2008 crisis. Why? Did banks’ dependence on non-resaleable debt precipitate the crisis? In this paper, we develop a model of bank lending with credit frictions. The key feature of the model is that debt claims are heterogeneous in their resaleability. We find that decreasing credit market frictions leads to an increase in borrowing via non-resaleable debt. Borrowing via non-resaleable debt has a dark side: it causes credit chains to form, since if a bank makes a loan via non-resaleable debt and needs liquidity, it cannot sell the loan but must borrow via a new contract. These credit chains are a source of systemic risk, since one bank’s default harms not only its creditors but also its creditors’ creditors. Overall, our model suggests that reducing credit market frictions may have an adverse effect on the financial system and may even lead to the failures of financial institutions. |
| Keywords: | resaleable debt; systemic risk; bankruptcy; repos; securities law |
| JEL: | G21 G28 G33 K12 K22 |
| Date: | 2017–12–20 |
| URL: | http://d.repec.org/n?u=RePEc:ehl:lserod:68068&r=all |
| By: | Mandler, Martin; Scharnagl, Michael |
| Abstract: | We analyse the cross-country dimension of financial cycles by studying cyclical co-movements in credit, house prices, equity prices and interest rates across the G7 economies. We use wavelet-based statistics to assess at which frequencies cyclical fluctuations and their crosscountry co-movements are important and how these change over time. We show cycles in interest rates and equity prices to be at least as synchronised as cycles in real GDP while cycles in credit and house prices are less synchronised. As a result, cross-country common cycles in equity prices and long-term interest rates account for a larger share of the volatility of these variables at the country level than common cycles in credit aggregates and house prices. A cluster analysis shows a high degree of similarity in the spectral characteristics of cycles in interest rates and equity prices across all countries but less similarities for cycles in credit and house price. For credit and house price cycles country-specific developments turn out to be more important than the common cross-country cycles. |
| Keywords: | financial cycles,wavelet analysis,cluster analysis,cross-country synchronisation |
| JEL: | C32 C38 E44 E51 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubdps:222019&r=all |
| By: | Markus K. Brunnermeier (Department of Economics, Princeton University (E-mail: markus@princeton.edu)); Yann Koby (Department of Economics, Princeton University (E-mail: ykoby@princeton.edu)) |
| Abstract: | The reversal interest rate is the rate at which accommodative monetary policy reverses and becomes contractionary for lending. Its determinants are 1) banks' fixed-income holdings, 2) the strictness of capital constraints, 3) the degree of pass-through to deposit rates, and 4) the initial capitalization of banks. Quantitative easing increases the reversal interest rate and should only be employed after interest rate cuts are exhausted. Over time the reversal interest rate creeps up since asset revaluation fades out as fixed-income holdings mature while net interest income stays low. We calibrate a New Keynesian model that embeds our banking frictions. |
| Keywords: | Monetary Policy, Lower Bound, Negative Rates, Banking |
| JEL: | E43 E44 E52 G21 |
| Date: | 2019–06 |
| URL: | http://d.repec.org/n?u=RePEc:ime:imedps:19-e-06&r=all |
| By: | Biron Miguel; Felipe Córdova; Antonio Lemus |
| Abstract: | During the recent financial crisis, banks suffered losses on a scale not witnessed since the Great Depression, partly due to two structural developments in the banking industry; deregulation combined with financial innovation. The regulatory response concentrated on the Basel III recommendations, affected banks’ business model and funding patterns. Consequently, these changes have had implications on how banks grant loans, how they react to monetary policy shocks, and on how they respond to global shocks. We find evidence of significant interactions between banks’ lending and both monetary and global shocks in Chile. In particular, these interactions have been significantly shaped by the counter-cyclical behavior of the state-owned bank. The good governance of this institution along with a sound legal and economic environment, have propitiated this result. |
| Keywords: | bank lending channel, global factors, Banco Estado |
| JEL: | E40 E44 E51 E52 E58 G21 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:drm:wpaper:2019-11&r=all |
| By: | Richard Heuver; Ron TriepelsTriepels |
