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on Banking |
| By: | Toni Ahnert; Martin Kuncl |
| Abstract: | Third parties often assume default risk at loan origination in return for a fee. Insurance, various guarantees and external credit enhancements protect the owner of the loan against borrower default. Governments often assume such default risk through guarantees for various types of loans, including mortgages, student loans and small business loans. The widespread use of loan default insurance raises important questions: What is the impact of loan insurance on secondary market liquidity and on lending standards in primary markets? And is there a role for government intervention? We propose a simple model of lending where borrowers are screened at loan origination and lenders can learn about loan quality over time. Lenders can transfer the loan default risk to outside financiers at loan origination through loan insurance. Alternatively, they can transfer the default risk after a liquidity shock or after learning about loan quality by selling the loan in the secondary market. The model features a trade-off between secondary market liquidity and lending standards. The timing of risk transfer affects this trade-off. Loan insurance lowers the lending standards but improves the liquidity in secondary markets with a net improvement in welfare. Since lenders do not take into account the positive benefit of insurance on the liquidity in the market for uninsured loans, there is insufficient loan insurance in equilibrium. This implies that a regulator can improve welfare by subsidizing loan default insurance. We also consider a policy of outright loan purchases and show that while it is optimal to have it as an option to rule out inferior equilibria, only a policy of insurance subsidy is optimally used in equilibrium. |
| Keywords: | Financial Institutions; Financial markets; Financial system regulation and policies |
| JEL: | G01 G21 G28 |
| Date: | 2019–12 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:19-47&r=all |
| By: | David Elliott; Ralf R. Meisenzahl; José-Luis Peydró; B.C. Turner |
| Abstract: | We show that credit supply effects and associated real effects of monetary policy depend on the size of nonbank presence in the respective lending market. Nonbank presence also alters how monetary policy affects the distribution of risk. For identification, we use exhaustive loan-level data since the 1990s and Gertler-Karadi (2015) monetary policy shocks. First, different from the literature showing that low monetary policy rates increase credit supply and risk-taking by banks, we find that higher monetary policy rates shifts credit supply for corporates, mortgages, and consumers shifts from regulated banks to less regulated, more fragile nonbanks. Moreover, this shift is more pronounced for ex-ante riskier borrowers. Second, nonbanks reduce the effectiveness of the bank lending channel of monetary policy at the loan-level. However, this reduction varies substantially across lending markets. Total credit and real effects are largely neutralized in consumer loans and the associated consumption, but not in corporate loans and investment. |
| Keywords: | Negative rates, non-standard monetary policy, reach-for-yield, securities, banks. |
| JEL: | E51 E52 G21 G23 G28 |
| Date: | 2019–03 |
| URL: | http://d.repec.org/n?u=RePEc:upf:upfgen:1679&r=all |
| By: | David Coble |
| Abstract: | In this paper, I present a structural discrete-choice model for deposit services. This model produces estimates of different supply functions at the MSA and bank levels. Combining this information with detailed cost data per bank at the national level, I trace the degree of competition in the banking system and perform compensatory analysis. I derive and estimate the model under three different assumptions: Nash-Bertrand competition, perfect collusion, and partially collusive equilibrium. The findings show that multimarket contacts in the US banking system lead to highly competitive behavior. Also, I measure the variation in consumer welfare as if there was a Nash-Bertrand competition vis-à-vis the identified market equilibrium. I show this change to be between 1.5 to 3.8 cents per dollar deposited, which is equivalent to an increase in (stock) welfare of about 0.65 percent points of a one year US GDP. |
| Date: | 2019–11 |
| URL: | http://d.repec.org/n?u=RePEc:chb:bcchwp:858&r=all |
| By: | Laura Liu (Indiana University, Bloomington, Indiana); Hyungsik Roger Moon (University of Southern California and Yonsei); Frank Schorfheide (University of Pennsylvania CEPR, NBER, and PIER) |
| Abstract: | We use a dynamic panel Tobit model with heteroskedasticity to generate point, set, and density forecasts for a large cross-section of short time series of censored observations. Our fully Bayesian approach allows us to flexibly estimate the cross-sectional distribution of heterogeneous coeffients and then implicitly use this distribution as prior to construct Bayes forecasts for the individual time series. We construct set forecasts that explicitly target the average coverage probability for the cross-section. We present a novel application in which we forecast bank-level charge-off rates for credit card and residential real estate loans, comparing various versions of the panel Tobit model. |
| Keywords: | Bayesian inference, density forecasts, interval forecasts, loan charge-offs, panel data, point forecasts, set forecasts, Tobit model |
| JEL: | C11 C14 C23 C53 G21 |
| Date: | 2019–05 |
| URL: | http://d.repec.org/n?u=RePEc:inu:caeprp:2019005&r=all |
| By: | Funke, Michael; Li, Xiang; Tsang, Andrew |
| Abstract: | This paper studies monetary policy transmission in China’s peer-to-peer lending market. Using spectral measures of causality, we explore the impacts of Chinese monetary policy shocks on China’s P2P market interest rates and lending amounts. The estimation results indicate significant spectral Granger causality from monetary policy surprises to P2P lending rates for borrowers, but not the reverse. Unlike the lending channel for traditional banks, monetary policy shocks do not Granger-cause the credit amount in the P2P lending market. |
