nep-ban New Economics Papers
on Banking
Issue of 2019‒09‒16
fifteen papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Credit risk in commercial real estate bank loans: the role of idiosyncratic versus macro-economic factors By Dimitris Mokas; Rob Nijskens
  2. The Countercyclical Capital Buffer and the Composition of Bank Lending By Raphael A. Auer; Steven Ongena
  3. The Formation of Hidden Negative Capital in Banking: A Product Mismatch Hypothesis By Alexander Kostrov; Mikhail Mamonov
  4. Regulating the doom loop By Alogoskoufis, Spyros; Langfield, Sam
  5. Did interest rates at the zero lower bound affect lending of com-mercial banks? Evidence for the Euro area By Ansgar Belke; Christian Dreger
  6. ECB corporate QE and the loan supply to bank-dependent firms By Betz, Frank; De Santis, Roberto A.
  7. An Impact Assessment of Higher Capital Adequacy Requirements: Evidence From India By Noor Ulain Rizvi; Smita Kashiramka; Shveta Singh
  8. Crowdfunding as Gambling: Evidence from Repeated Natural Experiments By Demir, Tolga; Mohammad, Ali; Shafi, Kourosh
  9. How local conditions affect global banking: The case of BBVA and Santander By Cuevas Casaña, Joaquim; Martín Aceña, Pablo; Pons Brias, María A.
  10. From Cash to Central Bank Digital Currencies and Cryptocurrencies: a balancing act between modernity and monetary stability By Ansgar Belke; Edoardo Beretta
  11. Spillovers of funding dry ups By Iñaki Aldasoro; Florian Balke; Andreas Barth; Egemen Eren
  12. Experimental Evidence on the Impact of Replacing the Incurred Credit Loss Model of Bank Loan Loss Provisions with the International or US Accounting Standards Boards’ Expected Credit Loss Models By Mohamed Gomaa; Kiridaran Kanagaretnam; Stuart Mestelman; Mohamed Shehata
  13. A Step Change in Tax Transparency? An Event Study on How the Automatic Exchange of Information Did Not Affect Swiss Banks By Tim B.M. Stolper
  14. Going-Concern Debt of Financial Intermediaries By Yueran Ma; Jose Scheinkman
  15. Tools for the Rescue of Banks in Crisis By Zsófia Kenesey; Tamás Kovács

  1. By: Dimitris Mokas; Rob Nijskens
    Abstract: The commercial real estate market is pro-cyclical. This feature, together with the relative size of the industry and the large capital inflows, has made this sector relevant for financial stability. Using a novel loan level data set covering the commercial real estate portfolios of Dutch banks we aim to uncover potential drivers of distress in commercial real estate loans. Furthermore, we estimate the relative importance of idiosyncratic and systematic factors and emphasize the importance of bank behavior for distinguishing between good and bad credit growth. We find that loans originated near the peak of the cycle are riskier, confirming the pro-cyclical nature of the market. As opposed to loans originated during busts, the risk of boom loans does not decrease when economic conditions improve. Idiosyncratic factors correlated with higher credit risk are loan-to-value ratios and interest rates, especially when coupled with variable rate contracts. Moreover, we find that collateral type plays a role, as loans for non-residential (office, retail, industrial) real estate with higher vacancy rates are riskier. These results have implications for both macroprudential and microprudential supervision, as they demonstrate the pro-cyclicality of the market and show that indicators like loan-to-value, interest rate structure and vacancy rates must be monitored more carefully in boom times.
    Keywords: macroprudential policy; risk monitoring; commercial real estate; procyclicality of credit
    JEL: E32 E44 E58 G21 G3 G33
    Date: 2019–08
  2. By: Raphael A. Auer; Steven Ongena
    Abstract: Do macroprudential regulations on residential lending influence commercial lending behavior too? To answer this question, we identify the compositional changes in banks’ supply of credit using the variation in their holdings of residential mortgages on which extra capital requirements were uniformly imposed by the countercyclical capital buffer (CCyB) introduced in Switzerland in 2012. We find that the CCyB’s introduction led to higher growth in commercial lending although this was unrelated to conditions in regional housing markets. Interest rates and fees charged to the firms concurrently increased. We rationalize these findings in a model featuring both private and firm-specific collateral.
