nep-ban New Economics Papers
on Banking
Issue of 2019‒08‒12
forty papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Shock Transmission through Cross-Border Bank Lending: Credit and Real Effects By Galina Hale; Tumer Kapan; Camelia Minoiu
  2. The anatomy of the euro area interest rate swap market By Fontana, Silvia Dalla; Holz auf der Heide, Marco; Pelizzon, Loriana; Scheicher, Martin
  3. The redistributive effects of bank capital regulation By Elena Carletti; Roberto Marquez; Silvio Petriconi
  4. Macroprudential Regulation and Leakage to the Shadow Banking Sector By Stefan Gebauer; Falk Mazelis
  5. Prevision des difficultes bancaires : un modele d'alerte precoce pour le cas du maroc By Firano, Zakaria; Filali adib, Fatine
  6. Behind the scenes of the beauty contest: window dressing and the G-SIB framework By Behn, Markus; Mangiante, Giacomo; Parisi, Laura; Wedow, Michael
  7. Alternative frameworks for measuring credit gaps and setting countercyclical capital buffers By Nicolas Reigl; Lenno Uuskula
  8. Role of Credit Reference Bureau On Financial Intermediation: Evidence from The Commercial Banks in Kenya By Mungiria, James; Ondabu, Ibrahim
  9. Unintended consequences of unemployment insurance benefits: the role of banks By Yavuz Arslan; Ahmet Degerli; Gazi Kabaş
  10. Modelling the distribution of mortgage debt By Levina, Iren; Sturrock, Robert; Varadi, Alexandra; Wallis, Gavin
  11. The cost-efficiency and productivity growth of euro area banks By Huljak, Ivan; Martin, Reiner; Moccero, Diego
  12. Default, Bailouts and the Vertical Structure of Financial Intermediaries By Tatiana Damjanovic; Vladislav Damjanovic; Charles Nolan
  13. Lending Standards, Productivity and Credit Crunches By Jonathan Swarbrick
  14. Banking, Capital Regulation, Risk and Dynamics By Larsson, Bo; Wijkander, Hans
  15. Value at Risk and Expected Shortfall under General Semi-parametric GARCH models By Xuehai Zhang
  16. The Consequences of Student Loan Credit Expansions: Evidence from Three Decades of Default Cycles By Looney, Adam; Yannelis, Constantine
  17. Determinants of Liquidity in Selected CEE Countries By Pavla Klepková Vodová
  18. Improving Access to Banking: Evidence from Kenya By Franklin Allen; Elena Carletti; Robert Cull; Jun QJ Qian; Lemma Senbet; Patricio Valenzuela
  19. An Early Warning System for banking crises: From regression-based analysis to machine learning techniques By Elizabeth Jane Casabianca; Michele Catalano; Lorenzo Forni; Elena Giarda; Simone Passeri
  20. Do Negative Interest Rates Affect Bank Risk-Taking? By AAlessio Reghezza; Jonathan Williams; Alessio Bongiovanni; Riccardo Santamaria
  21. Trust and Agency Redistribution in CajaVecina's Payment Ecosystem By Bernardo Batiz-Lazo; Alarcon-Molina, Jose; Espinosa-Cristia, Juan Felipe
  22. Securisation special purpose entities, bank sponsors and derivatives By Fiedor, Paweł; Killeen, Neill
  23. Debt Collateralization, Capital Structure, and Maximal Leverage By Feixue Gong; Gregory Phelan
  24. Monetary policy, macroprudential policy, and financial stability By Martinez-Miera, David; Repullo, Rafael
  25. Dissecting Saving Dynamics: Measuring Wealth, Precautionary, and Credit Effects By Christopher D. Carroll; Jiri Slacalek; Martin Sommer
  26. Monetary policy shocks and the health of banks By Jung, Alexander; Uhlig, Harald
  27. Drivers of Cross-Border Banking in Sub-Saharan Africa By Paul Henri Mathieu; Marco Pani; Shiyuan Chen; Rodolfo Maino
  28. Digital Currencies and Central Banking: A Sense of Déjà Vu By Sigitas Siaudinis
  29. Revisiting the finance-growth nexus: A socioeconomic approach By Agiropoulos, Charalampos; Karkalakos, Sotiris; Polemis, Michael
  30. Are international banks different? Evidence on bank performance and strategy By Ata Can Bertay; Asli Demirgüç-Kunt; Harry Huizinga
  31. Measuring contagion risk in international banking By Stefan Avdjiev; Paolo Giudici; Alessandro Spelta
  32. Lobbying, Regulatory Enforcement and Corporate Governance: Theory and Evidence from Regulatory Enforcement Actions against US Banks By Panagiota Papadimitri; Ansgar Wohlschlegel
  33. International Fiscal-financial Spillovers: The Effect of Fiscal Shocks on Cross-border Bank Lending By Sangyup Choi; Davide Furceri; Chansik Yoon
  34. Fiscal Risk and Financial Fragility By Thiago Christiano Silva; Solange Maria Guerra; Benjamin Miranda Tabak
  35. Forecasting High-Risk Composite CAMELS Ratings By Lewis Gaul; Jonathan Jones; Pinar Uysal
  36. Peer-to-Peer Lending, Joint Liability and Financial Inclusion with Altruistic Investors By Berentsen, Aleksander; Markheim, Marina
  37. Size, Efficiency, Market Power, and Economies of Scale in the African Banking Sector By Simplice A. Asongu; Nicholas M. Odhiambo
  38. The Real-Time Information Content of Financial Stress and Bank Lending on European Business Cycles By Jakob Fiedler; Josef Ruzicka; Thomas Theobald
  39. Statuts juridiques, gouvernance et performance des institutions de microfinance au Cameroun By DJOUFOUET, Wulli Faustin
  40. System-wide stress simulation By Aikman, David; Chichkanov, Pavel; Douglas, Graeme; Georgiev, Yordan; Howat, James; King, Benjamin

  1. By: Galina Hale; Tumer Kapan; Camelia Minoiu
    Abstract: We study the transmission of financial shocks across borders through international bank connections. Using data on cross-border interbank loans among 6,000 banks during 1997-2012, we estimate the effect of asset-side exposures to banks in countries experiencing systemic banking crises on profitability, credit, and the performance of borrower firms. Crisis exposures reduce bank returns and tighten credit conditions for borrowers, constraining investment and growth. The effects are larger for foreign borrowers, including in countries not experiencing banking crises. Our results document the extent of cross-border crisis transmission, but also highlight the resilience of financial networks to idiosyncratic shocks.
