nep-ban New Economics Papers
on Banking
Issue of 2020‒02‒17
six papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Bank funding costs and solvency By Arnould, Guillaume; Pancaro, Cosimo; Żochowski, Dawid
  2. Monetary Stimulus Policy in China: the Bank Credit Channel By Min Zhang; Yahong Zhang
  3. Bank-Intermediated Arbitrage By Or Shachar; Thomas M. Eisenbach; Nina Boyarchenko; Peter Van Tassel; Pooja Gupta
  4. What Makes a Bank Stable? A Framework for Analysis By Tanju Yorulmazer; Thomas M. Eisenbach
  5. Countercyclical Capital Buffers: A Cautionary Tale By Christoffer Koch; Gary Richardson; Patrick Van Horn
  6. Evolution and Current Status of the Competitive Environment in the Serbian Banking Sector: Concentration Indices Analysis By Bukvić, Rajko

  1. By: Arnould, Guillaume (Bank of England); Pancaro, Cosimo (European Central Bank); Żochowski, Dawid (European Central Bank)
    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.
    Keywords: Banks; solvency; funding costs
    JEL: G15 G21
    Date: 2020–02–07
  2. By: Min Zhang (East China Normal University, Faculty of Economics and Management, School of Economics); Yahong Zhang (Department of Economics, University of Windsor)
    Abstract: This paper develops a novel while plausible way to model the Chinese monetary transmission via open market operations (OMOs). In the model, monetary injections through OMOs, together with differentiated collateral regulation in the banking sector, directly affect banks' loan capacities, which then influences sectoral investments and aggregate GDP. The quantitative analysis shows that the 2009--2010 monetary expansion explains nearly 90 percent of the rise in GDP growth. Moreover, balancing credit allocation across sectors and applying unified banking regulations jointly enhance the GDP growth rate by 2.15 percentage points, with the contribution of the unified banking regulations proving more important.
    Keywords: Monetary stimulus, Bank credit channel, Open market operation rule, Chinese economy
    JEL: E32 E44 E52
    Date: 2020–02
  3. By: Or Shachar; Thomas M. Eisenbach (Leonard N. Stern School of Business; Federal Reserve Bank of New York); Nina Boyarchenko; Peter Van Tassel; Pooja Gupta
    Abstract: Since the 2007-09 financial crisis, the prices of closely related assets have shown persistent deviations?so-called basis spreads. Because such disparities create apparent profit opportunities, the question arises of why they are not arbitraged away. In a recent Staff Report, we argue that post-crisis changes to regulation and market structure have increased the costs to banks of participating in spread-narrowing trades, creating limits to arbitrage. In addition, although one might expect hedge funds to act as arbitrageurs, we find evidence that post-crisis regulation affects not only the targeted banks but also spills over to less regulated firms that rely on bank intermediation for their arbitrage strategies.
    Keywords: bank regulation; hedge funds; arbitrage
    JEL: G1 G2
  4. By: Tanju Yorulmazer (Federal Reserve Bank of New York; Bank of England; Federal Reserve Bank; National Bureau of Economic Research; Research and Statistics Group; Tel Aviv University; New York University); Thomas M. Eisenbach (Leonard N. Stern School of Business; Federal Reserve Bank of New York)
    Abstract: One of the major roles of banks and other financial intermediaries is to channel funds from savings into valuable projects. In doing so, banks engage in ?liquidity and maturity transformation,? since they finance long-term, illiquid projects while funding themselves with short-term, liquid liabilities. By performing this important role, banks expose themselves to the risk of runs: If depositors or other short-term creditors worry about their claims, they may withdraw funds en masse and cause the bank to fail. The recent financial crisis once again highlighted the fragility associated with financial intermediaries performing the roles of maturity and liquidity transformation. This post draws upon our paper ?Stability of Funding Models: An Analytical Framework? to illustrate the determinants of a financial intermediary?s ability to survive stress events.
    Keywords: liquidity; wholesale funding; maturity; market run; bank run; financial crisis
    JEL: G1 G2
  5. By: Christoffer Koch; Gary Richardson; Patrick Van Horn
    Abstract: Countercyclical capital buffers (CCyBs) are an old idea recently resurrected. CCyBs compel banks at the core of financial systems to accumulate capital during expansions so that they are better able to sustain operations during downturns. To gauge the potential impact of modern CCyBs, we compare the behavior of large and highly-connected commercial banks during booms before the Great Depression and Great Recession. Before the former, core banks did not expect bailouts and were subject to regulations that incentivized capital accumulation during booms. Before the later, core banks expected bailouts and kept capital levels close to regulatory minima. Our analysis indicates that the pre-Depression regulatory regime induced money-center banks to build capital buffers between 3% and 5% of total assets during economic expansions, which is up to double the maximum modern CCyB. These buffers enabled those banks to continue operations without government assistance during severe crises. This historical analogy indicates that modern countercyclical buffers may achieve their immediate goals of protecting core banks during crises but raises questions about whether they will contribute to overall financial stability.
    JEL: E02 E42 G01 G2 G21 G3 N1
    Date: 2020–01
  6. By: Bukvić, Rajko
    Abstract: This paper analyzes the degree of concentration and competition in the Serbian banking sector during the 2010-2017 period and in its current state, by considering the financial statements of banks for the years 2016 and 2017. For this purpose, both traditional concentration indicators (concentration ratio CRn and the Herfindahl-Hirschman index), and the relatively rarely used Linda indices have been used. The degree of concentration has been calculated based on five variables: total assets, deposits, capital, operating income of banks, and loans. The degree to which these indicators are compliant with the basic antitrust regulations has been illustrated. It has been demonstrated that in the current case of a relatively large number of banks operating in Serbia, the existing degree of concentration is relatively low. This provides suitable conditions for the development of healthy competition among them. However, the approximation of the indices to moderate concentration within the period analyzed warns of the appearance of oligopoly.
    Keywords: concentration, competition, banking sector, Serbia, Linda indices, Herfindahl-Hirschman index, concentration ratio, antitrust policy
    JEL: C38 G21 L10
    Date: 2019

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