nep-ban New Economics Papers
on Banking
Issue of 2019‒11‒25
nineteen papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Policy Uncertainty and Bank Mortgage Credit By Gazi Kara; Youngsuk Yook
  2. Interconnected banks and systemically important exposures By Roncoroni, Alan; Battiston, Stefano; D'Errico, Marco; Hałaj, Grzegorz; Kok, Christoffer
  3. Fintech Lending and Mortgage Credit Access By Jagtiani, Julapa; Lambie-Hanson, Lauren; Lambie-Hanson, Timothy
  4. One size does not fit all. Cooperative banking and income inequality By Minetti, Raoul; Murro, Pierluigi; Peruzzi, Valentina
  5. Network-motivated Lending Decisions: A Rationale for Forbearance By Yoshiaki Ogura; Ryo Okui; Yukiko Umeno Saito
  6. Monetary Policy and Bank Equity Values in a Time of Low and Negative Interest Rates By Miguel Ampudia; Skander J. Van den Heuvel
  7. Using textual analysis to identify merger participants: Evidence from the U.S. banking industry By Katsafados, Apostolos G.; Androutsopoulos, Ion; Chalkidis, Ilias; Fergadiotis, Emmanouel; Leledakis, George N.; Pyrgiotakis, Emmanouil G.
  8. Modelling households’ financial vulnerability with consumer credit and mortgage renegotiations By Carmela Aurora Attinà; Francesco Franceschi; Valentina Michelangeli
  9. Domestic Banks as Lightning Rods? Home Bias and Information during the Eurozone Crisis By Orkun Saka
  10. Bad loan closure times in Italy By Emilia Bonaccorsi di Patti; Cristina Demma; Davide Dottori; Giacinto Micucci
  11. CECL and the Credit Cycle By Bert Loudis; Benjamin Ranish
  12. Using credit variables to date business cycle and to estimate the probabilities of recession in real time By Valentina Aprigliano; Danilo Liberati
  13. Risky bank guarantees By Taneli M�kinen; Lucio Sarno; Gabriele Zinna
  14. Macroeconomic and bank-specific determinants of non-performing loans in sub-Saharan Africa By Trust R. Mpofu; Eftychia Nikolaidou
  15. Transparency and Collateral: The Design of CCPs' Loss Allocation Rules By Gaetano Antinolfi; Francesca Carapella; Francesco Carli
  16. Intermediary Segmentation in the Commercial Real Estate Market By David P. Glancy; John Krainer; Robert J. Kurtzman; Joseph B. Nichols
  17. Recapitalization in an Economy with State-Owned Banks - A DSGE Framework By Ghosh, Saurabh; Gopalakrishnan, Pawan; Satija, Sakshi
  18. Assessing systemic risk: An analysis of the German banking sector By Rotermund, Sophie-Dorothee
  19. The Leverage Factor: Credit Cycles and Asset Returns By Josh Davis; Alan M. Taylor

  1. By: Gazi Kara; Youngsuk Yook
    Abstract: We document that banks reduce supply of jumbo mortgage loans when policy uncertainty increases as measured by the timing of US gubernatorial elections in banks' headquarter states. The reduction is larger for more uncertain elections. We utilize high-frequency, geographically granular loan data to address an identification problem arising from changing demand for loans: (1) the microeconomic data allow for state/time (quarter) fixed effects; (2) we observe banks reduce lending not just in their home states but also outside their home states when their home states hold elections; (3) we observe important cross-sectional differences in the way banks with different characteristics respond to policy uncertainty. Overall, the findings suggest that policy uncertainty has a real effect on residential housing markets through banks' credit supply decisions and that it can spill over across states through lending by banks serving multiple states.
