nep-ban New Economics Papers
on Banking
Issue of 2019‒08‒26
seventeen papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Finding the Bad Apples in the Barrel: Using the Market Value of Equity to Signal Banking Sector Vulnerabilities By Will Kerry
  2. Value at Risk and Expected Shortfall under General Semi-parametric GARCH models By Xuehai Zhang
  3. Regulation, Financial Crises, and Liberalization Traps By Francesco Marchionne; Beniamino Pisicali; Michele Fratianni
  4. Loss of a lending relationship: shock or relief? By Karolis Liaudinskas; Kristina Grigaite
  5. Do conventional monetary policy instruments matter in unconventional times? By Buchholz, Manuel; Schmidt, Kirsten; Tonzer, Lena
  6. The Short Rate Disconnect in a Monetary Economy By Moritz Lenel; Monika Piazzesi; Martin Schneider
  7. Do banks need a supervisor? By Osadchiy, Maksim; Sidorov, Alexander
  8. Liquidity Ratios as Monetary Policy Tools: Some Historical Lessons for Macroprudential Policy By Eric Monnet; Miklos Vari
  9. Externalities and financial crisis - enough to cause collapse? By Miller, Marcus; Zhang, Lei
  10. The effects of the eurosystem's APP on euro area bank lending: Letting different data speak By Blaes, Barno A.; Kraaz, Björn; Offermanns, Christian J.
  11. Temporarily Vulnerable Consumers in a Bank Services Setting - à paraître. By Abdelmajid Amine; Shérazade Gatfaoui
  12. The Information View of Financial Crises By Tri Vi Dang; Gary B. Gorton; Bengt R. Holmstrom
  13. The Signalling Channel of Negative Interest Rates By de Groot, Oliver; Haas, Alexander
  14. Credit Building or Credit Crumbling? A Credit Builder Loan's Effects on Consumer Behavior, Credit Scores and Their Predictive Power By Burke, Jeremy; Jamison, Julian C.; Karlan, Dean S.; Mihaly, Kata; Zinman, Jonathan
  15. A procedure for loss-optimising default definitions across simulated credit risk scenarios By Arno Botha; Conrad Beyers; Pieter de Villiers
  16. Bank Lobbying: Regulatory Capture and Beyond By Deniz O Igan; Thomas Lambert
  17. Another Look at “Bank Competition and Financial Stability: Much Ado about Nothing?” By Samangi Bandaranayake; Kuntal K. Das; W. Robert Reed

  1. By: Will Kerry
    Abstract: This paper measures the performance of different metrics in assessing banking system vulnerabilities. It finds that metrics based on equity market valuations of bank capital are better than regulatory capital ratios, and other metrics, in spotting banks that failed (bad apples). This paper proposes that these market-based ratios could be used as a surveillance tool to assess vulnerabilities in the banking sector. While the measures may provide a somewhat fuzzy signal, it is better to have a strategy for identifying bad apples, even if sometimes the apples turn out to be fine, than not being able to spot any bad apples before the barrel has been spoiled.
    Date: 2019–08–16
  2. 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
  3. By: Francesco Marchionne; Beniamino Pisicali; Michele Fratianni
    Abstract: To reconcile the mixed empirical results, we develop a theoretical model whose main implication is a concave impact of regulation on the probability of a crisis. We test this relationship by applying a Probit model of a non-linear specification to annual data from 1999 to 2011 drawn from 132 countries. The probability of a financial crisis fits an inverted U-shaped curve: it rises as regulation stringency moves from low to medium levels and falls from medium to high levels. Countries located at the intermediate level of regulatory stringency face more instability than countries that are either loosely or severely regulated. We identify the latter two groups as falling in “liberalization traps”. Institutional quality interacts significantly with the regulatory environment.
    Keywords: crisis, banks, institutions, liberalization, regulation
    JEL: G01 G21 G28
    Date: 2019
  4. By: Karolis Liaudinskas (Universitat Pompeu Fabra); Kristina Grigaite (Bank of Lithuania)
    Abstract: We use loan-level data and a novel identification setting – closures of banks – to study how forced break-ups of lending relationships affect firms’ borrowing costs. We find that after a financially distressed bank closed and its best borrowers were exogenously forced to switch, their borrowing costs dropped steeply and converged to the market’s average. We document no such effect when a healthy bank closed. This suggests that distressed banks can use informational monopoly power to hold up and exploit their best borrowers. Apparently, closures of such banks can release the best-quality firms from the hold-up and allow borrowing cheaper elsewhere.
