nep-ban New Economics Papers
on Banking
Issue of 2019‒10‒14
24 papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Beyond the LTV ratio: new macroprudential lessons from Spain By Jorge E. Galán; Matías Lamas
  2. The real effects of bank distress: Evidence from bank bailouts in Germany By Bersch, Johannes; Degryse, Hans; Kick, Thomas; Stein, Ingrid
  3. Integration Among US Banks By Abhinav Anand; John Cotter
  4. Regulatory arbitrage and cross-border syndicated loans By Demirguc-Kunt, Asli; Horvath, Balint L.; Huizinga, Harry
  5. Negative interest rates in the euro area: does it hurt banks? By Jan Stráský; Hyunjeong Hwang
  6. Bank intermediation activity in a low interest rate environment By Borio, Claudio; Brei, Michael; Gambacorta, Leonardo
  7. Financial Risk Capacity By Saki Bigio; Adrien d'Avernas
  8. Do Algorithms Discriminate Against African Americans in Lending? By Jérémie BERTRAND; Laurent WEILL
  9. Russia’s banking sector in 2018 By Khromov Mikhail
  10. The Hidden Costs of Strategic Opacity By Ana Babus; Maryam farboodi
  11. Retirement in the Shadow (Banking) By Guillermo Ordoñez; Facundo Piguillem
  12. Financial innovations role in consumer behavior at Russian retail payments market By Egor Krivosheya; Polina Belyakova
  13. Shadow Banking and the Great Recession By Patrick Feve
  14. On Fintech and Financial Inclusion By Thomas Philippon
  15. Credit-to-GDP gap calculation using multivariate HP filter By Levente Kocsis; Miklos Sallay
  16. Fiscal distress and banking performance: The role of macroprudential regulation By Balfoussia, Hiona; Dellas, Harris; Papageorgiou, Dimitris
  17. "The Effects of Lender of Last Resort on Financial Intermediation during the Great Depression in Japan" By Masami Imai; Tetsuji Okazaki; Michiru Sawada
  18. Macroprudential policy in Poland By Mateusz Mokrogulski
  19. Measuring the Covariance Risk of Consumer Debt Portfolios By Carlos Madeira
  20. Economic Policy Uncertainty and the Supply of Business Loans By Santiago Barraza; Andrea Civelli
  21. Supervisory Governance, Capture and Non-Performing Loans By Niccolò Fraccaroli
  22. Microfinance and Poverty Reduction: Evidence from Djibouti By Mazhar Yasin MUGHAL; Mohamed ABDALLAH ALI
  23. Means of Payment By Nancy L Stokey
  24. Credit Smoothing By Sean Hundtofte; Arna Olafsson; Michaela Pagel

  1. By: Jorge E. Galán (Banco de España); Matías Lamas (Banco de España)
    Abstract: Booming house prices have been historically correlated with the loosening of banks’ lending standards. Nonetheless, the evidence in Spain shows that the deterioration of lending policies may not be fully captured by the popular loan-to-value (LTV) ratio. Drawing on two large datasets comprising more than five million mortgage operations that cover the last financial cycle, we show that the LTV indicator may exhibit a misleading picture of actual mortgage credit imbalances and risk. In turn, risk identification improves when other metrics are considered. In particular, we show that loan-to-price (LTP) as well as ratios that consider the income of borrowers are major determinants of mortgage defaults. Moreover, we identify relevant non-linear effects of lending standards on default risk. Finally, we document that the relationship between lending standards and default rates changes over the cycle. Overall, the findings provide useful insights for the design of the macroprudential policy mix and, in particular, for the implementation of borrower-based measures.
