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on Banking |
| By: | Leila Aghabarari; Andre Guettler; Mahvish Naeem; Bernardus Van Doornik |
| Abstract: | Credit unions (CUs) may respond to a financial shock differently than other types of banks because of their unique membership-based governance structure. We exploit the financial crisis of 2008/09 as a negative shock to Brazilian banks and analyze the lending behavior of CUs versus those of non-CUs and the subsequent effects on the commercial clients’ labor force. We find evidence that during the financial crisis, CUs tightened access to credit to their members to a lesser extent (insurance effect) than did other bank types. Moreover, compared to non-CUs during the crisis, CUs provided credit with longer maturities and required less collateral, albeit at higher interest rates. Notwithstanding, CUs did not display higher level of non-performing loans on their credit portfolios in comparison to other banks in the crisis period. However, CUs faced relatively higher future default frequencies. Notably, the labor market impact of the insurance effect of CUs is positive for very small firms in the form of an increase in employment and wages in the crisis period. |
| Date: | 2020–01 |
| URL: | http://d.repec.org/n?u=RePEc:bcb:wpaper:511&r=all |
| By: | Corbisiero, Giuseppe (Central Bank of Ireland); Faccia, Donata (European Central Bank) |
| Abstract: | This paper uses a unique dataset where credit rejections experienced by euro area firms are matched with firm and bank characteristics. This allows us to study simultaneously the role that bank weakness and firm weakness had in the credit reduction observed in the euro area during the sovereign debt crisis, and in credit developments characterising the post-crisis recovery. Compared with the existing literature matching borrowers’ and lenders’ characteristics, our dataset provides a better representation of euro area firms of small and medium size. Our findings suggest that, while firm balance sheet factors have been strong determinants of credit rejections, in the crisis period bank weakness made it harder to obtain external finance for firms located in stressed countries of the euro area. |
| Keywords: | Credit supply, Bank lending, Credit crunch, European sovereign debt crisis. |
| JEL: | E44 F36 G01 G21 |
| Date: | 2019–10 |
| URL: | http://d.repec.org/n?u=RePEc:cbi:wpaper:12/rt/19&r=all |
| By: | Acosta-Smith, Jonathan (Bank of England); Arnould, Guillaume (Bank of England); Milonas, Kristoffer (Moodys); Vo, Quynh-Anh (Bank of England) |
| Abstract: | We study the interaction between banks’ capital and their liquidity transformation in both a theoretical and empirical set-up. We first construct a simple model to develop hypotheses which we test empirically. Using a confidential Bank of England dataset that includes bank-specific capital requirement changes since 1989, we find that banks engage in less liquidity transformation when their capital increases. This finding suggests that capital and liquidity requirements are at least to some extent substitutes. By establishing a robust causal relationship, these results can help guide the optimal joint calibration of capital and liquidity requirements and inform macro-prudential policy decisions. |
| Keywords: | Banking; liquidity transformation; capital requirements and financial regulation |
| JEL: | G21 G28 G32 |
| Date: | 2019–12–20 |
| URL: | http://d.repec.org/n?u=RePEc:boe:boeewp:0840&r=all |
| By: | Ulf Lewrick; José María Serena Garralda; Grant Turner |
| Abstract: | Bail-in regulation is a centrepiece of the post-crisis overhaul of bank resolution. It requires major banks to maintain a sufficient amount of "bail-in debt" that can absorb losses during resolution. If resolution regimes are credible, investors in bail-in debt should have a strong incentive to monitor banks and price bail-in risk. We study the pricing of senior bail-in bonds to evaluate whether this is the case. We identify the bail-in risk premium by matching these bonds with comparable senior bonds that are issued by the same banking group but are not subject to bail-in risk. The premium is higher for riskier issuers, consistent with the notion that bond investors exert market discipline on banks. Yet the premium varies pro-cyclically: a decline in marketwide credit risk lowers the bail-in risk premium for all banks, with the compression much stronger for riskier issuers. Banks, in turn, time their bail-in bond issuance to take advantage of periods of low premia. |
| Keywords: | too big to fail, banking regulation, TLAC, financial stability |
