nep-ban New Economics Papers
on Banking
Issue of 2020‒02‒03
eighteen papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Bad bank resolutions and bank lending By Michael Brei; Leonardo Gambacorta; Marcella Lucchetta; Marcella Lucchetta
  2. Lifting the banking veil: credit standards’ harmonization through lending transparency By Kang, Jung Koo; Loumioti, Maria; Wittenberg-Moerman, Regina
  3. Systemic Risk of the Consumer Credit Network across Financial Institutions By Hyun Hak Kim; Hosung Jung
  4. Government Guarantees and Bank Vulnerability during a Crisis: Evidence from an Emerging Market By Viral V. Acharya; Nirupama Kulkarni
  5. Impact of IFRS 9 on the cost of funding of banks in Europe By Fatouh, Mahmoud; Bock, Robert; Ouenniche, Jamal
  6. Discovering Hidden Patterns in Loan Reimbursement By Niknamian, Sorush
  7. Banks' Credit Losses and Provisioning over the Business Cycle: Implications for IFRS 9 By Simona Malovana; Zaneta Tesarova
  8. Does diversification affect the quality of loan portfolio?Panel Granger-causality evidence from US banks By Tran, Dung Viet; Ho, Sy-Hoa
  9. Forecasting with a Panel Tobit Model By Laura Liu; Hyungsik Roger Moon; Frank Schorfheide
  10. Firm or bank weakness? Access to finance since the European sovereign debt crisis By Corbisiero, Giuseppe; Faccia, Donata
  11. Using Revenue Sharing for Higher Risk and Return Business Ventures in Microfinance: An Experimental Study By Jeremy Clark; John Spraggon
  12. Financial Stability with Sovereign Debt By Ryuichiro Izumi
  13. Bank funding costs and solvency By Pancaro, Cosimo; Żochowski, Dawid; Arnould, Guillaume
  14. Uncertainty, Credit and Investment: Evidence from Firm-Bank Matched Data By Youngju Kim; Seohyun Lee; Hyunjoon Lim
  15. The Cash-Flow Channel of Monetary Policy: Evidence from Mortgage Borrowers By Sang-yoon Song
  16. Forward Guidance and Corporate Lending By Delis, Manthos; Hong, Sizhe; Paltalidis, Nikos; Philip, Dennis
  17. The Bright Side of the Doom Loop: Banks Exposure and Default Incentives By Luis Rojas; Dominik Thaler
  18. Effects of Fiscal Policy on Credit Markets By Alan J. Auerbach; Yuriy Gorodnichenko; Daniel Murphy

  1. By: Michael Brei; Leonardo Gambacorta; Marcella Lucchetta; Marcella Lucchetta
    Abstract: The paper investigates whether impaired asset segregation tools, otherwise known as bad banks, and recapitalisation lead to a recovery in the originating banks' lending and a reduction in non-performing loans (NPLs). Results are based on a novel data set covering 135 banks from 15 European banking systems over the period 2000-16. The main finding is that bad bank segregations are effective in cleaning up balance sheets and promoting bank lending only if they combine recapitalisation with asset segregation. Used in isolation, neither tool will suffice to spur lending and reduce future NPLs. Exploiting the heterogeneity in asset segregation events, we find that asset segregation is more effective when: (i) asset purchases are funded privately; (ii) smaller shares of the originating bank's assets are segregated; and (iii) asset segregation occurs in countries with more efficient legal systems. Our results continue to hold when we address the potential endogeneity problem associated with the creation of a bad bank.
    Keywords: bad banks, resolutions, lending, non-performing loans, rescue packages, recapitalisations
    JEL: E44 G01 G21
    Date: 2020–01
  2. By: Kang, Jung Koo; Loumioti, Maria; Wittenberg-Moerman, Regina
    Abstract: We explore whether the transparency in banks’ lending activities enhances the harmonization of credit terms that a bank offers across its different geographic regions. We take advantage of a novel loan-level reporting initiative by the European Central Bank, which requires repo borrowing banks that pledge their asset-backed securities as collateral to disclose granular information on loan characteristics and performance. We find that loans originated under the transparency regime share more similar interest rate, loan-to-collateral-value ratio and maturity compared to same-purpose loans issued by the same bank in different regions. Underperforming regional branches and those with less easily accessible peer-branches experience greater convergence in their credit terms, suggesting that transparency facilitates learning across a bank’s different geographic regions. Additionally, banks that face stronger regulatory scrutiny are more likely to alleviate credit term disparities under the transparency regime. Overall, our findings suggest that transparency enhances the within-bank harmonization of lending practices. JEL Classification: M41, G21, D83
    Keywords: credit market, harmonization, learning, regulatory scrutiny, transparency
    Date: 2020–01
  3. By: Hyun Hak Kim (Department of Economics, Kookmin University); Hosung Jung (Economic Research Institute, Bank of Korea)
    Abstract: We investigate a network of financial institutions in Korea using the Korea Consumer Credit Panel (KCCP). The main contribution of this paper is that we construct the network of financial institution from the consumer credit level. We assume each consumer make a loan from multiple institutions so that those institutions share same risk from same consumer no matter of quality or type of loan. Then we construct the financial network between institutions and compute contagion index based on those multiple connection with a weight of default probability of individual borrowers. We found strong connection with banking institutions and credit card firms due to convenience in making small-amount loans with credit cards. However, when we give an weight with default probability to the linkage among institutions, connections of banking institution with savings bank, non-credit card finance corporation and merchant banking are stronger than others, while banking institution holds center position and has biggest amount of loans individually. Contagion index hit a peak in 2013Q1 and then fell rapidly, finally has been fluctuated in relatively low level from 2016 to 2017Q2. The result in our paper enables the authority to watch the systemic risk from consumer credit level with specific consumer type with their default probability.
