nep-ban New Economics Papers
on Banking
Issue of 2019‒12‒16
seventeen papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Does the Lack of Financial Stability Impair the Transmission of Monetary Policy? By Viral V. Acharya; Björn Imbierowicz; Sascha Steffen; Daniel Teichmann
  2. Performance Comparison of European Cooperative and Commercial Banks in a Low Interest Rate Environment By Petr Teply; Matej Kuc
  3. Opacity: Insurance and Fragility By Ryuichiro Izumi
  4. Technological innovation in mortgage underwriting and the growth in credit, 1985–2015 By Foote, Christopher L.; Loewenstein, Lara; Willen, Paul S.
  5. Mortgage lending, monetary policy, and prudential measures in small euro-area economies: Evidence from Ireland and the Netherlands By Mary Everett; Jakob de Haan; David-Jan Jansen; Peter McQuade; Anna Samarina
  6. Impact of IAS 39 reclassification on income smoothing by European banks By Ozili, Peterson K
  7. Financial cycles, credit bubbles and stabilization policies By Schuler, Tobias; Corrado, Luisa
  8. Disentangling the effect of Trust on Bank Lending By Christina Nicolas; Amine Tarazi
  9. Risk allocation through securitization - Evidence from non-performing loans By Sascha Tobias Wengerek; Benjamin Hippert; André Uhde
  10. Profit Taxation and Bank Risk Taking By Kogler, Michael
  11. Who Bears the Welfare Costs of Monopoly? The Case of the Credit Card Industry By Kyle F. Herkenhoff; Gajendran Raveendranathan
  12. Determinants of banks' profitability: Do Basel III liquidity and capital ratios matter? By Pierre Durand
  13. Interbank network characteristics, monetary policy "News" and sensitivity of bank stock returns By Aref Ardekani; Isabelle Distinguin; Amine Tarazi
  14. Firm-level employment, labour market reforms, and bank distress By Setzer, Ralph; Stieglitz, Moritz
  15. Do Negative Interest Rates Explain Low Profitability of European Banks? By Nicholas Coleman; Viktors Stebunovs
  16. Banking on cooperation: An evolutionary analysis of microfinance loan repayment By Gehrig, Stefan; Mesoudi, Alex; Lamba, Shakti
  17. Pricing Financial Derivatives Subject to Multilateral Credit Risk and Collateralization By Xiao, Tim

  1. By: Viral V. Acharya; Björn Imbierowicz; Sascha Steffen; Daniel Teichmann
    Abstract: We investigate the transmission of central bank liquidity to bank deposits and loan spreads in Europe over the period from January 2006 to June 2010. We find evidence consistent with an impaired transmission channel due to bank risk. Central bank liquidity does not translate into lower loan spreads for high-risk banks for maturities beyond one year, even as it lowers deposit spreads for both high-risk and low-risk banks. This adversely affects the balance sheets of high-risk bank borrowers, leading to lower payouts, capital expenditures and employment. Overall, our results suggest that banks’ capital constraints at the time of an easing of monetary policy pose a challenge to the effectiveness of the bank-lending channel and the central bank's lender-of-last-resort function.
    JEL: E43 E58 G01 G21
    Date: 2019–11
  2. By: Petr Teply (Department of Banking and Insurance, Faculty of Finance and Accounting, University of Economics in Prague, Winston Churchill Sq. 4, 130 67 Prague, Czech Republic); Matej Kuc (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Opletalova 26, 110 00, Prague, Czech Republic)
    Abstract: Our aim is to empirically assess differences in behaviour and performance of European cooperative and commercial banks in a low interest rate environment. We employ dynamic panel data methods to assess the relative performance of both ownership structures based on a data set of nearly 1,000 banks from 11 European countries for the 2009-2015 period. Our findings are threefold. First, we find that commercial banks are more profitable than cooperative banks in all three metrics used (return on average assets, return on average equity and net interest margin). Second, commercial banks decrease their loan loss provisioning to maintain their profitability. Interestingly, this trend is not present in the financial statements of cooperative banks. Third, cooperative banks are significantly more stable than commercial banks in terms of Z-score. In addition, the Z-score of cooperative banks increased during the observation period, whereas the Z-score of commercial banks remained stable. Therefore, our results show structural differences in the priorities and behaviour of both ownership types in a low interest rate environment: European commercial banks focus on maintaining their profitability, whereas cooperative banks seek to increase their stability by increasing their capital buffers.