| JEL: | E44 E61 G28 |
| Date: | 2019–12 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:831&r=all |
| By: | Rodrigo Barbone Gonzalez; Dmitry Khametshin; RJose-Luis Peydro; Andrea Polo |
| Abstract: | Bail-in regulation is a centrepiece of the post-crisis overhaul of bank resolution. It requires major banks to maintain a sufficient amount of "bail-in debt" that can absorb losses during resolution. If resolution regimes are credible, investors in bail-in debt should have a strong incentive to monitor banks and price bail-in risk. We study the pricing of senior bail-in bonds to evaluate whether this is the case. We identify the bail-in risk premium by matching these bonds with comparable senior bonds that are issued by the same banking group but are not subject to bail-in risk. The premium is higher for riskier issuers, consistent with the notion that bond investors exert market discipline on banks. Yet the premium varies pro-cyclically: a decline in marketwide credit risk lowers the bail-in risk premium for all banks, with the compression much stronger for riskier issuers. Banks, in turn, time their bail-in bond issuance to take advantage of periods of low premia. |
| Keywords: | foreign exchange, monetary policy, central bank, bank credit, hedging |
| JEL: | E5 F3 G01 G21 G28 |
| Date: | 2019–12 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:832&r=all |
| By: | Leonardo Gambacorta; Luigi Guiso; Paolo Emilio Mistrulli; Andrea Pozzi; Anton Tsoy |
| Abstract: | We build a model of the mortgage market where banks attain their optimal mortgage portfolio by setting rates and "steering" customers. "Sophisticated" households know which mortgage type is best for them, while "naïve" ones are susceptible to steering by their banks. Using data on the universe of Italian mortgages, we estimate the model and quantify the welfare implications of steering. The analysis shows that banks' steering activity could generate distortions, with welfare effects that vary between households depending on their degree of sophistication. However, the introduction of measures to restrict the scope for banks to steer their customers would not necessarily increase household welfare, because such activities, even if potentially distortive, may also contain useful information. By contrast, a financial literacy campaign always has a beneficial effect on the welfare of naïve households, which are proportionately more exposed to the risk of taking inappropriate financial decisions. |
| Keywords: | steering, financial advice, mortgage market, consumer protection |
| JEL: | G21 D18 D12 |
| Date: | 2019–12 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:835&r=all |
| By: | Saki Bigio; Adrien d'Avernas |
| Abstract: | Financial crises are particularly severe and lengthy when banks fail to recapitalize after bearing large losses. We present a model that explains the slow recovery of bank capital and economic activity. Banks provide intermediation in markets with information asymmetries. Large equity losses force banks to tighten intermediation, which exacerbates adverse selection. Adverse selection lowers bank profit margins which slows both the internal growth of equity and equity injections. This mechanism generates financial crises characterized by persistent low growth. The lack of equity injections during crises is a coordination failure that is solved when the decision to recapitalize banks is centralized. |
| JEL: | E32 E44 G01 G21 |
| Date: | 2019–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:26561&r=all |
| By: | Gaffney, Edward (Central Bank of Ireland) |
| Abstract: | I show that lenders respond to Ireland’s macroprudential mortgage measures by reducing lending and leverage to households seeking high loan-to-income ratios. Applying a bunching estimator to supervisory mortgage records in Ireland, it is shown that at least one in eight owner-occupier borrowers in 2018 took on less debt than they would have if there were no loan-to-income limit. The total reduction is at least one-half of one per cent of all new mortgage lending. Households at the limit earn less than other borrowers and are more likely to be single-income, two characteristics that have been associated historically with higher credit risk. These households reduce leverage by committing more gifts and non-earned deposits than other borrowers. The results suggest that due to the loan-to-income regulation, households with high credit-risk characteristics tend to borrow less, easing their burdens of leverage and debt service. |
| Date: | 2019–11 |
| URL: | http://d.repec.org/n?u=RePEc:cbi:fsnote:11/fs/19&r=all |