    Keywords: housing market, lending standards, defaults, macroprudential policy
    JEL: C25 E58 G01 G21 R30
    Date: 2019–10
  2. By: Bersch, Johannes; Degryse, Hans; Kick, Thomas; Stein, Ingrid
    Abstract: How does bank distress impact their customers' probability of default and trade credit availability? We address this question by looking at a unique sample of German firms from 2000 to 2011. We follow their firm-bank relationships through times of distress and crisis, featuring the different transmission of bank distress shocks into already weakened firm balance sheets. We find that a distressed bank bailout, which is subject to restructuring and deleveraging conditions, leads to a bank-induced increase of firms' probabilities of default. Moreover, bailouts tend to reduce trade credit availability and ultimately firms' sales. We further find that the direction and magnitude of the effects depends on firm quality and the relationship orientation of banks.
    Keywords: bank distress,bank risk channel,firm risk channel,relationship banking,firmdefaults,financial crisis
    JEL: G01 G21 G24 G33
    Date: 2019
  3. By: Abhinav Anand (Indian Institute of Management Bangalore); John Cotter (University College Dublin, Michael Smurfit Graduate Business School)
    Abstract: We define and measure integration among a sample of 357 US banks over 25 years from 1993 to 2017 and show that the median US bank's integration has increased significantly post-2005. During the great recession and the Eurozone crisis, integration levels among US banks display a significant rise over and above their trend. We find that bank size is the most economically and statistically significant characteristic in explaining integration levels. Size and the equity ratio show positive association with bank integration while the net interest margin and combined tier 1 and tier 2 capital ratio influence bank integration negatively. For regulators, abnormally high integration levels indicate warning signs of potential distress in the banking sector.
    Keywords: Bank integration; Bank size; Banking crises; Systemic risk; Principal component regressions
    JEL: G10 G21 G28 C32 C33 C38 C58
    Date: 2019–09–24
  4. By: Demirguc-Kunt, Asli; Horvath, Balint L.; Huizinga, Harry (Tilburg University, Center For Economic Research)
    Abstract: This paper investigates how international regulatory and institutional differences affect lending in the cross-border syndicated loan market. Lending provided through a foreign subsidiary is subject to subsidiary-country regulation and institutional arrangements. Multinational banks’ choices between loan origination through the parent bank or through a foreign subsidiary provide information about these banks’ preferences to operate in countries with varying regulations and institutions. Our results indicate that international banks have a tendency to switch loan origination towards countries with less stringent bank regulation and supervision consistent with regulatory arbitrage, but that they prefer to originate loans in countries with higher-quality institutions related to financial market monitoring, creditor rights, and the speed of contract enforcement.
    Keywords: regulator arbitrage; creditor rights
    JEL: G21 G38
    Date: 2019
  5. By: Jan Stráský; Hyunjeong Hwang
    Abstract: The negative interest rate policy (NIRP) has been in place in the euro area since June 2014. While the NIRP can provide additional monetary accommodation in the situation where the neutral rate of interest is most likely negative, there are also unintended consequences for banks’ profitability and potential financial stability risks associated with this policy. The paper assesses the effect of the NIRP on the net interest rate margins of the euro area banks using quarterly consolidated bank level data for some 50 banking groups directly supervised by the Single Supervisory Mechanism. Since our data set extends to 2018, it allows us to examine the period of negative short-term interest rates separately from the period of low, but positive policy rates. The econometric results confirm the effect of the interest rate level on bank profitability and, in some specifications, also suggest an additional negative effect on bank profitability in the period of negative euro area short-term interest rates. This additional effect of the NIRP is the strongest when looking at the disaggregated components of net interest income, i.e. interest income and interest expense. However, the effects are not particularly robust across various profitability measures and tend to disappear when conditioning on macroeconomic variables, such as expected real GDP growth and inflation expectations. Therefore, in line with other existing studies, we find weak evidence of possible negative effects on bank profitability from keeping rates low for an extended period of time. Statistical analysis of the bank-level data also points to an ongoing compression of non-interest income, in particular for the best performing banks, and a slow recovery in return on total assets among all banks over the analysed period.This Working Paper relates to the 2018 OECD Economic Survey of Euro Area( rea-and-european-union-economic-snapshot /)
    Keywords: bank profitability, lower bound, monetary policy, negative rates
    JEL: E43 E52 E58 G21 G28
    Date: 2019–10–14
  6. By: Borio, Claudio; Brei, Michael; Gambacorta, Leonardo
    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 1994â??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: bank business models; financial crisis; monetary policy
    JEL: C53 E43 E52 G21
    Date: 2019–09
  7. By: Saki Bigio (UCLA); Adrien d'Avernas (Stockholm School of Economics)
    Abstract: Financial crises seem particularly severe and lengthy when banks fail to re- capitalize after bearing large losses. We present a model that explains the slow recovery of bank capital and economic activity. Banks provide intermediation in markets with informational asymmetries. Large equity losses force banks to reduce intermediation, which exacerbates adverse selection. Adverse selection lowers profit margins for banks, which lowers banks profits and incentives to recapitalize. The model delivers financial crises characterized by persistent low economic growth.
