nep-ban New Economics Papers
on Banking
Issue of 2019‒12‒09
twelve papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Interactions between bank levies and corporate takes: how is the bank leverage affected? By Bremus, Franziska; Schmidt, Kirsten; Tonzer, Lena
  2. Mortgage-Related Bank Penalties and Systemic Risk Among U.S. Banks By Vaclav Broz; Evzen Kocenda
  3. Global Liquidity and Impairment of Local Monetary Policy By Salih Fendo?lu; Eda Gül?en; José-Luis Peydró
  4. The Effect of U.S. Stress Tests on Monetary Policy Spillovers to Emerging Markets By Emily Liu; Friederike Niepmann; Tim Schmidt-Eisenlohr
  5. The Effect of Higher Capital Requirements on Bank Lending: The Capital Surplus Matters By Dominika Kolcunová; Simona Malovaná
  6. Financial Performance Analysis of Distressed Banks in Ghana: Exploration of Financial Ratios and Z-score By Matey, Juabin
  7. The effects of capital requirements on good and bad risk-taking By Pancost, N. Aaron; Robatto, Roberto
  8. Key Determinants of Net Interest Margin of EU Banks in the Zero Lower Bound of Interest Rates By Petr Hanzlík; Petr Teplý
  9. Bank-Sourced Transition Matrices: Are Banks' Internal Credit Risk Estimates Markovian? By Barbora Máková
  10. Microfinance Performance and Social Capital: A Cross-Country Analysis By Luminita Postelnicu; Niels Hermes
  11. Regulatory Stress Tests and Bank Responses: Heterogeneous Treatment Effect in Dynamic Settings By Karel Janda; Oleg Kravtsov
  12. Pricing Financial Derivatives Subject to Multilateral Credit Risk and Collateralization By Xiao, Tim

  1. By: Bremus, Franziska; Schmidt, Kirsten; Tonzer, Lena
    Abstract: Regulatory bank levies set incentives for banks to reduce leverage. At the same time, corporate income taxation makes funding through debt more attractive. In this paper, we explore how regulatory levies affect bank capital structure, depending on corporate income taxation. Based on bank balance sheet data from 2006 to 2014 for a panel of EU-banks, our analysis yields three main results: The introduction of bank levies leads to lower leverage as liabilities become more expensive. This effect is weaker the more elevated corporate income taxes are. In countries charging very high corporate income taxes, the incentives of bank levies to reduce leverage turn ineffective. Thus, bank levies can counteract the debt bias of taxation only partially. JEL Classification: G21, G28, L51
    Keywords: bank capital structure, bank levies, debt bias of taxation
    Date: 2019–12
  2. By: Vaclav Broz (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Opletalova 26, 110 00, Prague, Czech Republic); Evzen Kocenda (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Opletalova 26, 110 00, Prague, Czech Republic)
    Abstract: We analyze link between mortgage-related regulatory penalties levied on banks and the level of systemic risk in the U.S. banking industry. We employ a frequency decomposition of volatility spillovers to draw conclusions about system-wide risk transmission with short-, medium-, and long-term dynamics. We find that after the possibility of a penalty is first announced to the public, long-term systemic risk among banks tends to increase. In contrast, a settlement with regulatory authorities leads to a decrease in the long-term systemic risk. Our analysis is relevant both to authorities imposing penalties as well as to those in charge of financial stability.
    Keywords: Bank, financial stability, global financial crisis, mortgage, penalty, systemic risk
    JEL: C14 C58 G14 G21 G28 K41
    Date: 2019–09
  3. By: Salih Fendo?lu; Eda Gül?en; José-Luis Peydró
    Abstract: We show that global liquidity limits the effectiveness of local monetary policy on credit markets. The mechanism is via a bank carry trade in international markets when local monetary policy tightens. For identification, we exploit global (VIX, U.S. monetary policy) shocks and loan-level data —the credit and international interbank registers— from a large emerging market, Turkey. Softer global liquidity conditions attenuate the pass-through of local monetary policy tightening on loan rates, especially for banks with more access to international wholesale markets. Effects are also important for other credit margins and for risk-taking, e.g. riskier borrowers in FX loans or defaults.
