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on Banking |
| By: | Ioana Neamtu (University of Amsterdam) |
| Abstract: | In this paper we develop a theoretical model to investigate the effect on a bank's financial stability of having multiple contingent convertible bonds buffers (CoCos) on the same bank balance sheet, using cash-in-the-market pricing and global games methodologies. Contingent convertible bonds are meant to act as a bail-in mechanism for banks, where CoCo debt converts into equity when a bank needs it the most. We find that having CoCo buffers which trigger at different capitalisation levels can be detrimental for the CoCo bail-in capacity. Market-based triggers lead to premature conversion and fire-sales of equity. In contrast with existing literature, we show that book-based trigger CoCos yield an optimal outcome, as long as they incorporate expected credit losses. |
| Keywords: | contingent convertible bonds, fire sales, financial stability |
| JEL: | G38 G21 G32 |
| Date: | 2020–02–09 |
| URL: | http://d.repec.org/n?u=RePEc:tin:wpaper:20200010&r=all |
| By: | Anil K. Kashyap; Dimitrios P. Tsomocos; Alexandros P. Vardoulakis |
| Abstract: | We modify the Diamond and Dybvig (1983) model so that, besides offering liquidity services to depositors, banks also raise equity funding, make loans that are risky, and can invest in safe, liquid assets. The bank and its borrowers are subject to limited liability. When profitable, banks monitor borrowers to ensure that they repay loans. Depositors may choose to run based on conjectures about the resources that are available for people withdrawing early and beliefs about banks’ monitoring. We use a new type of global game to solve for the run decision. We find that banks opt for a more deposit-intensive capital structure than a social planner would choose. The privately chosen asset portfolio can be more or less lending-intensive, while the scale of intermediation can also be higher or lower depending on a planner’s preferences between liquidity provision and credit extension. To correct these three distortions, a package of three regulations is warranted. |
| JEL: | E44 G01 G21 G28 |
| Date: | 2020–01 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:26689&r=all |
| By: | Demirguc-Kunt,Asli; Horvath,Balint Laszlo; Huizinga,Harry P. |
| Abstract: | This paper investigates how international regulatory and institutional differences affect lending in the cross-border syndicated loan market. Lending provided through a foreign subsidiary is subject to subsidiary-country regulation and institutional arrangements. Multinational banks'choices between loan origination through the parent bank or through a foreign subsidiary provide information about these banks'preferences to operate in countries with varying regulations and institutions. The results indicate that international banks have a tendency to switch loan origination toward countries with less stringent bank regulation and supervision consistent with regulatory arbitrage, but that they prefer to originate loans in countries with higher-quality institutions related to financial market monitoring, creditor rights, and the speed of contract enforcement. |
| Date: | 2019–10–09 |
| URL: | http://d.repec.org/n?u=RePEc:wbk:wbrwps:9037&r=all |
| By: | Alain MONFORT (CREST); Jean-Paul RENNE (University of Lausanne, HEC); Guillaume ROUSSELLET (Desautels Faculty of Management, McGill University) |
| Abstract: | We propose a discrete-time affi ne pricing model that simultaneously allows for (i) the presence of systemic entities by departing from the no-jump condition on the factors'conditional distribution, (ii) contagion effects, (iii) and the pricing of credit events. Our a ffine framework delivers explicit pricing formulas for default-sensitive securities like bonds and credit default swaps (CDS). We estimate a multi-country version of the model and address economic questions related to the pricing of sovereign credit risk. Speci cally, using euro-area data, we explore the in fluence of allowing for the pricing of credit events, we compare frailty and contagion channels, and we extract measures of depreciation-at-default from CDS denominated indifferent currencies. |
| Keywords: | a ffine credit risk model, Gamma-zero distribution, no-jump condition, contagion, credit-eventrisk, sovereign credit risk and exchange rates. |