| By: | McQuinn, John (Central Bank of Ireland) |
| Abstract: | Small and Medium Enterprise (SME) access to credit deteriorated during the financial crisis and credit constraints remain high for some euro area countries. This paper investigates the factors linked to the variation in SME credit access across euro area countries. After controlling for the fundamental performance and characteristics of firms and bank funding costs, I investigate the financial and macroeconomic channels that explain variation in credit constraints across countries and time. The paper combines approaches taken in the literature, extends the analysis to the post-crisis period, distinguishes between alternative measures of credit constraints and incorporates the role of soft information. The most economically important channels associated with SME access to finance are found to be the soft information channel and firm indebtedness. Bank competition and the condition of bank balance sheets are also found to have economically important relationships with SME access to finance. |
| Keywords: | access to finance, SMEs, financial crises, soft information, firm indebtedness, bank competition, bank balance sheets, capital markets union. |
| JEL: | G01 G21 D22 D82 E66 |
| Date: | 2019–08 |
| URL: | http://d.repec.org/n?u=RePEc:cbi:wpaper:10/rt/19&r=all |
| By: | Iconio Garrì (Bank of Italy) |
| Abstract: | This paper studies the effects of bank branch closures on individual business borrowers, using a sample of events that occurred in Italy between 2010 and 2014. I find that a branch closing down increases the probability of a credit relationship terminating. The impact is weaker the shorter the distance from an alternative branch of the bank, the longer the duration of the relationship and the greater the bank’s share of loans to the firm. However, branch closure is not generally associated with a decrease in the total amount of credit available for the firms formerly served by the closed branch. A temporary shrinkage of loans only occurs for small borrowers and short-term credit lines. |
| Keywords: | bank branch, closures, lending relationship, matching |
| JEL: | G21 D82 |
| Date: | 2019–12 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:wptemi:td_1254_19&r=all |
| By: | Bernhardt, Dan (University of Illinois and University of Warwick); Koufopoulos, Kostas (University of York); Trigilia, Giulio (University of Rochester) |
| Abstract: | Donaldson, Gromb and Piacentino (2019) suggest that, in the presence of limited commitment, increasing the fraction of a firm’s cash flows that can be pledged as collateral might make the firm worse off. We show that, in fact, firms can never be hurt by increased pledgeability of cash flows in their framework. We then show that the first best can always be implemented by non-state contingent collateralized debt contracts that differ from the ones they consider. |
| Keywords: | Collateral ; Secured debt ; Pledgeability |
| JEL: | G21 G32 G33 G38 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:wrk:warwec:1237&r=all |
| By: | Nicola Cetorelli (Brown University; National Bureau of Economic Research; Research and Statistics Group; Federal Reserve Bank; Federal Reserve Bank of New York); Douglas Leonard (Federal Reserve Bank of New York, Research and Statistics Group, Financial Intermediation Function) |
| Abstract: | Over the past thirty years, more than 2,900 U.S. banks have transformed from pure depository institutions into conglomerates involved in a broad range of business activities. What type of banks choose to become conglomerate organizations? In this post, we document that, from 1986 to 2018, such institutions had, on average, a higher return on equity in the three years prior to their decision to expand, as well as a lower level of risk overall. However, this superior pre-expansion performance diminishes over time, and all but disappears by the end of the 1990s. |
| Keywords: | Banking; Selection; Conglomeration |
| JEL: | G0 G2 G21 |
| Date: | 2019–12–16 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednls:86689&r=all |
| By: | Matey, Juabin |
| Abstract: | A robust bank industry is a major player in the stability of an economy.This calls for an efficient management the banks to properly situate them in the context of robustness. By way of financial ratios and Z-score, the study analysed UT Bank’s financial performance prior to the recent bank sector reforms in Ghana. Annual financials over a ten year period (2007-2016) 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. Inability to meet creditors’ claims would have been eminent considering the average mean 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 a sound footing 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: | E5 E58 G1 G20 G21 G24 G28 |
