nep-ban New Economics Papers
on Banking
Issue of 2019‒09‒23
sixteen papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Banks as Patient Lenders: Evidence from a Tax Reform By Elena Carletti; Filippo De Marco; Vasso Ioannidou; Enrico Sette
  2. Some Borrowers are More Equal than Others: Bank Funding Shocks and Credit Reallocation By Olivier De Jonghe; Hans Dewachter; Klaas Mulier; Steven Ongena; Glenn Schepens
  3. Bank intermediation activity in a low interest rate environment By Michael Brei; Claudio Borio
  4. Loan to value caps and government-backed mortgage insurance: Loan-level evidence from Dutch residential mortgages By Leo de Haan; Mauro Mastrogiacomo
  5. Global Banks and Systemic Debt Crises By Juan Morelli; Diego Perez; Pablo Ottonello
  6. The impact of large lending on bank efficiency in U.S.A. By Andriakopoulos, Konstantinos; Kounetas, Konstantinos
  7. The Agency of CoCos: Why Contingent Convertible Bonds Aren't for Everyone By Roman Goncharenko; Steven Ongena; Asad Rauf
  8. Innovations in emerging markets: the case of mobile money By Pelletier, Adeline; Khavul, Susanna; Estrin, Saul
  9. One size does not fit all. Cooperative banking and income inequality By Raoul Minetti; Pierluigi Murro; Valentina Peruzzi
  10. Fear, Anger and Credit. On Bank Robberies and Loan Conditions By Paola Morales Acevedo; Steven Ongena
  11. Anticipated Financial Contagion By Toni Ahnert; Co-Pierre Georg; Gideon DuRand
  12. Bank Standalone Credit Ratings By Michael R. King; Steven Ongena; Nikola A. Tarashev
  13. The impact of interest rate ceilings on households’ credit access: evidence from a 2013 Chilean legislation By Carlos Madeira
  14. The evolution of banking regulation since the financial crisis: a critical assessment By Andrea Sironi
  15. Fisherian Debt-Deflation Zero Lower Bound By Dan Cao; Guangyu Nie; Wenlan Luo
  16. Methods of Housing Finance in Urban Tanzania By Egino Millanzi

  1. By: Elena Carletti; Filippo De Marco; Vasso Ioannidou; Enrico Sette
    Abstract: We study how a greater reliance on deposits affects bank lending policies. For identification, we exploit a tax reform in Italy that induced households to substitute bank bonds with deposits. We show that the reform led to larger increases (decreases) in term deposits (bonds) in areas where households held more bonds before the reform. We then find that banks with larger increases in deposits did not change their overall credit supply, but increased credit-lines and the maturity of term-loans. These results are consistent with key theories on the role of deposits as a discipline device and of banks as liquidity providers.
    Keywords: Banks, deposits, maturity, risk-taking, government guarantee
    JEL: G21 G28 G01
    Date: 2019
  2. By: Olivier De Jonghe (Tilburg University - Department of Finance; National Bank of Belgium - Research Department; Tilburg University - European Banking Center); Hans Dewachter (Catholic University of Leuven (KUL) - Department of Economics; Erasmus Research Institute of Management (ERIM)); Klaas Mulier (Ghent University-Universiteit Gent - Faculty of Economics and Business Administration); Steven Ongena (University of Zurich - Department of Banking and Finance; Swiss Finance Institute; KU Leuven; Centre for Economic Policy Research (CEPR)); Glenn Schepens (ECB -Financial Research Division)
    Abstract: This paper provides evidence on the strategic lending decisions made by banks facing a negative funding shock. Using bank- rm level credit data, we show that banks reallocate credit within their domestic loan portfolio in at least three different ways. First, banks reallocate to sectors where they have high sector presence. Second, they also reallocate to sectors in which they are heavily specialized. Third, they reallocate credit towards low-risk fi rms. These reallocation effects are economically large. A standard deviation improvement in sector presence, sector specialization or fi rm risk reduces the transmission of the funding shock to credit supply by 22, 8 and 10%, respectively.
