nep-ban New Economics Papers
on Banking
Issue of 2019‒11‒11
twenty papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Does getting a mortgage affect credit card use? By Fulford, Scott L.; Stavins, Joanna
  2. Distance Effects in CMBS Loan Pricing: Banks versus Non-Banks By Piet Eichholtz; NAGIHAN MIMIROGLU; Steven Ongena; Erkan Yönder
  3. On the Special Role of Deposits for Long-Term Lending By Perazzi, Elena
  4. Market Power and Cost Efficiency in the African Banking Industry By Simplice A. Asongu; Rexon T. Nting; Joseph Nnanna
  5. The Community Reinvestment Act (CRA) and Bank Branching Patterns By Ding, Lei; Reid, Carolina
  6. What do almost 20 years of micro data and two crises say about the relationship between central bank and interbank market liquidity? Evidence from Italy By Massimiliano Affinito
  7. Micro-prudential regulation and banks' systemic risk By Jakob de Haan; Zhenghao Jin; Chen Zhou
  8. The impact of central bank liquidity support on banks’ balance sheets By de Haan, Leo; Holton, Sarah; van den End, Jan Willem
  9. Complexity of Global Banks and their Foreign Operation in Hong Kong By Kwan, Simon H.; Ho, Kelvin; Tan, Edward
  10. Does experience of banking crises affect trust in banks? By Fungáčová, Zuzana; Kerola, Eeva; Weill, Laurent
  11. Spillover Effects of Foreign Monetary Policy on the Foreign Indebtedness of Banks and Corporations By Paola Morales-Acevedo
  12. High-Speed Internet, Financial Technology and Banking in Africa By Angelo D'Andrea; Nicola Limodio
  13. The Federal Funds Market over the 2007-09 Crisis By Copeland, Adam
  14. Nonparametric Measurement of Potential Gains from Mergers: An Additive Decomposition and Application to Indian Bank Mergers By Subhash C. Ray; Shilpa Sethia
  15. Relationship Networks in Banking Around a Sovereign Default and Currency Crisis By D'Erasmo, Pablo; Moscoso Boedo, Herman J.; Pia Olivero, Maria; Sangiacomo, Maximo
  16. Concentration of Control Rights in Leveraged Loan Syndicates By Berlin, Mitchell; Nini, Gregory P.; Yu, Edison
  17. Consumption in the Great Recession: The Financial Distress Channel By Athreya, Kartik B.; Mather, Ryan; Mustre-del-Rio, Jose; Sanchez, Juan M.
  18. Foreign funded credit: funding the credit cycle? By Patty Duijm
  19. Going Negative at the Zero Lower Bound: The Effects of Negative Nominal Interest Rates By Ulate, Mauricio
  20. Credit Supply: Are there negative spillovers from banks' proprietary trading? By Michael Kurz; Stefanie Kleimeier

  1. By: Fulford, Scott L. (Consumer Financial Protection Bureau); Stavins, Joanna (Federal Reserve Bank of Boston)
    Abstract: Buying a house changes a household’s balance sheet by simultaneously reducing liquidity and introducing mortgage payments, which may leave the household more exposed to other shocks. We find that this change affects credit card use in two ways: A debt effect increases credit card spending, while a credit effect leads to higher credit limits. In the short run, a new mortgage acquisition has a robust and statistically significant positive effect on credit card utilization — the fraction of a consumer’s credit card limit that is used — of approximately 11 percentage points. Before the 2008 financial crisis, the credit effect exceeded the debt effect in the long run, pushing down long-term utilization. In our sample period after the financial crisis, the debt effect dominated in the long run, and credit card utilization rates rose upon the acquisition of a new mortgage, consistent with larger down payments leaving households more constrained.
    Keywords: credit cards; mortgage; credit card utilization; debt
    JEL: D14 E21
    Date: 2019–05–01
  2. By: Piet Eichholtz (Maastricht University); NAGIHAN MIMIROGLU (Maastricht University); Steven Ongena (University of Zurich - Department of Banking and Finance; Swiss Finance Institute; KU Leuven; Centre for Economic Policy Research (CEPR)); Erkan Yönder (John Molson School of Business, Concordia University)
    Abstract: The composition of lenders has changed dramatically since the crisis, and non-bank lenders have become important players in the commercial mortgage{backed securities (CMBS) markets. Comparing banks to non-bank lenders, we investigate whether the geographical distance between lenders, borrowers and their properties is reflected in the pricing of US mortgages that were included in US CMBS pools during the 2000 to 2017 period. We find that a doubling in bank borrower distance is associated with a 2.5 basis point increase in the spread, and that this effect is more pronounced if the loan is collateralized by a riskier property. Geographical distance does not seem to have any effect on the loan spread for mortgages granted by non-bank lenders. The difference in loan pricing across originator types (even after controlling for key mortgage and property characteristics) suggests banks and non-bank lenders have different incentives, lending technologies, and/or different types of borrowers.