    Date: 2019
  8. By: Jérémie BERTRAND (IESEG); Laurent WEILL (LaRGE Research Center, Université de Strasbourg)
    Abstract: We investigate whether discrimination against African Americans occurs in peer-to-peer lending. We consider data from a large peer-to-peer lender that uses algorithms and no face-to-face interview to decide loan approval and conditions. Using data from 3.6 million loan applications and 817,000 granted loans for 2016 and 2017, we perform regressions of loan acceptance and loan conditions on the percentage of African Americans by 3-digit zip area. We observe evidence of discrimination in peer-to-peer lending. African Americans have a greater chance to have their loan applications rejected, pay higher loan rates, and obtain loans with shorter maturity. Discrimination is more pronounced after the election of Trump.
    Keywords: discrimination, Fintech, peer-to-peer lending, loans.
    JEL: G21 J15
    Date: 2019
  9. By: Khromov Mikhail (Gaidar Institute for Economic Policy)
    Abstract: As of January 1, 2019, the Russian banking system numbered 484 credit organizations. A year earlier then number stood at 542. During the year the number decreased by 58 organizations. Six years ago at the beginning of 2013, the number of credit organizations exceeded one thousand (1094). The Bank of Russia policy aimed at clearing the banking sector has triggered a reduction of the number of banks in operation. Over this period, the Bank of Russia withdrew more than 400 banking licenses. From late 2014 the policy aimed at withdrawing from the market those credit organizations which do not satisfy the requirements of the regulator coincided with the deterioration of the situation in the Russian economy and the imposition of international sanctions on major Russian banks. Correspondingly, already from 2014 the rate of banking license revocation has increased. When in 2013, around 4–5 banks on average per month lost their licenses then in 2014 the rate of banking license revocation increased to 7 lending organizations per month, and during the time of peak manifestations of crisis in the Russian economy and financial system seen in 2015–2016 on average 8 credit organizations per month lost the right to continue their banking activity. The number of revoked banking licenses peaked in 2016: the number of revoked licenses during that year hit 97. Moreover, 2016 saw the peak on the aggregate amount of the bank assets of the banks which lost their banking licenses: RUB 1.7 trillion or 2.0 percent of the overall volume of the banking sector assets.
    Keywords: Russian economy, banking sector, profit, capital, corporate loans, retail lending
    JEL: E41 E51 G28 G21 G24
    Date: 2019
  10. By: Ana Babus (Washington University in St. Louis); Maryam farboodi (Massachusetts Institute of Technology)
    Abstract: We explore a model in which banks strategically hold interconnected and opaque portfolios, despite increasing the likelihood they are subject to financial crises. In our framework, banks choose their degree of exposure to other banks to influence how investors can use their information. In equilibrium banks choose portfolios which are neither fully opaque, nor fully transparent. However, their portfolios are interconnected beyond what is beneficial for diversification purposes. Banks can create a degree of opacity that decreases welfare, and makes bank crises more likely. Our model is suggestive about the implications of asset securitization, as well as of government bailouts.
