nep-ban New Economics Papers
on Banking
Issue of 2019‒07‒15
sixteen papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. How Language Shapes Bank Risk Taking By Francis OSEI-TUTU; Laurent WEILL
  2. Quest for robust optimal macroprudential policy By Pablo Aguilar; Samuel Hurtado; Stephan Fahr; Eddie Gerba
  3. Bank profitability, leverage constraints, and risk-taking By Martynova, Natalya; Ratnovski, Lev; Vlahu, Razvan E.
  4. The Impact of Stricter Merger Control on Bank Mergers and Acquisitions. Too-Big-To-Fail and Competition By Carletti, Elena; Ongena, Steven; Siedlarek, Jan-Peter; Spagnolo, Giancarlo
  5. Multiple banking relationships: the role of firm connectedness By Andrea Fracasso; Valentina Peruzzi; Chiara Tomasi
  6. Deposit insurance, market discipline and bank risk By Karas, Alexei; Pyle, William; Schoors, Koen
  7. Stress testing effects on portfolio similarities among large US Banks By Bräuning, Falk; Fillat, Jose
  8. Charge-offs, Defaults and U.S. Business Cycles By Christopher M. Gunn; Alok Johri; Marc-André Letendre
  9. The macroprudential implications of the 1990s Japanese financial crisis: remarks at the 5th Annual Macroprudential Conference, Eltville, Germany, June 21, 2019 By Rosengren, Eric S.
  10. The Impact of Merger Legislation on Bank Mergers By Carletti, Elena; Ongena, Steven; Siedlarek, Jan-Peter; Spagnolo, Giancarlo
  11. Tracking Foreign Capital: The Effect of Capital Inflows on Bank Lending in the UK By Alexander Raabe; Christiane Kneer
  12. Creditor Rights, Information Sharing, and Borrower Behavior: Theory and Evidence By John H. Boyd; Hendrik Hakenes; Amanda Heitz
  13. Externalities and financial crisis – enough to cause collapse? By Miller, Marcus; Zhang, Lei
  14. Consumer Payment Preferences and the Impact of Technology and Regulation: Insights from the Visa Payment Panel Study By Akana, Tom
  15. Moving into the Mainstream: Who Graduates from Secured Credit Card Programs? By Santucci, Larry
  16. Bank resolution and the structure of global banks By Bolton, Patrick; Oehmke, Martin

  1. By: Francis OSEI-TUTU (LaRGE Research Center, Université de Strasbourg); Laurent WEILL (LaRGE Research Center, Université de Strasbourg)
    Abstract: We analyze the impact of language on risk-taking behavior of banks. Our hypothesis is that languages that grammatically distinguish between present and future events lead banks to take more risk. We investigate this hypothesis on a sample of 1,402 banks from 82 countries over the 2010-2017 period. We find that banks from countries with future tense marking take more risk in accordance with our prediction. This finding is robust to the inclusion of alternative culture indicators, to alternative definitions of bank risk and of future time reference.
    Keywords: Banking, financial stability, language.
    JEL: G21 Z13
    Date: 2019
  2. By: Pablo Aguilar (Banco de España); Samuel Hurtado (Banco de España); Stephan Fahr (European Central Bank); Eddie Gerba (Danmarks Nationalbank)
    Abstract: This paper contributes by providing a new approach to study optimal macroprudential policies based on economy wide welfare. Following Gerba (2017), we pin down a welfare function based on a first-and second order approximation of the aggregate utility in the economy and use it to determine the merits of different macroprudential rules for Euro Area. With the aim to test this framework, we apply it to the model of Clerc et al. (2015). We find that the optimal level of capital is 15.6 percent, or 2.4 percentage points higher tan the 2001-2015 value. Optimal capital reduces significantly the volatility of the economy while increasing somewhat the total level of welfare in steady state, even with a time-invariant instrument. Expressed differently, bank default rates would have been 3.5 percentage points lower while credit and GDP 5% and 0.8% higher had optimal capital level been in place during the 2011-2013 crisis. Further, using a model-consistent loss function, we find that the optimal Countercyclical Capital Buffer (CCyB) rule depends on whether observed or optimal capital levels are already in place. Conditional on optimal capital level, optimal CCyB rule should respond to movements in total credit and mortgage lending spreads. Gains in welfare from optimal combination of instruments is higher than the sum of their individual effects due to synergies and positive mutual spillovers.