    Keywords: Bank Mortgage Credit ; Gubernatorial Elections ; Housing Market ; Policy Uncertainty
    JEL: G28 G21
    Date: 2019–09–05
  2. By: Roncoroni, Alan; Battiston, Stefano; D'Errico, Marco; Hałaj, Grzegorz; Kok, Christoffer
    Abstract: We study the interplay between two channels of interconnectedness in the banking system. The first one is a direct interconnectedness, via a network of interbank loans, banks' loans to other corporate and retail clients, and securities holdings. The second channel is an indirect interconnectedness, via exposures to common asset classes. To this end, we analyze a unique supervisory data set collected by the European Central Bank that covers 26 large banks in the euro area. To assess the impact of contagion, we apply a structural valuation model NEVA (Barucca et al., 2016a), in which common shocks to banks' external assets are reflected in a consistent way in the market value of banks' mutual liabilities through the network of obligations. We identify a strongly non-linear relationship between diversification of exposures, shock size, and losses due to interbank contagion. Moreover, the most systemically important sectors tend to be the households and the financial sectors of larger countries because of their size and position in the financial network. Finally, we provide policy insights into the potential impact of more diversified versus more domestic portfolio allocation strategies on the propagation of contagion, which are relevant to the policy discussion on the European Capital Market Union. JEL Classification: C45, C63, D85, G21
    Keywords: bank stress test, cross-border contagion channels, financial contagion, financial networks, financial stability, systemic risk
    Date: 2019–11
  3. By: Jagtiani, Julapa (Federal Reserve Bank of Philadelphia); Lambie-Hanson, Lauren (Federal Reserve Bank of Philadelphia); Lambie-Hanson, Timothy (Federal Reserve Bank of Philadelphia)
    Abstract: Following the 2008 financial crisis, mortgage credit tightened and banks lost significant mortgage market share to nonbank lenders, including to fintech firms recently. Have fintech firms expanded credit access, or are their customers similar to those of traditional lenders? Unlike in small business and unsecured consumers lending, fintech mortgage lenders do not have the same incentives or flexibility to use alternative data for credit decisions because of stringent mortgage origination requirements. Fintech loans are broadly similar to those made by traditional lenders, despite innovations in the marketing and the application process. However, nonbanks market to consumers with weaker credit scores than do banks, and fintech lenders have greater market shares in areas with lower credit scores and higher mortgage denial rates.
    Keywords: fintech; mortgage lending; homeownership; online mortgages; credit access
    JEL: G20 G21 G28 R20 R30
    Date: 2019–11–18
  4. By: Minetti, Raoul (Michigan State University, Department of Economics); Murro, Pierluigi (LUISS University); Peruzzi, Valentina (LUISS University)
    Abstract: The re-regulation wave following the global financial crisis is putting pressure on local community and cooperative banks. In this paper, we show that cooperative banking can play a pivotal role in reducing income inequalities in local communities. By analyzing Italian local (provincial) credit markets over the 2001-2011 period, we find that cooperative banks mitigate income inequality more than their commercial counterparts. This effect remains significant when we account for the pervasiveness of relationship lending in the provinces, suggesting that it is the specific nature and orientation of cooperative banks, rather than their lending technologies, that improve income distribution. The impact of cooperative banking on inequality appears to be mainly channeled by reduced migratory flows and lower business turnover.
    Keywords: Cooperative banks; income inequality; financial development
    JEL: G21 G38 O15
    Date: 2019–09–24
  5. By: Yoshiaki Ogura; Ryo Okui; Yukiko Umeno Saito
    Abstract: We demonstrate theoretically and empirically the presence of forbearance lending by profit maximizing banks to influential buyers in a supply network. If the financial market is concentrated, then banks can internalize the negative externality of an influential firm¡¯s exit. As a result, they may keep refinancing for a loss-making influential firm at an interest rate lower than the prime rate. This mechanism sheds new light on the discussion about bailouts offered to zombie firms. Our empirical study, with a unique dataset containing information about interfirm relationships and main banks, provides evidence for such network-motivated lending decisions.
    Keywords: supply network; influence coefficient; forbearance; bailout; zombie
    JEL: C55 D57 G21 G32 L13 L14
    Date: 2019–10
  6. By: Miguel Ampudia; Skander J. Van den Heuvel
    Abstract: Does banks' exposure to interest rate risk change when interest rates are very low or even negative? Using a high-frequency event study methodology and intraday data, we find that the effect of surprise interest rate cuts announced by the ECB on European bank equity values – an effect that is normally positive – has become negative since interest rates in the euro area reached zero and below. Since then, a further unexpected cut of 25 basis points in the short-term policy rate lowered banks' stock prices by about 2% on average, compared to a 1% increase in normal times. In the cross section, this 'reversal' was far more pronounced for banks with a more traditional, deposit-intensive funding mix. We argue that the reversal as well as its cross-sectional pattern can be explained by the zero lower bound on interest rates on retail deposits.