    Keywords: cross-border interbank exposures ; banking crises ; shock transmission ; bank loans ; real economy
    JEL: F34 G01 F36 G21
    Date: 2019–07–17
  2. By: Fontana, Silvia Dalla; Holz auf der Heide, Marco; Pelizzon, Loriana; Scheicher, Martin
    Abstract: Using a novel regulatory dataset of fully identified derivatives transactions, this paper provides the first comprehensive analysis of the structure of the euro area interest rate swap (IRS) market after the start of the mandatory clearing obligation. Our dataset contains 1.7 million bilateral IRS transactions of banks and non-banks. Our key results are as follows: 1) The euro area IRS market is highly standardised and concentrated around the group of the G16 Dealers but also around a significant group of core "intermediaries"(and major CCPs). 2) Banks are active in all segments of the IRS euro market, whereas non-banks are often specialised. 3) When using relative net exposures as a proxy for the "flow of risk" in the IRS market, we find that risk absorption takes place in the core as well as the periphery of the network but in absolute terms the risk absorption is largely at the core. 4) Among the Basel III capital and liquidity ratios, the leverage ratio plays a key role in determining a bank's IRS trading activity.
    Keywords: derivatives,network analysis,interest rate risk,banking,risk management,hedging
    JEL: G21 E43 E44
    Date: 2019
  3. By: Elena Carletti; Roberto Marquez; Silvio Petriconi
    Abstract: We build a general equilibrium model of banks’ optimal capital structure, where bankruptcy is costly and investors have heterogenous endowments and incur a cost for participating in equity markets. We show that banks raise both deposits and equity, and that investors are willing to hold equity only if adequately compensated. We then introduce (binding) capital requirements and show that: (i) it distorts investment away from productive projects toward storage; or (ii) it widens the spread between the returns to equity and to deposits. These results hold also when we extend the model to incorporate various rationales justifying capital regulation.
    Keywords: limited market participation, bank capital structure, capital regulation, investor returns
    JEL: G21 G28
    Date: 2018
  4. By: Stefan Gebauer; Falk Mazelis
    Abstract: Macroprudential policies for financial institutions have received increasing prominence since the global financial crisis. These policies are often aimed at the commercial banking sector, while a host of other non-bank financial institutions, or shadow banks, may not fall under their jurisdiction. We study the effects of tightening commercial bank regulation on the shadow banking sector. For this purpose, we develop a DSGE model that differentiates between regulated, monopolistically competitive commercial banks and a shadow banking system that relies on funding in a perfectly competitive market for investments. After estimating the model using euro area data from 1999-2014 including information on shadow banks, we find that tighter capital requirements on commercial banks increase shadow bank lending, which may have adverse financial stability effects. Coordinating the macroprudential tightening with monetary easing can limit this leakage mechanism, while still bringing about the desired reduction in aggregate lending. We discuss how regulators that either do or do not consider credit leakage to shadow banks set policy in response to macroeconomic shocks. Lastly, in a counterfactual analysis, we then compare how a macroprudential policy implemented before the crisis on all financial institutions, or just on commercial banks, would have dampened the leverage cycle.
    Keywords: Macroprudential Regulation, Monetary Policy, Shadow Banking, Non-Bank Financial Institutions, Financial Frictions
    JEL: E58 G23 G28
    Date: 2019
  5. By: Firano, Zakaria; Filali adib, Fatine
    Abstract: This paper proposes an early warning model that can predict vulnerabilities in the Moroccan banking system. This tool is part of a financial stability perspective because of its ability to anticipate banking weaknesses. Thus, and inspired by the practices of major central banks, notably those of the FED and the ECB, a logit model in panel data was developed on eight major Moroccan banks representing more than 90% of the banking system. This model relates the probability of distress and several macroeconomic and financial variables likely to anticipate banking difficulties. The results show that the bank leverage ratio and the output gap are the main determinants of banking difficulties in Morocco. Indeed, the analysis of the marginal effects shows that a 1% variation of these two determinants impacts the probability of distress of Moroccan banks by almost 20% and 14% respectively. In parallel, the examination of Type 1 and Type 2 errors indicates that the predictive quality of the chosen model and its ability to send good signals are widely acceptable
    Keywords: Probability of distress, bank fragility, systemic risk, early warning system.
    JEL: G2 G21
    Date: 2018–02–08
  6. By: Behn, Markus; Mangiante, Giacomo; Parisi, Laura; Wedow, Michael
    Abstract: This paper illustrates that systemically important banks reduce a range of activities at year-end, leading to lower additional capital requirements in the form of G-SIB buffers. The effects are stronger for banks with higher incentives to reduce the indicators, and for banks with balance sheet structures that can more easily be adjusted. The observed reduction in activity may imply an overall underestimation of banks' systemic importance as well as a distortion in their relative ranking, with implications for banks' ability to absorb losses. Moreover, a reduction in the provision of certain services at year-end may adversely affect overall market functioning. JEL Classification: G20, G21, G28
    Keywords: bank regulation, systemically important banks, window dressing
    Date: 2019–07
  7. By: Nicolas Reigl; Lenno Uuskula
    Abstract: This paper complements the standard Basel countercyclical capital buffer framework by suggesting four additional measures for credit gaps that can be used to measure the financial cycle and to decide on countercyclical capital buffers for banks. The new measures behave similarly to the gaps calculated with the standard Basel one-sided Hodrick-Prescott filter in long samples, but they have the properties desired for countries with relatively short historical samples. While the standard Basel credit gaps have been deep in negative territory for many European Union countries since the Great Recession the new gaps are close to zero and the buffers suggested are more in line with the countercyclical capital buffer ratios that were in place in 2018.
