nep-ban New Economics Papers
on Banking
Issue of 2019‒09‒09
fourteen papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Do reserve requirements reduce the risk of bank failure? By Glocker, Christian
  2. Determinants of CDS trading on major banks By Benjamin Hippert; André Uhde; Sascha Tobias Wengerek
  3. Negative interest rates, excess liquidity and retail deposits: Banks’ reaction to unconventional monetary policy in the euro area By Selva Demiralp; Jens Eisenschmidt; Thomas Vlassopoulos
  4. Stress Testing and Bank Lending By Shapiro, Joel; Zeng, Jing
  5. The finer points of model comparison in machine learning: forecasting based on russian banks’ data By Denis Shibitov; Mariam Mamedli
  6. The risk-taking channel of international financial flows By Pietro Cova; Filippo Natoli
  7. Predicting Consumer Default: A Deep Learning Approach By Stefania Albanesi; Domonkos F. Vamossy
  8. What Does Peer-To-Peer Lending Evidence Say about the Risk-Taking Channel of Monetary Policy? By Yiping Huang; Xiang Li; Chu Wang
  9. Regulation and ownership effect on banks performance: New Evidence from the MENA region By Miroslav Mateev
  10. Microfinance partnership among MFIs, banks, guarantee funds and national states By Szilvia Andriasik
  11. Banking stability, natural disasters, and state fragility: Panel VAR evidence from developing countries By Pedro Albuquerque; Wassim Rajhi
  12. Housing sector and optimal macroprudential policy in an estimated DSGE model for Luxembourg By Ibrahima Sangaré
  13. In search for stability in crypto-assets: are stablecoins the solution? By Bullmann, Dirk; Klemm, Jonas; Pinna, Andrea
  14. Drug Money and Bank Lending: The Unintended Consequences of Anti-Money Laundering Policies By Tomas Williams; Pablo Slutzky; Mauricio Villamizar-Villegas

  1. By: Glocker, Christian
    Abstract: There is an increasing literature proposing reserve requirements for financial stability. This study assesses their effects on the probability of bank failure and compares them to those of capital requirements. To this purpose a banking model is considered that is subject to legal reserve requirements. In general, higher reserve requirements promote risk-taking as either borrowers or banks have an incentive to choose riskier assets, so banks' probability of failure rises. Borrowers' moral hazard problem augments the adverse effects. They are mitigated when allowing for imperfectly correlated loan-default as higher interest revenues from non-defaulting loans curb losses from defaulting loans.
    Keywords: Reserve requirements, liquidity regulation, capital requirements, bank failure, default correlation
    JEL: E43 E58 G21 G28
    Date: 2019–08
  2. By: Benjamin Hippert (University of Paderborn); André Uhde (University of Paderborn); Sascha Tobias Wengerek (University of Paderborn)
    Abstract: Employing credit default swap (CDS) data for a sample of 52 major banks across 18 countries from 2008 to 2016, this paper investigates determinants of the outstanding net notional amount of CDS which are written on banks. We extend the current literature dealing with CDS trading by analyzing further CDS trading-specific, fundamental bank-specific as well as macroeconomic and institutional determinants with a focus on bank CDS trading. We find that, next to well-discussed determinants for corporate firms in the literature, especially a bank's tail risk, capital adequacy, loan portfolio and business model affect a bank's outstanding CDS net notional. This finding indicates that investors in the bank CDS market partly have a recourse to a fundamental analysis for their investment decision. Our study fills an important gap since empirical studies have solely focused on sovereign and corporate CDS yet. In addition, the analysis at hand provides important implications for both academics and practitioners since understanding the trading motives of bank CDS investors gives deeper insights into the still opaque CDS market.