    Keywords: Systemic risk, Financial network, Consumer credit, Financial stability
    JEL: C23 D14 G20 G21 G23
    Date: 2019–09–17
  4. By: Viral V. Acharya; Nirupama Kulkarni
    Abstract: We analyze the performance of Indian banks during 2007–09 relative to their vulnerability to a crisis measured using pre-crisis data, in order to study the impact of government guarantees on bank performance during a crisis. Using bank branch-level regulatory data, we exploit geographic variation in the exposure to state-owned banks to show that vulnerable private sector bank branches in districts with greater exposure to state-owned banks experienced deposit withdrawals and shortening of deposit maturity. In contrast, nearby vulnerable state-owned bank branches grew their deposit base and increased loan advances but with poorer ex-post performance of loans. Our evidence suggests that access to stronger government guarantees during aggregate crises allows even vulnerable state-owned banks to access and extend credit cheaply despite their under-performance, and this renders private sector banks especially vulnerable to crises.
    JEL: G01 G21 G28 H1
    Date: 2019–12
  5. By: Fatouh, Mahmoud (Bank of England and University of Essex); Bock, Robert (University of Edinburgh); Ouenniche, Jamal (University of Edinburgh)
    Abstract: On implementation, IFRS 9 increases credit loss (impairment) charges and reduces after-tax profits of banks. This makes retained earnings and hence capital resources lower than what they would be under IAS 39. To maintain their capital ratios under IFRS 9, banks could elect to hold higher levels of equity capital. This paper uses a modified version of CAPM, which accounts for the low-risk anomaly (as suggested by Baker and Wurgler (2015)), to estimate the impact of this potential increase in capital levels on the cost of funding of banks in six European countries, the UK, Germany, France, Italy, Spain and Switzerland. We confirm the existence of low-risk anomaly for banks’ equity in the six countries, except France. The magnitude of the anomaly varies across countries, but is generally low relative to the long-run cost of equity for banks. Our results show that, on day 1, the implementation of IFRS 9 has minor impact on the cost of funding of banks in the six countries.
    Keywords: IFRS 9; low-risk anomaly; cost of funding; cost of equity; leverage; expected loss model; asset beta
    JEL: D92 G21 G28 G31 L51
    Date: 2020–01–16
  6. By: Niknamian, Sorush
    Abstract: Loans are the major resources at banks. However, in some cases the cost that they incur to banks soar and finally makes them detrimental, as a result of irregular or delaying reimbursement or not paying at all. Due to the low wage rates in Iranian banks and the Central Bank of Iran (CBI) regulations in determining interest rates for deposits and loans, banks are becoming more and more dependent to the loans and their related profits. Therefore, banks have to look for customers with low risk for punctual payment. According to defect loan reimbursement in past years, banks have to specify severe prerequisites and limited contracts in granting loans to their customers. Contravening banking regulations and lack of consistent customers' accreditation banks are getting into heavy losses. Evaluating situations of the granted loans in EN Bank of Iran during a six-month period, based upon the profiles and loans history and the trend of payments useful patterns are discovered; designing a practical model of loan payment in Iran, the future default or failure to regain the granted loans is predicted and sensible methods of granting loans in Iran are developed. In order to extract hidden patterns in data statistical methods and data mining tools with focus on decision tree techniques are applied.
