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on Banking |
| By: | Lubello, Federico; Petrella, Ivan; Santoro, Emiliano |
| Abstract: | We study how bank collateral assets and their pledgeability affect the amplitude of credit cycles. To this end, we develop a tractable model where bankers intermediate funds between savers and borrowers. If bankers default, savers acquire the right to liquidate bankers' assets. However, due to the vertically integrated structure of our credit economy, savers anticipate that liquidating financial assets (i.e., loans) is conditional on borrowers being solvent on their debt obligations. This friction limits the collateralization of bankers' financial assets beyond that of real assets (i.e., capital). In this context, increasing the pledgeability of financial assets eases more credit and reduces the spread between the loan and the deposit rate, thus attenuating capital misallocation as it typically emerges in credit economies à la Kiyotaki and Moore (1997). We uncover a close connection between the collateralization of bank loans, macroeconomic amplification and the degree of procyclicality of bank leverage. |
| Keywords: | Bank Collateral; Banking; capital misallocation; liquidity; macroprudential policy |
| JEL: | E32 E44 G21 G28 |
| Date: | 2019–06 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:13831&r=all |
| By: | Christian Ewerhart; Robertas Zubrickas |
| Abstract: | We model the financial cooperative as an optimal institution sharing liquidity risks among agents with social preference and group identity. Stronger social concerns imply objectively better (worse) conditions for borrowers (depositors). Testing the model, we find that, indeed, deposit and loan rates offered by U.S. credit unions between 1995 and 2014 co-moved with (i) the number of members, and (ii) the common bond. Our theory explains how cooperatives coexist with banks, and why they have tended to be more resilient. However, the analysis also suggests that financial inclusion and advantages in resilience might quickly evaporate as membership requirements get diluted. |
| Keywords: | Social preferences, group identity, liquidity insurance, cooperative banking, credit union, common bond, bank competition, resilience |
| JEL: | G21 D91 L31 G28 |
| Date: | 2019–08 |
| URL: | http://d.repec.org/n?u=RePEc:zur:econwp:332&r=all |
| By: | Stefan Gissler; Rodney Ramcharan; Edison Yu |
| Abstract: | This paper finds that banks and non-banks respond differently to increased competition in consumer credit markets. Increased competition and the greater threat of failure induces banks to specialize more in relationship business lending, and surviving banks are more profitable. However, non-banks change their credit policy when faced with more competition and expand credit to riskier borrowers at the extensive margin, resulting in higher default rates. These results show how the effects of competition depend on the form of intermediation. They also suggest that increased competition can cause credit risk to migrate outside the traditional supervisory umbrella. |
| JEL: | D12 G21 G23 |
| Date: | 2019–08 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:26183&r=all |
| By: | Ioannidou, Vasso; Pavanini, Nicola; Peng, Yushi |
| Abstract: | We study the benefits and costs of collateral requirements in bank lending markets with asymmetric information. We estimate a structural model of firms' credit demand for secured and unsecured loans, banks' contract offering and pricing, and firm default using detailed credit registry data in a setting where asymmetric information problems in credit markets are pervasive. We provide evidence that collateral mitigates adverse selection and moral hazard. With counterfactual experiments, we quantify how an adverse shock to collateral values propagates to credit supply, credit allocation, interest rates, default, and bank profits and how the severity of adverse selection influences this propagation. |
| Keywords: | asymmetric information; Collateral; credit markets; structural estimation |
| JEL: | D82 G21 L13 |
| Date: | 2019–08 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:13905&r=all |
| By: | Altavilla, Carlo; Carboni, Giacomo; Lenza, Michele; Uhlig, Harald |
| Abstract: | This paper investigates the effects of interbank rate uncertainty on lending rates to euro area firms. We introduce a novel measure of interbank rate uncertainty, computed as the cross-sectional dispersion in interbank market rates on overnight unsecured loans. Using proprietary bank-level data, we find that interbank rate uncertainty significantly raises lending rates on loans to firms, with a peak effect of around 100 basis points during the 2007-2009 global financial crisis and the 2010-2012 European sovereign crisis. This effect is attenuated for banks with lower credit risk, sounder capital positions and greater access to central bank funding. JEL Classification: E44, D80, G21 |