    Keywords: global financial cycle, monetary policy, emerging markets, banks, carry trade
    JEL: G01 G15 G21 G28 F30
    Date: 2019–12
  4. By: Emily Liu; Friederike Niepmann; Tim Schmidt-Eisenlohr
    Abstract: This paper shows that monetary policy and prudential policies interact. U.S. banks issue more commercial and industrial loans to emerging market borrowers when U.S. monetary policy eases. The effect is less pronounced for banks that are more constrained through the U.S. bank stress tests, reflected in a lower minimum capital ratio in the severely adverse scenario. This suggests that monetary policy spillovers depend on banks’ capital constraints. In particular, during a period of quantitative easing when liquidity is abundant, banks are more flexible, and the scope for adjusting lending is larger when they have a bigger capital buffer. We conjecture that bank lending to emerging markets during the zero-lower bound period would have been even higher had the United States not introduced stress tests for their banks.
    Keywords: U.S. bank lending, stress tests, emerging markets, monetary policy spillovers
    JEL: E44 F31 G15 G21 G23
    Date: 2019
  5. By: Dominika Kolcunová (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Opletalova 26, 110 00, Prague, Czech Republic; Czech National Bank, Na Prikope 28, 115 03 Prague 1, Czech Republic); Simona Malovaná (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Opletalova 26, 110 00, Prague, Czech Republic; Czech National Bank, Na Prikope 28, 115 03 Prague 1, Czech Republic)
    Abstract: This paper studies the impact of higher additional capital requirements on loan growth to private sector of banks in the Czech Republic. The empirical results indicate that there is a negative effect of higher additional capital requirements on loan growth of banks with relatively low capital surplus. In addition, the results confirm that the relationship between capital surplus and loan growth is important also in the period of stable capital requirements, i.e. it does not serve only as an intermediate channel of higher additional capital requirements.
    Keywords: Bank lending, banks’ capital surplus, regulatory capital requirements
    JEL: C22 E32 G21 G28
    Date: 2019–04
  6. By: Matey, Juabin
    Abstract: A robust bank industry is a major player in the stability of an economy. By way of financial ratios and Z-score, the study analysed UT Bank’s financial performance prior to the recent bank sector reforms. Annual financials over a four year period were used. Debt management practices of UT Bank per the results obtained were quite on the hind side. Leverage and risk variables were poorly handled. UT Bank would have been unable to meet creditors’ claims considering the mean average values of debt-to-assets and debt-to equity ratios of 0.76 and 0.90 respectively. The entire bank sector will be put on sound footing on if credit management practices of individual banks are refreshed. The bank industry regulator should tighten its supervisory and monitoring role over banks to help detect early signs of non-performing banks. The study further recommends that statutory lending limits of banks be re-enforced to uphold the threshold of 10 percent for unsecured loans and 25 percentage for secured loans of net owned funds of the bank.
    Keywords: Bank, Debt, Distress, Performance, Credit Management Practice, Z-score
    JEL: G2 G21 G28
    Date: 2019–09–17
  7. By: Pancost, N. Aaron; Robatto, Roberto
    Abstract: We study optimal capital requirement regulation in a dynamic quantitative model in which nonfinancial firms, as well as households, hold deposits. Firms hold deposits for precautionary reasons and to facilitate the acquisition of production inputs. Our theoretical analysis identifies a novel general equilibrium channel that operates through firms’ deposits and mitigates the cost of increasing capital requirements. We calibrate our model and find that the optimal capital requirement is 18.7% but only 13.6% in a comparable model in which only households hold deposits. Our novel channel accounts for most of the difference. JEL Classification: E21, G21, G32
    Keywords: capital requirements, deposit insurance, idiosyncratic risk, safe assets
    Date: 2019–12
  8. By: Petr Hanzlík (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Opletalova 26, 110 00, Prague, Czech Republic); Petr Teplý (Department of Banking and Insurance, Faculty of Finance and Accounting, University of Economics in Prague, Winston Churchill Sq. 4, 130 67 Prague, Czech Republic)
    Abstract: In this paper, we analyse a relationship between net interest margin (NIM) of EU banks and market interest rates in a low-interest rate environment. We contribute to the literature when examining a large sample of annual data on 629 banks from EU member countries during the 2011-2016 period, which also covers the period of zero and negative rates. We test three hypotheses and come to the three main conclusions. First, NIM eroded during the whole observed period for all types of investigated banks. Second, a higher market concentration, proxied by the Herfindahl index, leads to higher NIM. Finally, we show a positive concave relationship of NIM with short-term interest rate observed in previous studies, which supports the suspected non-linearity in situation of zero lower bound of interest rates. Contrary to other researchers, we find a negative relationship between NIM and the yield curve slope.