    Keywords: banking, outstanding CDS net notional, determinants of bank CDS trading
    JEL: G10 G12 G21
    Date: 2019–08
  3. By: Selva Demiralp (Koç University); Jens Eisenschmidt (European Central Bank); Thomas Vlassopoulos (European Central Bank)
    Abstract: Negative interest rate policy (NIRP) is associated with a particular friction. The remuneration of banks´ retail deposits tends to be floored at zero, which limits the typical transmission of policy rate cuts to bank funding costs. We investigate whether this friction affects banks’ reactions under NIRP compared to a standard rate cut in the euro area. We argue that reliance on retail deposit funding and the level of excess liquidity holdings may increase banks’ responsiveness to NIRP. We find evidence that banks highly exposed to NIRP tend to grant more loans. This confirms studies pointing to higher risk taking by banks under NIRP and contrasts results that associate NIRP with a contraction in bank loans. Broader coverage of our loan data and the explicit consideration of banks’ excess liquidity holdings are likely reasons for this different result compared to some earlier literature. We are the first to document the importance of banks’ excess liquidity holdings for the effectiveness of NIRP, pointing to a strong complementarity of NIRP with central bank liquidity injections, e.g. via asset purchases.
    Keywords: Negative rates, bank balance sheets, monetary transmission mechanism
    JEL: E43 E52 G11 G21
    Date: 2019–09
  4. By: Shapiro, Joel; Zeng, Jing
    Abstract: Bank stress tests are a major form of regulatory oversight. Banks respond to the toughness of the tests by changing their lending behavior. Regulators care about bank lending; therefore, banks' reactions to the tests affect the tests' design and create a feedback loop. We demonstrate that stress tests may be (1) soft, in order to encourage lending in the future, or (2) tough, in order to deter excessive risk-taking in the future. There may be multiple equilibria due to strategic complementarity. Regulators may strategically delay stress tests. We also analyze bottom-up stress tests and banking supervision exams.
    Keywords: bank lending; Bank Regulation; reputation; stress tests
    JEL: G21 G28
    Date: 2019–08
  5. By: Denis Shibitov (Bank of Russia, Russian Federation); Mariam Mamedli (Bank of Russia, Russian Federation)
    Abstract: We evaluate the forecasting ability of machine learning models to predict bank license withdrawal and the violation of statutory capital and liquidity requirements (capital adequacy ratio N1.0, common equity Tier 1 adequacy ratio N1.1, Tier 1 capital adequacy ratio N1.2, N2 instant and N3 current liquidity). On the basis of 35 series from the accounting reports of Russian banks, we form two data sets of 69 and 721 variables and use them to build random forest and gradient boosting models along with neural networks and a stacking model for different forecasting horizons (1, 2, 3, 6, 9 months). Based on the data from February 2014 to October 2018 we show that these models with fine-tuned architectures can successfully compete with logistic regression usually applied for this task. Stacking and random forest generally have the best forecasting performance comparing to the other models. We evaluate models with commonly used performance metrics (ROC-AUC and F1) and show that, depending on the task, F1-score could be better at defining the model’s performance. Comparison of the results depending on the metrics applied and types of cross-validation used illustrate the importance of choosing the appropriate metric for performance evaluation and the cross-validation procedure, which accounts for the characteristics of the data set and the task under consideration. The developed approach shows the advantages of non-linear methods for bank regulation tasks and provides the guidelines for the application of machine learning algorithms to these tasks.
    Keywords: machine learning, random forest, neural networks, gradient boosting, forecasting, bank supervision
    JEL: C53 C52 C5
    Date: 2019–08
  6. By: Pietro Cova (Bank of Italy); Filippo Natoli (Bank of Italy)
    Abstract: From the second half of the 1990s, the high saving propensity in emerging economies triggered massive inflows towards safe assets in the United States; then, from the early 2000s, global banks also increased investment in US markets targeting riskier securities. We investigate to what extent the global saving glut and the global banking glut have stimulated risk taking, and find significant effects on credit spreads, market volatility and bank leverage. In a VAR framework, we also detect linkages between foreign inflows, US household indebtedness and house prices, suggesting a substan- tial risk-taking channel. Our findings provide evidence of the autonomous role of foreign financial flows during the run-up to the global financial crisis.
    Keywords: saving glut, banking glut, capital flows, banking leverage, risk-taking channel
    JEL: F32 F33 F34
    Date: 2019–08–08
  7. By: Stefania Albanesi; Domonkos F. Vamossy
    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.