    Keywords: Bank profitability ; Interest rate risk ; Monetary policy ; Negative interest rates ; ECB
    JEL: G21 E52 E58
    Date: 2019–08
  7. By: Katsafados, Apostolos G.; Androutsopoulos, Ion; Chalkidis, Ilias; Fergadiotis, Emmanouel; Leledakis, George N.; Pyrgiotakis, Emmanouil G.
    Abstract: In this paper, we use the sentiment of annual reports to gauge the likelihood of a bank to participate in a merger transaction. We conduct our analysis on a sample of annual reports of listed U.S. banks over the period 1997 to 2015, using the Loughran and McDonald’s lists of positive and negative words for our textual analysis. We find that a higher frequency of positive (negative) words in a bank’s annual report relates to a higher probability of becoming a bidder (target). Our results remain robust to the inclusion of bank-specific control variables in our logistic regressions.
    Keywords: Textual analysis; text sentiment; bank mergers and acquisitions; acquisition likelihood
    JEL: G00 G17 G21 G34
    Date: 2019–11
  8. By: Carmela Aurora Attinà (Bank of Italy); Francesco Franceschi (Bank of Italy); Valentina Michelangeli (Bank of Italy)
    Abstract: Strong growth in consumer credit and widespread recourse to mortgage renegotiations observed since 2015 have affected households’ ability to repay their loans. In this paper we explore a novel way of accounting for these trends, by extending the Bank of Italy microsimulation model of households’ financial vulnerability. The extension provides a more accurate assessment of the financial stability risks stemming from the household sector. Consumer credit growth drives an increase in the share of vulnerable households, but has limited effects on the overall debt at risk. Mortgage renegotiations contribute to a decrease in households’ vulnerability.
    Keywords: vulnerability, consumer credit, mortgage renegotiations
    JEL: C1 G2
    Date: 2019–11
  9. By: Orkun Saka
    Abstract: European banks have been criticized for holding excessive domestic government debt during the recent Eurozone crisis, which may have intensified the diabolic loop between sovereign and bank credit risks. By using a novel bank-level dataset covering the entire timeline of the Eurozone crisis, I first re-confirm that the crisis led to the reallocation of sovereign debt from foreign to domestic banks. In contrast to the recent literature focusing only on sovereign debt, I show that the banks’ private sector exposures were (at least) equally affected by the rise in home bias. Consistent with this pattern, I propose a new debt reallocation channel based on informational frictions and show that the informationally closer foreign banks increase their relative exposures when the sovereign risk rises. The effect of informational closeness is economically meaningful and robust to the use of different information measures and controls for alternative channels of sovereign debt reallocation.
    Keywords: home bias, information asymmetries, Eurozone crisis, sovereign debt
    JEL: F21 F34 F36 G01 G11 G21
    Date: 2019
  10. By: Emilia Bonaccorsi di Patti (Bank of Italy); Cristina Demma (Bank of Italy); Davide Dottori (Bank of Italy); Giacinto Micucci (Bank of Italy)
    Abstract: We propose a procedure for calculating closure times for bad business loans in Italy using Central Credit Register data over the period 2005-2016. We find that after 2008 bad loan closure times increased, peaking in the years 2011-12; they then began to fall, returning close to their initial levels in 2016. These results suggest that the recent initiatives improving banks’ non-performing loan management policies and the effectiveness and speed of recovery procedures are starting to bear fruit.
    Keywords: non-performing loans, closure times, firms’ credit, banks.
    JEL: G01 G21 G33
    Date: 2019–11
  11. By: Bert Loudis; Benjamin Ranish
    Abstract: We find that that the Current Expected Credit Loss (CECL) standard would slightly dampen fluctuations in bank lending over the economic cycle. In particular, if the CECL standard had always been in place, we estimate that lending would have grown more slowly leading up to the financial crisis and more rapidly afterwards. We arrive at this conclusion by estimating historical allowances under CECL and modeling how the impact on accounting variables would have affected banks' lending and capital distributions. We consider a variety of approaches to address uncertainty regarding the management of bank capital and predictability of credit losses.
