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on Banking |
| By: | Gardó, Sándor; Klaus, Benjamin |
| Abstract: | This paper takes an eclectic approach to investigating the notion of overcapacities in banking along the dimensions of (i) banking sector size, (ii) bank competition and (iii) banking infrastructure/efficiency, thereby offering a nuanced and granular view of the topic. In terms of measurement, a newly developed composite indicator synthesises these different layers into a single metric of overcapacities in banking, comparing developments in major advanced economies across the globe over the period from 2006 to 2017. Offering a relative comparison across countries and time, the composite indicator suggests that most countries in the sample have managed to reduce overcapacities in banking since the onset of the global financial crisis, albeit to varying degrees, as some were better able to adapt to the changing environment than others, in particular by deleveraging, rationalising costly physical infrastructure and exploiting the benefits of technological innovation. A panel framework is then used to analyse a number of hypotheses derived from the literature, with the aim of shedding light on the determinants of overcapacities in banking, the direction of the relationship, and their relative importance. The results indicate that non-bank competition, the interest rate environment as well as bank business models are the most important driving factors of the overall degree of overcapacity in banking. With respect to the specific dimensions, non-bank competition seems to be particularly relevant for the size pillar, while demographic features and technological innovation appear to play a prominent role for explaining the competition and infrastructure/efficiency dimensions. The findings provide useful insights for policy makers concerning the possible design, calibration and effectiveness of potential policy responses that aim to address the issue of overcapacities in banking. JEL Classification: C12, C23, G21, L1, O57 |
| Keywords: | bank competition, bank size, composite indicator, efficiency, overcapacity |
| Date: | 2019–11 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbops:2019236&r=all |
| By: | Hellwig, Michael; Laser, Falk Hendrik |
| Abstract: | We analyze a large merger in the Dutch banking market during the financial crisis using disaggregated data. Based on a merger simulation model, we evaluate merger-induced changes in the interest rates for savings accounts. We find that the merging banks decreased interest rates by 3 to 5 percent and competitors by up to 1 percent. These anti-competitive effects translate into a loss of consumer welfare by roughly 69 million euros in 2010. We identify heterogeneous effects indicating that less educated consumers with lower savings are most affected. Our findings highlight the important role of competition policy during financial crisis mitigation. |
| Keywords: | antitrust,competition policy,merger analysis,state aid,retail banking,random-coefficients logit models,differentiated products |
| JEL: | D22 G21 G34 L11 L25 L40 L41 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:zewdip:19047&r=all |
| By: | Guofeng Sun |
| Abstract: | Banks' shadow, or money creation by banks beyond traditional loans, plays an important role in China's money-creation process, posing a number of challenges to monetary policy operations and financial risk management. This paper analyzes the money-creation mechanisms of China's shadow banking sector in detail, provides accurate measurements, investigates its effects on financial risk, and surveys recent regulation. To strengthen supervision, China's regulators should closely track the evolution of various shadow banking channels, both on- and off-balance sheet. Specific macroprudential regulation tools, such as asset reserves and risk reserves, should be applied separately to banks' shadow and traditional shadow banking. |
| Keywords: | banks' shadow, traditional shadow banking, credit money creation, bank accounting, regulation |
| JEL: | E44 E51 G28 |
| Date: | 2019–11 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:822&r=all |
| By: | Chatterjee, Somnath (Bank of England); Jobst, Andreas (International Monetary Fund) |
| Abstract: | This paper presents a forward-looking approach to measure systemic solvency risk using contingent claims analysis (CCA) as a theoretical foundation for determining an institution’s default risk based on the uncertainty in its asset value relative to promised debt payments over time. Default risk can be quantified as market-implied expected losses calculated from integrating equity market and balance sheet information in a structural default risk model. The expected losses of multiple banks and their non-parametric dependence structure define a multivariate distribution that generates portfolio-based estimates of the joint default risk using the aggregation technique of the Systemic CCA framework (Jobst and Gray, 2013). This market-implied valuation approach (‘shadow capital adequacy’) endogenises bank solvency as a probabilistic concept based on the perceived default risk (in contrast to accounting-based prudential measures of capital adequacy). The presented model adds to the literature of analytical tools estimating market-implied systemic risk by augmenting the CCA approach with a jump diffusion process of asset changes to inform a more comprehensive and flexible assessment of common vulnerabilities to tail risks of the four largest UK commercial banks. |
| Keywords: | Systemic risk; contingent claims analysis; jump diffusion; CoVaR; systemic expected shortfall; conditional tail expectation; capital adequacy |
| JEL: | C61 C63 G01 G21 G28 |
| Date: | 2019–09–16 |
| URL: | http://d.repec.org/n?u=RePEc:boe:boeewp:0823&r=all |
