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on Banking |
| By: | Franziska Bremus; Melina Ludolph |
| Abstract: | Since the global financial crisis and the related restructuring of banking systems, bank concentration is on the rise in many countries. Consequently, bank size and its role for macroeconomic volatility (or: stability) is the subject of intense debate. This paper analyzes the effects of financial regulations on the link between bank size, as measured by the volume of the loan portfolio, and volatility. Using bank-level data for 1999 to 2014, we estimate a power law that relates bank size to the volatility of loan growth. The effect of regulation on the power law coefficient indicates whether regulation weakens or strengthens the size-volatility nexus. Our analysis reveals that more stringent capital regulation and the introduction of bank levies weaken the size-volatility nexus; in countries with more stringent capital regulation or levies in place, large banks show, ceteris paribus, lower loan portfolio volatility. Moreover, we find weak evidence that diversification guidelines weaken the link between size and volatility. |
| Keywords: | Bank size, regulation, volatility, diversification, moral hazard, power law |
| JEL: | G21 G28 E32 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:diw:diwwpp:dp1822&r=all |
| By: | Pablo D'Erasmo (FRB Philadelphia); Hernan Moscoso Boedo (University of Cincinnati); Maria Olivero (Drexel University) |
| Abstract: | We study the impact of banks' exposure to defaulted sovereign debt on their supply of credit. As a natural experiment and to identify the credit supply effects of an unanticipated shock to banks funding, we use the default of 2001 in Argentina and the sharp currency devaluation that followed. We start by exploiting the variation in the data at the bank-level and bank-firm linked data in the context of a reduced form empirical model. Then, we build a model characterized by search and matching frictions in which firms (borrowers) develop long-term relationships with their lenders. Using bank-firm linked data for the period 2001-2005 we find evidence consistent with our theory. Exposure to defaulted bonds in 2001 of the lenders that a firm borrows from has a negative effect on the post-default growth rate of the supply of credit available to that firm. This exposure effect is weaker for firms that were able to grow even after the default. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:1326&r=all |
| By: | Toni Ahnert; Mahmoud Elamin |
| Abstract: | After the financial crisis of 2007–09, many jurisdictions introduced new banking regulations to make banks more resilient and less likely to fail. These regulations included tighter limits for the quality and quantity of bank capital and introduced minimum standards for liquidity. But what was the impact of these changes? |
| Keywords: | Financial stability; Wholesale funding |
| JEL: | G01 G21 |
| Date: | 2019–09 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:19-37&r=all |
| By: | Kolev, Atanas; Maurin, Laurent; Ségol, Matthieu |
| Abstract: | We use the association between non-financial firms and their banks, an information available in the European Investment Bank Investment Survey (EIBIS), to disentangle the effects of borrowers' and lenders' financial weakness on the satisfaction with the loan contracted. The dataset matches survey data of non-financial firms about their satisfaction with bank lending with their financial data and the financial data of their banks. We find evidence of both demand and supply factors determining firm satisfaction with bank loan financing: non-financial firms with weaker finances and those financed by weaker banks are less satisfied with their bank financing. We also find that the impact of supply factors differs across regions within the EU: the effect of bank's financial weakness on borrower satisfaction is not significant in core countries but is in periphery countries. |
| Keywords: | financial constraints,bank lending,survey data,bank-firm matching,satisfaction with bank loans,bank weakness,EU regions |
| JEL: | E44 G01 G32 L25 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:eibwps:201907&r=all |
| By: | Ewa Wróbel (Narodowy Bank Polski) |
| Abstract: | Basing on the notion that “true” changes in credit standards set by commercial banks are these which do not result from a variation in the Net Present Value (NPV) of a loan, we suggest a method to verify whether the currently observed lending standards are too tight (soft). In this aim we use (S)VAR models which employ macroeconomic data and information contained in the Senior Loan Officer Opinion Survey. We argue that forecasts of credit standards obtained from these models may be identified with the level of standards congruent with the NPV. If actual credit standards systematically differ from forecasts, they provide a signal of a potential development of a credit cycle. |