    Keywords: Current expected credit loss ; Allowance for Loan and Lease Losses ; Accounting policy
    JEL: E1 E3 G21 G28 M41 M48
    Date: 2019–08
  12. By: Valentina Aprigliano (Bank of Italy); Danilo Liberati (Bank of Italy)
    Abstract: Following the debate on the relationship between business and financial cycle rekindled in the last decade since the global financial crisis, we assess the ability of some financial indicators to track the Italian business cycle. We mostly use credit variables to detect the turning points and to estimate the probability of recession in real time. A dynamic factor model with Markov-switching regimes is used to handle a large dataset and to cope with the nonlinear evolution of the business cycle. The in-sample results strongly support the capacity of credit variables to estimate the probability of recessions and the implied coincident indicator proves their ability to fit the business cycle. Also in real time the contribution of credit is not negligible compared to that of the industrial production, currently used for the conjunctural analysis.
    Keywords: business cycle, financial cycle, real time estimation, Markow-switching model, state-space model
    JEL: C53 E17 E32 E44 G21
    Date: 2019–07
  13. By: Taneli M�kinen (Bank of Italy); Lucio Sarno (Cambridge Judge Business School, University of Cambridge; Cass Business School, City, University of London); Gabriele Zinna (Bank of Italy)
    Abstract: Applying standard portfolio-sort techniques to bank asset returns for 15 countries from 2004 to 2018, we uncover a risk premium associated with implicit government guarantees. This risk premium is intimately tied to sovereign risk, suggesting that guaranteed banks, defined as those of particular importance to the national economy, inherit the risk of the guarantor. Indeed, this premium does not exist in safe-haven countries. We rationalize these findings with a model in which implicit government guarantees are risky in the sense that they provide protection that depends on the aggregate state of the economy.
    Keywords: banks, sovereign risk, risk premium, government guarantee
    JEL: G23
    Date: 2019–07
  14. By: Trust R. Mpofu (School of Economics, University of Cape Town); Eftychia Nikolaidou (School of Economics, University of Cape Town)
    Abstract: This paper investigates the macroeconomic and bank-specific determinants of non-performing loans (NPLs) in eight sub-Saharan African economies. The study is motivated by the fact that some of these economies have experienced banking crises in the past, their NPLs have relatively been rising post the 2008/2009 global financial crisis and have recently experienced rapid growth of bank credit to the private sector. Such issues pose credit risks in the banking sector. Employing dynamic panel data methods over the period 2000-2017 and using a variety of specifications, the results show that NPLs decrease when real GDP growth rate, return on equity, return on assets, and bank size increase and rises when public debt, inflation rate, broad money, and domestic credit to private sector by banks increase.
    Date: 2019
  15. By: Gaetano Antinolfi; Francesca Carapella; Francesco Carli
    Abstract: This paper adopts a mechanism design approach to study optimal clearing arrangements for bilateral financial contracts in which an assessment of counterparty risk is crucial for efficiency. The economy is populated by two types of agents: a borrower and lender. The borrower is subject to limited commitment and holds private information about the severity of such lack of commitment. The lender can acquire information at a cost about the commitment of the borrower, which affects the assessment of counterparty risk. When truthful revelation by the borrower is not incentive compatible, the mechanism designer optimally trades off the value of information about the lack of commitment of the borrower with the cost of incentivizing the lender to acquire such information. Central clearing of these financial contracts through a central counterparty (CCP) allows lenders to mutualize their counterparty risks, but this insurance may weaken incentives to acquire and reveal informatio n about such risks. If information acquisition is incentive compatible, then lenders choose central clearing. If it is not, they may prefer bilateral clearing to prevent strategic default by borrowers and to economize on costly collateral. Central clearing is analyzed under different institutional features observed in financial markets, which place different restrictions on the contract space in the mechanism design problem. The interaction between the costly information acquisition and the limited commitment friction differs significantly in each clearing arrangement and in each set of restrictions. This results in novel lessons about the desirability of central versus bilateral clearing depending on traders' characteristics and the institutional features defining the operation of the CCP.