    Keywords: lCredit reallocation, bank funding shock, domestic credit, sector specialization, firm risk
    JEL: G01 G21
    Date: 2019–08
  3. By: Michael Brei; Claudio Borio
    Abstract: This paper investigates how the prolonged period of low interest rates affects bank intermediation activity. We use data for 113 large international banks headquartered in 14 major advanced economies during the period 1994–2015. We find that low interest rates induce banks to shift their activities from interest-generating to fee-related and trading activities. This rebalancing is stronger for low capitalised banks. Banks also moderately adjust their funding structure, away from short-term market funding towards deposits. We observe a concomitant decline in the risk-weighted asset ratio and a reduction in loan-loss provisions, which is consistent with signs of evergreening.
    Keywords: monetary policy, bank business models, financial crisis
    JEL: C53 E43 E52 G21
    Date: 2019–08
  4. By: Leo de Haan; Mauro Mastrogiacomo
    Abstract: Using loan level data on mortgage loans originated by Dutch banks during 1996 to 2015, we analyse the determinants of the incidence of non-performance. We find that both the originating loan-to-value ratio (OLTV) and the debt-service-to-income ratio (DSTI) are significantly positively associated with the probability of non-performance. The results suggest that mortgages with government-loan-guarantees perform better. Moreover, several mortgage loan and borrower characteristics, such as the (interest-only) loan type and the underwater status of the borrower, increase credit risk. Our model predictions suggest a novel policy implication: in order to avoid acceleration of non-performance probabilities, the OLTV-limit should be set to about 70%-80% for uninsured mortgages, and to about 90% for those with mortgage insurance.
    Keywords: Credit risk; Mortgage loans; Loan to Value; Loan guarantees
    JEL: G20 G21 H81
    Date: 2019–09
  5. By: Juan Morelli (NYU Stern); Diego Perez (New York University); Pablo Ottonello (University of Michigan)
    Abstract: We study the role of financial intermediaries in the global market for risky external debt. We first provide empirical evidence measuring the effect of global banks’ net worth on bond prices of emerging-market economies. We exploit within-borrower bond variation and show that, around the collapse of Lehman Brothers, bonds held by more distressed global banks experienced larger price contractions. We then construct a model of global banks’ lending to emerging economies and quantify their role using our empirical estimates and other key data. In the model, banks’ net worths affect bond prices by the combination of a form of market segmentation and banks’ financial frictions. We show that these banks’ exposure to emerging economies is the key to determine their role in propagating shocks. With the current observed exposure, global banks play an important role in transmitting shocks originating in developed economies, accounting for the bulk of the variation of spreads in emerging economies during the recent global financial crisis. Global banks help explain key patterns of debt prices observed in the data, and the evolution of their exposure over the last decades can explain the changing nature of systemic debt crises in emerging economies.
    Date: 2019
  6. By: Andriakopoulos, Konstantinos; Kounetas, Konstantinos
    Abstract: This paper investigates a rather neglected issue in the banking literature regarding the impact of large lending (LL) on the three banks’ performance aspects (cost, profit and productive). Possible influences may arise in the context of banks’ credit risk as trade credit, which is provided by large, creditworthy firms, and it is a method of monitoring and enforcing loan contracts to relatively riskier firms. Indeed, trade credit providers view payments beyond the discount period as a sign of financial difficulty while the option to cut off shipments for nonpayment is a potentially powerful means for a trade creditor to force repayment, especially if a supplier provides its costumer with a product that has no close substitutes. A unique dataset was constructed concerning all USA banks collected from SDI (Statistics on Depository Institutions) report compiled by FDIC (Federal Deposit Insurance Corporation). Our sample contains 7960 banks and tracked yearly for the period 2010 -2017, creating an unbalanced panel of year observations. An econometric framework based on nested non-neutral frontiers, was developed to estimate the influence and the decomposition of large lending on the three banks' performance aspects (cost, profit and productive). Moreover, different types of frontiers aiming at the cost, profit, and production side have been investigated. The empirical findings reveal that the large lending plays a crucial role on banks' technical efficiency. Significant variations among different frontier models, type of bank and size, banks’ ownership structure and macroeconomic conditions appear to be present. By considering all CAMEL (Capital Adequacy Asset Quality Management Earnings Liquidity) parameters we notice that banks’ financial strength affects banks’ efficiency. Some policy implications are derived based on the empirical evidence supporting a safer and sounder banking system can be emerged as banks finance large firms, increasing the willingness of people to save and bank’s attitude to finance profitable investments projects that rise firm’s value and promote economic growth.