    Date: 2019
  11. By: Guillermo Ordoñez; Facundo Piguillem
    Abstract: The U.S. economy has recently experienced two, seemingly unrelated, phenomena: a large increase in post-retirement life expectancy and a major expansion in securitization and shadow banking activities. We argue they are intimately related. Agents rely on financial intermediaries to save for post-retirement consumption. When expecting to live longer, they rely more heavily on intermediaries that use securitization, with riskier but higher returns. A quantitative evaluation of the model shows the potential of the demographic transition to account for a boom in credit and output, but only when it triggers a more extensive use of securitization and shadow banking.
    JEL: E21 E44 G21 J11
    Date: 2019–10
  12. By: Egor Krivosheya (Moscow School of Management SKOLKOVO; National Research University - Higher School of Economics); Polina Belyakova (National Research University - Higher School of Economics)
    Abstract: This study estimates the effect of contactless payment and various financial innovations on the frequency of payments in terms of number of transactions for different individuals at the Russian retail payments market. Using the representative nation-wide survey of 1500 individuals, it was found that various types of financial innovations promote activity of consumers at the retail payments market. This paper contributes to the existing literature in payment economics by empirically analyzing the effects of emerging and existing retail financial innovations on the consumers? behavior at Russian retail payments market. The results of the paper provide important implications for both consumers and merchants, as well as help to overcome barriers that prevent spread and use various financial innovations in the future.
    Keywords: Retail payments; payment cards; customers? behavior; financial services; benefits; financial innovation
    JEL: G21 D53 E42
    Date: 2019–10
  13. By: Patrick Feve
    Abstract: We argue that shocks to credit supply by shadow and retail banks were key to understand the behavior of the US economy during the Great Recession and the Slow Recovery. We base this result on an estimated DSGE model featuring a rich representation of credit flows. Our model selects the two banking shocks as the most important drivers of the crisis because they account simultaneously for the fall in real activity, the decline in credit intermediation, and the rise in lending-borrowing spreads. On the other hand, in contrast with the existing literature, our results assign only a moderate role to productivity and investment efficiency shocks.
    Date: 2019
  14. By: Thomas Philippon
    Abstract: The cost of financial intermediation has declined in recent years thanks to technological progress and increased competition. I document this fact and I analyze two features of new financial technologies that have stirred controversy: returns to scale, and the use of big data and machine learning. I argue that the nature of fixed versus variable costs in robo-advising is likely to democratize access to financial services. Big data is likely to reduce the impact of negative prejudice in the credit market but it could reduce the effectiveness of existing policies aimed at protecting minorities.
    JEL: G11 G2 L1 N2
    Date: 2019–09
  15. By: Levente Kocsis; Miklos Sallay
    Abstract: Periods of excessive credit growth can imply emergence of systemic financial stress which may result in financial crisis causing severe losses in the real economy. The base indicators of overheatedness in the credit markets are the expansion of the credit-to-GDP ratio and its deviation from its long-term trend, the credit-to-GDP gap. When calculating the latter, the major methodological challenge is to develop a model capable of executing the most reliable trend-cycle decomposition. This study presents a multivariate Hodrick-Prescott approach for the decomposition process, which defines the cycle with the inclusion of explanatory variables chosen by considering both statistical and economic selection criteria, successfully solving the problems raised by previous Hungarian research. The model also plays a role in the Hungarian macroprudential policy as in the future it will serve a basis for the calculation of the country specific, additional credit-to-GDP gap: one of the main quantitative factors influencing decisions regarding the countercyclical capital buffer (CCyB).
    Keywords: excessive credit growth, financial stability, credit-to-GDP gap, multivariate HP filter, countercyclical capital buffer.