| Abstract: | Liquidity stress constitutes an ongoing threat to financial stability in the banking sector. A bank that manages its liquidity inadequately might find itself unable to meet its payment obligations. These liquidity issues, in turn, can negatively impact the liquidity position of many other banks due to contagion effects. For this reason, central banks carefully monitor the payment activities of banks in financial market infrastructures and try to detect early-warning signs of liquidity stress. In this paper, we investigate whether this monitoring task can be performed by supervised machine learning. We construct probabilistic classifiers that estimate the probability that a bank faces liquidity stress. The classifiers are trained on a dataset consisting of various payment features of European banks and which spans several known stress events. Our experimental results show that the classifiers detect the periods in which the banks faced liquidity stress reasonably well. |
| Keywords: | Risk Monitoring; Liquidity Stress; Neural Networks; Financial Market Infrastructures; Large-Value Payment Systems |
| JEL: | G32 G33 C45 E42 |
| Date: | 2019–06 |
| URL: | http://d.repec.org/n?u=RePEc:dnb:dnbwpp:642&r=all |
| By: | Huang, Yiping; Li, Xiang; Wang, Chu |
| Abstract: | This paper uses loan application-level data from a Chinese peer-to-peer lending platform to study the risk-taking channel of monetary policy. By employing a direct ex-ante measure of risk-taking and estimating the simultaneous equations of loan approval and loan amount, we are the first to provide quantitative evidence of the impact of monetary policy on the risk-taking of nonbank financial institution. We find that the search-for-yield is the main workhorse of the risk-taking effect, while we do not observe consistent findings of risk-shifting from the liquidity change. Monetary policy easing is associated with a higher probability of granting loans to risky borrowers and a greater riskiness of credit allocation, but these changes do not necessarily relate to a larger loan amount on average. |
| Keywords: | monetary policy,risk-taking,non-bank financial institution,search-for-yield,risk-shifting |
| JEL: | E52 G23 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:iwhdps:142019&r=all |
| By: | Martin Brown (University of St.Gallen); Ioanna S. Evangelou (Central Bank of Cyprus); Helmut Stix (Oesterreichische Nationalbank) |
| Abstract: | We study changes in deposit and cash holdings by households following the 2013 banking crisis in Cyprus. During this crisis the two largest banks in the country were resolved involving a bail-in of uninsured depositors and debt holders. Our analysis is based on anonymized survey data covering households with differential exposures to the resolved banks: uninsured deposits, subordinated debt and equity holdings. In line with the portfolio theory of money demand, we find that in the intermediate aftermath of the crisis households significantly reduced their holding of bank deposits and increased their cash holdings. This flight to cash was much stronger for clients which experienced a bail-in of deposits or subordinated debt than for households which held equity in the resolved banks or did not suffer any financial loss. In the medium term, however, there was no difference in depositor confidence or money holdings between households which suffered a bail-in and those which did not. |
| Keywords: | Financial crises, bank resolution, bail-in, deposits, cash, money demand. |
| JEL: | E41 G01 G11 G21 G28 |
| Date: | 2018–01 |
| URL: | http://d.repec.org/n?u=RePEc:cyb:wpaper:2017-2&r=all |
| By: | Etienne Lepers; Caroline Mehigan |
| Abstract: | The post financial crisis period has been associated with increased countercyclical use of various financial policies, including residency-based measures. This paper analyses in a single analytical framework the relative effectiveness of three types of financial policies – macroprudential (foundations), currency-based (fences), and residency-based measures (fire doors). The findings in this paper are based on a granular quarterly database of adjustments in these policies that covers both advanced and emerging economies from 2000 to 2015. The results show that residency-based measures on bonds and credit reduce capital inflows but provide limited support for a credit-mitigation role. While no evidence emerges that macroprudential measures alter capital inflows, most appear effective in reducing credit growth. Currency-based measures may reduce both inflows and credit growth (particularly FX reserve requirements and FX lending regulations). These results indicate that the impact of policies needs to be analysed at a granular level and that policy makers should adopt an integrated view of the financial policy toolkit. |
| JEL: | E58 F32 F34 G15 G21 G28 |
| Date: | 2019–07–04 |
| URL: | http://d.repec.org/n?u=RePEc:oec:dafaaa:2019/02-en&r=all |
| By: | Jason Roderick Donaldson; Giorgia Piacentino; Anjan Thakor |