| JEL: | E52 E43 G23 C22 |
| Date: | 2019–12–05 |
| URL: | http://d.repec.org/n?u=RePEc:bof:bofitp:2019_023&r=all |
| By: | Verma, Radheshyam; Herwadkar, Snehal |
| Abstract: | The continuing deterioration in asset quality of public sector banks in India since 2012 has had multidimensional ramifications. On the one hand, while significant loan loss provisions were required to be kept, eroding the profitability of these banks, on the other hand, it affected their risk-taking ability and resources available for on-lending to commercial sector. From a macroeconomic perspective thus, poor asset quality and lower economic growth reinforced each other into a vicious cycle. The government intermittently infused capital in the public-sector banks, but most of that was absorbed by the continuing deterioration in asset quality, delaying the revival in the credit growth cycle. This led to the question of how much capital infusion is necessary to kick-start the credit cycle. Using bank-wise data for the period 2008-18, the present study analyses this question in a dynamic panel framework. The findings of the study suggest that the relationship between bank capital and credit growth is non-linear. Any amount of recapitalisation in banks is may be helpful in accelerating credit growth. However, the study found the single threshold level 13.1 per cent of CRAR level would be optimal. Above this threshold level, incremental increase in bank capital has positive but declining marginal effects on lending. |
| Keywords: | Bank capital, regulatory capital, recapitalisation, bank lending. |
| JEL: | G21 |
| Date: | 2019–12–04 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:97394&r=all |
| By: | Sjoerd Van Bekkum; Marc Gabarro; Rustom M. Irani; José-Luis Peydró |
| Abstract: | We examine the effects of borrower-based macroprudential policy for household leverage, liquidity, and financial distress. For identification, we exploit the introduction of a mortgage loan-to-value limit in the Netherlands, in conjunction with population tax-return and property ownership data linked to the universe of housing transactions.First-time homebuyers most affected by the policy shock substantially reduce household leverage and debt servicing costs by taking on less mortgage debt. Rather than buying more affordable homes or taking non-regulated loans, households consume greater liquidity in the year of home purchase to plug funding gaps. Improvements in household solvency are accompanied by fewer instances of financial distress despite the temporary loss of liquidity; however, along the extensive margin, fewer households transition from renting into ownership. These effects are stronger among cash-constrained households. |
| Keywords: | Macroprudential policy; financial regulation; residential mortgages; household finance; household leverage; loan-to-value ratio |
| JEL: | D14 D31 E21 E58 G21 G28 |
| Date: | 2019–11 |
| URL: | http://d.repec.org/n?u=RePEc:upf:upfgen:1682&r=all |
| By: | , abdul.mongid |
| Abstract: | The existence of the rural bank in the Indonesian’ financial market is more pronounced recently than ever especially after the Asian crisis in 1997. The ability of rural banks to shield during the crisis and the state programs to develop small and medium enterprises (SMEs), make the role of rural banks more pivotal. Rural banks begin to fill in the gap of financial services in rural areas. Recently, the issue of efficiency has received attention among academic researchers. This study estimates the technical and scale efficiency of rural banks in Indonesia during the period of 2006 and 2007 by using the non-parametric approach – Data Envelopment Analysis (DEA). The results suggest that the degree of technical efficiency is found to be lower than the degree of scale efficiency which indicates that portion of overall inefficiency is due to producing below the production frontier rather than producing at an inefficient scale. In addition, majority of the banks in the sample exhibit suboptimal scale which imply that output should be expanded to reach the optimal scale. |
| Date: | 2018–01–10 |
| URL: | http://d.repec.org/n?u=RePEc:osf:inarxi:w9j54&r=all |
| By: | Takuji Komatsuzaki; Steve Brito |
| Abstract: | We study the growth determinants in the Eastern Caribbean Currency Union (ECCU), using the Growth at Risk (GaR) framework with a focus on financial variables. We find that excessive bank credit growth is associated with lower future real GDP growth in the medium term especially on the low quantiles of growth distribution. Moreover, worsening of both global financial conditions and external conditions are associated with lower future growth in the short term, especially at the high quantiles of growth distribution. Country-specific results are broadly in line with ECCU-wide results, with some variation potentially due to the strong Citizenship-By-Investment program inflows and lack of credit union data. The establishment of a macroprudential framework in the ECCU would need to pay close attention to credit growth not only of banks but also credit unions and continue to monitor global and external conditions. |
| Date: | 2019–11–15 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:19/247&r=all |
| By: | Giorgio Calcagnini (Department of Economics, Society & Politics, Università di Urbino Carlo Bo); Rebel Cole (College of Business, Florida Atlantic University. U.S.A); Germana Giombini (Department of Economics, Society & Politics, Università di Urbino Carlo Bo); Giuseppe Travaglini (Department of Economics, Society & Politics, Università di Urbino Carlo Bo) |