    Keywords: credit gaps, countercyclical capital buffer, Basel III, Estonia
    JEL: G01 E59
    Date: 2019–01–23
  8. By: Mungiria, James; Ondabu, Ibrahim
    Abstract: This study discusses the role of the Credit Reference Bureau on financial intermediation among the commercial banks in Kenya. The study uses a descriptive survey research design. The study population consists of all the 45 commercial banks licensed by the central bank of Kenya under the banking act as at 31st May 2019. The study adopts a census population approach to study all the banks. The study uses secondary data collected from annual supervision reports of CBK, and the respective bank's audited accounts relate to the total loans, total non-performing loans, and interest earned on investments. Also, the credit reports done annually by reference bureaus were used to obtain data for the period between 2010 and 2018. Quantitative data collect was analyzed using the latest SPSS software, version 22.0. The study applies both descriptive and inferential statistics. Results generated are then presented in tables and explanations given in prose. Inferential statistics included the Pearson correlation analysis and Correlational relationships among the number of loans offered defaulted loans and the interest earnings on loans by commercial banks bank in Kenya. Linear regression analysis was conducted to establish the significance of the variables. ANOVA was used to test the relationship between independent variables and dependent variable. The Chi-Square test was also performed. Both the mean of the study and the mean before the introduction of CRB were used to check if there is a statistical difference between the means. The study establishes that credit reference bureau checks have a role in the financial intermediation (non-performing loans) in commercial banks in Kenya. Further, the study found that non-performing loans have a negative correlation with credit reference bureau checks. It can, therefore, be concluded that a relationship exists between credit reference bureau information and the level of financial intermediation as shown through non-performing loans in Kenya commercial banks.
    Keywords: Credit reference bureau, financial intermediation, commercial banks in Kenya
    JEL: G2 G32
    Date: 2019–06–29
  9. By: Yavuz Arslan; Ahmet Degerli; Gazi Kabaş
    Abstract: Many countries provide unemployment insurance (UI) to reduce individuals' income risk and to moderate fluctuations in the economy. However, to the extent that these policies are successful, they would be expected to reduce precautionary savings and hence bank deposits--households' main saving instrument. In this paper, we study this reduced incentive to save and uncover a novel distortionary mechanism through which UI policies affect the economy. In particular, we show that, when UI benefits become more generous, bank deposits fall. Since deposits are the main stable funding source for banks, this fall in deposits squeezes bank commercial lending, which in turn reduces corporate investment.
    Keywords: unemployment insurance, precautionary savings, bank deposits
    JEL: D14 G21 J65
    Date: 2019–07
  10. By: Levina, Iren (Bank of England); Sturrock, Robert (Bank of England); Varadi, Alexandra (Wadham College, Oxford); Wallis, Gavin (Bank of England)
    Abstract: This paper presents an approach to modelling the flow and the stock of mortgage debt, using loan‑level data. Our approach allows us to consider different macroeconomic scenarios for the housing market, lenders’ and borrowers’ behaviour, and different calibrations of macroprudential policy interventions in a consistent way. This, in turn, allows us to take a forward-looking view about potential risks stemming from the distribution of mortgage debt, as well as assess the impact of potential macroprudential policies in a forward‑looking manner.
    Keywords: Mortgage market; housing market; macroprudential policy; loan‑level data; flow model; stock model
    JEL: D04 G21 R20 R21 R31
    Date: 2019–07–19
  11. By: Huljak, Ivan; Martin, Reiner; Moccero, Diego
    Abstract: We use an industrial organisation approach to quantify the size of Total Factor Productivity Growth (TFPG) for euro area banks after the crisis and decompose it into its main driving factors. In addition, we disentangle permanent and time-varying inefficiency in the banking sector. This is important because lack of distinction may lead to biased estimates of inefficiency and because the set of policies needed in both cases is different. We focus on 17 euro area countries over the period 2006 to 2017. We find that cost efficiency in the euro area banking sector amounted to around 84% on average over the 2006 to 2017 period. In addition, we observe that Total Factor Productivity growth for the median euro area bank decreased from around 2% in 2007 to around 1% in 2017, with technological progress being the largest contributor, followed by technical efficiency. Given the need to boost productivity and enhance profitability in the euro area banking sector, these findings suggests that bank’s efforts in areas such as rationalisation of branches, digitalisation of business processes and possibly mergers and acquisitions should be intensified. JEL Classification: C23, D24, G21
    Keywords: banking sector, bank productivity, cost-efficiency frontier, euro area, financial stability, panel data, permanent inefficiency, time-varying inefficiency, total factor productivity
    Date: 2019–08
  12. By: Tatiana Damjanovic (Durham Business School); Vladislav Damjanovic (Durham Business School); Charles Nolan (Adam Smith Business School, University of Glasgow)
    Abstract: Should we break up banks and limit bailouts? We study vertical integration of deposit-taking institutions and those investing in risky equity. Integration, by eliminating a credit spread, increases output but entails larger, more frequent bailouts. Bailouts of leveraged institutions boost economic activity but are costly. The optimal structure of intermediaries depends largely on the efficiency of government intervention, the competitiveness of the Önancial sector and shocks hitting the economy. Separated institutions are preferred when profit margins are small, financial shocks systemic and volatile, and bailouts costly. For a baseline calibration, universal banks are typically preferred.