    Keywords: CMBS, non{bank lending, geographical distance, asymmetric information, loan spread.
    JEL: G21 G32
    Date: 2019–11
  3. By: Perazzi, Elena
    Abstract: I build a general equilibrium model to show that deposits are a special form of financing, that makes banks more suitable to extend long-term loans when confronted with the risks of monetary policy. In the model, banks borrow short-term and lend long-term, are subject to a minimum equity requirement consistent with Basel III, and face a financial friction: they cannot raise equity on the market. Consistent with the "bank-capital channel" of monetary policy, when the risk-free rate increases, the value of the banks' assets and equity are eroded, and banks deleverage by cutting their lending. I show that, thanks to a combination of banks' market power in the deposit market and of the money-like properties of deposits, the profits on deposits are strongly countercyclical, and reduce the contraction of lending at high interest rates due to the bank capital channel. Amid current proposals for narrow banking, this effect provides a rationale for the coexistence of lending and deposit-taking activities in current commercial banks.
    Keywords: Deposits, Banks, Long-Term Lending, Narrow Banking
    JEL: E5 G21
    Date: 2019–10–25
  4. By: Simplice A. Asongu (Yaoundé/Cameroon); Rexon T. Nting (London, UK); Joseph Nnanna (The Development Bank of Nigeria, Abuja, Nigeria)
    Abstract: Purpose- In this study, we test the so-called ‘Quiet Life Hypothesis’ (QLH) which postulates that banks with market power are less efficient. Design/methodology/approach- We employ instrumental variable Ordinary Least Squares, Fixed Effects, Tobit and Logistic regressions. The empirical evidence is based on a panel of 162 banks consisting of 42 African countries for the period 2001-2011. There is a two-step analytical procedure. First, we estimate Lerner indices and cost efficiency scores. Then, we regress cost efficiency scores on Lerner indices contingent on bank characteristics, market features and the unobserved heterogeneity. Findings- The empirical evidence does not support the QLH because market power is positively associated with cost efficiency. Originality/value- Owing to data availability constraints, this is one of the few studies to test the QLH in African banking.
    Keywords: Finance; Savings banks; Competition; Efficiency; Quiet life hypothesis
    JEL: E42 E52 E58 G21 G28
    Date: 2019–01
  5. By: Ding, Lei (Federal Reserve Bank of Philadelphia); Reid, Carolina (University of California, Berkeley)
    Abstract: This paper examines the relationship between the Community Reinvestment Act (CRA) and bank branching patterns, measured by the risk of branch closure and the net loss of branches at the neighborhood level, in the aftermath of Great Recession. Between 2009 and 2017, there was a larger decline in the number of bank branches in lower-income neighborhoods than in more affluent ones, raising concerns about access to mainstream financial services. However, once we control for supply and demand factors that influence bank branching decisions, we find generally consistent evidence that the CRA is associated with a lower risk of branch closure, and the effects are stronger for neighborhoods with fewer branches, for larger banks, and for major metro areas. The CRA also reduces the risk of net bank losses in lower-income neighborhoods. The evidence from our analysis is consistent with the notion that the CRA helps banks meet the credit needs of underserved communities and populations by ensuring the continued presence of brick-and-mortar branches.
    Keywords: Banking industry; Community Reinvestment Act; Branch; Regulation
    JEL: G21 G34 L10
    Date: 2019–09–10
  6. By: Massimiliano Affinito
    Abstract: This paper studies the mutual interplay between central bank (CB) liquidity provisions and interbank market (IM) liquidity exchanges, exploring whether the relationship changes in the event of IM impairments and massive CB liquidity injections during global and sovereign crises. The analysis uses a data set containing 17 years of monthly bank-by-bank and counterparty-by-counterparty data collated from 1998 to 2015 in Italy. The results show the existence of complementarity. Banks receiving CB liquidity redistribute more to other banks. When CB liquidity increases exponentially during crises, some healthy banks specialise in interbank lending. The complementarity helps to offset euro area fragmentation via domestic interbank relationships and to adjust the collateral and maturity profiles of banks' liquidity.