    JEL: E44 G01 G17 G18 G21
    Date: 2018
  16. By: Balfoussia, Hiona; Dellas, Harris; Papageorgiou, Dimitris
    Abstract: Fiscal fragility can undermine a government's ability to honor its bank deposit insurance pledge and induces a positive correlation between sovereign default risk and financial (bank) default risk. We show that this positive relation is reversed if bank capital requirements in fiscally weak countries are allowed to adjust optimally. The resulting higher requirements buttress the banking system and support higher output and welfare relative to the case where macroprudential policy does not vary with the degree of fiscal stress. Fiscal tenuousness also exacerbates the effects of other risk shocks. Nonetheless, the economy's response can be mitigated if macroprudential policy is adjusted optimally. Our analysis implies that, on the basis of fiscal strength, fiscally weak countries would favor and fiscally strong countries would object to banking union.
    Keywords: bank performance; Banking Union; Fiscal distress; Greece; optimal macroprudential policy
    JEL: E3 E44 G01 G21 O52
    Date: 2019–09
  17. By: Masami Imai (Department of Economics, Wesleyan University); Tetsuji Okazaki (Faculty of Economics, The University of Tokyo); Michiru Sawada (College of Economics, Nihon University)
    Abstract: The interwar Japanese economy was unsettled by chronic banking instability, and yet the Bank of Japan (BOJ) restricted access to its liquidity provision to a select group of banks, i.e. BOJ correspondent banks, rather than making its loans widely available "to merchants, to minor bankers, to this man and to that man" as prescribed by Bagehot (1873). This historical episode provides us with a quasi-experimental setting to study the impact of Lender of Last Resort (LOLR) policies on financial intermediation. We find that the growth rate of deposits and loans was notably faster for BOJ correspondent banks than the other banks during the bank panic phase of the Great Depression from 1931-1932, whereas it was not faster before the bank panic phase. Furthermore, BOJ correspondent banks were less likely to be closed during the bank panics. To address possible selection bias, we also instrument a bank' s corresponding relationship with the BOJ with its geographical proximity to the nearest branch or the headquarters of the BOJ, which was a major determinant of a bank's transaction relationship with the BOJ at the time. This instrumental variable specification yields qualitatively same results. Taken together, Japan's historical experience suggests that central banks' liquidity provisions play an important backstop role in supporting the essential financial intermediation services in time of financial stringency.
    Date: 2019–01
  18. By: Mateusz Mokrogulski (Warsaw School of Economics)
    Abstract: The main objective of this paper is to present macroprudential measures introduced in Poland compared to other EU Member States. Macroprudential policy is applied to strengthen the resilience of the financial system in case of materialisation of systemic risk and to support long-term sustainable economic growth. In Poland a lot of effort has been made to address the problem of Swiss franc loans. Due to increasing risk weights for FX portfolios, banks have to maintain much more capital to address systemic risk compared to domestic-currency portfolios. Other macroprudential policy instruments were set to evaluate the systemic importance of large banks operating in Poland. Nevertheless, supervisory authorities from Central and Eastern European countries do not have full flexibility in implementing macroprudential policy instruments.
    Keywords: macroprudential policy, capital buffer, risk weights, banking sector, systemic risk, financial stability
    JEL: D04 G21 G28
    Date: 2019–10
  19. By: Carlos Madeira (Central Bank of Chile)
    Abstract: The covariance risk of consumer loans is difficult to measure due to high heterogeneity. Using the Chilean Household Finance Survey I simulate the default conditions of heterogeneous households over distinct macro scenarios. I show that consumer loans have a high covariance beta relative to the stock market and bank assets. Banks' loan portfolios have very different covariance betas, with some banks being prone to high risk during recessions. High income and older households have lower betas and help diversify banks' portfolios. Households' covariance risk increases the probability of being rejected for credit and has a negative impact on loan amounts.