    Keywords: macroprudential policy, spillovers, credit, bank capital, systemic risk
    JEL: E51 E58 E60 G01 G21 G28
    Date: 2019
  3. By: Alexander Kostrov; Mikhail Mamonov
    Abstract: This paper investigates the phenomenon of hidden negative capital (HNC) associated with bank failures and introduces a product mismatch hypothesis to explain the formation of HNC. Given that troubled banks tend to hide negative capital in financial statements from regulators to keep their licenses, we attempt to capture this gambling behavior by evaluating product mismatches reflecting disproportions between the allocation of bank assets and the sources of funding. We manually collect unique data on HNC and test our hypothesis using U.S. and Russian banking statistics for the 2004–2017 period (external validity argument). To manage the sample selection concerns, we apply the Heckman selection approach. Our results clearly indicate that product mismatch matters and works similarly in both U.S. and Russian banking systems. Specifically, an increase in mismatch has two effects: it leads to a higher probability that a bank’s capital is negative and raises the conditional size of the bank’s HNC. Further, we demonstrate that the mismatch effect is heterogeneous with respect to bank size being at least partially consistent with the informational asymmetry view. Our results may facilitate improvements in the prudential regulation of banking activities in other countries that share similar features with either the U.S. or Russian banking systems.
    Keywords: bank failure; hidden negative capital; product mismatch; misreporting; Heckman selection model;
    JEL: G21 G33 C34
    Date: 2019–03
  4. By: Alogoskoufis, Spyros; Langfield, Sam
    Abstract: Euro area governments have committed to break the doom loop between banks and sovereigns.But policymakers disagree on how to treat sovereign exposures in bank regulation. Our contributionis to model endogenous sovereign portfolio reallocation by banks in response toregulatory reform. Simulations highlight a tension between concentration and credit risk inportfolio reallocation. Resolving this tension requires regulatory reform to be complementedby an expansion in the portfolio opportunity set to include an area-wide low-risk asset. Byreinvesting into such an asset, banks would reduce both their concentration and credit riskexposure. JEL Classification: G01, G11, G21, G28
    Keywords: Bank regulation, sovereign risk, systemic risk
    Date: 2019–09
  5. By: Ansgar Belke; Christian Dreger
    Abstract: The paper examines the bank lending activities of banks in a low interest rate environ-ment. External financing of small- and medium-sized enterprises in the euro area primari-ly takes place via bank loans and not through capital markets. Based on the Bankscope database, bank balance sheet data is utilized. Control variables are included, such as for the system of banking regulation. The panel estimation includes 706 banks from 15 Euro area member states and is conducted for the period 2000 to 2015. All models show a significant positive impact of lower interest rates on net lending. In particular, the results do not indicate that credit is restricted if interest rates move towards the zero-lower bound.
    Keywords: Bank lending, banking regulation, monetary transmission mechanisms, low interest rate environment
    JEL: E44 E51 E52
    Date: 2019–07
  6. By: Betz, Frank; De Santis, Roberto A.
    Abstract: Using a representative sample of businesses in the euro area, we show that Eurosystempurchases of corporate bonds under the Corporate Sector Purchase programme (CSPP)increased the net issuance of debt securities, triggering a shift in bank loan supply infavour of firms that do not have access to bond-based financing. Identification comes frommatching bank-dependent firms to their lenders and accounting for the effect of CSPPon banks’ activity in the syndicated loan market. In a difference-in-differences setting,we show that credit access improved relatively more for firms borrowing from banksrelatively more exposed to CSPP-eligible firms. Unlike in previous studies, this resultapplies regardless of bank balance sheet quality as measured by Tier 1 and NPL ratios. JEL Classification: E52, E58, G01, G21, G28
    Keywords: corporate sector purchase programme, ECB, loan supply, Unconventional monetary policy
    Date: 2019–09
  7. By: Noor Ulain Rizvi (Indian Institute of Technology Delhi); Smita Kashiramka (Indian Institute of Technology Delhi); Shveta Singh (Indian Institute of Technology Delhi)
    Abstract: Regulatory norms aim to ensure stability and resilience in the banking sector as episodes of crises may have a spill-over effect in the real economy. Literature based on studies of developed economies, suggests that higher capital norms improve the resilience of the banking sector, which in turn, reduces the probability of a financial crisis. An important benefit of which is on the size of the economic loss if the crisis does occur. On the other hand, higher capital requirements pose significant costs to banks, which are, in turn, passed on to the rest of society through reductions in lending volumes, credit rationing and increase in prices of credit that culminates into decreasing the output of the economy. This study aims to find the net impact of implementing Basel norms in a fast-growing economy, (yet under-researched) of Asia, i.e, India. The results prove that the implementation of Basel norms has significant benefits (using a step wise approach, multivariate logistic regression), along with costs (using vector auto regression). In sum, there are positive net benefits in terms of output saved.