    Keywords: banks, cooperative banking, European Union, low interest rate environment, profitability, Z-score
    JEL: C23 G21 L25
    Date: 2019–12
  3. By: Ryuichiro Izumi (Department of Economics, Wesleyan University)
    Abstract: What are the effects of banks holding opaque, complex assets? Should regulators require bank assets to be more transparent? I study these questions in a model of fnancial intermediation where opacity determines how long the realized value of an asset remains unknown. By allowing a bank to sell assets before the realization is known, opacity provides insurance to the bank's depositors. However, higher opacity also increases depositors' incentives to join a bank run. In choosing the level of opacity, therefore, a bank faces a trade-off between providing insurance and increasing fragility. If depositors can accurately observe the level of opacity, banks will choose the socially-effcient level. If depositors are unable to observe this choice, however, banks will have an incentive to become overly opaque and regulation to limit opacity can improve welfare.
    Keywords: Opacity, Bank runs, Insurance, Banking regulation
    JEL: G01 G21 G28
    Date: 2019–12
  4. By: Foote, Christopher L. (Federal Reserve Bank of Boston); Loewenstein, Lara (Federal Reserve Bank of Cleveland); Willen, Paul S. (Federal Reserve Bank of Boston)
    Abstract: The application of information technology to finance, or “fintech,” is expected to revolutionize many aspects of borrowing and lending in the future, but technology has been reshaping consumer and mortgage lending for many years. During the 1990s, computerization allowed mortgage lenders to reduce loan-processing times and largely replace human-based assessments of credit risk with default predictions generated by sophisticated empirical models. Debt-to-income ratios at origination add little to the predictive power of these models, so the new automated underwriting systems allowed higher debt-to-income ratios than previous underwriting guidelines would have allowed. In this way, technology brought about an exogenous change in lending standards that was especially relevant for borrowers with low current incomes relative to their expected future incomes—in particular, young college graduates. By contrast, the data suggest that the credit expansion during the 2000s housing boom was an endogenous response to widespread expectations of higher future house prices, as average mortgage sizes rose for borrowers across the entire income distribution.
    Keywords: mortgage underwriting; housing cycle; technological change; credit boom
    JEL: C55 D53 G21 L85 R21 R31
    Date: 2019–11–01
  5. By: Mary Everett; Jakob de Haan; David-Jan Jansen; Peter McQuade; Anna Samarina
    Abstract: This paper examines whether the increased use of macroprudential policies since the global financial crisis has affected the impact of (euro area and foreign) monetary policy on mortgage lending in Ireland and the Netherlands, which are both small open economies in the euro area. Using bank-level data on domestic lending in both countries during the period 2003-2018, we find that restrictive euro area monetary policy shocks reduce the growth of mortgage lending. We find evidence that stricter domestic prudential regulation mitigates this effect in Ireland, but not so in the Netherlands. There is weak evidence for an international bank lending channel.
    Keywords: monetary policy; prudential policy; mortgage lending; European monetary union
    JEL: G21 E42 F36
    Date: 2019–11
  6. By: Ozili, Peterson K
    Abstract: The article examines the impact of the reclassification of IAS 39 on income smoothing using loan loss provisions among European banks. The author predicts that the strict recognition and re-classification requirements of IAS 139 reduced banks' ability to smooth income using bank securities and derivatives, motivating them to rely more on loan loss provisions to smooth income. The findings do not support the prediction for income smoothing through loan loss provisions. Also, there is no evidence for income smoothing in the pre- and post-IAS 39 reclassification period. The implication of the findings is that: (i) European banks did not use loan loss provisions to smooth income during the period examined, and rather rely on other accounting numbers to smooth income; (ii) the IASB’s strict disclosure regulation improved the reliability and informativeness of loan loss provision estimates among European banks during the period of analysis.