| Keywords: | lending standards, Net Present Value, (S)VAR models |
| JEL: | E5 G21 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:nbp:nbpmis:317&r=all |
| By: | Norring, Anni |
| Abstract: | In this paper I study how the effects of nationally implemented macroprudential policy spill across borders via international lending. For a set of 157 countries, I estimate a gravity model applied to international banking where the use of different macroprudential policy measures enter as friction variables. My findings support the existence of cross-border spillovers from macroprudential policy. Moreover, I find that the overall effect from more macroprudential regulation is highly dependent on the income group of the countries in which banks operate: The effect is of opposite sign for advanced and for emerging economies. I argue that the difference may tell of banks having more opportunities for regulatory arbitrage in emerging market economies. JEL Classification: F42, G15, G21 |
| Keywords: | international banking, macroprudential policy, policy spillovers |
| Date: | 2019–09 |
| URL: | http://d.repec.org/n?u=RePEc:srk:srkwps:2019101&r=all |
| By: | Donadelli, Michael; Jüppner, Marcus; Prosperi, Lorenzo |
| Abstract: | According to current regulation, European banks can apply zero risk weights to sovereign exposures in their balance sheet, irrespective of the assigned rating. We show that a zero risk weighting of sovereign bonds has implications by distorting banks' asset allocation decisions. Due to the lower regulatory cost of sovereign bonds, banks invest more in those bonds at the expense of lending to the real sector. To quantify the effect of this distortion, we build a standard RBC model featuring financial intermediation and a government sector calibrated to the euro area economy. Financial regulation is introduced via a penalty function that punishes banks if they deviate from the target capital ratio. We study the zero risk weight policy during normal times when there is no sovereign default risk and find that a policy introducing positive risk weights on government bonds has both long-run effects and stabilising properties with respect to the business cycle. This policy makes the steady state lending spread on loans to firms decline, stimulating investment and output. Also, it stabilises the lending spread, leading to a lower volatility of investment and output. |
| Keywords: | sovereign bonds,risk weighting,RBC,lending |
| JEL: | E44 E32 G21 G32 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubdps:302019&r=all |
| By: | Nicole Lux |
| Abstract: | The current papers examines the sensitivity of loan characteristics on mortgage default probability for UK commercial mortgages. Commercial real estate (CRE) mortgages are major asset holdings for commercial banks, life insurance companies and thrift institutions. The slumping market for real estate threatened to drag down regional banks and other smaller financial institutions in the 08/09 financial crisis and led to the collapse of some financial institutions. Despite the prominence of CRE mortgages, modeling and analysing credit risk of CRE mortgages has been lagging behind those of non-CRE commercial loans. Modelling the probability of default for commercial real estate mortgages is more complicated than that for non-commercial real estate loans. Many distressed loans passed traditional underwriting standards suggesting that, in addition to LTV and DSCR ratios, other characteristics should be taken into consideration such as the inclusion property characteristics. The accuracy of default prediction is tested comparing two traditional statistical methods a) logistic regression (logit) and b) multiple discriminant analysis (MDA) using a unique dataset of defaulted commercial loan portfolios from 60 financial institutions lending in the UK between 2005 – 2017. Overall, both models show that the inclusion of property characteristics such as geography and asset type have been significant factors in determining default probability and improve model accuracy, while LTV shows no clear significance. |
| Keywords: | commercial mortgage risk; Credit risk modelling; linear discriminant analysis; Logistic Regression; Probability of default (PD) |
| JEL: | R3 |
| Date: | 2019–01–01 |
| URL: | http://d.repec.org/n?u=RePEc:arz:wpaper:eres2019_86&r=all |
| By: | Igor Livshits (Federal Reserve Bank of Philadelphia); Youngmin Park (Bank of Canada) |