    Keywords: optimal policy, global welfare analysis, financial stability, financial DSGE model, macroprudential policy
    JEL: G21 G28 G17 E58 E61
    Date: 2019–07
  3. By: Martynova, Natalya; Ratnovski, Lev; Vlahu, Razvan E.
    Abstract: Traditional theory suggests that higher bank profitability (or franchise value) dissuades bank risk-taking. We highlight an opposite effect: higher profitability loosens bank borrowing constraints. This enables profitable banks to take risk on a larger scale, inducing risk-taking. This effect is more pronounced when bank leverage constraints are looser, or when new investments can be financed with senior funding (such as repos). The model's predictions are consistent with some notable cross-sectional patterns of bank risk-taking in the run-up to the 2008 crisis.
    Keywords: Banks,Risk-Taking,Leverage,Funding Structure,Crises
    JEL: G21 G24 G28
    Date: 2019
  4. By: Carletti, Elena (Bocconi University, IGIER, and CEPR); Ongena, Steven (University of Zurich, the Swiss Finance Institute, KU Leuven, and CEPR); Siedlarek, Jan-Peter (Federal Reserve Bank of Cleveland); Spagnolo, Giancarlo (SITE-Stockholm School of Economics, the University of Rome Tor Vergata, EIEF, and CEPR)
    Abstract: The effect of regulations on the banking sector is a key question for financial intermediation. This paper provides evidence that merger control regulation, although not directly targeted at the banking sector, has substantial economic effects on bank mergers. Based on an extensive sample of European countries, we show that target announcement premia increased by up to 16 percentage points for mergers involving control shifts after changes in merger legislation, consistent with a market expectation of increased profitability. These effects go hand-in-hand with a reduction in the propensity for mergers to create banks that are too-big-to-fail in their country.
    Keywords: banks; regulation; mergers and acquisitions; merger control; antitrust;
    JEL: G21 G34 K21 L40
    Date: 2019–07–05
  5. By: Andrea Fracasso; Valentina Peruzzi; Chiara Tomasi
    Abstract: The aim of this work is to shed light on the role that firm connectedness has on multiple bank relationships, controlling for other firm-level traditional determinants. Working on a large sample of Italian manufacturing firms, we develop novel measures of firm connectedness and multiple banking. We measure firm connectedness by exploiting the information on the number of connections that a non-financial firm has with any other non-financial firm through persons holding a position (including several types of appointments such as shareholder, administrator, technical or administrative worker, among others) in both companies. The paper finds empiri- cal evidence showing that firm connectedness is positively associated with the number of banks that provide credits to the firm. This e↵ect appears to be stronger for the younger, smaller and more indebted firms, thereby suggesting that firms’ connectedness favours their access to multiple sources of credit by reducing the negotiation and transaction costs that these compa- nies face to engage with lending banks, due to asymmetric information. Connectedness does not seem to reduce the incentives for the firms to expand the number of lenders to minimize hold-up risks.
    Keywords: Multiple-bank lending, firm connectedness
    JEL: F12 F14 F31 F41
    Date: 2019
  6. By: Karas, Alexei; Pyle, William; Schoors, Koen
    Abstract: Using evidence from Russia, we explore the effect of the introduction of deposit insurance on bank risk. Drawing on within-bank variation in the ratio of firm deposits to total household and firm deposits, so as to capture the magnitude of the decrease in market discipline after the introduction of deposit insurance, we demonstrate for private, domestic banks that larger declines in market discipline generate larger increases in traditional measures of risk. These results hold in a difference-in-difference setting in which state and foreign-owned banks, whose deposit insurance regime does not change, serve as a control.