| Abstract: | We explain the emergence of a variety of intermediaries in a model based only on differences in their funding costs. Banks have a low cost of capital due to, say, safety nets or money-like liabilities. We show, however, that this can be a disadvantage, because it exacerbates soft-budget-constraint problems, making it costly to finance innovative projects. Non-banks emerge to finance them. Their high cost of capital is an advantage, because it works as a commitment device to withhold capital, solving soft-budget-constraint problems. Still, non-banks never take over the entire market, but coexist with banks in equilibrium. |
| JEL: | G21 G23 G24 |
| Date: | 2019–06 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:25946&r=all |
| By: | Radoslav Raykov |
| Abstract: | Many derivatives markets use collateral requirements calculated with industry-standard but dated methods that are not designed with systemic risk in mind. This paper explores whether the conservative nature of conventional collateral requirements outweighs their lack of consideration of systemic risk. To investigate this issue, we calculate a new systemic risk metric: the expected systemic market shortfall. We analyze the composition of systemic risk across firms both before and after applying conventional collateral requirements. Our results show that the conservative nature of conventional collateral levels does buffer systemic risk adequately and results in only small risk spillovers above collateral. These spillovers do not meaningfully add to banks' pre-existing systemic risk. We verify the robustness of this result by exploring alternative systemic risk measures, allowing for an implausibly large margin of error. Even under the most extreme scenario, the maximum market-wide shortfall in excess of collateral barely reaches 1 per cent of banks' market capitalization. This maximum shortfall therefore does not exceed the effect of a 1 per cent decline in stock price. |
| Keywords: | Financial Institutions; Financial markets |
| JEL: | G10 G20 |
| Date: | 2019–06 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:19-23&r=all |
| By: | Bluwstein, Kristina (Bank of England); Yung, Julieta (Bates College) |
| Abstract: | We develop a dynamic stochastic general equilibrium framework that can account for important macroeconomic and financial moments, given Epstein-Zin preferences, heterogeneous banking and third-order approximation methods that yield a time-varying term premium that feeds back to the real economy. A risk perception shock increases term premia, lowers output, and reduces short-term credit in the private sector in response to higher loan rates and constrained borrowers, as banks rebalance their portfolios. A ‘bad’ credit boom, driven by investors mispricing risk, leads to a more severe recession and is less supportive of economic growth than a ‘good’ credit boom based on fundamentals. |
| Keywords: | Stochastic discount factor; DSGE; long-term interest rate; risk mispricing; macro-financial linkages; bank lending |
| JEL: | E43 E44 E58 G12 |
| Date: | 2019–06–21 |
| URL: | http://d.repec.org/n?u=RePEc:boe:boeewp:0806&r=all |
| By: | Cloyne, James; Huber, Kilian; Ilzetzki, Ethan; Kleven, Henrik |
| Abstract: | We investigate the effect of house prices on household borrowing using administrative mortgage data from the United Kingdom and a new empirical approach. The data contain household-level information on house prices and borrowing in a panel of homeowners, who refinance at regular and quasi-exogenous intervals. The data and setting allow us to develop an empirical approach that exploits house price variation coming from the idiosyncratic and exogenous timing of refinance events around the Great Recession. We present two main results. First, there is a clear and robust effect of house prices on borrowing. Second, the effect of house prices on borrowing can be explained largely by collateral effects. We study the collateral channel through a multivariate and nonparametric heterogeneity analysis of proxies for collateral and wealth effects. |
| JEL: | D14 E32 R31 |
| Date: | 2019–06–01 |
| URL: | http://d.repec.org/n?u=RePEc:ehl:lserod:101065&r=all |
| By: | Christiane Kneer; Alexander Raabe |
| 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 channeled back abroad, reflecting the role of the UK as a global financial center. |
| Keywords: | Capital flows, bank lending, credit allocation, international finance, instrumental variables, international financial linkages |
| JEL: | F21 F30 F32 F34 G00 G21 |
| Date: | 2019–07 |
| URL: | http://d.repec.org/n?u=RePEc:zur:econwp:326&r=all |
| By: | Suzanne H. Bijkerk; Casper G. de Vries |
| Abstract: | Asset-based lending, the supply of loans based on floating collateral, is an important source of funding for small .rms. We analyze the effect of competition on asset-based loan markets on interest rate distributions and the mobility of small firms. Close monitoring of collateral by lenders results in an informational advantage for the incumbent lender and third-degree price discrimination. We find that adverse selection results in a unique equilibrium in which lenders randomize interest rates and firms switch lender with positive probability. Increased competition between lenders does not benefit firms through lower expected interest rates, neither does it improve their mobility. |