    Keywords: banks, net interest margin, Herfindahl index, interest rates, profitability, system GMM
    JEL: C33 E43 G21
    Date: 2019–03
  9. By: Barbora Máková (Institute of Economic Studies, Faculty of Social Science, Charles University, Prague, Czech Republic; Credit Benchmark, London, UK)
    Abstract: This study provides new insights into banks' credit risk models by exploring features of their credit risk estimates and assessing practicalities of transition matrix estimation and related assumptions. Using a unique dataset of internal credit risk estimates from twelve global A-IRB banks, covering monthly observations on 20,000 North American and EU large corporates over the 2015-2018 time period, the study empirically tests the widely used assumptions of the Markovian property and time homogeneity at a larger scale than previously documented in the literature. The results show that internal credit risk estimates do not satisfy these assumptions as they show evidence of both path-dependency and time heterogeneity. In addition, contradicting previous findings on credit rating agency data, banks tend to revert their rating actions.
    Keywords: Risk management, credit risk, transition matrices
    JEL: C12 G12 G21 G32
    Date: 2019–03
  10. By: Luminita Postelnicu; Niels Hermes
    Abstract: In recent years, the microfinance industry has received a substantial amount of cross-border funding from both public and private sources. This funding reflects the increasing interest in microfinance as part of a more general trend towards socially responsible investments. In order to be able to secure sustained interest from these investors, it is important that the microfinance industry can show evidence of its contribution to reducing poverty at the bottom of the pyramid. For this, it is crucial to understand under what conditions microfinance institutions (MFIs) are able to reduce poverty. This paper contributes to this discussion by investigating the relationship between the extent to which social capital formation is facilitated within different societies and the financial and social performance of MFIs. This focus on social capital formation is important, because in many cases MFIs use group loans with joint liability to incentivize asset-poor borrowers to substitute the lack of physical collateral by their social capital. Hence, the success of a large part of the loan relationship between MFIs and their borrowers depends on the social capital those borrowers can bring into the contract. We carry out a cross-country analysis on a dataset containing 100 countries and identify different social dimensions as proxies for how easy social capital can be developed in different countries. We hypothesize that microfinance is more successful, both in terms of their financial and social aims, in societies that are more conducive to the development of social capital. Our empirical results support our hypothesis.
    Keywords: Financial performance; Microfinance; Social capital; Social performance
    Date: 2018–12
  11. By: Karel Janda (Department of Banking and Insurance, University of Economics, Prague, W. Churchilla 4, 13067 Praha 3, Czech Republic; Institute of Economic Studies, Charles University, Opletalova 26,11000 Praha 1, Czech Republic); Oleg Kravtsov (Department of Banking and Insurance, University of Economics, Prague, W. Churchilla 4, 13067 Praha 3, Czech Republic)
    Abstract: The article is part of a project that has received funding from the European Union's Horizon 2020 Research and Innovation Staff Exchange programme under the Marie Sklodowska-Curie grant agreement No. 681228. We also acknowledge support from the Czech Science Foundation (grant 18-05244S). The views expressed in the paper are those of the authors and not necessarily those of our institutions.
    Keywords: regulatory stress test, capital regulation, heterogeneous treatment effect, event study, instrumental variable
    JEL: G20 G21 G28
    Date: 2019–10
  12. By: Xiao, Tim
    Abstract: This article presents a new model for valuing financial contracts subject to credit risk and collateralization. Examples include the valuation of a credit default swap (CDS) contract that is affected by the trilateral credit risk of the buyer, seller and reference entity. We show that default dependency has a significant impact on asset pricing. In fact, correlated default risk is one of the most pervasive threats in financial markets. We also show that a fully collateralized CDS is not equivalent to a risk-free one. In other words, full collateralization cannot eliminate counterparty risk completely in the CDS market.
    Date: 2019–11–01

This nep-ban issue is ©2019 by Christian Calmès. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
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