| Abstract: | Loose financial regulation encourages some banks to adopt a risky strategy of specializing in residential mortgages. In the event of an adverse aggregate housing shock, these banks fail. When banks do not fully internalize the losses from such failure (due to limited liability or deposit insurance), they offer mortgages at less than actuarially fair interest rates. This opens a door to home-ownership for some young low net-worth individuals. In turn, the additional demand from these new home-buyers drives up house prices. All of this leads to non-trivial distribution of gains and losses from lax regulation amongst the households. Renters and individuals with large non-housing wealth suffer from the fragility of the banking system induced by the lax regulation. On the other hand, some young middle-income households are able to get a mortgage and buy a house, thus benefiting from the lax regulation. Furthermore, the current (old) homeowners benefit from the increase in the price of their houses. If the latter two groups constitute a majority of the population, then regulatory failure can be an outcome of a democratic political process. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:1465&r=all |
| By: | Horst, Maximilian; Neyer, Ulrike |
| Abstract: | In March 2015, the Eurosystem launched its QE-programme. The asset purchases induced a rapid and strong increase in excess reserves, implying a structural liquidity surplus in the euro area banking sector. Against this background, the first part of this paper analyses the Eurosystem's liquidity management during normal times, crisis times and times of too low in ation. With a focus on the latter, the second part of this paper develops a relatively simple theoretical model in which banks operate under a structural liquidity surplus. The model shows that increasing excess reserves have no or even a contractionary impact on bank loan supply. As the newly created excess reserves are heterogeneously distributed across euro area countries, the impact of QE on bank loan supply may differ across countries. Moreover, we derive implications for monetary policy implementation. Increases in the central bank's main refinancing rate as well as in the minimum reserve ratio and decreases in the central bank's deposit rate develop expansionary effects on loan supply - contrary to the case in which banks face a structural liquidity deficit. |
| Keywords: | monetary policy,quantitative easing (QE),monetary policy implementation,excess liquidity,loan supply,bank lending channel |
| JEL: | E43 E51 E52 E58 G21 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:dicedp:325&r=all |
| By: | Marcos R. Castro |
| Abstract: | We develop and estimate a closed economy DSGE model with banking sector to assess the impact of introducing sectoral countercyclical capital buffers as a macroprudential tool. The model is developed to represent Brazilian bank credit markets. It features three types of bank credit — housing, consumer and commercial — as well as loans provided by a development bank. Loans are long-term, and government regulates housing loans, influencing both interest rates and loan supply. Banks are subject to bank capital requirement, and both broad (CCyB) and sectoral (SCCyB) countercyclical buffers can be introduced by macroprudential authorities. We simulate alternative policies using SCCyBs and CCyB with implementable nonlinear rules using broad and sectoral credit gaps as indicators, and compared the resulting performances. We conclude that, compared with CCyB alone, SCCyBs provide a more flexible set of instruments that allows achieving better macroeconomic stabilization in terms of variances of credit, total capital requirement and capital adequacy ratio. However, the marginal benefit of those SCCyB policies relative to the CCyB-only policy is lower than the improvements obtained by this latter policy compared with the reference scenario with no buffer. Also, SCCyB policies imply more frequent intervention, suggesting that in practice introducing these additional instruments may require more complex implementation procedures. |
| Date: | 2019–09 |
| URL: | http://d.repec.org/n?u=RePEc:bcb:wpaper:503&r=all |
| By: | Tal Gross; Raymond Kluender; Feng Liu; Matthew J. Notowidigdo; Jialan Wang |
| Abstract: | A more generous consumer bankruptcy system provides greater insurance against financial risks, but it may also raise the cost of credit to consumers. We study this trade-off using the 2005 Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA), which raised the costs of filing for bankruptcy. We identify the effects of BAPCPA on borrowing costs by exploiting variation in the effects of the reform on bankruptcy risk across credit-score segments. Using a combination of administrative records, credit reports, and proprietary market-research data, we find that the reform reduced bankruptcy filings, and reduced the likelihood that an uninsured hospitalization received bankruptcy relief by 70 percent. BAPCPA led to a decrease in credit card interest rates, with an implied pass-through rate of 60–75 percent. Overall, BAPCPA decreased the gap in offered interest rates between prime and subprime consumers by roughly 10 percent. |
| JEL: | D14 G21 G28 K35 L13 |
| Date: | 2019–09 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:26254&r=all |
| By: | Malikov, Emir; Hartarska, Valentina; Mersland, Roy |