    Keywords: relationship lending, hold-up, asymmetric information, bank closures, financial distress, switching costs
    JEL: D82 E51 G20 G21 G30 G33 L14
    Date: 2019–07–10
  5. By: Buchholz, Manuel; Schmidt, Kirsten; Tonzer, Lena
    Abstract: This paper investigates how declines in the deposit facility rate set by the ECB affect euro area banks' incentives to hold reserves at the central bank. We find that, in the face of lower deposit rates, banks with a more interest-sensitive business model are more likely to reduce reserve holdings and allocate freed-up liquidity to loans. The result is driven by wellcapitalized banks in the non-GIIPS countries of the euro area. This reveals that conventional monetary policy instruments have limited effects in restoring monetary policy transmission during times of crisis.
    Keywords: bank portfolio,central bank reserves,monetary policy
    JEL: E52 G11 G21
    Date: 2019
  6. By: Moritz Lenel; Monika Piazzesi; Martin Schneider
    Abstract: In modern monetary economies, most payments are made with inside money provided by payment intermediaries. This paper studies interest rate dynamics when payment intermediaries value short bonds as collateral to back inside money. We estimate intermediary Euler equations that relate the short safe rate to other interest rates as well as intermediary leverage and portfolio risk. Towards the end of economic booms, the short rate set by the central bank disconnects from other interest rates: as collateral becomes scarce and spreads widen, payment intermediaries reduce leverage, and increase portfolio risk. We document stable business cycle relationships between spreads, leverage, and the safe portfolio share of payment intermediaries that are consistent with the model. Structural changes, especially in regulation, induce low frequency shifts, such as after the financial crisis.
    JEL: E0 E3 E4 E5 G0 G1 G11 G12 G2 G21 G23
    Date: 2019–07
  7. By: Osadchiy, Maksim; Sidorov, Alexander
    Abstract: The paper studies a simple microeconomic stochastic model of a bank operating in a competitive environment. The model allows us to describe the conditions on the model parameters that generate both the formation of bubbles in the credit market and the formation of stable banks with self-restrictive behavior, that do not require the intervention of the regulator. The comparative statics of equilibria is studied with respect to the basic parameters of the model, a theoretical assessment is carried out of the probability of bank default based on the values of exogenous factors in both the short and long term.
    Keywords: Banking microeconomics, Credit bubble, Probability of default, Capital adequacy ratio
    JEL: G21 G28 G32 G33
    Date: 2019–07–22
  8. By: Eric Monnet; Miklos Vari
    Abstract: This paper explores what history can tell us about the interactions between macroprudential and monetary policy. Based on numerous historical documents, we show that liquidity ratios similar to the Liquidity Coverage Ratio (LCR) were commonly used as monetary policy tools by central banks between the 1930s and 1980s. We build a model that rationalizes the mechanisms described by contemporary central bankers, in which an increase in the liquidity ratio has contractionary effects, because it reduces the quantity of assets banks can pledge as collateral. This effect, akin to quantity rationing, is more pronounced when excess reserves are scarce.
    Date: 2019–08–16
  9. By: Miller, Marcus; Zhang, Lei
    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: bank runs; cross-border banking; Illiquidity; lender of last resort; Pecuniary externalities
    JEL: G01 G11 G24
    Date: 2019–07
  10. By: Blaes, Barno A.; Kraaz, Björn; Offermanns, Christian J.
    Abstract: We study the implications of the Eurosystem's expanded Asset Purchase Programme (APP) for the bank lending business of euro area banks with euro area non-financial corporations (NFCs) using microeconometric matching techniques. Based on confidential bank-level data on quantitative balance sheet items and interest rates as well as on qualitative survey responses to the Eurosystem's Bank Lending Survey, we identify the exposure of banks to the APP and corresponding effects on loan growth. We find that the APP was effective in stimulating the lending activity with NFCs for a subset of relatively sound banks. At the same time, our results show that there is a non-negligible number of banks with less healthy balance sheets which could not transfer the APP stimulus into more lending. Instead, such banks appear to have used the APP stimulus for consolidating their balance sheets, thereby also reducing their lending business with NFCs. This confirms the importance of accounting for the large degree of heterogeneity in the euro area banking sector in analyses of the effectiveness of monetary policy measures.