| Keywords: | asset-based lending, floating, collateral, adverse selection |
| JEL: | D53 D82 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_7662&r=all |
| By: | Daisuke Ikeda (Bank of Japan); Mayumi Ojima (Bank of Japan); Koji Takahashi (Bank of Japan) |
| Abstract: | Interconnectedness is an essential feature of banks, but it can be a shock-amplifier. We explore changes in, and implications and underlying drivers of interconnectedness among major banks in the world, focusing on their stock market volatilities. The estimated vector autoregressive model reveals significant changes in interconnectedness between before and after the global financial crisis of 2007-09. Specifically, the estimation shows a significant increase in connectedness from foreign banks to Japanese banks. The impulse responses to a credit shock show that changes in the estimated interconnectedness can be an amplifier for Japanese banks in particular. A panel regression analysis suggests that Japanese banks' cross-border activity, especially lending, has likely driven an increase in connectedness from foreign banks. |
| Keywords: | Global financial linkages; Stock price volatilities; LASSO |
| JEL: | E44 G15 G21 |
| Date: | 2019–06–28 |
| URL: | http://d.repec.org/n?u=RePEc:boj:bojwps:wp19e11&r=all |
| By: | Sandrine Lecarpentier; Mathias Lé; Henri Fraisse; Michel Dietsch |
| Abstract: | Starting in 2014 with the implementation of the European Commission Capital Requirement Directive, banks operating in the Euro area were benefiting from a 25% reduction (the Supporting Factor or "SF" hereafter) in their own funds requirements against Small and Medium-sized enterprises ("SMEs" hereafter) loans. We investigate empirically whether this reduction has supported SME financing and to which extent it is consistent with SME credit risk. Economic capital computations based on multifactor models do confirm that capital requirements should be lower for SMEs. Taking into account the uncertainty surrounding their estimates and adopting a conservative approach, we show that the SF is consistent with the difference in economic capital between SMEs and large corporates. As for the impact on credit distribution, our differences-in-differences specification enables us to find a positive and significant impact of the SF on the credit supply. |
| Keywords: | SME finance, Credit supply, Basel III, Credit risk modelling, SME Supporting Factor |
| JEL: | C13 G21 G33 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:drm:wpaper:2019-12&r=all |
| By: | Gimber, Andrew (Bank of England); Rajan, Aniruddha (Bank of England) |
| Abstract: | If bail-in is credible, risk premia on bank securities should decrease as funding sources junior to and alongside them in the creditor hierarchy increase. Other things equal, we find that when banks have more equity and less subordinated debt they have lower risk premia on both. When banks have more subordinated and less senior unsecured debt, senior unsecured risk premia are lower. For percentage point changes to an average balance sheet, these reductions would offset about two thirds of the higher cost of equity relative to subordinated debt and one third of the spread between subordinated and senior unsecured debt. |
| Keywords: | Funding costs; weighted average cost of capital; capital structure; creditor hierarchy; loss‑absorbing capacity; Modigliani–Miller offset; contingent claims analysis. |
| JEL: | G21 G32 |
| Date: | 2019–06–21 |
| URL: | http://d.repec.org/n?u=RePEc:boe:boeewp:0805&r=all |
| By: | Pierluigi Murro (LUISS-Guido Carli University.); Tommaso Oliviero (Università di Napoli Federico II and CSEF); Alberto Zazzaro (University of Naples Federico II, CSEF and MoFiR.) |
| Abstract: | Using firm-level survey information, we study if relationship lending affects companies’ employment decisions when they face adverse conditions. Our empirical analysis reveals that firms with durable lending relationships show a significantly lower degree of sensitivity of internal workforce variation to shocks in sales. This result is robust to different measures of the shocks in sales and to an instrumental variable strategy. We also show that the result is stronger for younger, smaller and more innovative firms, confirming that relationship lending provides insurance against adverse conditions for companies whose internal labor force is arguably more valuable. |
| Keywords: | Employment, relationship banking, insurance |
| JEL: | G32 G38 H53 J65 |
| Date: | 2019–06–26 |
| URL: | http://d.repec.org/n?u=RePEc:sef:csefwp:533&r=all |