| Abstract: | Prior studies of the diversification-driven cost savings from the joint provision of credit and deposits in microfinance usually ignore the multi-way heterogeneity across MFIs which vary substantially in size, business model, target clientele and operate in diverse environments. Using a quantile panel data model with correlated effects capable of accommodating multiple heterogeneity, we show that the typical measurement of economies of diversification at the mean provides an incomplete and distorted picture of their magnitude and prevalence in the industry. While we find statistically significant estimates, they are modest for most small-size MFIs but are quite substantial for large-scale institutions. |
| Keywords: | cost, diversification, microfinance institutions, quantile regression |
| JEL: | G15 G21 L33 O16 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:95935&r=all |
| By: | Rene Chalom (Federal Reserve Bank of New York); Benjamin Pugsley (University of Notre Dame); Fatih Karahan (Federal Reserve Bank of New York); Kurt Mitman (Stockholm University) |
| Abstract: | Recipients of unemployment insurance benefits may allocate payouts towards consumption, savings, or servicing outstanding debt. This paper examines the effects that unemployment benefits have on mortgage, automobile loan, and credit card debt delinquency, exploiting the variation across states in the magnitude of unemployment benefit extensions that were provided in response to the Great Recession. We find that additional unemployment benefits reduced mortgage debt delinquency in locations that avoided large home price declines in the aftermath of the recession. Accordingly, we conclude that the stimulus effects of unemployment insurance may be muted to the extent that benefit payments are used to satisfy housing debt obligations. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:438&r=all |
| By: | Chao Gu (University of Missouri); Cyril Monnet (Universitat Bern); Ed Nosal (Federal Reserve Bank of Atlanta); Randall Wright (University of Wisconsin) |
| Abstract: | Are fi nancial intermediaries inherently unstable? If so, why? What does this suggest about government intervention? To address these issues we analyze whether model economies with fi nancial intermediation are particularly prone to multiple, cyclic, or stochastic equilibria. Four formalizations are considered: a dynamic version of Diamond-Dybvig incorporating reputational considerations; a model with delegated monitoring as in Diamond; one with bank liabilities serving as payment instruments similar to currency in Lagos-Wright; and one with Rubinstein-Wolinsky intermediaries in a decentralized asset market as in Duffie et al. In each case we fi nd, for different reasons, that fi nancial intermediation engenders instability in a precise sense. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:352&r=all |
| By: | Tölö, Eero; Jokivuolle, Esa; Viren, Matti |
| Abstract: | Using the Eurosystem’s proprietary interbank loan data from more than one thousand banks, practically all major banks in Europe for 2008-2016, we show that larger European banks have had a lower cost of overnight borrowing than smaller banks. The size premium remains significant after controlling for time, relationship lending, competitive environment of lenders, and bank risk characteristics but has decreased over time in countries that were stricken by the Sovereign Debt Crisis. Further, the ultra-short maturity of the overnight loans and the daily frequency at which we measure them provide for an ideal setting to use difference-in-differences analysis to study the potential effect of the Bank Recovery and Resolution Directive (BRRD) on the size premium in overnight rates and to avoid possible simultaneity problems. However, we find that changes in the size premium cannot be related to the implementation dates of the BRRD in different member countries. |
| JEL: | G21 G22 G24 G28 |
| Date: | 2019–09–25 |
| URL: | http://d.repec.org/n?u=RePEc:bof:bofrdp:2019_022&r=all |
| By: | Alla Koblyakova; Michael White |
| Abstract: | The global financial crisis after 2007, and the subsequent housing and mortgage market stagnation, significantly deteriorated households’ ability to buy a house. Responding to declining homeownership rates, the government introduced a range of initiatives to offset the negative impact of relatively high first time deposit requirements, and the associated overall mortgage costs, also providing a stimulus to the house-building market by assisting households to obtain a mortgage when purchasing a new-build house. The Help to Buy Scheme was designed to help first time buyers and households in need to enter homeownership, also aiming to stabilise house prices by stimulating supply of new homes. However, the strict and inflexible planning system in England may have significantly reduced responsiveness of housing supply to raising demand for housing debt. Such politically infeasible consequences may have led to destabilisation of house prices and a regionally unequal distribution of HTB benefits. Further, there is a possibility that the main beneficiaries may refer to lenders, since lending rates within the scheme may apply additional risk premiums, leading to additional profit margins. This article addresses these questions by employing a system of the four structural equations, exploring reverse causality and simultaneous relationships between the share of the HTB Equity Scheme, Supply of New Built houses, House Prices and spreads between average mortgage rates and base interest rates. The period of study covers 2013-2018, capturing the start and subsequent developments of the HTB Scheme in England. Empirical estimations employ two stage least squares and IV estimation techniques. |