    Keywords: liquidity, financial and sovereign crises, central bank intervention, interbank
    JEL: G21 E52 C30
    Date: 2019–11
  7. By: Jakob de Haan; Zhenghao Jin; Chen Zhou
    Abstract: This paper investigates how countries' micro-prudential regulatory regimes are related to banks' systemic risk. We use a bank-level systemic risk indicator that can be decomposed into a bank's individual risk and its systemic linkage. To proxy the strictness of a country's regulatory regime, we employ World Bank survey data. Our results suggest that entry regulations increased systemic risk before and after the crisis. Liquidity and entry regulations seem to reduce individual risk in the post-crisis era, with little impact on systemic linkage. Other regulation categories, including capital regulation, do not have a robust relationship with systemic risk or its subcomponents.
    Keywords: systemic risk; regulatory regime; micro-prudential regulation
    JEL: G21 G28
    Date: 2019–09
  8. By: de Haan, Leo; Holton, Sarah; van den End, Jan Willem
    Abstract: We empirically analyse the relationship between longer term central bank liquidity support and banks’ balance sheet ratios, using difference-in-differences panel regressions and propensity score matching on a large sample of banks in the euro area. The research question is whether the liquidity operations, which were introduced to prevent disorderly deleveraging, can also be linked to unintended changes in banks’ funding policies and asset allocations. The results show that unconditional and conditional refinancing operations are associated with different developments on banks’ balance sheets. Unconditional longer-term refinancing operations went together with higher maturity transformation by banks in stressed countries, and also more carry trades, i.e. banks borrowing more while increasing their holdings of government bonds. In contrast, refinancing operations that were conditional on banks’ lending were not associated with such carry trades, highlighting the benefits of conditionality attached to long-term refinancing operations. JEL Classification: E51, G21, G32
    Keywords: banking, central bank liquidity, financial intermediation
    Date: 2019–11
  9. By: Kwan, Simon H. (Federal Reserve Bank of San Francisco); Ho, Kelvin (Hong Kong Monetary Authority); Tan, Edward (Hong Kong Monetary Authority)
    Abstract: This paper studies the relation between the complexity of global banking organizations and their foreign banking operations (FBOs) in Hong Kong. Our empirical evidence indicates that the complexity of the parent company has significant effects on their Hong Kong branch’s business model, liquidity management, risk-taking, and profitability. The more complex the global banking organizations, their Hong Kong FBOs are more likely to derive a larger share of revenues from fee-based activities, and incur a higher cost of production despite enjoying a funding cost advantage. Notwithstanding the FBOs in Hong Kong may serve as a funding hub for its parent company, FBOs of more complex global banks tend to hold more liquid assets. While our empirical evidence suggests that the complexity of global banks has significant effects on FBOs risk-taking and profitability, the relation depends on how complexity is measured. For example, both the BCBS complexity score and the measure of geographic complexity are significant in explaining FBO profitability, but they have different signs. Likewise, geographic complexity and scope complexity are often found to have significantly different effects on FBOs performance. Taken together, the concept of global bank complexity has multiple dimensions, where different facets could have qualitatively different effects on FBOs in Hong Kong.
    JEL: F65 G21
    Date: 2019–09–24
  10. By: Fungáčová, Zuzana; Kerola, Eeva; Weill, Laurent
    Abstract: This paper investigates how past experience with banking crises influences an individual’s trust in banks. We combine data on banking crises for the period 1970–2014 with individual data on trust in banks for 52 countries. We find that experiencing a banking crisis diminishes a person’s trust in banks, and that high exposure to banking crises is negatively related to trust in banks. An individual’s age at the time of the crisis is important, and significant for individuals between 41 and 60 years of age at the time of the banking crisis. Both severe and mild crises diminish trust in banks, but a severe banking crisis hits also young people’s trust, while less severe banking crises mainly degrade trust of more mature people. The detrimental effect for trust in banks seems to be connected specifically to systemic banking crises. Other types of financial crises incur a less significant effect. Overall, our results indicate that banking crises generate previously unrecognized costs for the economy in the form of a lasting reduction of trust in banks.
