nep-ban New Economics Papers
on Banking
Issue of 2020‒01‒20
twelve papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Bank Risk-Taking in a Small Open Economy. By Pozo, Jorge
  2. Capital Flows and Bank Risk-Taking. By Pozo, Jorge
  3. Bank loan supply during crises: the importance of geographic diversification By Sebastian Doerr; Philipp Schaz
  4. Market Structure and Financial Stability: Theory and Evidence By AMENDOLA, Adalgiso; BARRA, Cristian; BOCCIA, Marinella; PAPACCIO, Anna
  5. Bank Monitoring and Liquidity in the Business Cycle By Minetti, Raoul; Cal, Qingqing; Di Pietro, Marco; Kokas, Sotirios
  6. The Signalling Channel of Negative Interest Rates By Oliver de Groot; Alexander Haas
  7. Systematic Banking Crises: The Relationship Between Concentration and Interbank Connections. By Andrea Calef
  8. Effects of credit limit on efficiency and welfare in a simple general equilibrium model By Pham, Ngoc-Sang; Pham, Hien
  9. Fiscal distress and banking performance: the role of macroprudential regulation By Hiona Balfoussia; Harris Dellas; Dimitris Papageorgiou
  10. Corporate Governance and Liquidity Risk of Bank of China By YAN, SHIWEI
  11. International Banking and Financial Fragility: The Contrasting Experience of Brazil and Mexico in the Lead-up to the 1982 Crisis By Sebastian Alvarez
  12. Bank instability: Interbank linkages and the role of disclosure By Christian König-Kersting; Stefan T. Trautmann; Razvan Vlahu

  1. By: Pozo, Jorge (Banco Central de Reserva del Perú)
    Abstract: I develop an open economy model with banks facing foreign borrowing limits. The interaction of banks' limited liability and deposit insurance leads banks into socially excessive risk-taking, which involves credit volume and not the type of credit. The novel result is that, under a realistic calibration, a lower foreign interest rate reduces the excessive bank risk-taking. Since the foreign borrowing limit is binding, this lower rate does not boost banks' credit, but rather decreases it, since for a given capital the lower rate reduces the default probability of banks, which diminishes their risk-taking incentives. Through the same mechanism, a greater access to the international credit markets reduces the excessive risk-taking by banks. Hence, less banking regulation to achieve socially efficient risk-taking is required after a foreign rate reduction and a higher foreign borrowing limit.
    Keywords: Macroprudential policies, financial stability, monetary policy and bank risk-taking.
    JEL: E44 E52 F41 G01 G21 G28
    Date: 2019–12
  2. By: Pozo, Jorge (Banco Central de Reserva del Perú)
    Abstract: I build up a framework to study the dynamics of the default probability of banks and the excess bank risk-taking in an emerging economy. I calibrate the model for the 1998 Peruvian economy. The novelty result is that an infinity-period model creates an intertemporal channel that amplifies banks' incentives to take excessive risk. I simulate the sudden stop that hit Peru in 1998 as a negative shock on the foreign borrowing limit of banks. The model accurately predicts the substantial short-term rise in the morosity rate through the rise of the excess bank risk-taking after the sudden stop.
    Keywords: Sudden stop, bank risk-taking, prudential policy.
    JEL: E44 F41 G01 G21 G28
    Date: 2019–12
  3. By: Sebastian Doerr; Philipp Schaz
    Abstract: We classify a large sample of banks according to the geographic diversification of their international syndicated loan portfolio. Our results show that diversified banks maintain higher loan supply during banking crises in borrower countries. The positive loan supply effects lead to higher investment and employment growth for firms. Diversified banks have a stabilizing effect, thanks to their ability to raise additional funding during times of distress, which also shields connected markets from spillovers. Further distinguishing banks by nationality reveals a pecking order: diversified domestic banks are the most stable source of funding, while foreign banks with little diversification are the most fickle. Our findings suggest that the decline in financial integration since the recent crisis increases countries' vulnerability to local shocks.