    Keywords: Financial intermediation in DSGE models, Vertical structure of financial intermediary, separation of retail and investment banks, bailouts, trade-off between financial stability and efficiency.
    JEL: E13 E44 G11 G24 G28
    Date: 2019–05
  13. By: Jonathan Swarbrick
    Abstract: We propose a macroeconomic model in which adverse selection in investment drives the amplification of macroeconomic fluctuations, in line with prominent roles played by the credit crunch and collapse of the asset-backed security market in the financial crisis. Endogenous lending standards emerge due to an informational asymmetry between borrowers and lenders about the riskiness of borrowers. By using loan approval probability as a screening device, banks ration credit following financial disturbances, generating large endogenous movements in total factor productivity, explaining why productivity often falls during crises. Furthermore, the mechanism implies that financial instability is heightened when interest rates are low.
    Keywords: Business fluctuations and cycles; Credit and credit aggregates; Financial markets; Financial stability; Interest rates; Productivity
    JEL: E22 E32 E44 G01
    Date: 2019–07
  14. By: Larsson, Bo (erfConsulting AB); Wijkander, Hans (Dept. of Economics, Stockholm University)
    Abstract: Effects from risk, bankruptcies, and capital regulation of banks is explored in a dynamic stochastic equilibrium model where banks have two controls, dividends and level of risktaking. Unregulated value-maximizing banks, balance current profit against cost of risk. Banks with capitalization below desired level chose a lower level of risk than well-capitalized banks, but their capital adequacy ratios are yet lower. Binding regulation reduces risk-taking and instantaneous risk of bankruptcy but in the process also reduce endogenous growth of bank capital. This leads to an increased risk of bankruptcy that stems from the longer time banks spend poorly capitalized after large negative shocks due to the capital regulation.
    Keywords: Banking; Dynamic Banking; Banking regulation; Capital adequacy; Dividends; Incentive structure
    JEL: C61 G21 G22
    Date: 2019–06–23
  15. By: Xuehai Zhang (Paderborn University)
    Abstract: Risk management has been emphasized by financial institutions and the Basel Com- mittee on Banking Supervision (BCBS). The core issue in risk management is the mea- surement of the risks. Value at Risk (VaR) and Expected Shortfall (ES) are the widely used tools in quantitative risk management. Due to the ineptitude of VaR on tail risk performances, ES is recommended as the financial risk management metrics by BCBS. In this paper, we generate general SemiGARCH class models with a time-varying scale function. GARCH class models, based on the conditional t-distribution, are parametric extensions. Besides, backtesting with the semiparametric approach is also discussed. Fol- lowing Basel III, the trac light tests are applied in the model validation. Finally, we propose the loss functions with the views from regulators and firms, combing a power transformation in the model selection and it is shown that semiparametric models are a necessary option in practical financial risk management.
    Date: 2019–08
  16. By: Looney, Adam (The Brookings Institution); Yannelis, Constantine (University of Chicago Booth School of Business)
    Abstract: This paper studies the link between credit availability and student loan repayment using administrative federal student loan data. We demonstrate that expansions and contractions in federal student loan credit to institutions with high default rates explain most of the time series variation in student loan defaults between 1980 and 2010. Expansions in loan eligibility between 1976 and 1988 led to the entry of new, high-risk institutions, and default rates exceeding 30 percent in the late 1980s. Credit access was subsequently tightened through strict institutional and student accountability measures. This contracted credit availability at the highest default rate institutions, which in turn caused an exodus of institutions with high default rates, resulting in lower default rates on student loans. After 1992, the cycle was repeated, with credit access gradually loosened by unwinding many of the pre-1992 reforms. We confirm this time series narrative by examining discrete policy changes governing access to credit to show that tightening credit supply led to the closure of high-default schools and the relaxation of accountability rules resulted in their expansion. Our estimates imply that 85 percent of the increase in default between 1980 and 1990, and 95 percent of the decrease in default between 1990 and 2000 is driven by schools entering and exiting loan programs. One-third of the recent increase in default is associated with the entry of online programs following the relaxation of rules for lending to online schools, and another third is associated with the abolition of rules limiting the share of revenue coming from federal programs
    Keywords: student loans; credit expansion; human capital; loan default
    JEL: D14 G28 H52 H81
    Date: 2019–07–29
  17. By: Pavla Klepková Vodová (Department of Finance and Accounting, School of Business Administration, Silesian University)
    Abstract: The aim of this paper is to describe the development of bank liquidity in six selected Central and Eastern European Countries (Bosnia and Herzegovina, Bulgaria, Croatia, Romania, Serbia and Slovenia) and to find out if selected liquidity ratios are influenced by the affiliation of banks with financial conglomerate or if other determinants are more important. The data cover the period from 2011 to 2017. Results of the panel data regression analysis showed that the affiliation of banks with the financial conglomerate does not statistically significant affect values of liquidity ratios in the selected CEE countries. Instead, other bank-specific and macroeconomic factors are important, such as bank solvency and profitability, quality of the loan portfolio, gross domestic product, the unemployment rate, interest rate on loans and interbank interest rate matter, at least for some countries. Focusing on the buffer of liquid assets, size of the bank is important for all six selected CEE countries. Bank profitability, quality of the loan portfolio, gross domestic product, the unemployment rate, interest rate on loans, interbank interest rate and lagged value of bank solvency matter, at least for some countries. In case of the net interbank position, the lagged value of bank solvency, economic cycle, bank size, interbank interest rate, and quality of the loan portfolio are significant.