    Keywords: JEL classifications: C33; G21; G30
    JEL: C33 G21 G30
    Date: 2019–09–15
  7. By: Roman Goncharenko (KU Leuven - Department of Accountancy, Finance and Insurance (AFI)); Steven Ongena (University of Zurich - Department of Banking and Finance; Swiss Finance Institute; KU Leuven; Centre for Economic Policy Research (CEPR)); Asad Rauf (KUniversity of Groningen)
    Abstract: Most regulators grant contingent convertible bonds (CoCos) the status of equity. Theory, however, suggests that CoCos can induce debt overhang, thereby, increasing the cost of issuing equity. First, we theoretically investigate how the extent of this debt overhang varies with bank characteristics. Our model predicts that riskier banks face higher debt overhang from CoCos. Our empirical analysis confirms that riskier banks are less likely to issue CoCos than their safer counterparts. Since under Basel III banks are expected to raise equity prior to CoCo conversion, riskier banks that anticipate future equity issuance are less likely to issue CoCos before.
    Keywords: CoCos, Contingent Convertible Bonds, Bank Capital Structure, Debt Overhang, Basel III
    JEL: G01 G12 G24
    Date: 2019–06
  8. By: Pelletier, Adeline; Khavul, Susanna; Estrin, Saul
    Abstract: Mobile money is a financial innovation that provides transfers, payments, and other financial services at a low or zero cost to individuals in developing countries where banking and capital markets are deficient and financial inclusion is low. We use transaction costs and institutional theories to explain the growth and impact of mobile money. Having developed a new archival dataset that tracks mobile money deployment across 90 emerging economies during 16 years between 2000 and 2015, we address the question of relative economic impact of the banking and telecoms sectors in the provision of mobile money. We show that telecom groups and not banks are more likely to launch mobile money in countries where legal rights are weaker and credit information less prevalent. However, it is when mobile money is offered via a banking channel that the spillover effects on the economy are greater. Findings have significant implications for policy and strategy.
    JEL: G21 M13 O33
    Date: 2019–09–09
  9. By: Raoul Minetti (Michigan State University); Pierluigi Murro (LUISS University); Valentina Peruzzi (LUISS University)
    Abstract: The re-regulation wave following the global financial crisis is putting pressure on local community and cooperative banks. In this paper, we show that cooperative banking can play a pivotal role in reducing income inequalities in local communities. By analyzing Italian local (provincial) credit markets over the 2001-2011 period, we find that cooperative banks mitigate income inequality more than their commercial counterparts. This effect remains significant when we account for the pervasiveness of relationship lending in the provinces, suggesting that it is the specific nature and orientation of cooperative banks, rather than their lending technologies, that improve income distribution. The impact of cooperative banking on inequality appears to be mainly channeled by reduced migratory flows and lower business turnover.
    Keywords: Cooperative banks, income inequality, financial development.
    JEL: G21 G38 O15
    Date: 2019–02
  10. By: Paola Morales Acevedo (Tilburg University - Center for Economic Research (CentER); Tilburg University - European Banking Center); Steven Ongena (University of Zurich - Department of Banking and Finance; Swiss Finance Institute; KU Leuven; Centre for Economic Policy Research (CEPR))
    Abstract: We study the impact of emotions on real-world decisions made by loan officers by analyzing the loan conditions of loans granted immediately after a bank branch robbery. We find significant differences between the conditions of loans granted after a robbery and changes in loan conditions that occur contemporaneously at unaffected branches. In general, loan officers seem to adopt so-called avoidance behavior. In accordance with the literature on posttraumatic stress, their avoidance behavior is halved within two weeks following the robbery and the effect further varies depending on the presence, or absence, of a firearm during the robbery.