    Keywords: Basel, Banking, Financial crisis, India, Comparative study
    JEL: G28 G01 O57
    Date: 2019–06
  8. By: Demir, Tolga (Sabanci University); Mohammad, Ali (Copenhagen Business & School and Centre of Excellence for Science and Innovation Studies (CESIS), Royal Institute of Technology); Shafi, Kourosh (California State University East Bay)
    Abstract: We explore whether sensation-seeking, a personality trait that involves risk-taking for novelty and thrill, is one of the underlying motivations for participating in peer-to-peer lending crowdfunding markets. To empirically substantiate this argument, we test whether individuals participating in Prosper, one of the largest lending markets in the U.S., reduce their lending activity when gambling in the form of playing the multistate lotteries Powerball and Mega Millions becomes more attractive. Lottery is a repeated natural experiment: lottery jackpots are randomly won and a series of draws with no winners form large jackpots. We find that the thrill of winning a large jackpot lottery, perhaps intensified by advertising and media coverage around this event, fulfills some lenders' desire of sensation-seeking and substitutes participating in Prosper, decreasing their lending activity. We discuss implications for lenders and borrowers, as well as platform organizers and policy makers.
    Keywords: Peer-to-peer lending; crowdfunding; lottery; gambling; Fin-Tech
    JEL: G23
    Date: 2019–09–10
  9. By: Cuevas Casaña, Joaquim; Martín Aceña, Pablo; Pons Brias, María A.
    Abstract: This paper explores why Spanish banks internationalise and why Latin America has been the main region for the international expansion of BBVA and Santander. It shows that prior to 1986 Spanish banks had a limited presence abroad, and analyses the main drivers of this initial expansion (remittances and trade connections). However, from 1986 on, there was a confluence of domestic and external factors (economic and regulatory changes in Latin America) that encouraged the international forays of BBVA and Santander. The fact that changes in the Spanish and the Latin American financial sectors occurred just when other transnational banks were turning their attention to other regions created the optimal conditions for the expansion of Spanish banks in Latin America.
    Keywords: Banking globalisation,Financial markets in Latin America,Spanish banks
    JEL: G15 G21 N26
    Date: 2019
  10. By: Ansgar Belke; Edoardo Beretta
    Abstract: The paper explores the precarious balance between modernizing monetary systems by means of digital currencies (either issued by the central bank itself or independently) and safeguarding financial stability as also ensured by tangible payment (and saving) instruments like paper money. Which aspects of modern payments systems could contribute to improve the way of functioning of today’s globalized economy? And, which might even threaten the above mentioned instable equilibrium? This survey-paper aims, precisely, at giving some preliminary answers to a complex – therefore, ongoing – debate at scientific as well as banking and political level.
    Keywords: cash, central banks, cryptocurrencies, digital currencies, monetary systems
    JEL: E4 E5 G21 G23
    Date: 2019–09
  11. By: Iñaki Aldasoro; Florian Balke; Andreas Barth; Egemen Eren
    Abstract: We uncover a new channel for spillovers of funding dry-ups. The 2016 US money market fund (MMF) reform exogenously reduced unsecured MMF funding for some banks. We use novel data to trace those banks to a platform for corporate deposit funding. We show that intensified competition for corporate deposits spilled the funding squeeze over to other banks with no MMF exposure. These banks paid more for deposits, and their pool of funding providers deteriorated. Moreover, their lending volumes and margins declined, and their stocks underperformed. Our results suggest that banks' competitiveness in funding markets affect their competitiveness in lending markets.
    Keywords: funding dry-ups, competition, spillovers, money market funds, corporate deposits, dollar funding
    JEL: G21 G28
    Date: 2019–09
  12. By: Mohamed Gomaa; Kiridaran Kanagaretnam; Stuart Mestelman; Mohamed Shehata
    Abstract: Our objective is to test-bed the new Expected Credit Loss (ECL) and Current Expected Credit Loss (CECL) models for bank credit loss accounting to identify the potential consequences of their implementation. In particular, whether and how ECL and CECL approaches could lead to divergence in credit loss accounting practices in the U.S. relative to the rest of the world is an unanswered question. To do this, we develop a stylized bank-loan setting in a controlled laboratory environment with eight different secured personal-loan portfolios. Fifty-six senior accounting students take the role of loan managers responsible for making annual loan-loss reserve decisions in a between-subjects design under the rules of either the ECL or CECL models. We examine the effects of mandating the ECL or CECL model in terms of their impacts on the adequacy of loan-loss reserves, the comparability and predictability of loan-loss reserves and the volatility of reported profit.