    Keywords: Limited commitment ; Central counterparties ; Collateral
    JEL: G10 G14 G20 G23
    Date: 2019–08
  16. By: David P. Glancy; John Krainer; Robert J. Kurtzman; Joseph B. Nichols
    Abstract: Banks, life insurers, and commercial mortgage-backed securities (CMBS) lenders originate the vast majority of U.S. commercial real estate (CRE) loans. While these lenders compete in the same market, they differ in how they are funded and regulated, and therefore specialize in loans with different characteristics. We harmonize loan-level data across the lenders and review how their CRE portfolios differ. We then exploit cross-sectional differences in loan portfolios to estimate a simple model of frictional substitution across lender types. The substitution patterns in the model match well the observed shift of borrowers away from CMBS when CMBS spreads rose in 2016.
    Keywords: Commercial real estate ; Life insurers ; Segmentation
    JEL: G21 G22 G23 R33
    Date: 2019–11–15
  17. By: Ghosh, Saurabh; Gopalakrishnan, Pawan; Satija, Sakshi
    Abstract: We simulate a DSGE model with state owned banks to analyze the impact of bank recapitalization as a policy action in response to loan defaults by firms. As a special case, we calibrate the model to India, an emerging economy with state-owned banks facing a minimum investment requirement in safe assets and a sectoral lending requirement. We analyze two different scenarios of government infused recapitalization - an unconditional transfer to banks and an "equity in exchange for transfer". Our analysis shows that a government infused recapitalization in response to a negative TFP shock may increase output in the short run. However, there is a welfare loss in both cases, although higher for the unconditional transfers as compared with the "equity in exchange for transfer". Our analysis suggests that while bank recapitalization is a welcome move to kick-start credit creation, capital formation and growth, especially during a cyclical downturn, there is need for appropriate policy vigil to protect the quality of public expenditure in the social sector that matters for welfare in the long run.
    Keywords: Bank recapitalization, SLR requirements, Emerging Market Economies, Financial Frictions, state owned banks
    JEL: E32 E62
    Date: 2019–11–14
  18. By: Rotermund, Sophie-Dorothee
    Abstract: This paper examines the impact of bank heterogeneity on the assessment of systemic risk in the context of the German banking sector. Precisely, it is questioned whether currently employed systemic risk indicators are able to account for banks' heterogeneity and to signal systemic risk reliably regardless of different bank types' individual characteristics. For the assessment, currently employed systemic risk indicators are applied to bank-type-specific data for six different bank types from 1990 until 2018 and benchmarked against crises that occurred during the assessment period. The findings suggest that these indicators are indeed able to account for the German banking sector's heterogeneity, providing insight into different bank types' behavior. Moreover, the indicators allow for the identification of individual bank types' role in the accumulation of systemic risk. Yet, they are only partially able to signal crises correctly and behave more like thermometers than barometers of risk. Structural features of the German banking sector amplify the risk of individual institutions and thus their contribution to systemic risk at large. The analysis further identifies three distinct episodes over the assessment period, finding evidence of intra-sectoral behavioral shifts across time. The distinctiveness of banks' behavior in these three episodes suggests that heterogeneity within the German banking system not only prevails between bank types but also across time. In sum, the research developed here, while fragmentary, illustrates the complexity of systemic risk developments in the German banking sector, which in turn proposes that these developments derive from multiple factors that vary over time. Further research into the causes and consequences of this heterogeneity is warranted.
    Keywords: Banks,Banking,Bank heterogeneity,Germany,Systemic risk,Systemic riskindicators
    JEL: G00 G21
    Date: 2019
  19. By: Josh Davis; Alan M. Taylor
    Abstract: Research finds strong links between credit booms and macroeconomic outcomes like financial crises and output growth. Are impacts also seen in financial asset prices? We document this robust and significant connection for the first time using a large sample of historical data for many countries. Credit boom periods tend to be followed by unusually low returns to equities, in absolute terms and relative to bonds. Return predictability due to this leverage factor is distinct from that of established factors like momentum and value and generates trading strategies with meaningful excess profits out-of-sample. These findings pose a challenge to conventional macro-finance theories.
    JEL: E17 E20 E21 E32 E44 G01 G11 G12 G17 G21 N10
    Date: 2019–11

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