    Date: 2019–08
  8. By: Yiping Huang; Xiang Li; Chu Wang
    Abstract: This paper uses loan application-level data from a peer-to-peer lending platform to study the risk-taking channel of monetary policy. By employing a direct ex-ante measure of risk-taking and estimating the simultaneous equations of loan approval and loan amount, we are the first to provide quantitative evidence of the impact of monetary policy on the risk-taking of nonbank financial institution. We find that the search-for-yield is the main workhorse of the risk-taking effect, while we do not observe consistent findings of risk-shifting from the liquidity change. Monetary policy easing is associated with a higher probability of granting loans to risky borrowers and a greater riskiness of credit allocation, but these changes do not necessarily relate to a larger loan amount on average.
    Keywords: monetary policy, risk-taking, nonbank financial institution, peer-to-peer lending, search-for-yield, risk-shifting
    JEL: E52 G23
    Date: 2019
  9. By: Miroslav Mateev (American University in the Emirates)
    Abstract: This paper investigates the impact of regulation and ownership on the performance of banks in 19 countries in the Middle East and North Africa (MENA) region, over a period of 11 years (2005 - 2015). We test the hypothesis that the effect of regulation on efficiency and profitability depends on the type of bank ownership. We find that only capital regulations have a strong impact on bank efficiency, but this effect does not depend on the level of ownership concentration of the bank. In line with previous empirical studies, we find that the impact of regulatory measures on bank profitability does not depend on bank ownership type. We also investigate whether the impact of regulation and ownership is different between conventional and Islamic banks, and find that the interaction effect of bank regulations and different types of ownership on a bank?s profitability is strongly significant only in the sample of Islamic banks. The analysis of bank performance before and after the recent global financial crisis reveals that bank regulations have no influence on cost efficiency of a conventional bank either before or after the crisis; however, the impact on an Islamic bank?s efficiency is strongly significant in the full sample period and the post-crisis period.
    Keywords: global financial crisis, ownership, bank regulation, efficiency, profitability
    JEL: G21 G28
    Date: 2019–07
  10. By: Szilvia Andriasik
    Abstract: This paper looks into the kind of collaboration that exists between microfinance institutions (MFIs), ethical banks, commercial banks, and guarantee funds in terms of microfinance, and how they can have an impact on business creation within the European Union. It shows how different national legislation can affect the practice of microcredit provision as well as the institutional background, which resulted in establishing alternative banking or non-banking models such as the Growth Funding Scheme in Hungary, the institution of ethical banks and authorized MFIs in Italy, or the trust-based partnership model in Germany.Furthermore, the effective support of microenterprises has to originate from the combination of different attributes such as the support of innovative start-ups through legislative acts; creation of state-guaranteed national funds for enterprise support, usage of European funds (EaSI, ESIF, EFSI or COSME) as well as fiscal and monetary policy incentives for favourable (micro)loan provision or special capital requirements for commercial banks with SME loan lending.These multi-level partnership models as well as the legislative background including relevant European regulations and directives could be seen as the first line of defence for the microfinance sector, decreasing the potential risks which form internationally against the effectiveness of microfinance, such as the potential indebtedness of the borrowers or high interest rates. In addition, those multi-level partnerships between institutions, MFIs, commercial banks on national and supranational level as well as the optimal usage of EU funds can result in a higher efficiency in the field of microfinance which can contribute to the establishment of start-ups or even family businesses and better access to finance in the initial phase of a young enterprise.Finally, the research intends to contribute to awareness-raising among commercial banks, encouraging them to add microfinance to their lending portfolio for instance as part of their Corporate Social Responsibility, sign further guarantee agreements with the relevant European funds or enter into partnership with authorized MFIs.The research focuses mainly on country-specific examples of different partnership and collaboration models which evolved in Italy, Germany, Austria and Hungary as different legislation and different institutional background triggered diverse microfinance models (e.g.: Growth Funding Scheme in Hungary; the institution of ethical banks and authorized microfinance institutions (MFIs) in Italy; the trust-based partnership model in Germany or collaboration between ERSTE Bank Austria and EaSI) and can be therefore used for a comparative research.