    Keywords: lending to non-financial corporations,bank-level data,bank heterogeneity,unconventional monetary policy,treatment effects,regression-adjusted matching
    JEL: E52 G21 C21
    Date: 2019
  11. By: Abdelmajid Amine (IRG - Institut de Recherche en Gestion - UPEM - Université Paris-Est Marne-la-Vallée - UPEC UP12 - Université Paris-Est Créteil Val-de-Marne - Paris 12); Shérazade Gatfaoui (IRG - Institut de Recherche en Gestion - UPEM - Université Paris-Est Marne-la-Vallée - UPEC UP12 - Université Paris-Est Créteil Val-de-Marne - Paris 12)
    Abstract: Purpose-The purpose of this paper is to explore how do temporarily vulnerable customers and their bank advisors cope with incidents met over the course of their service relationships. Design/methodology/approach-A qualitative design based on ten cases studies, involving interviews with both sides of the dyad (client-bank advisor) as well as internal secondary data from the bank, is conducted. Findings-The findings show that the two sides of the dyad span a gradation of coping strategies that are enacted to co-create solutions to incidents encountered. Thus, temporarily vulnerable consumers turn out to be non-passive in their asymmetrical relationship with advisors and deploy residual resources to maintain their inclusion within the banking system. Research implications-The results enrich our knowledge on consumers' vulnerability insofar as we extend the transformative service literature to temporarily vulnerable clients who project themselves beyond the crisis period and consider ensuring satisfactory levels of their well-being. Practical implications-The findings suggest that banks can refine their categorization of temporary vulnerable clients by identifying those that remain profitable and for which an effort is worth, and those in whom it is appropriate to disinvest. They also prompt the banks to design supports to the advisors in managing increased stressful interactions with precarious customers. Social implications-To prevent the risk of slippage by or exclusion of the vulnerable customers who experience serious banking incidents, the paper points out the necessity to mobilize alternative levers from the public and associative spheres to allow these customers access to a minimum of banking services. Originality/value-As an early exploration of transient vulnerable clients, this research fuels our understanding of their capacity to consider co-creating, alongside bank advisors, solutions to the incidents met in a view of preserving their well-being and insuring their social and economic inclusion.
    Keywords: well- being,case study,Temporarily vulnerable customer,bank advisor,coping strategies,social inclusion
    Date: 2019–08–13
  12. By: Tri Vi Dang; Gary B. Gorton; Bengt R. Holmstrom
    Abstract: Short-term debt that can serve as a medium of exchange is designed to be information insensitive. No one should be tempted to acquire private information to gain an informational advantage in trading that could destabilize the value of the debt. Short-term debt minimizes the incentive to acquire information among all securities of equal value backed by the same underlying asset. These features align with observed practice in money markets (markets for short-term debt). They are also consistent with financial crises occurring periodically. In the information view adopted here, financial crisis can occur when the collateral backing the short-term debt is thought to have lost enough value to raise doubts among the traders that some may acquire private information. The purpose of this paper is to review some of the burgeoning empirical literature that bears on the information view sketched above. We focus on evidence related to three key implications of information insensitive debt: (i) adjustments to external shocks will occur along non-price dimensions (less debt issued, higher haircuts, added collateral, etc); (ii) in a crisis some of the short-term debt turns information sensitive; (iii) money markets feature low transparency as well as purposeful opacity.
    JEL: D53 E3 G01 G1
    Date: 2019–07
  13. By: de Groot, Oliver; Haas, Alexander
    Abstract: Negative interest rates are a new (and controversial) monetary policy tool. This paper studies a novel signalling channel and asks whether negative rates can be 1) an effective and 2) an optimal policy tool. 1) We build a financial-friction new-Keynesian model in which monetary policy can set a negative reserve rate, but deposit rates are constrained by zero. All else equal, a negative rate contracts bank net worth and increases credit spreads (the costly "interest margin" channel). However, it also signals lower future deposit rates, even with current deposit rates constrained, boosting aggregate demand and net worth. Quantitatively, we find the signalling channel dominates, but the effectiveness of negative rates depends crucially on three factors: i) degree of policy inertia, ii) level of reserves, iii) zero lower bound duration. 2) In a simplified model we prove two necessary conditions for the optimality of negative rates: i) time-consistent policy setting, ii) preference for policy smoothing.