    Date: 2019–12–31
  7. By: Simona Malovana; Zaneta Tesarova
    Abstract: We examine the procyclicality of banks' credit losses and provisions in the Czech Republic using pre-2018 data and then discuss the implications of the findings for provisioning in stage 3 under IFRS 9. This is possible because the majority of banks seem to have aligned their accounting definitions of default with the regulatory definition prior to the implementation of IFRS 9. We find significant asymmetries in banks' behavior over the cycle. Firstly, provisioning procyclicality is strongest in the later contractionary phase and early recovery phase, while it is non-existent in the early contractionary phase. Secondly, banks with higher credit risk behave more procyclically than their peers. If this behavior persists under IFRS 9, it may lead to delayed transfer of exposures between stages and exaggerate cyclical fluctuations.
    Keywords: Credit losses, IFRS 9, procyclicality, provisions
    JEL: C22 E32 G21
    Date: 2019–12
  8. By: Tran, Dung Viet; Ho, Sy-Hoa
    Abstract: This paper investigates the direction of causality between bank business model and the quality of loan portfolio using a large sample of US banks. We employ the panel causality testing approach, developed by Dumitrescu and Hurlin (2012), and new technique of optimal lag selection of Hans et al (2017). Empirical results show that there is evidence of two-way causality between diversification and non-performing loans.
    Keywords: Bank diversification, Non-performing loan, Panel Granger-causality
    JEL: G21 G28 G34
    Date: 2019–01–16
  9. By: Laura Liu; Hyungsik Roger Moon; Frank Schorfheide
    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 coefficients 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.
    JEL: C11 C14 C23 C53 G21
    Date: 2019–12
  10. By: Corbisiero, Giuseppe; Faccia, Donata
    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 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. JEL Classification: E44, F36, G01, G21
    Keywords: bank lending, credit crunch, credit supply, European sovereign debt crisis
    Date: 2020–01
  11. By: Jeremy Clark (University of Canterbury); John Spraggon
    Abstract: We report a group liability microfinance lab experiment that tests a mechanism to raise repayment rates among borrowers whose business plans carry higher exogenous risk and return. The mechanism is optional revenue sharing among the group of borrowers, agreed to before their individual business outcomes are realized and loan repayment decisions are made. Such revenue sharing makes loan repayment optimal under more business outcome states, thus increasing the expected benefit to each borrower of repayment to qualify for future loans. We further test the effect of allowing the borrowers to renege on revenue sharing agreements after learning their business outcomes, prior to making their loan repayment decisions. Our results illustrate the problem that exogenously higher risk/return borrowing groups achieve lower loan repayment rates than lower risk/return borrowing groups. We then find that introducing optional revenue sharing significantly increases the high risk borrowers’ repayment rates, but that most of this gain is lost when successful borrowers can renege on revenue sharing agreements.
    Keywords: Microfinance; Revenue sharing; Profit sharing; Risk; Adverse selection
    JEL: G21 O16 O17 O43
    Date: 2020–01–01
  12. By: Ryuichiro Izumi (Department of Economics, Wesleyan University)
    Abstract: Are government guarantees or fnancial regulation a more effective way to prevent banking crises? I study this question in the presence of a negative feedback loop between the fscal position of the government and the health of the banking sector. I construct a model of fnancial intermediation in which the government issues, and may default on, debt. Banks hold some of this debt, which ties their health to that of the government. The government's tax revenue, in turn, depends on the quantity of investment that banks are able to fnance. I compare the effectiveness of government guarantees, liquidity regulation, and a combination of these policies in preventing self-fulflling bank runs. In some cases, a combination of the two policies is needed to prevent a run. In other cases, liquidity regulation alone is effective and adding guarantees would make the fnancial system fragile.
    Keywords: Bank runs, Sovereign default, Feedback loop, Government guarantees, Liquidity regulation
    JEL: G21 G28 H63
    Date: 2020–01
  13. By: Pancaro, Cosimo; Żochowski, Dawid; Arnould, Guillaume
    Abstract: This paper investigates the relationship between bank funding costs and solvency for a large sample of euro area banks using two proprietary ECB datasets for both wholesale funding costs and deposit rates. In particular, the paper studies the relationship between bank solvency, on the one hand, and senior bond yields, term deposit rates and overnight deposit rates, on the other. The analysis finds a significant negative relationship between bank solvency and the different types of funding costs. It also shows that this relationship is non-linear, namely convex, for senior bond yields and term deposit rates. It also identifies a positive realistic solvency threshold beyond which the effect of an increase in solvency on senior bond yields becomes positive. The paper also finds that senior bond yields are more sensitive to a change in solvency than deposit rates. Among the deposit rates, the interest rates of the overnight deposits are the least sensitive. Banks' asset quality, profitability and liquidity seem to play only a minor role in driving funding costs while the ECB monetary policy stance, sovereign risk and financial markets uncertainty appear to be material drivers. JEL Classification: G15, G21
    Keywords: banks, funding costs, solvency
    Date: 2020–01
  14. By: Youngju Kim (Bank of Korea); Seohyun Lee (The International Monetary Fund and Bank of Korea); Hyunjoon Lim (Bank of Korea)
    Abstract: This paper studies how high uncertainty affects corporate bank loans, addressing the important identification issue. In times of high uncertainty, firms reduce their credit demand due to delayed investments or a deterioration in their credit worthiness, while at the same time banks are more exposed to negative shocks to their balance sheet and thereby reduce credit supply. To isolate the uncertainty effect from the credit supply effect, we employ matched bank-firm loan data covering all loans extended by all financial intermediaries to the universe of listed firms in Korea, a bank-centered economy. Our empirical results reveal that a failure to control for credit supply leads to overestimation of the negative effect of uncertainty on bank loans. In addition, we find that the negative effect is stronger for relatively larger firms or financially unconstrained firms with low leverage or financial slack, once credit supply is controlled for. We confirm the same results in the analysis of firm investment, suggesting that high uncertainty may transmit to investment and bank loans mainly through the real options effects.