    JEL: E65 G21 G28 P34
    Date: 2019–06–27
  7. By: Bräuning, Falk (Federal Reserve Bank of Boston); Fillat, Jose (Federal Reserve Bank of Boston)
    Abstract: We use an expansive regulatory loan-level dataset to analyze how the portfolios of the largest US banks have evolved since 2011. In particular, we analyze how the commercial and industrial and commercial real estate loan portfolios have changed in response to stress-testing requirements stipulated in the 2010 Dodd-Frank Act. We find that the largest US banks, which are subject to stress testing, have become more similar since the current form of the stress testing was implemented in 2011. We also find that banks with poor stress test results tend to adjust their portfolios in a way that makes them more similar to the portfolios of banks that performed well in the stress testing. In general, stress testing has resulted in more diversified bank portfolios in terms of sectoral and regional distributions. However, we also find that all the large US banks diversified in a similar way, creating a more concentrated systemic portfolio in the aggregate.
    Keywords: bank correlations; concentration; portfolio similarity; stress tests; systemic risk
    JEL: G21 G28
    Date: 2019–04–01
  8. By: Christopher M. Gunn (Department of Economics, Carleton University); Alok Johri (Department of Economics, McMaster University); Marc-André Letendre (Department of Economics, McMaster University)
    Abstract: We use aggregate banking data to uncover a new fact: U.S. banks counter-cyclically vary the proportion of defaulted loans that they charge-off. The variance of this “charge-offs to defaults” ratio is roughly 15 times larger than that of GDP. Canonical financial accelerator models cannot explain this variance. We show that introducing stochastic default costs into the model helps to resolve the discrepancywith the data. Estimating the augmented model on typical macroeconomic data using Bayesian techniques reveals that the estimated default cost shocks not only help account for the variance of the banking data but also help account for a significant fraction of the U.S. business cycle between 1984 and 2015.
    Keywords: Charge-offs and defaults, default cost shocks, financial acceleratormodels, business cycles
    JEL: E3 E44
    Date: 2019–07–05
  9. By: Rosengren, Eric S. (Federal Reserve Bank of Boston)
    Abstract: The Japanese financial crisis of the late 1990s had significant implications for both the Japanese and global economies. Effective use of macroprudential tools – that is, banking regulations aimed at mitigating financial-system risk – could have lessened the crisis in Japan. Unfortunately, it wasn't until the financial crisis of 2008 that countries began to work on improving macroprudential policies. Bank stress tests and the use of a countercyclical capital buffer (or CCyB) are two macroprudential tools that emerged from the financial crisis which could have reduced the severity of the banking crisis in Japan. The Japanese banking system is again being affected by adverse economic conditions. Like the U.S., Japan might benefit from considering an expanded set of macroprudential tools.
    Keywords: Japanese economy; macroprudential policy; Countercyclical Capital Buffer; stress test; Japanese financial crisis; monetary policy
    Date: 2019–06–21
  10. By: Carletti, Elena (Bocconi University, IGIER, and CEPR); Ongena, Steven (University of Zurich, the Swiss Finance Institute, KU Leuven, and CEPR); Siedlarek, Jan-Peter (Federal Reserve Bank of Cleveland); Spagnolo, Giancarlo (SITEStockholm School of Economics, the University of Rome Tor Vergata, EIEF, and CEPR)
    Abstract: We fi nd that the introduction of stricter merger control legislation in the European Union in the period 1986–2007 increases the abnormal announcement returns of targets in bank mergers by 7 percentage points. In searching for potential explanations, we document an increase in the pre-merger profitability of targets, a decrease in the size of acquirers and a decreasing share of transactions in which banks are acquired by other banks. Other merger properties, including the size and risk profile of targets, the geographic overlap of merging banks and the stock market response of rivals appear unaffected. The evidence suggests that the strengthening of merger control leads to more efficient and more competitive transactions.