    Keywords: global banks, diversification, syndicated loans, financial crisis
    JEL: F30 G2
    Date: 2019–12
  4. By: AMENDOLA, Adalgiso (CELPE - Centre of Labour Economics and Economic Policy, University of Salerno - Italy); BARRA, Cristian (CELPE - Centre of Labour Economics and Economic Policy, University of Salerno - Italy); BOCCIA, Marinella (CELPE - Centre of Labour Economics and Economic Policy, University of Salerno - Italy); PAPACCIO, Anna (CELPE - Centre of Labour Economics and Economic Policy, University of Salerno - Italy)
    Abstract: This paper investigates on the relationship between market structure and financial stability. More in details, considering the profit-oriented commercial banks and mutual cooperative banks, this work presents both a theoretical and an empirical approach in order to test the above relationship. As to the theoretical framework a case of imperfect mixed-Cournot competition between the two types of agents and a form of credit risk are considered. Moreover, to empirically explore the link between competition and financial stability the analysis employs a parametric approach using the ABI data allowing banks’ information from 1994 to 2015. The overall results show a negative trade-off between concentration and financial stability. However, this result, in the theoretical model, is strictly dependent on mutual cooperative banks’ presence in the market.
    Keywords: Market Structure; Bank’s Risk; Profitability; Financial Stability; U-shaped Relationship
    JEL: G21 L13
    Date: 2018–11–30
  5. By: Minetti, Raoul (Michigan State University, Department of Economics); Cal, Qingqing (Michigan State University, Department of Economics); Di Pietro, Marco (Sapienza University of Rome); Kokas, Sotirios (University of Glasgow)
    Abstract: This paper studies the interaction between bank monitoring and liquidity and its impact on business cycle transmission. We develop a dynamic general equilibrium model with endogenous loan monitoring and constrained banks in retail and wholesale liquidity markets. Liquidity shortages and loan portfolio values govern banks' monitoring incentives and productivity. Calibrating the model to U.S. data reveals that banks monitoring acts as a countercyclical attenuator of aggregate liquidity shocks but as an amplifier of capital shocks that erode loan portfolio values. Credit policies can temporarily dilute stabilizing effects of bank monitoring. The model predictions are broadly consistent with granular evidence on 200 U.S. banks over 1995-2015.
    Keywords: Bank monitoring; Liquidity constraints; Business cycles
    JEL: E32 E44 F44
    Date: 2020–01–09
  6. By: Oliver de Groot; Alexander Haas
    Abstract: Negative interest rates are a new (and controversial) monetary policy tool. This paper studies a novel signalling channel and asks whether negative rates can be 1) an effective and 2) an optimal policy tool. 1) We build a financial-friction newKeynesian model in which monetary policy can set a negative reserve rate, but deposit rates are constrained by zero. All else equal, a negative rate contracts bank net worth and increases credit spreads (the costly “interest margin” channel). However, it also signals lower future deposit rates, even with current deposit rates constrained, boosting aggregate demand and net worth. Quantitatively, we find the signalling channel dominates, but the effectiveness of negative rates depends crucially on three factors: i) degree of policy inertia, ii) level of reserves, iii) zero lower bound duration. 2) In a simplified model we prove two necessary conditions for the optimality of negative rates: i) time-consistent policy setting, ii) preference for policy smoothing.
    Keywords: Monetary policy, Taylor rule, Forward guidance, Liquidity trap
    JEL: E44 E52 E61
    Date: 2019–08
  7. By: Andrea Calef (University of East Anglia)
    Abstract: In this paper I study the extent to which the nexus between concentration and interbank linkages affects financial stability, using data for a sample of 19,689 banks in 69 countries from 1995 to 2014. I find that high levels of interbank exposures decrease the probability of observing a systemic banking crisis, when the banking system is either highly concentrated or fragmented. The relationship between concentration and stability is found to be non-monotonic, as predicted by Martinez-Miera & Repullo (2010), although not U-shaped.
    Keywords: banking crisis, systemic risk, market structure; interbank linkages, network, contagion.