| Keywords: | Deposit requirements; Homeownership; House Prices; Housing Supply; Mortgage Finance |
| JEL: | R3 |
| Date: | 2019–01–01 |
| URL: | http://d.repec.org/n?u=RePEc:arz:wpaper:eres2019_269&r=all |
| By: | Stulz, Rene M. (Ohio State University (OSU) - Department of Finance; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI)) |
| Abstract: | Banks are unique in that they combine the production of liquid claims with loans. They can replicate most of what FinTech firms can do, but FinTech firms benefit from an uneven playing field in that they are less regulated than banks. The uneven playing field enables non-bank FinTech firms to challenge banks for specific products whose success is not tied to what makes banks unique, but they cannot replace banks as such. In contrast, BigTech firms have unique advantages that banks cannot easily replicate and therefore present a much stronger challenge to established banks in consumer finance and loans to small firms. Both Fintech and BigTech are contributing to a secular trend of banks losing their comparative advantage as they have less access to unique information about parties seeking credit. |
| JEL: | G21 G23 G24 G28 |
| Date: | 2019–09 |
| URL: | http://d.repec.org/n?u=RePEc:ecl:ohidic:2019-20&r=all |
| By: | Aneta Dzik-Walczak (Faculty of Economic Sciences, University of Warsaw); Mateusz Heba (Faculty of Economic Sciences, University of Warsaw) |
| Abstract: | Abstract: Credit scoring has become an important issue as the competition among financial institutions becomes very intense and even a slight improvement in accuracy of prediction might translate into significant savings. Financial institutions are seeking optimal strategies through the help of credit scoring models. Therefore credit scoring tools are widely studied. As a result different parametric statistical methods, non-parametric statistical tools and soft-computing approaches have been developed in order to increase the accuracy of credit scoring models. In this paper different approaches to classify customers as those who pay back loan and those who default on a loan will be employed. The purpose of this study is to explore the performance of two credit scoring techniques, the logistic regression model and neural networks. In order to evaluate the feasibility and effectiveness of these methods analysis is performed on Ledning Club data. Peer-to-Peer lending, also called social lending are investigated. On the basis of the results, we can conclude that logistic regression model can provide better performance than neutral nets. |
| Keywords: | credit scoring, credit risk, Lending Club, logistic regression, neural nets, peer-to-peer lending |
| JEL: | G21 G32 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:war:wpaper:2019-16&r=all |
| By: | Tong Zhang |
| Abstract: | This paper contributes to the literature on the effect of financial frictions on business cycle activity. We follow the "leverage cycles" approach in the spirit of Geanakoplos (2010) which argues that equilibrium fluctuations in collateral rates (equivalently haircuts, margins, or leverage), rather than just in interest rates, are a key driver of persistent fluctuations in economic activity. In particular, we focus on how adverse economic shocks can be amplified and prolonged by endogenous variations in haircuts in the standard macrofinance framework à la Kiyotaki and Moore (1997). In our model, collateral constraints are motivated by no-recourse loans, and the interest rate and the haircut are jointly determined as general equilibrium objects. We highlight the difference between the risk and the illiquidity of the collateral in determining the credit market equilibrium: an increase in risk increases both the interest rate and the haircut, while an increase in illiquidity increases the haircut but decreases the interest rate. Compared with the previous literature, our model allows us to decompose the transmission of adverse shocks through the credit market into the interest rate channel and the haircut channel, and evaluate their relative importance. The numerical exercises illustrate that risk shocks can generate sizable business cycle fluctuations through the credit market, and the haircut channel is dominant in times of low market liquidity. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:124&r=all |