    Keywords: Credit-Loss Rule Changes; Test-bedding; Adequacy of Reserves; Excess of Reserves; Accounting Comparability; Accounting Predictability
    JEL: M48 C63 C91 M52
    Date: 2019–10
  13. By: Tim B.M. Stolper
    Abstract: For decades the Swiss banking secrecy has made it a criminal act for banks in Switzerland to reveal information about their customers' identities. As of 2018, Switzerland will exchange banking information on foreign bank customers with the respective home countries on an automatic basis. This event study estimates the abnormal returns in the stock prices of Swiss banks around important milestones toward the automatic exchange of information. There is no evidence of significant or sizeable decreases in the market value of Swiss banks due to the new tax transparency. The minimum detectable e¤ect sizes are moderate and suggest a high statistical power. The null results stand in reasonable contrast to a significant increase in the level of tax compliance among the owners of Swiss bank accounts.
    Keywords: automatic exchange of information, banking secrecy, tax evasion
    JEL: G21 G28 H26 K34
    Date: 2017–10
  14. By: Yueran Ma (University of Chicago); Jose Scheinkman (Columbia University)
    Abstract: We analyze the importance of asset-based debt and going-concern based debt among US financial intermediaries. Asset-based debt is based on the resale value of specific assets, which includes repurchase agreements as well as other collateralized financing secured by securities or loans. Going-concern based debt is based on the firm’s going-concern enterprise value (such as those generated by commercial lending, derivatives, services, networks, etc.), and generally takes the form of unsecured long-term bonds in the case of financial institutions. We document five main facts among US public financial intermediaries. First, in the aggregate, the resale value of directly pledgeable assets accounts for about 60% of financial intermediaries’ enterprise value. While this ratio is much higher than that of non-financial firms (around 20%), going-concern value still accounts for a sizable fraction of aggregate enterprise value. This share decreases substantially with size, that is, smaller financial institutions have a higher share of asset value coming directly from the resale value of collateralizable assets. This size dependence is especially strong among financial firms, and not as significant among non-financial firms. Second, in the aggregate, the value of going-concern debt is almost as large as that of asset-based debt. Going-concern debt as a share of total assets is about 25% among investment banks and about 10% among commercial banks. The high share is also particularly pronounced among large institutions. Third, there is a significant negative correlation between the share of total asset value coming from the resale value of directly pledgeable assets, and the share of assets financed with going-concern debt. In other words, firms with a smaller portion of asset value coming from the resale value of collateralizable assets have more going-concern debt. This pattern is consistent with patterns in non-financial firms. Fourth, the going-concern debt of financial intermediaries has much lighter covenants than that of non-financial firms. While going-concern cash flow-based debt of non-financial firms tends to have strong control rights to guard against potential moral hazard problems, going-concern debt of financial institutions has weak rights. Before the crisis, creditors of financial intermediaries’ going-concern debt may have relied on implicit government guarantee as a substitute mechanism. Recent financial regulations, such as total loss-absorbing capacity (TLAC) requirements, explicitly limit the rights of financial intermediaries’ going-concern debt and also limit government bailouts. With neither creditor control rights nor bailout protection, the cost of going-concern debt could be high. Taken together, our findings suggest that financial institutions, especially large institutions, are not just about holding collateralizable assets. Rather, a significant portion of value lies in their going concern. Correspondingly, going-concern based debt is still important for financial institutions. However, enforcing going-concern based debt may faced unique challenges in the context of financial intermediaries, given the difficulty in the orderly restructuring of institutions that engage in liquidity provision.
    Date: 2019
  15. By: Zsófia Kenesey (University of Sopron, István Széchenyi Management and Organisation Sciences Doktoral School); Tamás Kovács (University of Sopron, Alexandre Lamfalussy Faculty of Economics)
    Abstract: The financial crisis of 2008 drew attention to the insufficient regulation of banks. Due to the bank failures taking place at different places of the world, the crisis significantly decreased the budgetary funds of the countries. Banks too big to fail that had extensively grown due to the previously used practice expected the governments of the countries in which they were established to save them from the money of the taxpayers. However, this process was not sustainable on a long term and mainly after the crisis, and induced the operators to develop a new solution. Not only new legislation was necessary, but new institutions had to be also set up. In the framework of the European Union, the reform was named banking union, and two of its three components, i.e. banking supervision and resolution, are intended to prevent bank failures, and one, i.e. deposit guarantee, is intended to mitigate the damages caused by the failure. This study presents the economic tools used to prevent the failure of banks in crisis, with special regard to the institutional system of resolution. Resolution is a tool for the restoration of the operation of an institution that is becoming or has become insolvent, with the intention to prevent the spread of the problem in order to make sure that the involvement of the institution paying funds in the case of the bank failure is not necessary and the society is affected by the situation to the minimum extent. The national resolution funds as well as the Single Resolution Fund of the EU have been established mainly to reduce the system risk caused by the so-called banks too big to fail, ensuring thereby the stability of the financial system.
    Keywords: banking union, bank failures, too big to fail, resolution
    JEL: G21 G28 H12
    Date: 2019–07

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