| Date: | 2019–11 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:97282&r=all |
| 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 D60 E21 E44 G21 |
| Date: | 2019–12 |
| URL: | http://d.repec.org/n?u=RePEc:hka:wpaper:2019-071&r=all |
| By: | Muteba Mwamba, John Weirstrass; Mhlophe, Bongani |
| Abstract: | This paper examines the extraction of the empirical asset correlation for three datasets of monthly defaults on loans and credit cards obtained from the SARB from February 2006 to January 2017. The study makes use of the Beta and Vasicek distributions over a static period of time, as well as a rolling period of time. However two different calculation approaches (mode and percentile) are used for the Vasicek distribution assumption. We first use these three distinct calculation approaches to empirically estimate the asset correlation over a static period of time and compare them to the BCBS (Basel Committee for Bank Supervision) prescribed asset correlations. The computed empirical asset correlations are thereafter used to determine the economic capital and compare it to the economic capital determined using the BCBS prescribed asset correlations. Secondly, we use these three distinct calculation approaches to empirically estimate the asset correlation over a rolling five-year period and compare them to the BCBS’ prescribed asset correlations. For both the static and five-year rolling empirical asset correlations, we show that the BCBS’ prescribed asset correlations are much higher than the empirical asset correlations for the South African loans dataset. However, the opposite is found for both the credit card default and writeoff datasets which had higher empirical asset correlations. The economic capital charge calculated using the computed empirical asset correlations is lower than the economic capital calculated using the BCBS’ prescribed asset correlations for the South African loans dataset, while the opposite result is found for both the credit card default and write-off datasets. This result implies that the BCBS’ prescribed asset correlation is not as conservative as intended for South African bank specific credit cards and that the required capital charge stipulated by the BCBS is not sufficient to cover unexpected losses. This may have dire consequences to the South African banking system through systemic risk. Therefore, we recommend that the capital levels be raised to match the capital levels determined in this study. |
| Keywords: | asset correlation, Vasicek distribution, Beta distribution, BCBS, economic capital, credit card defaults |
| JEL: | C1 C15 G1 G12 G3 |
| Date: | 2019–08–14 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:97340&r=all |
| By: | Paolo Emilio Mistrulli (Bank of Italy); Luca Antelmo (Bank of Italy); Maddalena Galardo (Bank of Italy); Iconio Garrì (Bank of Italy); Dario Pellegrino (Bank of Italy); Davide Revelli (Bank of Italy); Vito Savino (Bank of Italy) |
| Abstract: | In the aftermath of the Great Recession, the number of bank branches declined in most of developed countries. In this paper, we investigate how banks have downsized their branch networks in Italy, by comparing the pre and post crisis spatial distribution of branches. By using a detailed dataset that includes a wide set of controls for the characteristics of each bank branch, we estimate the probability of a branch being closed as a function of its distance from both proprietary and competitors’ branches. We find that banks are more prone to close branches in those areas where other proprietary branches are closer and also where competitors’ branches are closer. This indicates that, since the start of the crisis, banks have closed branches especially in those areas where their proprietary network was relatively more populated and competition was fiercer. |
| Keywords: | Bank Branch, Geographical Location, Market Structure |
| JEL: | G21 L10 R3 |
| Date: | 2019–12 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:opques:qef_540_19&r=all |
| By: | Marcel Br\"autigam; Marie Kratz |