    Keywords: liquidity, liquidity ratios, liquid assets, net interbank position, panel data regression analysis, commercial banks
    JEL: G21 C33
    Date: 2019–07–31
  18. By: Franklin Allen; Elena Carletti; Robert Cull; Jun QJ Qian; Lemma Senbet; Patricio Valenzuela
    Abstract: We explore the relationship between bank branch expansion, financial inclusion and profitability for Equity Bank. Unlike traditional banks in Kenya, Equity Bank pursues branching strategies that target underserved territories and less privileged households. Its presence has a positive and significant impact on households’ access to bank accounts and credit. It increased financial inclusion by 31 percent of the adult population between 2006 and 2015. Access is especially improved for Kenyans who are less educated, do not own their own home and live in lessdeveloped areas. Equity Bank’s business model proves to be profitable both at bank and branch level.
    Keywords: Equity Bank, bank penetration, bank account, microfinance.
    JEL: G2 O1 R2
    Date: 2018
  19. By: Elizabeth Jane Casabianca (Prometeia Associazione per le Previsioni Econometriche, and DiSeS, Polytechnic University of Marche); Michele Catalano (Prometeia Associazione per le Previsioni Econometriche); Lorenzo Forni (Prometeia Associazione per le Previsioni Econometriche, and DSEA, University of Padua); Elena Giarda (Prometeia Associazione per le Previsioni Econometriche, and Cefin, University of Modena and Reggio Emilia); Simone Passeri (Prometeia Associazione per le Previsioni Econometriche)
    Abstract: Ten years after the outbreak of the 2007-2008 crisis, renewed attention is directed to money and credit fluctuations, financial crises and policy responses. By using an integrated dataset that includes 100 countries (advanced and emerging) spanning from 1970 to 2017, we propose an Early Warning System (EWS) to predict the build-up of systemic banking crises. The paper aims at (i) identifying the macroeconomic drivers of banking crises, (ii) going beyond the use of traditional discrete choice models by applying supervised machine learning (ML) and (iii) assessing the degree of countries’ exposure to systemic risks by means of predicted probabilities. Our results show that ML algorithms can have a better predictive performance than the logit models. All models deliver increasing predicted probabilities in the last years of the sample for the advanced countries, warning against the possible build-up of pre-crisis macroeconomic imbalances.
    Keywords: banking crises, EWS, machine learning, decision trees, AdaBoost
    JEL: C40 G01 C25 E44 G21
    Date: 2019–08
  20. By: AAlessio Reghezza (Bangor University); Jonathan Williams (Bangor University); Alessio Bongiovanni (University of Turin); Riccardo Santamaria (Sapienza – University of Rome)
    Abstract: We offer early evidence on how negative interest rate policy affects bank risk-taking. We identify a dichotomy between monetary policy and prudential regulation. Our primary result suggests NIRP produced an unintended outcome, which we measure as a 10 per cent reduction in banks’ holdings of risky assets. It infers that banks deleverage their balance sheets and invest in safer, liquid assets to meet new and binding capital and liquidity requirements. We find risk-taking behaviour is sensitive to capitalisation and banks with stronger capital ratios take more risks. Similarly, tighter prudential requirements could inadvertently retard economic growth should poorly capitalised banks reduce investment in riskier assets in favour of zero risk-weighted assets, such as, sovereign bonds to comply with risk-based capital requirements. Risk-taking is greater in less competitive markets because stronger market power insulates net interest margins and profitability. We obtain our results from a sample of 2,371 banks from 33 OECD countries between 2012 and 2016, and a difference-in-differences framework.
    Keywords: NIRP, Bank risk-taking, Monetary Policy, Difference-in-Differences, Propensity-Score-Matching.
    JEL: E43 E44 E52 E58 G21 F34
    Date: 2019–05
  21. By: Bernardo Batiz-Lazo; Alarcon-Molina, Jose (Ministry of Health, Chile); Espinosa-Cristia, Juan Felipe (Andrés Bello University)
    Abstract: The present study situates itself within the frame of domestic finances and technologies of the everyday. CajaVecina is defined as a correspondent banking system, managed by BancoEstado (Chile), and brings banking operations to groups of people who have been recently brought into the banking system and receive financial services at various points of sale (POS). Using a qualitative methodology based on structured interviews with managers, intermediaries, and merchants, we observe that the phenomenon of a bank's agency redistribution and the so-called correspondent banking is fundamentally based on what is known as operating quotas, from which BancoEstado diversifies risk and learns from the banking behaviors of stores. Nonetheless, it is information itself what allows a store to transform into a different kind of solution, independent of the bank, taking advantage of the levels of trust nurtured with its clients. This is how this system of payments and financial operations gets redistributed, with the result that the intermediary/correspondent assumes a dominion on its scope and operations and thus completely reformulates the so-called "payment space" for the bank, users, and intermediaries.
    Keywords: correspondent banking, agency redistribution, payment space, special monies, classifications
    Date: 2019–07
  22. By: Fiedor, Paweł; Killeen, Neill
    Abstract: This paper documents the use of derivatives by securitisation special purpose entities (SPEs), also known as financial vehicle corporations (FVCs), domiciled in Ireland using transaction-level data established by the European Market Infrastructure Regulation. We show that these entities primarily engaged in interest rate derivatives over the period of 2015-2017. We find that larger entities that already engage in international capital markets are more likely to have derivative exposures. We also show that entities sponsored by banks and non-bank financial institutions are relatively more likely to engage in derivative markets. The characteristics of these bank sponsors are important in determining SPEs' engagement in derivative markets. SPEs' heavy reliance on debt finance coupled with their strong interconnectedness with bank sponsors underscores the importance of continuous monitoring and macroprudential surveillance of their derivative activities. JEL Classification: F30, F36, G15, G23
    Keywords: derivatives, EMIR, FVCs, market-based finance, shadow banking, SPEs
    Date: 2019–07
  23. By: Feixue Gong (Massachusetts Institute of Technology); Gregory Phelan (Williams College)
    Abstract: We study the effects of allowing risky debt to be used as collateral in a general equilibrium model with heterogeneous agents and collateralized financial contracts. With debt collateralization, investors switch to using exclusively high-leverage contracts for every investment they choose (issuing risky debt when possible). High-leverage positions maximize the ability of contracts to serve as collateral, expanding the set of state-contingencies created from collateralized debt. We provide conditions under which debt collateralization will increase the price of the underlying asset. Our results also apply to variations in capital structure since many capital structures implicitly provide the ability to use debt contracts as collateral.