    Keywords: Earnings Management; Income Smoothing; Loan loss provisions; IFRS, IAS 39; Financial Crises; disclosure regulation; banks; European banks; real earnings management;
    JEL: G20 G21 G28 M40 M41 M42 M48
    Date: 2019–02–01
  7. By: Schuler, Tobias; Corrado, Luisa
    Abstract: This paper analyzes the effects of several policy instruments for mitigating financial bubbles generated in the banking sector. We augment a New Keynesian macroeconomic framework by endogenizing boundedly-rational expectations on asset values of loan portfolios, allow for interbank trading and show how a credit bubble can develop from a financial innovation. We then evaluate the efficacy of several policy instruments in counteracting financial bubbles. We find that an endogenous capital requirement reduces the impact of a financial bubble significantly while central bank intervention (“leaning against the wind”) proves to be less effective. A welfare analysis ranks the policy reaction through an endogenous capital requirement highest. We therefore provide a rationale for the use of countercyclical capital buffers. JEL Classification: E44, E52
    Keywords: Basel III, CCyB, credit-to-GDP gap
    Date: 2019–12
  8. By: Christina Nicolas (LAPE - Laboratoire d'Analyse et de Prospective Economique - IR SHS UNILIM - Institut Sciences de l'Homme et de la Société - UNILIM - Université de Limoges); Amine Tarazi (LAPE - Laboratoire d'Analyse et de Prospective Economique - IR SHS UNILIM - Institut Sciences de l'Homme et de la Société - UNILIM - Université de Limoges)
    Abstract: Please do not quote without the permission of the authors. Abstract This paper examines the effect of trust on bank lending using a sample of commercial banks in 34 countries around the world. We distinguish between two forms of trust: In-group trust, which we define as the trust in people we know, and Out-group trust, which we define as the trust in people we meet for the first time. We find that that Out-group trust significantly boosts bank lending. A closer look shows that this effect only holds in countries with relatively lower levels of institutional and judicial development. As for In-group trust, we find that it affects bank lending indirectly by favoring the development of informal lending. Overall, this paper provides novel evidence on the importance of trust and the mechanisms by which it influences bank lending around the world. JEL classification: G21, G28, G32
    Keywords: Bank Lending,Trust,Institutional Development
    Date: 2019–11–28
  9. By: Sascha Tobias Wengerek (University of Paderborn); Benjamin Hippert (University of Paderborn); André Uhde (University of Paderborn)
    Abstract: Employing a unique and hand-collected dataset of securitization transactions by European banks, this paper analyzes the relationship between true sale loan securitization and the issuing banks’ non-performing loans to total assets ratios (NPLRs). We provide evidence for an NPLR-reducing effect during the boom phase of securitizations suggesting that banks (partly) securitized NPLs as the most risky junior tranche. In contrast, we find the reverse effect during the crises period indicating that issuing banks demonstrated `skin in the game'. A variety of sensitivity analyses provides further important implications for the vital debate on reducing NPL exposures and regulating securitization markets.
    Keywords: European Banking, Non-performing Loans, Risk Allocation, Securitization
    JEL: G21 G28 G32
    Date: 2019–09
  10. By: Kogler, Michael
    Abstract: How can tax policy improve financial stability? Recent studies point to large potential stability gains from a reform that eliminates the debt bias in corporate taxation. It is well known that such a reform reduces bank leverage. This paper analyzes a novel, complementary channel: bank risk taking. We model the portfolio choice of banks under moral hazard and thereby emphasize the “incentive function” of equity. We find that (i) an allowance for corporate equity (ACE) and a lower corporate tax rate discourage risk taking and offer stability and welfare gains, (ii) a revenue-neutral introduction of the ACE unambiguously improves financial stability, and (iii) capital regulation and deposit insurance importantly influence the tax sensitivities of bank risk taking.
    Keywords: Corporate taxation, tax reform, banking, risk taking, financial stability
    JEL: G21 G28 H25
    Date: 2019–12
  11. By: Kyle F. Herkenhoff; Gajendran Raveendranathan
    Abstract: How are the welfare costs from monopoly distributed across U.S. households? We answer this question for the U.S. credit card industry, which is highly concentrated, charges interest rates that are 3.4 to 8.8 percentage points above perfectly competitive pricing, and has repeatedly lost antitrust lawsuits. We depart from existing competitive models by integrating oligopolistic lenders into a heterogeneous agent, defaultable debt framework. Our model accounts for 20 to 50 percent of the spreads observed in the data. Welfare gains from competitive reforms in the 1970s are equivalent to a one-time transfer worth between 0.24 and 1.66 percent of GDP. Along the transition path, 93 percent of individuals are better off. Poor households benefit from increased consumption smoothing, while rich households benefit from higher general equilibrium interest rates on savings. Transitioning from 1970 to 2016 levels of competition yields welfare gains equivalent to a one-time transfer worth between 1.87 and 3.20 percent of GDP. Lastly, homogeneous interest rate caps in 2016 deliver limited welfare gains.