    JEL: G01 G21 G28
    Date: 2020–01–15
  8. By: Pham, Ngoc-Sang; Pham, Hien
    Abstract: We consider a simple general equilibrium model with two agents under the presence of financial market imperfections: agents can borrow to realize their productive project up to the level of debt whose repayment reaches a fraction of the project's value (so-called credit limit). After characterizing the whole set of equilibria, we investigate the connection between credit limit, (individual and social) welfare, and efficiency. We also compute the optimal credit limit which maximizes the social welfare function.
    Keywords: General equilibrium, credit limit, welfare, efficiency
    JEL: D5 E44 G10
    Date: 2019–08–05
  9. By: Hiona Balfoussia (Bank of Greece); Harris Dellas (University of Bern, CEPR); Dimitris Papageorgiou (Bank of Greece)
    Abstract: Fiscal fragility can undermine a government’s ability to honor its bank deposit insurance pledge and induces a positive correlation between sovereign default risk and financial (bank) default risk. We show that this positive relation is reversed if bank capital requirements in fiscally weak countries are allowed to adjust optimally. The resulting higher requirements buttress the banking system and support higher output and welfare relative to the case where macroprudential policy does not vary with the degree of fiscal stress. Fiscal tenuousness also exacerbates the effects of other risk shocks. Nonetheless, the economy’s response can be mitigated if macroprudential policy is adjusted optimally. Our analysis implies that, on the basis of fiscal strength, fiscally weak countries would favor and fiscally strong countries would object to banking union.
    Keywords: Fiscal distress; bank performance; optimal macroprudential policy;Greece; banking union
    JEL: E3 E44 G01 G21 O52
    Date: 2019–12
  10. By: YAN, SHIWEI
    Abstract: The aim of this study is to exam the relationship between the return on asset (ROA) and the internal, external factors of the companies.Kupiec, P. , & Lee, Y. (2012), stated that ROA is very useful statistic for comparing the profitability of banks. The companies I had chosen for this study are Bank of China.I collected this bank’s data from 2014 to 2018.The independent variables used for this study are current ratio,credit risk,operating margin,CGI, GDP,inflation, interest rate,and exchange rate, while the dependent variable is ROA. We used SPSS to analyse the statistics and the relationship between the dependent variable and the independent variables.
    Keywords: ROA, Bank of China,independent variables ,dependent variable
    JEL: G3 G32 O16
    Date: 2019–11–21
  11. By: Sebastian Alvarez
    Abstract: The recent international financial crisis has dramatically revealed the shortcomings and potential dangers of bank globalization and deeper financial integration. While the lack of supervision and adequate legal frameworks has been largely acknowledged as a main problem, the effects of regulation on the development of international banking activity and financial stability are still a matter of controversy. This article investigates the conditions under which the globalization of the domestic banking sector unfolded in Brazil and Mexico during the years of dizzying expansion of foreign finance that culminated the international debt crisis of 1982. It shows how the regulatory framework for international banking and foreign capital in Brazil created a model of intermediation that was considerably less vulnerable to crisis than in Mexico, with a more lightly regulated institutional base. These findings provide insights into historical discussions about the implications of financial regulation and capital controls for the development and expansion of foreign finance and whether the risks underlying international banking are necessarily inherent to the process of financial globalization.
    Date: 2020–01–06
  12. By: Christian König-Kersting; Stefan T. Trautmann; Razvan Vlahu
    Abstract: We study the impact of disclosure about bank fundamentals on depositors' behavior in the presence (and absence) of economic linkages between financial institutions. Using a controlled laboratory environment, we identify under which conditions disclosure is conducive to bank stability. We find that bank deposits are sensitive to perceived bank performance. While banks with strong fundamentals benefit from more precise disclosure, an opposing effect is present for solvent banks with weaker fundamentals. Depositors take information about economic linkages into account and correctly identify when disclosure about one institution conveys meaningful information for others. Our findings highlight both the costs and benefits of bank transparency and suggest that disclosure is not always stability enhancing.
    Keywords: Disclosure; Banks; Interbank linkages; Coordination; Beliefs
    JEL: D81 G21 G28
    Date: 2020–01

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