    Keywords: banks; mergers and acquisitions; merger control; antitrust;
    JEL: G21 G34 K21 L40
    Date: 2017–07–19
  11. By: Alexander Raabe (IHEID, Graduate Institute of International and Development Studies, Geneva); Christiane Kneer (Bank of England)
    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: 2019–06–30
  12. By: John H. Boyd; Hendrik Hakenes; Amanda Heitz
    Abstract: This paper provides a comprehensive theoretical and empirical analysis of "creditor rights" and "information sharing" throughout over 1.8 million private firms in Europe. We show that many of the outcomes associated with greater levels of creditor rights can be obtained with higher information sharing between banks. Both theory and empirics show that creditor rights and information sharing are associated with greater firm leverage, lower profitability, and greater distance to default. Moreover, theory and empirics find that creditor rights and information sharing are robust substitutes. Our analysis suggests that poor creditor rights can be substituted by improved information sharing.
    Keywords: Creditor rights, information sharing
    JEL: G21 G28 L15
    Date: 2018–10
  13. By: Miller, Marcus (University of Warwick and CEPR); Zhang, Lei (Sichuan University)
    Abstract: After the boom in US subprime lending came the bust - with a run on US shadow banks. The magnitude of boom and bust were, it seems, amplified by two significant externalities triggered by aggregate shocks: the endogeneity of bank equity due to mark-to-market accounting and of bank liquidity due to ‘fire-sales’ of securitised assets. We show how adding a systemic ‘bank run’ to the canonical model of Adrian and Shin allows for a tractable analytical treatment - including the counterfactual of complete collapse that forces the Treasury and the Fed to intervene.
    Keywords: pecuniary externalities ; bank runs ; illiquidity ; Lender of Last Resort ; cross-border banking
    JEL: G01 G11 G24
    Date: 2019
  14. By: Akana, Tom (Federal Reserve Bank of Philadelphia)
    Abstract: The Consumer Finance Institute hosted a workshop in August 2018 featuring Michael Marx, senior director at Visa, Inc., to discuss recent data from the Visa Payment Panel, highlighting the evolution of consumer payment preferences since the Great Recession and the passage of the Credit Card Accountability Responsibility and Disclosure (CARD) Act of 2009. A number of intriguing trends were discussed. Debit card adoption and growth have shown signs of slowing, even as regulatory changes have increased its prevalence recently among younger consumers. Credit card usage continues to grow and has shifted largely to rewards-based products. Payment preferences for younger consumers appear to be influenced by the availability of financial products (driven by social and regulatory influences) as well as the advent of mobile wallets and person-to-person (P2P) technologies. This paper summarizes Marx’s presentation along with additional research.
    Keywords: Consumer payments; credit cards; debit cards; P2P; CARD Act
    JEL: D14 G28
    Date: 2019–07–02
  15. By: Santucci, Larry (Federal Reserve Bank of Philadelphia)
    Abstract: Secured credit cards--credit cards whose limit is fully or partially collateralized by a bank deposit--are considered a gateway product to mainstream credit access. As consumers demonstrate good usage and repayment behavior, they may be offered the opportunity to graduate to an unsecured credit card. This paper uses anonymized account-level data to examine the prevalence of account graduation in the secured credit card market since 2012. Using a fixed effects regression model, we identify a set of usage and repayment behaviors that are correlated with account graduation.
    Keywords: credit cards; secured credit cards; account graduation
    JEL: D14 G21
    Date: 2019–07–02
  16. By: Bolton, Patrick; Oehmke, Martin
    Abstract: We study the resolution of global banks by national regulators. Single-point-of-entry (SPOE) resolution, where loss-absorbing capital is shared across jurisdictions, is efficient but faces implementation constraints. First, when expected transfers across jurisdictions are too asymmetric, national regulators fail to set up SPOE resolution ex ante. Second, when required ex-post transfers are too large, national regulators ring-fence assets instead of cooperating in SPOE resolution. In this case, a multiple-point-of- entry (MPOE) resolution, where loss-absorbing capital is pre-assigned, is more robust. Our analysis highlights a fundamental link between efficient bank resolution, the operational structures, risks, and incentives of global banks.
    JEL: F3 G3
    Date: 2018–11–29

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