| Abstract: | Despite the recent academic focus on the effects of the crisis on bank loan quality, a fully satisfying analysis of their causes is still missing, likely because of a lack of detailed information on bank-borrower relationships and the way loan decisions are taken within banks. Thanks to the availability of a large dataset provided us by a regional Italian bank for the three calendar years 2010-2012, we are able to describe changes occurred in the bank loan quality of 3,103 firms, primarily small- and medium-sized firms. Besides a generalized deterioration of the loan quality due to the crisis, our findings show that the loan quality (as measured by each loan rating) is largely influenced by how information is processed and used at the different hierarchical levels within the bank at the time of loan decisions. More specifically, the deterioration of loan quality increases as the loan approval decision is made at higher levels of the lending-decision hierarchy, while it decreases with the firm age, size and the proximity of firms to the bank. The latter result supports the primacy of relationship-lending technology relative to transaction-based lending technology. |
| Keywords: | SMEs funding; Relationship lending, Bank-loan policies. |
| JEL: | G21 G24 O16 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:urb:wpaper:19_07&r=all |
| By: | Selim Elekdag; Sheheryar Malik; Srobona Mitra |
| Abstract: | This paper explores the determinants of profitability across large euro area banks using a novel approach based on conditional profitability distributions. Real GDP growth and the NPL ratio are shown to be the most reliable determinants of bank profitability. However, the estimated conditional distributions reveal that, while higher growth would raise profits on average, a large swath of banks would most likely continue to struggle even amid a strong economic recovery. Therefore, for some banks, a determined reduction in NPLs combined with cost efficiency improvements and customized changes to their business models appears to be the most promising strategy for durably raising profitability. |
| Date: | 2019–11–22 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:19/254&r=all |
| By: | Annika Gnann; Sahika Kaya |
| Abstract: | Liquidity creation is a fundamental function of banks. It provides the public with easy access to funds. These funds are important because they allow households and businesses to consume and invest. In this note, we measure liquidity creation by Canadian financial institutions from the first quarter of 2012 to the second quarter of 2019, using a methodology suggested by Berger and Bouwman (2009) and known as the BB measure. Our assessment shows that the Canadian banking sector created liquidity steadily from 2012 to 2015, stabilizing in 2016 through the second quarter of 2019. Over this period, liquidity creation was mainly driven by two sets of movements on banks’ balance sheets: decreases in illiquid liabilities and increases in liquid liabilities such as bank deposits. Liquidity creation is important for supporting economic growth, but it may have financial stability implications if banks engage in high levels of liquidity creation. Therefore, it is important to monitor this balancing act between the benefits and costs of liquidity creation to predict and perhaps lessen risk to the financial system. To facilitate this, we suggest using the BB measure as a tool. By monitoring the movements on banks’ balance sheets, we can observe the changes in banks’ liquidity creation over time. |
| Keywords: | Financial Institutions; Financial stability; Monetary and financial indicators |
| JEL: | G21 G28 G32 |
| Date: | 2019–12 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocsan:19-30&r=all |
| By: | Anastasios Demertzidis (University of Kassel) |
| Abstract: | The focus of this paper lies in the study of the intraday distribution of the number of transactions and transaction volume (absolute and mean per transaction) in the interbank credit market e-MID in different market states around the events of the financial crisis of 2007. The results show that the distributions of the number and of the volume of transactions can be characterized as U-shaped and the distribution of the mean per transaction as three-peaked. However, there are important differences when it comes to the comparison of the different market states and the differentiation between sell and buy transactions. Moreover, this study detects stylized facts about the market regarding the number of trades and the volume during the day. Sell transactions are higher in each market state. This highlights the fact that this market is used widely to deposit excessive liquidity in all intervals during the day. Furthermore, differences within these variables during different market states can be observe, which highlights the importance of this analysis. This study can strengthen our understanding of the interbank credit market as it is important for policy makers and the daily trading strategies of banks. Additionally, implications can be seen as the basis for further empirical and econometric research. |
| Keywords: | Interbank credit market, e-MID, intraday frequency, financial crisis |
| JEL: | C46 G01 G12 G15 Y10 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:mar:magkse:201932&r=all |
| By: | Grodecka-Messi, Anna (Department of Economics, Lund University) |
| Abstract: | In this paper, a unique event is studied: the opening of Bank of Canada in 1935, the central bank note issuance monopoly and its impact on the note issuing chartered banks. Between 1935-1950, Canadian chartered banks had to gradually withdraw their notes from circulation. In a difference-in-differences analysis, I show that chartered banks constrained by new issuance limits experienced higher volatility of return-on-equity in the short run and lower Z-scores and return-on-assets in the longer horizon, suggesting that note issuance was an important source of revenue for private banks and allowed them to smooth the profits. The effect on lending is either non-significant or ambiguous. This study of central bank cash implementation can offer lessons for the current debates on a new form of central bank money - central bank digital currencies - and their potential impacts on commercial banks. |
| Keywords: | Banknote Monopoly; Banknote Issuance; Cash; Central Bank Digital Currencies; Double Liability; Canadian banks; Financial Stability; Bank of Canada |
| JEL: | E42 E50 G21 G28 N22 |
| Date: | 2019–12–16 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:lunewp:2019_021&r=all |