| By: | Lojak, Benjamin; Makarewicz, Tomasz; Proaño Acosta, Christian |
| Abstract: | We investigate the relationship between monetary policy and banks' risk-taking behavior. We study a general equilibrium model in which a risk averse bank credits firms and also manages a portfolio consisting of a risky and a risk-free asset. When a bank signs up credit contracts with firms, it takes into account their solvency and potential gains from outside investment strategies. We show that the bank's asset/liability and risk management depend on the prevailing policy rate. However, low policy rates incentivizes a bank to search-for-yield by re-allocating their asset portfolios towards more risky exposures ultimately leads to under-capitalized positions. This renders the financial sector more vulnerable. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bamber:153&r=all |
| By: | Coen, Patrick (London School of Economics); Coen, Jamie (London School of Economics and Bank of England) |
| Abstract: | The interbank network, in which banks compete with each other to supply and demand differentiated financial products, fulfils an important function but may also result in risk propagation. We examine this trade-off by setting out a model in which banks form interbank network links endogenously, taking into account the effect of links on default risk. We estimate this model based on novel, granular data on aggregate exposures between banks. We find that the decentralised interbank market is not efficient: a social planner would be able to increase surplus on the interbank market by 13% without increasing mean bank default risk or decrease mean bank default risk by 4% without decreasing interbank surplus. We then propose two novel regulatory interventions (caps on aggregate exposures and pairwise capital requirements) that result in efficiency gains. |
| Keywords: | Contagion; systemic risk; interbank network; network formation |
| JEL: | G18 G28 L13 L51 |
| Date: | 2019–10–11 |
| URL: | http://d.repec.org/n?u=RePEc:boe:boeewp:0833&r=all |
| By: | Ricardo Correa; Laurie Pounder Demarco |
| Abstract: | In line with a growing literature on financial intermediary asset pricing, we find that changes in the leverage of primary dealers have predictive power in forecasting exchange rates. Unlike previous studies, we find that primary dealer heterogeneity matters for their role in asset pricing. The leverage of foreign-headquartered dealers in the United States entirely drive the predictive power on exchange rates, while the same measure for domestic U.S.-headquartered dealers is insignificant. The leverage of foreign-headquartered dealers also has more predictive power for some other assets. We argue that this heterogeneity is due to foreign broker-dealers having more balance sheet capacity relative to domestic dealers during the 2000s. This result conflicts with an assumption of homogeneity among intermediaries which is implicit in most modern intermediary asset pricing models. In addition, we find that currency market positions, including derivatives positions, are likely stronger than cross-border lending as the main channel through which leverage manifests itself in exchange rate changes. |
| Keywords: | Exchange rates ; Intermediaries ; International finance ; Leverage cycles ; Primary dealers |
| JEL: | F30 F31 G12 G24 |
| Date: | 2019–11–06 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgif:1262&r=all |
| By: | Maddalena Galardo (Bank of Italy); Maurizio Lozzi (Bank of Italy); Paolo Emilio Mistrulli (Bank of Italy) |
| Abstract: | Despite social capital being widely acknowledged as a key factor in the functioning of financial markets, the evidence on the channels through which it operates is still scant. In this paper we isolate one possible channel and investigate whether social capital plays a role in mitigating the impact of uncertainty shocks on bank credit supply. We exploit both the huge rise in the level of uncertainty that followed the Lehman Brothers default and a very granular and rich loan-level dataset from the Italian Credit register that allows us to clearly disentangle demand and supply factors. We find that social capital makes credit markets more resilient to uncertainty shocks, especially when informational asymmetries between banks and borrowers are more severe. |
| Keywords: | credit supply, uncertainty, social capital, trust, loan applications |
| JEL: | A13 G01 G2 |
| Date: | 2019–11 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:wptemi:td_1245_19&r=all |
| By: | Jeon, Bang (Drexel University); Wu, Ji (Southwestern University of Finance and Economics); Yao, Yao (Southwestern University of Finance and Economics); Chen, Minghua (Southwestern University of Finance and Economics) |
| Abstract: | This paper examines the impact of economic uncertainty on the risk of banks in emerging markets. Using the data of approximately 1500 banks in 34 emerging economies during the period of 2000-2016, we find consistent evidence that bank risk increases with the level of uncertainty. Economic uncertainty mainly exerts its impact by affecting banks’ return and its volatility, and the effect of nominal uncertainty is seemingly more conspicuous relative to that of real uncertainty. We also find that the effect of uncertainty on bank risk is conditional on banks’ characteristics such as size and efficiency. Moreover, macroprudential policies can play a stabilizing force by mitigating bank risk as economic uncertainty surges. |
| Keywords: | Economic uncertainty; Bank risk; Emerging economies |
| JEL: | G15 G21 |
| Date: | 2019–10–22 |
| URL: | http://d.repec.org/n?u=RePEc:ris:drxlwp:2019_008&r=all |
| By: | Aikman, David (Bank of England); Bridges, Jonathan (Bank of England); Hacioglu Hoke, Sinem (Bank of England and Data Analytics for Finance and Macro (KCL)); O’Neill, Cian (Bank of England); Raja, Akash (Bank of England) |