| Keywords: | bank lending, interbank market, uncertainty |
| Date: | 2019–08 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20192311&r=all |
| By: | Jason Allen; Robert Clark; Brent Hickman; Eric Richert |
| Abstract: | Bank resolution is costly. In the United States, the Federal Deposit Insurance Corporation (FDIC) typically resolves failing banks by auction. If a bank is failing, healthy banks are encouraged to compete at auction to buy it. This results in a cash transfer from the FDIC to the buyer; the failing bank then continues under new ownership. The FDIC tries to minimize these transfers by holding competitive auctions. The main feature of these auctions is that they are scoring auctions. First, healthy banks place bids that can differ along multiple dimensions. These are scored based on their estimated costs. Second, to foster competition, bidders are encouraged to submit multiple bids, even though only one bid can win. This paper proposes a methodology for analyzing auction environments where bids are ranked according to multiple attributes but there is uncertainty about the scoring rule used to evaluate them. We use this framework to estimate the cost to the FDIC of having an opaque scoring rule. We find that the FDIC could reduce costs of resolution by around 17 percent by removing uncertainty. |
| Keywords: | Econometric and statistical methods; Financial Institutions |
| JEL: | D44 G21 |
| Date: | 2019–08 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:19-30&r=all |
| By: | Enrico Perotti (University of Amsterdam); Magdelena Rola-Janicka (University of Amsterdam) |
| Abstract: | Some credit booms, though by no means all, result in financial crises. While risk-taking incentives seem a plausible cause, market participants do not appear to anticipate increasing risk. We show how credit expansions driven by credit supply shocks may be misunderstood as productivity driven, due to the opacity of bank balance sheets. Large funding shocks may induce some intermediaries to scale up speculative lending, distorting price signals. Other banks and firms may misjudge actual profitability, reinforcing the credit expansion. Similarly, at times of low saving supply credit may be inefficiently low, and speculative assets underpriced. |
| Date: | 2019–08–20 |
| URL: | http://d.repec.org/n?u=RePEc:tin:wpaper:20190060&r=all |
| By: | Albanesi, Stefania; Vamossy, Domonkos |
| Abstract: | We develop a model to predict consumer default based on deep learning. We show that the model consistently outperforms standard credit scoring models, even though it uses the same data. Our model is interpretable and is able to provide a score to a larger class of borrowers relative to standard credit scoring models while accurately tracking variations in systemic risk. We argue that these properties can provide valuable insights for the design of policies targeted at reducing consumer default and alleviating its burden on borrowers and lenders, as well as macroprudential regulation. |
| Keywords: | Consumer default; credit scores; deep learning; macroprudential policy |
| JEL: | C45 D1 E27 E44 G21 G24 |
| Date: | 2019–08 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:13914&r=all |
| By: | Kinghan, Christina (Central Bank of Ireland); McCann, Fergal (Central Bank of Ireland) |
| Abstract: | Borrower-based measures introduced in 2015 by the Central Bank of Ireland placed a limit on the loan to income (LTI) and loan to value (LTV) ratio of newly originated mortgages in Ireland. These limits come with an important exception: a system of “allowances” for a percentage of each lender’s total annual loan volume to be issued above the stated LTI and LTV limits. In this Note we study the way in which these allowances are allocated, focusing on two dimensions. First, from a borrower composition viewpoint, we show that allowances for First Time Buyers (FTBs) typically go to borrowers who are at low to middle incomes, predominantly in Dublin and more likely to be single. Second, from a risk management perspective, we study banks’ choice of LTI and LTV levels within the allowance group.We show that borrowers with an LTI allowance are highly likely to have the maximum allowable LTV level, and vice versa, suggesting that a large proportion of borrowers are accessing the maximum available leverage under the regime. Finally, we show that, in line with rapid house price growth since 2015, the LTI and LTV levels of loans with allowances have grown in each year to 2018. |
| Date: | 2019–07 |