| Abstract: | Procyclicality of historical risk measure estimation means that one tends to over-estimate future risk when present realized volatility is high and vice versa under-estimate future risk when the realized volatility is low. Out of it different questions arise, relevant for applications and theory: What are the factors which affect the degree of procyclicality? More specifically, how does the choice of risk measure affect this? How does this behaviour vary with the choice of realized volatility estimator? How do different underlying model assumptions influence the pro-cyclical effect? In this paper we consider three different well-known risk measures (Value-at-Risk, Expected Shortfall, Expectile), the r-th absolute centred sample moment, for any integer $r>0$, as realized volatility estimator (this includes the sample variance and the sample mean absolute deviation around the sample mean) and two models (either an iid model or an augmented GARCH($p$,$q$) model). We show that the strength of procyclicality depends on these three factors, the choice of risk measure, the realized volatility estimator and the model considered. But, no matter the choices, the procyclicality will always be present. |
| Date: | 2020–01 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2001.00529&r=all |
| By: | Bräuning, Michael; Malikkidou, Despo; Scricco, Giorgio; Scalone, Stefano |
| Abstract: | This paper describes a machine learning technique to timely identify cases of individual bank financial distress. Our work represents the first attempt in the literature to develop an early warning system specifically for small European banks. We employ a machine learning technique, and build a decision tree model using a dataset of official supervisory reporting, complemented with qualitative banking sector and macroeconomic variables. We propose a new and wider definition of financial distress, in order to capture bank distress cases at an earlier stage with respect to the existing literature on bank failures; by doing so, given the rarity of bank defaults in Europe we significantly increase the number of events on which to estimate the model, thus increasing the model precision; in this way we identify bank crises at an earlier stage with respect to the usual default definition, therefore leaving a time window for supervisory intervention. The Quinlan C5.0 algorithm we use to estimate the model also allows us to adopt a conservative approach to misclassification: as we deal with bank distress cases, we consider missing a distress event twice as costly as raising a false flag. Our final model comprises 12 variables in 19 nodes, and outperforms a logit model estimation, which we use to benchmark our analysis; validation and back testing also suggest that the good performance of our model is relatively stable and robust. JEL Classification: E58, C01, C50 |
| Keywords: | bank distress, decision tree, machine learning, Quinlan |
| Date: | 2019–12 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20192348&r=all |
| By: | Mohamed Belkhir; Sami Ben Naceur; Ralph Chami; Anis Semet |
| Abstract: | Using a sample of publicly listed banks from 62 countries over the 1991-2017 period, we investigate the impact of capital on banks’ cost of equity. Consistent with the theoretical prediction that more equity in the capital mix leads to a fall in firms’ costs of equity, we find that better capitalized banks enjoy lower equity costs. Our baseline estimations indicate that a 1 percentage point increase in a bank’s equity-to-assets ratio lowers its cost of equity by about 18 basis points. Our results also suggest that the form of capital that investors value the most is sheer equity capital; other forms of capital, such as Tier 2 regulatory capital, are less (or not at all) valued by investors. Additionally, our main finding that capital has a negative effect on banks’ cost of equity holds in both developed and developing countries. The results of this paper provide the missing evidence in the debate on the effects of higher capital requirements on banks’ funding costs. |
| Date: | 2019–12–04 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:19/265&r=all |
| By: | UEDA Kenichi |
| Abstract: | To reduce the future occurrence of bank bailouts, after the global financial crisis of 2008, the financial stability policies seem to settle into stronger prudential regulations (e.g., capital requirements) and speedier bankruptcy procedures especially for big banks (e.g., living wills). Speedier bankruptcy procedures have also been adopted to help heavily indebted households and corporations in many countries. However, I argue here an opposite consequence. Because of simple and speedy bankruptcy procedures, along with prudential regulations, bank bailouts can be justified in a crisis. This result emerges as an implication of optimal contracts in general equilibrium with an endogenous, competitive banking sector. |
| Date: | 2019–12 |
| URL: | http://d.repec.org/n?u=RePEc:eti:dpaper:19108&r=all |