    Keywords: Leverage, margins, asset prices, default, securitized markets, asset-backed securities, collateralized debt obligations
    JEL: D52 D53 G11 G12
    Date: 2019–07
  24. By: Martinez-Miera, David; Repullo, Rafael
    Abstract: This paper reexamines from a theoretical perspective the role of monetary and macroprudential policies in addressing the build-up of risks in the financial system. We construct a stylized general equilibrium model in which the key friction comes from a moral hazard problem in firms financing that banks’ equity capital serves to ameliorate. Tight monetary policy is introduced by open market sales of government debt, and tight macroprudential policy by an increase in capital requirements. We show that both policies are useful, but macroprudential policy is more effective in fostering financial stability and leads to higher social welfare. JEL Classification: G21, G28, E44, E52
    Keywords: bank monitoring, capital requirements, financial stability, intermediation margin, macroprudential policy, monetary policy
    Date: 2019–07
  25. By: Christopher D. Carroll; Jiri Slacalek; Martin Sommer
    Abstract: We show that an estimated tractable ‘buffer stock saving’ model can match the 30-year decline in the U.S. saving rate leading up to 2007, the sharp increase during the Great Recession, and much of the intervening business cycle variation. In the model, saving depends on the gap between ‘target’ and actual wealth, with the target determined by measured credit availability and measured unemployment expectations. Following financial deregulation starting in the late 1970s, expanding credit supply explains the trend decline in saving, while fluctuations in wealth and consumer-survey-measured unemployment expectations capture much of the business-cycle variation, including the sharp rise during the Great Recession.
    JEL: D14 E2 E21 E24 E44
    Date: 2019–08
  26. By: Jung, Alexander; Uhlig, Harald
    Abstract: Based on high frequency identification and other econometric tools, we find that monetary policy shocks had a significant impact on the health of euro area banks. Information effects, which made the private sector more pessimistic about future prospects of the economy and the profitability of the banking sector, were strongly present in the post-crisis period. We show that ECB communications at the press conference were crucial for the market response and that bank health benefitted from surprises, which steepened the yield curve. We find that the effects of monetary policy shocks on banks displayed some persistence. Other bank characteristics, in particular bank size, leverage and NPL ratios, amplified the impact of monetary policy shocks on banks. After the OMT announcement, we detect that the response of bank stocks to monetary policy shocks normalised. We discover that, in the post-crisis episode, Fed monetary policy shocks influenced euro area bank stock valuations. JEL Classification: E40, E52, G14, G21
    Keywords: high-frequency identification, information effects, local projections, panel of individual banks
    Date: 2019–07
  27. By: Paul Henri Mathieu; Marco Pani; Shiyuan Chen; Rodolfo Maino
    Abstract: Using data collected from pan-African banks’ (PABs), balance sheets and other sources (Orbis, Fitch), this study identifies some key patterns of cross-border investment in bank subsidiaries by key banking groups in sub-Saharan Africa (SSA) and discusses some of the determinants of this investment. Using a gravity model relating the annual value of a banking group’s investment in the net equity of its subsidiaries to a set of explanatory variables, the analysis finds that cross-border banking is in part driven by a search for yield, diversification, and expansion for strategic reasons.
    Date: 2019–07–11
  28. By: Sigitas Siaudinis (Bank of Lithuania)
    Abstract: This paper examines the implications of digital currencies – both private cryptocurrencies and central bank digital currencies (CBDCs) – for central banking. We discuss some déjà vu episodes from monetary history in order to obtain a clearer understanding the present and potential implications of these currencies. We find that not only the current limitations of private cryptocurrencies, but also their conceptual underpinnings, argue against their replacement of conventional money. The two main potential problems with broadly accessible (general purpose) CBDC are a digital run and an excessive involvement of a central bank in the funding of the real economy. Meanwhile, alternative reserve-backed accounts or tokens (an implicit CBDC known as Tobin’s alternative) would also be exposed to these problems, albeit in a less pronounced way. CBDC-related hopes for monetary policy to eliminate the effective lower bound constraint are found to be exaggerated, even in a cashless world. We argue that central banks’ response to the digitalisation trend should be an integrative solution which satisfies the public demand for a safe means of payment, safeguards private innovations, and ensures financial stability. We conclude that there is no observable form of CBDC that would serve as a best-choice central bank response in advanced economies. Such a response might be considered as a temporary solution (if any), however, in emerging economies with weak financial inclusion.
    Keywords: private cryptocurrencies, central bank digital currency (CBDC), fintechs, financial stability, monetary policy
    JEL: E51 E58 N20
    Date: 2019–08–06
  29. By: Agiropoulos, Charalampos; Karkalakos, Sotiris; Polemis, Michael
    Abstract: Despite the fact that financial development is recognised as a vital determinant of countries’ economic growth path, many empirical studies fail to further isolate the role of socioeconomic indicators on accelerating growth. This study attempts to fill this gap by examining the statistical significance and the behavior of several socioeconomic indicators on economic growth. We apply parametric (System GMM estimators) and semi-parametric techniques along the lines of Baltagi and Li (2002) on a panel data set of 19 EU countries over the period 1995-2017. We test for nonlinear effects on economic growth for three banking indicators (domestic credit, non-performing loans and banking capitalization). In contrast to the related literature, our findings provide sufficient evidence of nonlinear relationships between several aspects of financial development and economic growth. Our results imply significant policy implications for policy makers and regulators in their effort of balancing banking development with a resurgence in economic growth within the EU periphery.