    Keywords: Welfare costs of monopoly; consumer credit; competition; welfare
    JEL: D14 D43 D60 E21 E44 G21
    Date: 2019–12
  12. By: Pierre Durand
    Abstract: In this paper, we investigate the role played by the TCR and LCR among determinants of banks' profitability. To this end, using Random Forest regressions and a large dataset of banks' balance sheet variables, we assess the impact and predicting power of Basel III capital and liquidity ratios. Our results confirm the trade-off theory of the capital structure: banks have an optimal capital ratio below which the relation between capital and profitability is positive. On average, this optimum falls between 15% and 20%. Furthermore, we show that LCR has a positive, but weak, effect on profitability. Overall, our findings illustrate the fact that regulatory ratios do not constitute binding conditions for banks' performance.
    Keywords: Basel III, Capital ratio, Liquidity ratio, Banks' profitability, Random Forest regressions.
    JEL: C44 G21 G28
    Date: 2019
  13. By: Aref Ardekani (LAPE - Laboratoire d'Analyse et de Prospective Economique - IR SHS UNILIM - Institut Sciences de l'Homme et de la Société - UNILIM - Université de Limoges); Isabelle Distinguin (LAPE - Laboratoire d'Analyse et de Prospective Economique - IR SHS UNILIM - Institut Sciences de l'Homme et de la Société - UNILIM - Université de Limoges); Amine Tarazi (LAPE - Laboratoire d'Analyse et de Prospective Economique - IR SHS UNILIM - Institut Sciences de l'Homme et de la Société - UNILIM - Université de Limoges)
    Abstract: This paper investigates whether interbank network topology influences the impact of monetary policy announcements on bank cumulative abnormal returns (CAR's). Although recent studies have emphasized the channels of non-conventional monetary policy actions and the sensitivity of bank stock prices to "News", how such reaction could be influenced by the shape of bank networks remains an open issue. We look at how banks' interconnectedness within interbank loan and deposit networks affects investors' expectations of future bank performance in response to monetary policy "News". Our sample consists of commercial, investment, real estate and mortgage banks in 10 Euro-zone countries. Our results show that the stock prices of banks with stronger local network positions are less sensitive to monetary policy announcements while those of banks with stronger system-wide positions are more sensitive to them.
    Keywords: Interbank network topology,Monetary policy,bank's stock reaction,event study
    Date: 2019–11–28
  14. By: Setzer, Ralph; Stieglitz, Moritz
    Abstract: We explore the interaction between labour market reforms and financial frictions. Our study combines a new cross-country reform database on labour market reforms with matched firm-bank data for nine euro area countries over the period 1999 to 2013. While we find that labour market reforms are overall effective in increasing employment, restricted access to bank credit can undo up to half of long-term employment gains at the firm-level. Entrepreneurs without sufficient access to credit cannot reap the full benefits of more flexible employment regulation. JEL Classification: G21, J21, J60, K31
    Keywords: bank stress, employment protection, structural reforms, unemployment insurance
    Date: 2019–12
  15. By: Nicholas Coleman; Viktors Stebunovs
    Abstract: In this note, we examine the effects of low and negative sovereign yields on net interest margins and the general profitability of European banks.
    Date: 2019–11–29
  16. By: Gehrig, Stefan; Mesoudi, Alex (University of Exeter); Lamba, Shakti
    Abstract: Microfinance is an economic development intervention that involves credit provision to low-income entrepreneurs. Lenders typically require joint liability, where borrowers share the responsibility of repaying a group loan. We argue that this lending practice is subject to the same fundamental cooperation problem faced by other organisms in nature, and consequently evolutionary theories of cooperation from the biological sciences can provide new insights into loan repayment behaviour. This could both inform the design of microfinance institutions, and offer a real-world test case for evolutionary theories of cooperation. We first formulate evolutionary hypotheses on group loan repayment based on assortment mechanisms like kin selection, reciprocity or partner choice. We then test them by reviewing 40 studies on micro-borrowers’ loan repayment from 31 countries. We find more supportive than contrary evidence for the hypotheses, but results are generally mixed, generating avenues for future research within this framework. Finally, we present an evolutionary game-theoretic model of group lending as a threshold public goods game which further explains some empirical findings and generates new predictions on repayment rates. Our work shows how understanding the evolution of cooperation can guide economic development interventions and, more generally, offer ultimate explanatory theories for phenomena studied by social scientists.
    Date: 2019–10–21
  17. 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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