    Keywords: behavioural finance, bank robberies, transactional versus relationship lending
    JEL: G02 G2
    Date: 2019–06
  11. By: Toni Ahnert (Bank of Canada and CEPR); Co-Pierre Georg (Deutsche Bundesbank); Gideon DuRand (University of Stellenbosch)
    Abstract: We revisit the seminal model of financial contagion of Allen and Gale (2000) by allowing aggregate liquidity shocks to occur with positive probability. We study how an ex-post shock’s size and probability affect ex-ante portfolio choices and risk sharing across states and over time. We characterize a numerically approximate symmetric Nash equilibrium in the non-cooperative game between two regional banks. We describe parameter regions where contagion does and does not occur for positive probability of the aggregate liquidity shock. Our solution fully characterizes banks’ ex-ante optimal portfolio choices. Additionally, we present novel benchmarks where optimal risk sharing with observable types involves (i) full default after a large but sufficiently unlikely aggregate liquidity shock; (ii) holding excess liquidity when the shock is relatively likely; (iii) partial liquidation of investment after a small and unlikely shock; and (iv) both excess liquidity and partial liquidation for shocks of intermediate size and probability. We obtain a number of additional benchmark results numerically to show the robustness of our numerical approach and highlight its usefulness for the literature.
    Date: 2019
  12. By: Michael R. King (Gustavson School Of Business); Steven Ongena (University of Zurich - Department of Banking and Finance; Swiss Finance Institute; KU Leuven; Centre for Economic Policy Research (CEPR)); Nikola A. Tarashev (Bank for International Settlements (BIS) - Monetary and Economic Department)
    Abstract: We study a unique experiment to examine the importance of rating agencies' private information for bank shareholders. On July 20, 2011, Fitch Ratings refined their bank standalone ratings, which measure intrinsic financial strength, from a 9-point to a 21-point scale. This refinement did not affect their all-in ratings, which combine assessments of intrinsic strength and extraordinary sovereign support and provide an estimate of banks' creditworthiness. Thus, the impact of the standalone rating refinement was cleanly limited to bank shareholders. We find evidence suggesting that the refinement resulted in higher than expected standalone ratings, but we find only weak evidence of ratings catering. We also find a positive relationship between stock price reactions and rating surprises, revealing that the rating refinement delivered useful information about the importance of bank characteristics for assessing intrinsic financial strength.
    Keywords: banks, standalone credit ratings, ratings catering, stock market reaction
    JEL: G21 G14 G15
    Date: 2019–02
  13. By: Carlos Madeira
    Abstract: This study analyzes the impact of a legislation introduced in Chile in 2013, which gradually reduced the maximum legal interest rate for consumer loans from 54% to 36%. Using a representative sample of households that matches survey data and banking loan records, I compare consumers with riskadjusted interest rates slightly above and slightly below the legal interest rate ceiling, two groups of similar characteristics but who are differently affected by the law. After accounting for both macroeconomic shocks and unobserved household heterogeneity, the results show that being above the interest rate cap reduces the probability of credit access by 8.7% on average. A counterfactual exercise shows that the new legislation excluded 9.7% of the borrowers from banking consumer loans. Finally, I show that the new law affected all lenders of consumer loans in Chile, not just banks.