    Keywords: Socioeconomic aspects; Growth; Banking development; Semi-parametric analysis; Non-linear effects.
    JEL: C14 G20 O11
    Date: 2019–07–18
  30. By: Ata Can Bertay; Asli Demirgüç-Kunt; Harry Huizinga
    Abstract: This paper provides evidence on how bank performance and strategies vary with the degree of bank internationalization, using data for 113 countries over 2000-15. Over this period, bank internationalization is associated with lower valuations and lower returns on equity. However, developing country banks that internationalized seem to have fared better than their high-income counterparts. Following the crisis, international banks were revalued particularly if they had stable funding in the form of deposits and if they had more generous deposit insurance coverage. Furthermore, for international banks headquartered in developing countries, our results indicate that bank internationalization reduces the cyclicality of their domestic credit growth with respect to home country gross domestic product growth, smoothing local downturns. In contrast, if the international bank is from a high-income country investing in a developing country, its lending is relatively procyclical, which can be destabilizing.
    Keywords: bank internationalization, financial crisis, deposit funding, procyclicality
    JEL: F36 G21 G28
    Date: 2019–06
  31. By: Stefan Avdjiev; Paolo Giudici; Alessandro Spelta
    Abstract: We propose a distress measure for national banking systems that incorporates not only banks' CDS spreads, but also how they interact with the rest of the global financial system via multiple linkage types. The measure is based on a tensor decomposition method that extracts an adjacency matrix from a multi-layer network, measured using banks' foreign exposures obtained from the BIS international banking statistics. Based on this adjacency matrix, we develop a new network centrality measure that can be interpreted in terms of a banking system's credit risk or funding risk.
    Keywords: international banking, contagion risk, multi-layer networks, tensor decompositions
    JEL: G01 C58 C63
    Date: 2019–07
  32. By: Panagiota Papadimitri (Portsmouth Business School); Ansgar Wohlschlegel (Portsmouth Business School)
    Abstract: We explore protection against enforcement as a motive for lobbying and present evidence for bank holding companies with good corporate governance but a poorly performing portfolio of subsidiaries to be more likely to lobby. A simple theoretical model of lobbying as a means for banks to communicate otherwise private information on their quality rationalizes regulators' responsiveness to lobbying, even though lobbying banks inadvertently expose themselves as violators of the regulation. Using a composite governance indicator as a proxy for a bank's quality, we take the hypotheses from the model to a panel dataset of 173 large bank holding companies and their subsidiaries. In line with the theoretical hypotheses, we find that subsidiaries of lobbying, high-governance parent companies are less likely to receive a regulatory enforcement action, but the reverse is true for poor-governance parent companies. Furthermore, banks whose parent companies have lobbied perform better (worse) after five years if the bank holding has a high (low) governance indicator. On a policy note, our paper highlights a potential benefit of the lobbying system and makes the case for carefully designed incentives and commitment powers of bank regulators in order to make the most of this benefit.
    Keywords: Lobbying, enforcement, bank regulation, corporate governance
    JEL: D72 G28 G34 K42
    Date: 2019–07–31
  33. By: Sangyup Choi; Davide Furceri; Chansik Yoon
    Abstract: This paper sheds new light on the degree of international fiscal-financial spillovers by investigating the effect of domestic fiscal policies on cross-border bank lending. By estimating the dynamic response of U.S. cross-border bank lending towards the 45 recipient countries to exogenous domestic fiscal shocks (both measured by spending and revenue) between 1990Q1 and 2012Q4, we find that expansionary domestic fiscal shocks lead to a statistically significant increase in cross-border bank lending. The magnitude of the effect is also economically significant: the effect of 1 percent of GDP increase (decrease) in spending (revenue) is comparable to an exogenous decline in the federal funds rate. We also find that fiscal shocks tend to have larger effects during periods of recessions than expansions in the source country, and that the adverse effect of a fiscal consolidation is larger than the positive effect of the same size of a fiscal expansion. In contrast, we do not find systematic and statistically significant differences in the spillover effects across recipient countries depending on their exchange rate regime, although capital controls seem to play some moderating role. The extension of the analysis to a panel of 16 small open economies confirms the finding from the U.S. economy.
    Date: 2019–07–12
  34. By: Thiago Christiano Silva; Solange Maria Guerra; Benjamin Miranda Tabak
    Abstract: This paper proposes a new methodology to evaluate the importance of fiscal risk to financial stability. We first develop a novel method to estimate the probability of default of public entities, which takes into account a strict legal framework is mandatory for governments. Using options theory, we model the volatile public revenues using country macroeconomic expectations while allowing expenses, which cannot be easily reduced, to grow with inflation. Next, we compute the expected losses due to fiscal risk using a combination of the probability of default with potential losses that the public sector would impose on the economy using a complex network model. Motivated by the crisis on Brazilian states after 2015, we use Brazil to illustrate the usefulness of our model. We estimate the probability of default of states using legal restrictions on consolidated debt and personnel expenses. While most states are struggling to comply with limits on personnel expenses, the richest states have trouble to comply with limits on the consolidated debt. Using a network model that embeds counterparty and funding risks to estimate losses, we find state-owned banks are most likely to be affected if states default on bank credit. Financial contagion is small mostly because the banks that are more exposed to the public sector are highly capitalized.