| URL: | http://d.repec.org/n?u=RePEc:cbi:fsnote:8/fs/19&r=all |
| By: | Koray Alper (Government of the Republic of Turkey - Central Bank of the Republic of Turkey); Fatih Altunok (Central Bank of the Republic of Turkey); Tanju Çapacıoğlu (Central Bank of Turkey); Steven Ongena (University of Zurich - Department of Banking and Finance; Swiss Finance Institute; KU Leuven; Centre for Economic Policy Research (CEPR)) |
| Abstract: | We analyze the impact of quantitative easing by the Federal Reserve, European Central Bank and Bank of England on cross‐border credit flows. Relying on comprehensive loan‐level data, we find that Fed QE strongly boosts cross‐border credit granted to Turkish banks by banks located in the US, Euro Area and UK, while ECB and BoE QEs work only moderately through banks in the EA and UK, respectively. In general QE works at short maturities across bank locations and loan currencies, more strongly for weaker lenders and borrowers, and may have resulted in maturity mismatches in Turkish banks searching for yield. |
| Keywords: | bank lending channel; bank borrowing channel; monetary transmission; quantitative easing (QE); cross‐border bank loans, micro‐level data, capital requirements, financial de‐globalization |
| JEL: | E44 E52 F42 G15 G21 |
| Date: | 2019–07 |
| URL: | http://d.repec.org/n?u=RePEc:chf:rpseri:rp1938&r=all |
| By: | Schmidt, Reinhard H. |
| Abstract: | The financial crisis of 2007-08 has stressed the importance of a sound financial system. Unlike other studies weighing the pros and cons of market versus bank-based systems, this paper investigates whether the main elements of the German financial system can be regarded as complementary and consistent. This assessment refers to the idea that there is a potential for positive interaction between different elements in the system that is actually used to make it more valuable to economy and society and more robust to crises. It is shown that the old German bank-based system, where the risk of long-term lending by large private commercial banks was limited by the membership in supervisory boards and strong personal ties between all stakeholders, was a consistent system of well-adjusted complementary elements. After reunification, a hybrid system has emerged where, on the one hand, public savings banks and cooperative banks maintain their role as lenders, but on the other, large private banks have withdrawn from their former dominant role in financing and corporate governance. It is argued that this transition to stronger capital-market and, accordingly, shareholder value orientations has occurred at the expense of consistency. |
| Keywords: | German financial system,corporate governance,German banks |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:safewh:61&r=all |
| By: | Mavrakana, Christina; Psillaki, Maria |
| Abstract: | This paper investigates the effects of economic freedom, regulations and bank governance on bank performance and risk-taking in 18 European countries for the period 2004–2016. To this end, we use the Fraser economic freedom index and its sub-components namely credit, labor and business market regulation. Our results reveal that economic freedom increases bank performance and contributes to financial stability and soundness. Moreover, we show that liberal credit, labor and business regulation improves the profitability of banks and reduces risk-taking. Regarding the bank governance variables, we find that a large board increases the probability of default whilst the results are mixed for bank performance. Also, we show that experienced directors are associated with less risk-taking and better bank performance. The impact of female directors is positive on bank performance. Regarding the risk-taking of banks, we find that, in a liberal environment, women lead to less credit risk. Finally, the compensation of directors increases bank performance and reduces risk-taking. Our findings change depending on the time period and the location. |
| Keywords: | Fraser economic freedom index, bank stability, regulation, bank governance, bank performance |
| JEL: | G21 G28 P34 P51 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:95709&r=all |
| By: | Christoph Basten (University of Zurich); Steven Ongena (University of Zurich - Department of Banking and Finance; Swiss Finance Institute; KU Leuven; Centre for Economic Policy Research (CEPR)) |
| Abstract: | We analyze how banks’ allocations of mortgage credit across regions change when an online platform enables them to offer to regions where they have no branches, staff or legacy. Unique data from an online platform with offers from different banks to each mortgage application yield three novel findings. First, banks offer more and cheaper credit to borrowers in less competitive offline markets. Second, banks offer more credit to more distant locations, where house prices appear less over-heated, and past price growth is less correlated with that in their existing portfolio. Third, over time offers become more automated, lowering operational costs. |