    JEL: G21 O16
    Date: 2019–10–25
  11. By: Paola Morales-Acevedo (Monetary and International Investment Office of the Central Bank of Colombia)
    Abstract: This paper analyses the impact of foreign monetary policy — from a broad range of countries — on the foreign indebtedness of Colombian banks and corporations, and evaluates if capital controls can help to mitigate these spillover effects. The paper uses two unique loan-level datasets on cross-border lending that cover all the foreign loans granted by foreign-located financial institutions to domestically located financial and non-financial companies, respectively. The results support the existence of spillover effects of foreign monetary policy over the characteristics of cross-border loans. In particular, periods of foreign monetary policy easing (tightening) are associated with: i) increases (decreases) on the cross-border lending to banks, and decreases (increases) on the cross-border lending to corporations; and ii) decreases (increases) on the loan interest rates to banks and corporations. The paper also finds that capital controls play an important role in mitigating these spillover effects, however, their effectiveness depends on the stance of both foreign and domestic monetary policy.
    Keywords: cross-border lending, monetary policy, capital control
    JEL: E44 F34 G01
    Date: 2019–11–05
  12. By: Angelo D'Andrea; Nicola Limodio
    Abstract: This paper provides empirical evidence on the effect of high-speed internet on financial technology and banking in Africa. Our test combines data on 551 banks and 28,171 firms with the staggered arrival of fibre-optic submarine cables in Africa. High-speed internet promoted private-sector lending by banks, and credit and sales by firms. These results are consistent with an extensive adoption of financial technologies, like real-time gross settlement systems (RTGS), lowering transaction costs in African interbank markets. We find that liquidity management considerably changed for banks being weak interbank users prior to high-speed internet. In fact, such banks lowered their internal liquidity hoarding by 10%, increased interbank transactions by 40% and expanded lending by 37%. Analogously, firms in countries with weak pre-existing interbank markets presented stronger effects at the cable arrival. These results are consistent with high-speed internet promoting financial technology adoption, liquidity and credit.
    Keywords: Fintech, Banking, Investment, Financial Development
    JEL: G2 G21 O16 O12
    Date: 2019
  13. By: Copeland, Adam (Federal Reserve Bank of New York)
    Abstract: This paper measures how the 2007-09 financial crisis affected the U.S. federal funds market. I accomplish this by developing and estimating a structural model of this market, in which intermediation plays a crucial role and borrowing banks differ in their unobserved probability of default. The estimates imply that the expected probability of default increases 0.29 percentage point at the start of the crisis in mid-2007 and then gains a further 1.91 percentage points after the bankruptcy of Lehman Brothers. These increases do not cause a market freeze, however, because simultaneously there is a shift outward in the supply of funds. The model indicates that amid the turmoil of the crisis, lenders viewed the fed funds market as a relatively attractive place to invest cash overnight.
    Keywords: asymmetric information; fed funds; intermediation; financial crisis
    JEL: D82 G01 G14
    Date: 2019–11–01
  14. By: Subhash C. Ray (University of Connecticut); Shilpa Sethia (University of Connecticut)
    Abstract: One of the main incentives for voluntary merger between firms in the same industry is the potential gain in the form of lower cost of producing the combined output of the merging firms. Baumol, Panzar, and Willig (1982) showed that subadditivity of the cost function at the combined output level is a precondition for positive cost gains from a merger. In this paper we build on their theoretical model to derive conditions for potential gains from merger in a short run cost framework where not only the outputs but also the fixed inputs of the merging firms are aggregated through merger. We show that subadditivity of the short run ray total cost curve of the merged firm at the combined output bundle is neither necessary nor sufficient for positive gains from merger. We also provide a decomposition of the potential gain from merger into three components related to convexity of the technology, subadditivity of the short run ray total cost, and decrease in the variable cost due to an aggregation of the fixed inputs. Appropriate linear programming models are formulated for measuring the gain from merger and its components using the nonparametric method of Data Envelopment Analysis. We use data for a number of recent mergers of Indian banks in an empirical application of our proposed models.
    Keywords: Sub-additivity, Ray Average Cost, DEA
    JEL: L25 D24 G21
    Date: 2019–09
  15. By: D'Erasmo, Pablo (Federal Reserve Bank of Philadelphia); Moscoso Boedo, Herman J. (University of Cincinnati); Pia Olivero, Maria (Drexel University); Sangiacomo, Maximo (Central Bank of Argentina)
    Abstract: We study how banks’ exposure to a sovereign crisis gets transmitted onto the corporate sector. To do so we use data on the universe of banks and firms in Argentina during the crisis of 2001. We build a model characterized by matching frictions in which firms establish (long-term) relationships with banks that are subject to balance sheet disruptions. Credit relationships with banks more exposed to the crisis suffer the most. However, this relationship-level effect overstates the true cost of the crisis since profitable firms (e.g., exporters after a devaluation) might find it optimal to switch lenders, reducing the negative impact on overall credit and activity. Using linked bank-firm and firm-level data we find evidence largely consistent with our theory.