    Date: 2019–07
  35. By: Lewis Gaul; Jonathan Jones; Pinar Uysal
    Keywords: Bank supervision and regulation, early warning models, CAMELS ratings, machine learning
    JEL: G21 G28 C53
    Date: 2019–07–23
  36. By: Berentsen, Aleksander; Markheim, Marina
    Abstract: Peer-to-peer lending platforms are increasingly important alternatives to traditional forms of credit intermediation. These platforms attract projects that appeal to socially motivated investors. There are high hopes that these novel forms of credit intermediation improve financial inclusion and provide better terms for borrowers. To study these hopes, we introduce altruistic investors into a peer-to-peer model of credit intermediation where the terms of the loans are determined through bilateral bargaining. We find that altruistic investors do not improve financial inclusion in the sense that all projects that are financed by altruistic investors are also financed by rational investors. Altruistic investors offer, however, better borrowing conditions in the sense that the borrowing rates with altruistic investors are always lower in comparison to the ones obtained with rational investors. Furthermore, investors with strong altruistic preferences are willing to finance projects which generate an expected financial loss. We also introduce joint liability contracts and we find that they increase borrowing rates and have no effects on the surpluses of borrowers and investors. Finally, for a certain range of parameters the model’s allocation is observationally equivalent to a model with rational investors that have low bargaining power. Outside of this range, the model generates equilibrium allocations that are not incentive feasible in a model with rational investors which is interesting from the point of view of pure bargaining theory.
    Keywords: altruistic preferences, financial intermediation, financial inclusion, peer-to-peer platforms, joint liability
    JEL: D4 G0 O1
    Date: 2019–07
  37. By: Simplice A. Asongu (Yaoundé/Cameroon); Nicholas M. Odhiambo (Pretoria, South Africa)
    Abstract: There is a growing body of evidence that interest rate spreads in Africa are higher for big banks compared to small banks. One concern is that big banks might be using their market power to charge higher lending rates as they become larger, more efficient, and unchallenged. In contrast, several studies found that when bank size increases beyond certain thresholds, diseconomies of scale are introduced that lead to inefficiency. In that case, we also would expect to see widened interest margins. This study examines the connection between bank size and efficiency to understand whether that relationship is influenced by exploitation of market power or economies of scale. Using a panel of 162 African banks for 2001–2011, we analyzed the empirical data using instrumental variables and fixed effects regressions, with overlapping and non-overlapping thresholds for bank size. We found two key results. First, bank size increases bank interest rate margins with an inverted U-shaped nexus. Second, market power and economies of scale do not increase or decrease the interest rate margins significantly. The main policy implication is that interest rate margins cannot be elucidated by either market power or economies of scale. Other implications are discussed.
    Keywords: Sub-Saharan Africa; banks; lending rates; efficiency; Quiet Life Hypothesis; competition
    JEL: E42 E52 E58 G21 G28
    Date: 2018–01
  38. By: Jakob Fiedler; Josef Ruzicka; Thomas Theobald
    Abstract: We integrate newly created financial stress indices (FSIs) into an automated real-time recession forecasting procedure for the Euro area and Germany. The FSIs are based on a large number of financial indicators, each of them potentially signaling financial stress. A subset of these indicators is selected in real-time and their stress signal is summarized by principal component analysis (PCA). Besides conventional measures of realized financial stress, such as volatilities, we include variables related to the financial cycle, such as different types of credit growth, for which strong increases may anticipate future financial market stress. Building blocks in our fully automated real-time probit forecasts are then i. the use of a broad set of widely acknowledged macroeconomic and financial variables with predictive power for a real economic downturn, ii. the use of both general-to-specific and specific-to-general approaches for variable and lag selection, and iii. the averaging of different specifications into a composite forecast. As a real-time out-of-sample analysis shows, the inclusion of financial stress leads to an improved recession forecast for the Euro area, while the results for Germany are mixed. Finally, we also evaluate the predictive power of the change in bank lending (credit impulse) and find that it adds little additional information.
    Date: 2019
  39. By: DJOUFOUET, Wulli Faustin
    Abstract: The main objective of this article is to analyse the impact of governance mechanisms in general and their interactions in particular on the performance of microfinance institutions while taking into account their legal forms. To achieve this objective, a multiple regression was carried out on a sample of 62 microfinance institutions whose data collected covers a period from 2009 to 2015. Our results show that large boards of directors do not add value to governance in microfinance co-ops. Private microfinance institutions, on the other hand, need to have a large board in order to benefit from a multiplicity of skills and increase staff productivity. Second-tier microfinance institutions that want to increase the productivity of their staff must review the number of women on their boards. They need to redefine their recruitment and compensation policies.
    Keywords: Microfinance, interactions, financial performance, governance
    JEL: G00 G2
    Date: 2018–02–11
  40. By: Aikman, David (Bank of England); Chichkanov, Pavel (Bank of England); Douglas, Graeme (MKP Capital Europe LLP); Georgiev, Yordan (Standard Chartered Bank); Howat, James (Bank of England); King, Benjamin (Bank of England)
    Abstract: We present a model for assessing how the UK’s system of market-based finance — an increasingly important source of credit to the real economy since the financial crisis — might behave under stress. The core of this model is a set of representative agents, which correspond to key sectors of the UK’s financial system. These agents interact in asset, funding (repo), and derivatives markets and face a range of solvency and liquidity constraints on their behaviour. Our model generates ‘tipping points’ such that, if shocks are large, or if headroom relative to constraints is small, lower asset prices can cause solvency/liquidity constraints to bind, resulting in forced deleveraging and large endogenous illiquidity premia. We illustrate such an outcome via a stress scenario in which a deteriorating corporate sector outlook coincides with tighter leverage limits at key intermediaries. Our findings highlight the key role played by broker-dealers, commercial banks, investment funds and life insurers in shaping these dynamics.
    Keywords: Systemic risk; market-based finance; fire sales; stress testing.
    JEL: G18 G21 G22 G23
    Date: 2019–07–12

This nep-ban issue is ©2019 by Christian Calmès. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.