| Keywords: | Mortgage Lending, Spatial Competition, Credit Risk, Diversification, Automation of Banking, FinTech, Online Pricing |
| JEL: | G2 L1 R2 |
| Date: | 2019–08 |
| URL: | http://d.repec.org/n?u=RePEc:chf:rpseri:rp1939&r=all |
| By: | Galenianos, Manolis; Gavazza, Alessandro |
| Abstract: | We build a framework to understand the effects of regulatory interventions in credit markets, such as caps on interest rates and higher compliance costs for lenders. We focus on the credit card market, in which we observe U.S. consumers borrowing at high and very dispersed interest rates, despite receiving many credit card offers. Our framework includes two main features that may explain these patterns: endogenous effort of examining offers and product differentiation. Our calibration suggests that these patterns occur because borrowers do not examine most of the offers that they receive. The calibrated model implies that interest rate caps reduce credit supply modestly and curb lenders' market power significantly, leading to large gains in consumer surplus, whereas higher compliance costs unambiguously decrease consumer surplus. |
| JEL: | D14 D83 G28 |
| Date: | 2019–06 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:13807&r=all |
| By: | Mavrakana, Christina; Psillaki, Maria |
| Abstract: | This paper investigates the impact of bank governance on European bank performance and risk- taking. More precisely, using a sample of 75 banks from 18 European countries over the 2004-2016 period, we examine the relationship between bank governance variables namely board size, age of directors, financial experience, board independency, gender diversity, governance system and compensation on bank performance and risk-taking. Our empirical analysis shows that experienced directors increase bank performance and reduce risk-taking. Moreover, female directors have a positive impact on bank performance but the results are mixed for risk-taking. We also find that the one-tier system improves bank performance and reduces credit risk. Moreover, compensation is positively related with bank performance. The empirical findings are inconclusive regarding risk-taking. In addition, the impact of board size and age on bank performance differs, depending on the measure. We find that older members increase risk-taking. Finally, equity linked wealth leads to better bank performance but it also increases risk-taking. Our results differ according to time period and location criteria. |
| Keywords: | Bank governance, financial crises, corporate governance, bank performance, executive compensation |
| JEL: | G01 G21 G28 G34 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:95776&r=all |
| By: | Leledakis, George N.; Pyrgiotakis, Emmanouil G. |
| Abstract: | Using a sample of 312 bank M&As announced between 1998 and 2016 in the EU-27 countries, this paper investigates the impact of market concentration and the European sovereign debt crisis on the way investors react to these corporate events. In Western European countries, we find results which contrast the conventional wisdom that acquiring banks lose around the merger announcement date. In fact, since 2009, acquiring banks shareholders gain approximately $34 million around the announcement, a $56 million improvement compared to the pre-crisis period. These documented shareholder gains are also accompanied by significant improvements in post-merger profitability. Markedly, we link this superior performance of the post-2008 acquirers with the degree of market concentration in the Western European region. Finally, results for the Eastern European countries indicate that the crisis did not have a significant impact on the quality of bank M&As in the region. |
| Keywords: | European sovereign debt crisis; bank mergers and acquisitions; market concentration; event study |
| JEL: | G01 G14 G15 G21 G34 |
| Date: | 2019–08–26 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:95739&r=all |
| By: | Caballero, Ricardo; Simsek, Alp |