| Abstract: | How can macroeconomic tail risks originating from financial vulnerabilities be monitored systematically over time? This question lies at the heart of operationalising the macroprudential policy regimes that have developed around the world in response to the global financial crisis. Using quantile regressions applied to a panel dataset of 16 advanced economies, we examine how downside risk to growth over the medium term, GDP-at-Risk, is affected by a set of macroprudential indicators. We find that credit booms, property price booms and wide current account deficits each pose material downside risks to growth at horizons of three to five years. We find that such downside risks can be partiall y mitigated, however, by increasing the capitalisation of the banking system. We estimate that across our sample of countries, GDP-at-Risk, defined as the 5th quantile of the projected GDP growth distribution over three years, on average deteriorated by around 4.5 percentage points cumulatively in the run-up to the crisis. Our estimates suggest that an increase in bank capital equivalent to a countercyclical capital buffer rate of 2.5% (5%) would have been sufficient to mitigate up to 20% (40%) of this increase in medium-term macroeconomic tail risk. |
| Keywords: | Financial stability; GDP-at-Risk; macroprudential policy; quantile regressions; local projections |
| JEL: | G01 G18 G21 |
| Date: | 2019–09–20 |
| URL: | http://d.repec.org/n?u=RePEc:boe:boeewp:0824&r=all |
| By: | Matthew Guse; Woojung Park; Zack Saravay; Youngsuk Yook |
| Abstract: | This note describes how the Federal Reserve’s Financial Accounts of the United States account for Collateralized Loan Obligations (CLOs) and discusses two new data series on CLOs that are introduced in the September 2019 publication of the Financial Accounts. |
| Date: | 2019–09–20 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfn:2019-09-20-3&r=all |
| By: | de Roure, Calebe (Reserve Bank of Australia); McLaren, Nick (Bank of England) |
| Abstract: | We investigate how counterparties’ characteristics, and the collateral they use, interact with their demand for liquidity in the Bank of England’s (BoE) operations. Between 2010 and 2016 there was regular usage of two BoE facilities: Indexed Long-Term Repos (ILTR) and the Funding for Lending Scheme (FLS). Using BoE proprietary data, we show that participation in ILTR is not skewed towards riskier counterparties, and is instead consistent with safe counterparties using the facilities to meet their liquidity needs. Collateral assets used for FLS are less liquid, since almost all assets are loan portfolios. Riskier and larger institutions are more likely to pre-position collateral in the FLS, but these counterparties do not subsequently draw upon FLS more than others do. Overall, our study points to no systemic misincentives; rather banks react to incentives in the manner intended by the policy objectives. Our results support the view that the central bank can provide market liquidity without absorbing undue risks onto its balance sheet. |
| Keywords: | Money demand; collateral assets; counterparties |
| JEL: | E41 E58 G21 G28 |
| Date: | 2019–09–27 |
| URL: | http://d.repec.org/n?u=RePEc:boe:boeewp:0830&r=all |
| By: | Marcelo Rezende; Judit Temesvary; Rebecca Zarutskie |
| Abstract: | In this note, we empirically assess whether changes in the interest on excess reserves (IOER) rate and changes in the spread between the IOER rate and the effective federal funds rate (EFFR) have affected banks’ reserve holdings and lending, controlling for changes in the stance of monetary policy and other macroeconomic conditions. |
| Date: | 2019–10–18 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfn:2019-10-18&r=all |
| By: | A. Bismark; M. Asinyaka; C. Umugwaneza; R. Mugisha |
| Abstract: | In this paper, we consider the viability of a Secondary Mortgage Market (SMM) in Rwanda and its potential to ensure sustainable access to housing finance, taking cognizance of the economic and institutional transformations witnessed over the last two decades. We do so by exploiting primary and secondary data, utilizing structured questionnaires and interviews to obtain information from commercial banks, the National Bank of Rwanda, Development Bank of Rwanda and the Capital Market Authority.The findings reveal that the mortgage market in Rwanda is burgeoning rapidly. We observed, in the primary mortgage market, a high willingness on the part of banks to grant mortgage loans, albeit, they are constrained by lack of access to long-term funding and limited risk-bearing capacity. The macro-economic environment was evaluated with regard to the pre-requisites of a viable SMM and was found to be robust to support an SMM. Further, the Rwanda capital market is adequately prepared for Mortgage Backed Securities (MBS) with a well-founded regulation for asset-backed securities in place and high discipline in the market. The study reveals that the securities of many reputable companies on the Rwanda Stock Exchange (RSE) are currently over-subscribed suggesting a high potential demand for new, innovative securities. Finally, we observe that the legal and regulatory framework is strong enough to support an SMM. The mortgage law, foreclosure procedures and systematic land title registration, promise adequate title security to collateralised properties. In light of these observations, we submit that there is a reasonably high prospect that an SMM would be a success in Rwanda. |
| Keywords: | Developing Economies; housing; Mortgage Finance; Rwanda; secondary mortgage market |
| JEL: | R3 |
| Date: | 2018–09–01 |
| URL: | http://d.repec.org/n?u=RePEc:afr:wpaper:afres2018_153&r=all |