    Keywords: Firm-level uncertainty, Bank loan, Investment
    JEL: D84 E22
    Date: 2019–11–06
  15. By: Sang-yoon Song (Economic Research Institute, Bank of Korea)
    Abstract: This paper investigates the relationships between consumption and mortgage interest reduction caused by an expansionary monetary policy, using comprehensive borrower-level information on mortgages and credit card purchases from a credit bureau company in South Korea. The main findings are as follows: (i) the significant and negative relationship between mortgagors¡¯ interest payments and consumption comes from borrowers with ARMs (Adjustable-Rate Mortgages), (ii) among mortgagors with ARMs, those with low liquidity and credit accessibility show a high interest-induced MPC (Marginal Propensity to Consume), (iii) the debt burdens of mortgagors have a weaker effect on the interest-induced MPC heterogeneity due to active deleveraging behavior of borrowers with a high debt burden, (iv) while unconstrained borrowers consistently show low and insignificant MPCs, constrained borrowers (those with low liquidity, credit accessibility) maintain long-lasting high MPCs for eight quarters after interest reduction, and (v) the MPC of those with low liquidity becomes lower as time goes by, indicating that windfall gains by mortgage interest reduction help to relax the liquidity constraints they face. These results imply that financial characteristics of mortgage borrowers can affect the magnitude and persistence of the cash flow channels of an expansionary monetary policy.
    Keywords: Mortgage, Consumption, Monetary Policy, Household Debt
    JEL: D14 E21 E52
    Date: 2019–07–29
  16. By: Delis, Manthos; Hong, Sizhe; Paltalidis, Nikos; Philip, Dennis
    Abstract: We suggest that forward guidance, via “binding” the central bank’s actions and creating associated expectations, fundamentally affects bank-lending decisions independently of other forms of monetary policy. To test this hypothesis, we build a forward guidance measure based on the language used in the Federal Open Market Committee meetings and match this measure with syndicated loans. Our results show that expansionary forward guidance decreases corporate loan spreads and that this effect is stronger for well-capitalized banks lending to riskier firms. Moreover, banks more easily initiate new lending relationships with lower spreads, and the loan syndicates are less concentrated.
    Keywords: Forward guidance; Monetary policy transmission; Bank lending; Corporate loans; Loan spreads; Syndicate structure; Bank-firm relationships
    JEL: E43 E52 E58 G21
    Date: 2020–01–15
  17. By: Luis Rojas; Dominik Thaler
    Abstract: We revisit the doom-loop debate emphasizing the commitment device that the exposure of the financial sector to sovereign debt provides to the sovereign. If this mechanism is strong then lower exposure or a commitment not to bailout banks, two policy prescriptions that have emerged in this literature, can backfire. We present a simple 3-period model with strategic sovereign default where debt is held by local banks or foreign investors and show that: i) Reducing exposure reduces commitment and hence increases the probability of default, without avoiding the “doom loop”. Furthermore, that allowing banks to buy additional sovereign debt in times of sovereign distress can rule out the doom loop. ii) A no bailout commitment is not sufficient to rule out self-fulfilling expectations.
    Keywords: sovereign default, bailout, doom loop, self-fulfilling crises
    JEL: E44 E6 F34
    Date: 2020–01
  18. By: Alan J. Auerbach; Yuriy Gorodnichenko; Daniel Murphy
    Abstract: Credit markets typically freeze in recessions: access to credit declines and the cost of credit increases. A conventional policy response is to rely on monetary tools to saturate financial markets with liquidity. Given limited space for monetary policy in the current economic conditions, we study how fiscal stimulus can influence local credit markets. Using rich geographical variation in U.S. federal government contracts, we document that, in a local economy, interest rates on consumer loans decrease in response to an expansionary government spending shock.
    JEL: E32 E43 E62
    Date: 2020–01

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