| Abstract: | Should monetary policy have a prudential dimension? That is, should policymakers raise interest rates to rein in financial excesses during a boom? We theoretically investigate this issue using an aggregate demand model with asset price booms and financial speculation. In our model, monetary policy affects financial stability through its impact on asset prices. Our main result shows that, when macroprudential policy is imperfect, small doses of prudential monetary policy (PMP) can provide financial stability benefits that are equivalent to tightening leverage limits. PMP reduces asset prices during the boom, which softens the asset price crash when the economy transitions into a recession. This mitigates the recession because higher asset prices support leveraged, high-valuation investors' balance sheets. An alternative intuition is that PMP raises the interest rate to create room for monetary policy to react to negative asset price shocks. The policy is most effective when there is extensive speculation and leverage limits are neither too tight nor too slack. |
| Keywords: | aggregate demand; Business cycle; effective lower bound; leaning against the wind; leverage; macroprudential policies; monetary policy; regulation; Speculation |
| JEL: | E00 E12 E21 E22 E30 E40 G00 G01 G11 |
| Date: | 2019–06 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:13832&r=all |
| By: | Lei Li; Elena Loutskina; Philip E. Strahan |
| Abstract: | This paper shows that banks raising deposits in more concentrated markets have more funding stability, which enhances banks’ ability to extend longer-maturity loans. We show that banks raising deposits in concentrated markets exhibit less pro-cyclical financing costs and profits, which in turn reduces the funding risk of originating long-term illiquid loans. Consistently, banks with deposit HHI one standard deviation above average extend loans with about 20% longer maturity than those with deposit HHI one standard deviation below average. Deposit concentration also allows banks to charge lower maturity premiums. Access to banks raising funds in concentrated markets improves growth in industries traditionally reliant on long-term credit. |
| JEL: | G2 |
| Date: | 2019–08 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:26163&r=all |
| By: | Damar, H. Evren; Gropp, Reint; Mordel, Adi |
| Abstract: | We study how an increase to the deposit insurance limit affects households' portfolio allocation by exogenously reducing uninsured deposit balances. Using unique data that identifies insured versus uninsured deposits, along with detailed information on Canadian households' portfolio holdings, we show that households respond by drawing down deposits and shifting towards mutual funds and stocks. These outflows amount to 2.8% of outstanding bank deposits. The empirical evidence, consistent with a standard portfolio choice model that is modified to accommodate uninsured deposits, indicates that more generous deposit insurance coverage results in nontrivial adjustments to household portfolios. |
| Keywords: | deposit insurance,banking,households,regulation |
| JEL: | D14 G21 G28 L51 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:iwhdps:192019&r=all |
| By: | Erlend Nier; Radu Popa; Maral Shamloo; Liviu Voinea |
| Abstract: | We provide empirical evidence to support the calibration of a limit on household indebtedness levels, in the form of a cap on the debt-service-to-income (DSTI) ratio, in order to reduce the probability of borrower defaults in Romania. The analysis establishes two findings that are new to the literature. First, we show that the relationship between DSTI and probability of default is non-linear, with probability of default responding to increases in DSTI only after a certain threshold. Second, we establish that consumer loan defaults occur at lower levels of DSTI compared to mortgages. Our results support the recent regulation adopted by the National Bank of Romania, limiting the household DSTI at origination to 40 percent for new mortgages and consumer loans. Our counterfactual analysis indicates that had the limit been in place for all the loans in our sample, the probability of default (PD) would have been lower by 23 percent. |
| Date: | 2019–08–22 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:19/182&r=all |
| By: | Ansgar Rannenberg (Economics and Research Department, National Bank of Belgium) |
| Abstract: | I investigate the effect of rising income inequality on the natural rate of interest in an economy with “rich” households with preferences over wealth and “non-rich” households, a housing market and credit market frictions. Simulating the increase in interpersonal and functional income inequality over the 1981-2016 period replicates the downward trend in the natural rate of interest estimated by Laubach and Williams (2016), most of the increase in the debt-to-income ratio of the bottom 90 % of households and the upward trend in house prices observed during this period. |
| Keywords: | Income inequalitynatural rate of interestsecular stagnation |
| JEL: | E25 E52 E43 D14 |
| Date: | 2019–08 |
| URL: | http://d.repec.org/n?u=RePEc:nbb:reswpp:201908-375&r=all |