    Keywords: Banks, Guarantee, Microfinance, Microfinance in Europe, Microfinance Institutions, Partnership
    Date: 2019
  11. By: Pedro Albuquerque (KEDGE Business School [Marseille], AMSE - Aix-Marseille Sciences Economiques - EHESS - École des hautes études en sciences sociales - AMU - Aix Marseille Université - ECM - Ecole Centrale de Marseille - CNRS - Centre National de la Recherche Scientifique); Wassim Rajhi (Independent Researcher - Independent researcher)
    Abstract: Panel VAR methodology is used in this study to empirically evaluate the effects of natural disasters and state fragility on economic and financial dimensions in developing countries such as GDP per capita, banking and financial system deposits, banks' Z-scores, and non-performing loans. Results based on three panels of up to 66 countries and 17 years of annual data indicate that natural disasters and state fragility may cause significant economic and financial disruption in low-income and middle-income countries. Shocks from natural disasters seem to be temporary and detrimental only to non-performing loans, while shocks from state fragility appear to be permanent and to create detrimental economic and financial feedback loops.
    Keywords: Banking stability,GDP per capita,Natural disasters,State fragility
    Date: 2019–12
  12. By: Ibrahima Sangaré
    Abstract: This study investigates the optimal macroprudential policies for Luxembourg using an estimated closed-economy DSGE model. The model features a monopolistically competitive banking sector, a collateral constraint and an explicit differentiation between the flow and the stock of household mortgage debt. Based on a welfare-oriented approach and in a context of easy monetary policy environment, we first find that the non-joint optimal loan-to-value (LTV) and risk weighted capital requirement (RW) ratios for Luxembourg seem to be 90% and 30%, respectively, while the joint optimal ratios are found to be 100% and 10% respectively. Our results from the combination of instruments suggest that the policy scenario that provides better stabilization effects on mortgage credits isn’t necessarily the one that is welfare improving. In other words, we find a complementarity between LTV and RW in terms of welfare, while their optimal combination diminishes the stabilization effects on mortgage debt and house prices. However, the time-varying and endogenous rules for LTV and RW improve the social welfare and better stabilizes mortgage loans and house prices compared to their static exogenous ratios. We further find that the optimal interactions between LTV and RW ratios in our modelling framework exhibit a convex shape. It should be recalled that the results are conditional on the model’s specific assumptions.
    Keywords: LTV, Risk weights, optimal macroprudential policy, combination of macroprudential instruments
    JEL: E32 E44 R38
    Date: 2019–07
  13. By: Bullmann, Dirk; Klemm, Jonas; Pinna, Andrea
    Abstract: Stablecoins claim to stabilise the value of major currencies in the volatile crypto-asset market. This paper describes the often complex functioning of different types of stablecoins and proposes a taxonomy of stablecoin initiatives. To this end it relies on a novel framework for their classification, based on the key dimensions that matter for crypto-assets, namely: (i) accountability of issuer, (ii) decentralisation of responsibilities, and (iii) what underpins the value of the asset. The analysis of different types of stablecoins shows a trade-off between the novelty of the stabilisation mechanism used in an initiative (from mirroring the traditional electronic money approach to the alleged introduction of an “algorithmic central bank”) and its capacity to maintain a stable market value. While relatively less innovative stablecoins could provide a solution to users seeking a stable store of value, especially if legitimised by the adherence to standards that are typical of payment services, the jury is still out on the potential future role of more innovative stablecoins outside their core user base. JEL Classification: E42, L17, O33
    Keywords: crypto-assets, distributed ledger technology, electronic money, stablecoins
    Date: 2019–08
  14. By: Tomas Williams (George Washington University); Pablo Slutzky (University of Maryland); Mauricio Villamizar-Villegas (Central Bank of Colombia)
    Abstract: CWe explore the unintended consequences of anti-money laundering (AML) policies. For identification, we exploit the implementation of the SARLAFT system in Colombia in 2008, aimed at controlling the flow of money from drug trafficking into the financial system. We find that bank deposits in municipalities with high drug trafficking activity decline after the implementation of the new AML policy. More importantly, this negative liquidity shock has consequences for credit in municipalities with little or nil drug trafficking. Banks that source their deposits from areas with high drug trafficking activity cut lending relative to banks that source their deposits from other areas. We show that this credit shortfall negatively impacted the real economy. Using a proprietary database containing data on bank-firm credit relationships, we show that small firms that rely on credit from affected banks experience a negative shock to investment, sales, size, and profitability. Additionally, we observe a reduction in employment in small firms. Our results suggest that the implementation of the AML policy had a negative effect on the real economy.
    Keywords: money laundering; organized crime; financial system; bank lending; liquidity; economic growth
    JEL: I15 O15 Q12
    Date: 2019–05

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.