| By: | Denisa Banulescu (University of Orleans; Maastricht School of Business and Economics); Christophe Hurlin (University of Orleans); Jeremy Leymarie (University of Orleans); O. Scaillet (University of Geneva GSEM and GFRI; Swiss Finance Institute; University of Geneva - Research Center for Statistics) |
| Abstract: | This paper proposes an original approach for backtesting systemic risk measures. This backtesting approach makes it possible to assess the systemic risk measure forecasts used to identify the financial institutions that contribute the most to the overall risk in the financial system. Our procedure is based on simple tests similar to those generally used to backtest the standard market risk measures such as value-at-risk or expected shortfall. We introduce a concept of violation associated with the marginal expected shortfall (MES), and we define unconditional coverage and independence tests for these violations. We can generalize these tests to any MES-based systemic risk measures such as SES, SRISK, or ∆CoVaR. We study their asymptotic properties in the presence of estimation risk and investigate their finite sample performance via Monte Carlo simulations. An empirical application is then carried out to check the validity of the MES, SRISK, and ∆CoVaR forecasts issued from a GARCH-DCC model for a panel of U.S. financial institutions. Our results show that this model is able to produce valid forecasts for the MES and SRISK when considering a medium-term horizon. Finally, we propose an original early warning system indicator for future systemic crises deduced from these backtests. We then define an adjusted systemic risk measure that takes into account the potential misspecification of the risk model. |
| Date: | 2019–09 |
| URL: | http://d.repec.org/n?u=RePEc:chf:rpseri:rp1948&r=all |
| By: | Skander Van den Heuvel (Federal Reserve Board) |
| Abstract: | The stringency of bank liquidity and capital requirements should depend on their social costs and benefits. This paper investigates the welfare effects of these regulations and provides a quantification of their welfare costs. The special role of banks as liquidity providers is embedded in an otherwise standard general equilibrium growth model. In the model, capital and liquidity regulation mitigate moral hazard on the part of banks due to deposit insurance, which, if unchecked, can lead to excessive risk taking by banks through credit or liquidity risk. However, these regulations are also costly because they reduce the ability of banks to create net liquidity and they can distort capital accumulation. For the liquidity requirement, the reason is that safe, liquid assets are necessarily in limited supply and may have competing uses. A key insight is that equilibrium asset returns reveal the strength of preferences for liquidity, and this yields two simple formulas that express the welfare cost of each requirement as a function of observable variables only. Using U.S. data, the welfare cost of a 10 percent liquidity requirement is found to be equivalent to a permanent loss in consumption of about 0.03%. Even using a conservative estimate, the cost of a similarly-sized increase in the capital requirement is about five times as large. At the same time, the financial stability benefits of capital requirements are also found to be broader. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:325&r=all |
| By: | Florian Bourgey (CMAP - Centre de Mathématiques Appliquées - Ecole Polytechnique - X - École polytechnique - CNRS - Centre National de la Recherche Scientifique); Emmanuel Gobet (CMAP - Centre de Mathématiques Appliquées - Ecole Polytechnique - X - École polytechnique - CNRS - Centre National de la Recherche Scientifique); Clément Rey (CMAP - Centre de Mathématiques Appliquées - Ecole Polytechnique - X - École polytechnique - CNRS - Centre National de la Recherche Scientifique) |
| Abstract: | We design a meta-model for the loss distribution of a large credit portfolio in the Gaussian copula model. Using both the Wiener chaos expansion on the systemic economic factor and a Gaussian approximation on the associated truncated loss, we significantly reduce the computational time needed for sampling the loss and therefore estimating risk measures on the loss distribution. The accuracy of our method is confirmed by many numerical examples. |
| Keywords: | Monte Carlo simulation,portfolio credit risk,polynomial chaos expansion,meta-model |
| Date: | 2019–09–19 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:hal-02291548&r=all |
| By: | Giacomo Candian (HEC Montréal); Mikhail Dmitriev (Florida State University) |