    Keywords: Monetary policy, Taylor rule, Forward guidance, Liquidity trap
    JEL: E5 E6
    Date: 2019–08–01
  14. By: Burke, Jeremy; Jamison, Julian C.; Karlan, Dean S.; Mihaly, Kata; Zinman, Jonathan
    Abstract: There is little evidence on how the large market for credit score improvement products affects consumers or credit market efficiency. A randomized encouragement design on a standard credit builder loan (CBL) identifies null average effects on whether consumers have a credit score and the score itself, with important heterogeneity: those with loans outstanding at baseline fare worse, those without fare better. Selection, treatment effect, and prediction models indicate the CBL reveals valuable information to markets, inducing positive selection and making credit histories more precise, while keeping credit scores' predictive power intact. With modest targeting changes, CBLs could work as intended.
    Keywords: consumer finance; credit invisibles; credit scoring; household finance; screening; subprime; thin file
    JEL: D12 G14 G21
    Date: 2019–07
  15. By: Arno Botha; Conrad Beyers; Pieter de Villiers
    Abstract: A new procedure is presented for the objective comparison and evaluation of default definitions. This allows the lender to find a default threshold at which the financial loss of a loan portfolio is minimised, in accordance with Basel II. Alternative delinquency measures, other than simply measuring payments in arrears, can also be evaluated using this optimisation procedure. Furthermore, a simulation study is performed in testing the procedure from `first principles' across a wide range of credit risk scenarios. Specifically, three probabilistic techniques are used to generate cash flows, while the parameters of each are varied, as part of the simulation study. The results show that loss minima can exist for a select range of credit risk profiles, which suggests that the loss optimisation of default thresholds can become a viable practice. The default decision is therefore framed anew as an optimisation problem in choosing a default threshold that is neither too early nor too late in loan life. These results also challenges current practices wherein default is pragmatically defined as `90 days past due', with little objective evidence for its overall suitability or financial impact, at least beyond flawed roll rate analyses or a regulator's decree.
    Date: 2019–07
  16. By: Deniz O Igan; Thomas Lambert
    Abstract: In this paper, we discuss whether and how bank lobbying can lead to regulatory capture and have real consequences through an overview of the motivations behind bank lobbying and of recent empirical evidence on the subject. Overall, the findings are consistent with regulatory capture, which lessens the support for tighter rules and enforcement. This in turn allows riskier practices and worse economic outcomes. The evidence provides insights into how the rising political power of banks in the early 2000s propelled the financial system and the economy into crisis. While these findings should not be interpreted as a call for an outright ban of lobbying, they point in the direction of a need for rethinking the framework governing interactions between regulators and banks. Enhanced transparency of regulatory decisions as well as strenghtened checks and balances within the decision-making process would go in this direction.
    Keywords: Financial regulation and supervision;Financial crises;Gross domestic product;Financial institutions;Financial services;banks,regulatory capture,lobbying,political economy,regulation,supervision,bank lobby,bank industry,lobbyist,regulator
    Date: 2019–08–09
  17. By: Samangi Bandaranayake; Kuntal K. Das (University of Canterbury); W. Robert Reed (University of Canterbury)
    Abstract: This study replicates Zigraiova and Havranek’s (2016) meta-analysis of banking competition and financial stability. It performs multiple types of replications: a “Reproduction” replication where Z&H’s data and code are verified to reproduce the results of their study; a “Repetition” replication where the studies used by Z&H are independently recoded and then re-analyzed; an “Extension” replication where additional studies on banking competition and stability are analyzed; and a “Robustness Analysis” where we check Z&H’s results using an alternative empirical procedure. Our analysis strongly confirms Z&H’s main finding that competition in the banking sector has an economically negligible effect on financial stability. This result is consistently confirmed across a variety of replication analyses. Most impressively, we confirm their finding even when we analyze a completely independent set of 35 studies not included in Z&H’s meta-analysis. Our results for Z&H’s other findings are less supportive. As the first comprehensive replication of a meta-analysis, this study also provides insights into the robustness of meta-analysis. We find that meta-regression analysis, where estimated effects are related to data, estimation, and study characteristics, is sensitive to how data are coded and to the choice of estimation procedure; and that this sensitivity extends to “best practice” estimates.
    Keywords: Bank competition, financial stability, Bayesian model averaging, meta-analysis, publication selection, replication
    JEL: C41 G21 G28 L11
    Date: 2019–08–01

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.