    Date: 2019–09
  14. By: Andrea Sironi
    Abstract: Following the 2008 financial crisis a major process of regulatory reform of the banking industry took place with the aim of increasing the resilience of the financial system. More specifically, the regulatory changes introduced after the financial crisis were aimed at pursuing three main objectives: (i) improve the resilience of individual banks, thereby reducing the risk of financial institutions to fail, (ii) improve the resilience of the financial system as a whole, limiting the risk of spillovers to the broader economy that would be triggered by the failure of large financial institutions, and (iii) reduce the risk for taxpayers to bear the cost of future banking crisis. Starting from an exam of the main weaknesses of the banking regulatory framework highlighted by the financial crisis, this paper provides a detailed analysis of the Basel 3 reform, its main goals, timing and technical features. It then examines the more recent revisions of the Basel 3 framework - often called “Basel 4” - and the new requirements associated to bank resolution policies, i.e. the “total loss absorbing capacity” (TLAC) and the “minimum required eligible liabilities” (MREL). These regulatory reforms are then critically discussed, both though the analysis of their impact on the banking industry, and with recourse to the available empirical evidence. This evidence shows that the banking industry did register a significant increase in the amount and quality of equity capital, mostly achieved through capital increases, and in liquidity. This led to a decrease in the probability of future large banks defaults and in the incentive for banks to take on excessive risks. Also, by introducing bail in mechanisms for banks’ liabilities, these reforms reduced the likelihood of future crisis being supported by taxpayers via government bail outs. However, a number of threats are still being faced by the banking industry. These include profitability, a necessary condition for a bank to be sustainable over time, the sovereignbanks “doom loop”, and the possibility of future recessions, as banks’ safety and soundness is inevitably linked to the state of the economy.
    Date: 2018
  15. By: Dan Cao (Georgetown University); Guangyu Nie (Shanghai University of Finance and Economics); Wenlan Luo (Tsinghua University)
    Abstract: In this paper, we build a nonlinear two-sector DSGE model with capital accumulation, in which the Zero Lower Bound (ZLB) of interest rate and the collateral constraint are occasionally binding. We show the interaction of ZLB and the deleveraging cycle triggered by a binding collateral constraint can be a powerful mechanism in exacerbating the financial crisis as well as generating the prolonged liquidity trap and stagnation after the crisis. In particular, a binding ZLB can be triggered by capital over-accumulation, and when ZLB is binding, output is decreasing in capital stock. We also find an equilibrium does not exist when the capital stock is too high, while the existence of equilibrium can be restored by adding the adjustment cost of capital into the model. In our numerical results, we find the amplification effect of the collateral constraint is modest when the ZLB is not binding, but is quantitatively large when the ZLB is binding. In addition, with collateral constraint and ZLB, the recovery of the economy is slow since it takes longer for the borrowers to restore their net worth, and due to insufficient demand, the duration of the liquidity trap is longer. Lastly, in a society with better access to the credit market, the borrowers use higher leverage ex ante, and the average duration of ZLB is longer once the economy is hit by adverse shocks.
    Date: 2019
  16. By: Egino Millanzi
    Abstract: Purpose-. Essentially, there are different housing finance methods applicable in mobilizing financial resources for housing development in developed and developing countries. The type and usefulness of these methods differ among countries, as well as within countries geographical area. Long term mortgage finance methods which perform better in developed countries, invariably underperform in developing countries. Large number of urban households are excluded in mortgage finance system. This paper seeks to determine the sources and methods of housing finance among households as well as their applicability in urban Tanzania.Methodology- The paper starts with a presentation of the sources and methods of housing finance and discusses housing finance system from the perspective of system theory which encompass demand and supply subsystems. Several hypotheses based on questionnaires are tested through a questionnaire survey sent to 370 homeowners in surveyed and surveyed areas of Kinondoni Municipality, Dar es salaam city.Findings-The study revealed that mortgage finance method is irrelevant in Tanzania. There is dominance of informal equity based methods such as personal income and profits from petty business, sweat equity, small loans from friends and relatives, pensions and gratuity, and remittances from family living abroad and within the country. Use of microfinances such as Saccos, Vicoba as well as microcredits from banks and other microfinance institutions also increases. The study further revealed that it takes 3 to 20 years to complete housing development with an average period of 8 years. These findings imply that incremental finance methods dominate housing market in urban Tanzania. Majority use multiple methods through progressive phases to finance housing development. Originality/value- Despite the constraints of mortgage finance and other long-term housing finance methods in developing countries. Microfinances which are compatible with incremental housing finance methods if improved can be useful to urban Tanzania housing market. Incremental housing strategy fits the requirements of urban poor which calls for fundamental policy innovations of this strategy and microfinance institutions.
    Keywords: housing finance methods; Housing finance system; incremental finance strategy; sources of finances; Urban Area
    JEL: R3
    Date: 2019–01–01

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