| Abstract: | We document that default recovery rates in the United States are highly volatile and strongly pro-cyclical. These facts are hard to reconcile with the existing financial friction literature. Indeed, models with limited enforceability a la Kiyotaki and Moore (1997) do not have defaults and recovery rates, while agency costs models following Bernanke, Gertler, and Gilchrist (1999) underestimate the volatility of recovery rates by one order of magnitude. We extend the standard agency costs model allowing liquidation costs for creditors to depend on the tightness of the market for physical capital. Creditors do not have expertise in selling entrepreneurial assets, but when buyers are plentiful, this disadvantage is minimal. Instead when sellers are abundant, the disadvantage of being an outsider is higher. Following a negative shock, entrepreneurs sell capital and liquidation costs for creditors increase. Creditors cut lending and cause entrepreneurs to sell more capital. This liquidity channel works independently from standard balance sheet effects and amplifies the impact of financial shocks on output by up to 50 percent. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:1185&r=all |
| By: | Jason Donaldson (Washington University in St Louis); Denis Gromb (HEC Paris); Giorgia Piacentino (Columbia University) |
| Abstract: | Debt secured by collateral has absolute priority in the event of default—it is paid ahead of unsecured debt, even if unsecured debt is protected by negative pledge covenants prohibiting new secured debt. We develop a model of how this priority rule leads to conflicts among creditors, but can be optimal nonetheless: borrowers’ option to use collateral in violation of covenants allows for the dilution of existing debt, and hence prevents under-investment, whereas creditors’ option to accelerate debt following a covenant violation deters dilution, and hence prevents over-investment. The optimal investment policy is implementable via a mix of different types of debt, including secured and unsecured debt with tight and loose covenants. The model is consistent with a number of stylized facts about debt structure, covenants, and their violations. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:157&r=all |
| By: | Sergio Rubens Stancato de Souza; Thiago Christiano Silva Carlos Eduardo de Almeida; Carlos Eduardo de Almeida |
| Abstract: | We investigate the effectiveness of bail-in mechanisms in mitigating systemic risk and welfare costs to society during resolution processes. To perform this study, we define a network model of mutually exposed banks and use it to simulate the effects of shocks to these banks using granular data of the Brazilian banking system, its interbank exposures and credit register operations. In the simulations, we compare the outcomes of these initial shocks after resolution processes with and without bail-ins. The simulations show that by avoiding the liquidation of banks and the resulting interruption in their credit provision, bail-ins would be effective in preventing the amplification of losses imposed on the real sector. Analyzing the effects that the liquidation of Brazilian Domestic Systemically Important Banks (D-SIBs) would cause to credit provision to economic sectors, we find bailing in these banks would produce a relevant decrease in credit crunches. However, in our sample, only a few banks could benefit from bail-ins due to insufficiency of bail-inable instruments. To tackle this issue, we carry out a study based on counterfactual simulations to assess if and how setting requirements for bail-inable instruments would affect the likelihood of a successful bail-in. We find the number of small and medium banks that could benefit from a bail-in would grow substantially for small increases in these requirements. |
| Date: | 2019–09 |
| URL: | http://d.repec.org/n?u=RePEc:bcb:wpaper:504&r=all |
| By: | Gächter, Martin; Geiger, Martin; Stöckl, Sebastian |
| Abstract: | We examine the transmission of global macro-financial uncertainty to economic activity depending on the current state of the banking sector. Previous literature suggests that credit supply and uncertainty shocks are important drivers of economic activity, but the distinction between the two is empirically challenging. In this paper, we introduce a new, but surprisingly simple measure of macro-financial uncertainty at the global level while the state of credit intermediation is being captured on the country level. Macro-financial uncertainty generally exerts adverse effects on economic growth in a sample of advanced economies. We find, however, that a shock to uncertainty is strongly reinforced when credit intermediation is distressed. In addition, we show that both macroeconomic and financial market uncertainty are associated with lower economic activity, although the latter exerts stronger effects. State-dependency of the effects is prevalent in both cases. Our findings have important policy implications, highlighting both the state of the banking sector as well as the origin of uncertainty as crucial factors in the transmission of uncertainty. |
| Keywords: | uncertainty,credit intermediation,local projection method,state-dependency |
| JEL: | D80 E32 E44 G21 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:esprep:204444&r=all |