    Keywords: Sovereign Default; Devaluation; Bank networks
    JEL: E32 G21 H63 N26
    Date: 2019–10–29
  16. By: Berlin, Mitchell (Federal Reserve Bank of Philadelphia); Nini, Gregory P. (Federal Reserve Bank of Philadelphia); Yu, Edison (Federal Reserve Bank of Philadelphia)
    Abstract: We find that corporate loan contracts frequently concentrate control rights with a subset of lenders. Despite the rise in term loans without financial covenants—so-called covenant-lite loans—borrowing firms’ revolving lines of credit almost always retain traditional financial covenants. This split structure gives revolving lenders the exclusive right and ability to monitor and to renegotiate the financial covenants, and we confirm that loans with split control rights are still subject to the discipline of financial covenants. We provide evidence that split control rights are designed to mitigate bargaining frictions that have arisen with the entry of nonbank lenders and became apparent during the financial crisis.
    Keywords: covenant; cov-lite; institutional loans; control rights; credit agreements
    JEL: G21 G23 G29
    Date: 2019–10–28
  17. By: Athreya, Kartik B. (Federal Reserve Bank of Richmond); Mather, Ryan (Federal Reserve Bank of St. Louis); Mustre-del-Rio, Jose (Federal Reserve Bank of Kansas City); Sanchez, Juan M. (Federal Reserve Bank of St. Louis)
    Abstract: During the Great Recession, the collapse of consumption across the U.S. varied greatly but systematically with house-price declines. We find that financial distress among U.S. households amplified the sensitivity of consumption to house-price shocks. We uncover two essential facts: (1) the decline in house prices led to an increase in household financial distress prior to the decline in income during the recession, and (2) at the zip-code level, the prevalence of financial distress prior to the recession was positively correlated with house-price declines at the onset of the recession. Using a rich-estimated-dynamic model to measure the financial distress channel, we find that these two facts amplify the aggregate drop in consumption by 7 percent and 45 percent respectively.
    Keywords: Consumption; Credit Card; Mortgage; Bankruptcy; Foreclosure; Delinquency; Financial Distress; Great Recession
    JEL: D31 D58 E21 E44 G11 G12 G21
    Date: 2019–09–17
  18. By: Patty Duijm
    Abstract: This study investigates what drives the credit cycle, focusing on the role of foreign funded bank credit (FFC). Considering credit cycles in 41 countries over the period 1985-2015, this study finds that credit booms are associated with an increase in the share of FFC in an economy, both in emerging and developed economies and for business as well as for household credit cycles. The impact of FFC on credit booms is however significantly higher in emerging countries. While FFC increases rapidly during the boom, the period preceding the boom is characterized by an in increase in domestically funded credit relative to FFC. FFC thus accelerates credit during the boom. The increased credit needs during a boom may cause the subsitution of domestically funded credit by FFC, as the growth in FFC is less restricted than domestically funded credit, for example by the domestic deposit base.
    Keywords: credit cycles; international banking; financial crisis
    JEL: F34 F44 G21
    Date: 2019–10
  19. By: Ulate, Mauricio (Federal Reserve Bank of San Francisco)
    Abstract: After the Great Recession several central banks started setting negative nominal interest rates in an expansionary attempt, but the effectiveness of this measure remains unclear. Negative rates can stimulate the economy by lowering the rates that commercial banks charge on loans, but they can also erode bank profitability by squeezing deposit spreads. This paper studies the effects of negative rates in a new DSGE model where banks intermediate the transmission of monetary policy. I use bank-level data to calibrate the model and find that monetary policy in negative territory is between 60% and 90% as effective as in positive territory.
    JEL: E32 E44 E52 E58 G21
    Date: 2019–08–27
  20. By: Michael Kurz; Stefanie Kleimeier
    Abstract: Following the 2008 financial crisis, policy makers considered regulations that restrict banks' activities which were motivated by concerns that banks use central bank borrowing, government guarantees, or subsidies to fund securities trading instead of lending to the real economy. Using a global sample of 132 major banks from 2003 to 2016, we find that banks' securities trading is indeed associated with decreased loan supply. Effects are stronger for domestic lending markets, during crisis periods, and in countries with deeper financial markets. However, corporate capital expenditures and employment growth are unaffected, suggesting that policy makers' concerns are only partly justified.
    Keywords: Credit Supply; Proprietary Trading; International Lending; Banking; Corporate Loans
    JEL: G01 G21 G28
    Date: 2019–10

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