    Date: 2019
  20. By: Santiago Barraza (Universidad de San Andres); Andrea Civelli (University of Arkansas)
    Abstract: Using a Vector Autoregressive framework of analysis, we show that banks contract their supply of business credit in response to an exogenous increase in economic policy uncertainty. This contraction takes two main, distinct forms. On the one hand, banks restrict their supply of spot funds, which we document using flows of loans and term loan originations. On the other, banks also curtail their provision of liquidity insurance, reducing the amount of new credit lines and embedding in them a pricing structure that reduces the probability of borrowers ever drawing down on the lines.
    Keywords: economic policy uncertainty, bank lending, business, credit
    JEL: D80 E66 G21 G28
    Date: 2019–10
  21. By: Niccolò Fraccaroli (DEF University of Rome "Tor Vergata")
    Abstract: Supervisory governance is believed to affect financial stability. While the literature has identified pros and cons of having a central bank or a separate agency responsible for microprudential banking supervision, the advantages of having this task shared by both institutions have received considerably less attention in the literature. Shared supervision has however inherent benefits for the stability of the banking system, as it increases the costs of supervisory capture: capturing a single supervisor, be it the central bank or an agency, has in fact lower costs than capturing two. Nevertheless, while this argument has been proposed theoretically, it has never been tested empirically. This paper fills this void introducing a new dataset on the supervisory governance of 116 countries from 1970 to 2016. It finds that, while nonperforming loans are not significantly affected by supervisory governance per se, they are significantly lower in countries where supervision is shared and the risk of capture is high. This last result, which is robust to a number of controls and robustness checks, proves new evidence in support of the detrimental impact of shared supervision on supervisory capture.
    Keywords: banking supervision, supervisory capture, NPLs
    JEL: G18 G38 E58 P16 D73
    Date: 2019–10–08
  22. By: Mazhar Yasin MUGHAL; Mohamed ABDALLAH ALI
    Abstract: Does access to microfinance improve household welfare? We seek the answer to this question using data on 2,060 borrower and non-borrower households based in six major urban centers of Djibouti. We construct a composite index of multi-dimensional poverty and carry out estimations using a number of econometric techniques. Our results show that neither access to micro-credit nor its ostensibly productive use is significantly associated with poverty regardless of the duration of time since the loan was acquired. This holds both for access to, and the amount of micro-credit obtained. The results raise doubts on the effectiveness of Djibouti’s microfinance programme.
    Keywords: Microfinance, Poverty, Productive Loans, Djibouti
    Date: 2019–10
  23. By: Nancy L Stokey (Department of Economics)
    Abstract: When consumers or firms purchase goods or pay bills, they must choose a means of payment: cash, credit card, check, electronic transfer, etc. What governs those choices? In particular, how do their choices vary with the inflation rate, and how do total transaction costs change?
    Date: 2019
  24. By: Sean Hundtofte; Arna Olafsson; Michaela Pagel
    Abstract: Standard economic theory says that unsecured, high-interest, short-term debt — such as borrowing via credit cards and bank overdraft facilities — helps individuals smooth consumption in the event of transitory income shocks. This paper shows that — on average — individuals do not use such borrowing to smooth consumption when they experience a typical transitory income shock of unemployment. Instead, individuals smooth their credit card debt and overdrafts by adjusting consumption. We first use detailed longitudinal information on debit and credit card transactions, account balances, and credit lines from a financial aggregator in Iceland to document that unemployment does not induce a borrowing response at the individual level. We then replicate this finding in a representative sample of U.S. credit card holders, instrumenting local changes in employment using a Bartik (1991)-style instrument. The absence of a borrowing response occurs even when credit supply is ample and liquidity constraints, captured by credit limits, do not bind. Standard economic models predict a strictly countercyclical demand for credit; in contrast, the demand for credit appears to be procyclical which may deepen business cycle fluctuations.
    JEL: D14 D90
    Date: 2019–10

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