| JEL: | E43 G12 |
| Date: | 2019–12–31 |
| URL: | http://d.repec.org/n?u=RePEc:crs:wpaper:2020-01&r=all |
| By: | Mark Mink (De Nederlandsche Bank); Rodney Ramcharan (Marshall School of Business, University of Southern California); Iman van Lelyveld (Vrije Universiteit Amsterdam) |
| Abstract: | This paper uses granular bond portfolio data to study how banking systems across the European Union (EU) adjust their asset holdings in response to regulatory solvency shocks. We also study the impact of these shocks at financial intermediaries on the prices of bonds in their portfolio. Despite the creation of a Single Supervisory Mechanism (SSM) in the EU, we find that risk-shifting interacts with regulatory arbitrage motives to explain how banks adjust their portfolios after adverse solvency shocks. After regulatory solvency declines, banks increase their exposure to domestic bonds, including higher yielding but zero risk-weight sovereign bonds. The increase in banking system risk might therefore be even larger than the decline in risk-weighted solvency ratios suggests. Distress in the banking system also feeds back onto bond prices. Bonds owned by less-well capitalized banking systems trade at a discount relative to otherwise similar bonds owned by better capitalized intermediaries. |
| Keywords: | Bank capital, portfolio allocation, risk shifting, SSM |
| JEL: | G11 G12 G15 G21 |
| Date: | 2020–02–04 |
| URL: | http://d.repec.org/n?u=RePEc:tin:wpaper:20200006&r=all |
| By: | Arraiz,Irani; Bruhn,Miriam; Roth,Benjamin N.; Ruiz Ortega,Claudia; Stucchi,Rodolfo Mario |
| Abstract: | This paper provides evidence that commercial lenders in Peru free ride off their peers'screening efforts. Leveraging a discontinuity in the loan approval process of a large bank, the study finds that competing lenders responded to additional loan approvals by issuing approvals of their own. Competing lenders captured almost three-quarters of the new loans to previously financially excluded borrowers, greatly diminishing the profits accruing to the initiating bank. Lenders may therefore underinvest in screening new borrowers and expanding financial inclusion, as their competitors reap some of the benefit. The results highlight that information spillovers between lenders may operate outside credit registries. |
| Date: | 2019–12–03 |
| URL: | http://d.repec.org/n?u=RePEc:wbk:wbrwps:9072&r=all |
| By: | Imbierowicz, Björn; Löffler, Axel; Vogel, Ursula |
| Abstract: | We investigate the transmission of changes in bank capital requirements and supranational monetary policy, and their interaction effect, on euro area bank lending and lending rates. Our results show that - for weakly capitalized banks - increases in capital requirements are in the short-run associated with a decrease in the total of domestic and cross-border bank lending. In addition, we find that there is no similar effect of capital requirements for strongly capitalized banks. Furthermore, changes in the monetary policy stance are positively related to lending rates. Regarding the interacting effect of national capital requirements and supranational monetary policy, we observe that increases in capital requirements attenuate the general effects of monetary policy on interest rates. Overall, the transmission of an accommodating monetary policy to lending rates is attenuated by contemporaneous increases in bank capital requirements which additionally imply a transitory decrease of the loan growth of weakly capitalized banks. |
| Keywords: | Bank Lending,Lending Rates,Capital Requirements,Monetary Policy,International Policy Interaction |
| JEL: | E52 F30 G28 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubdps:492019&r=all |
| By: | Anginer,Deniz; Bertay,Ata Can; Cull,Robert J.; Demirguc-Kunt,Asli; Mare,Davide Salvatore |
| Abstract: | This paper summarizes the latest update of the World Bank Bank Regulation and Supervision Survey. The paper explores and summarizes the evolution in bank capital regulations, capitalization of banks, market discipline, and supervisory power since the global financial crisis. It shows that regulatory capital increased, but some elements of capital regulations became laxer. Market discipline may have deteriorated as the financial safety nets became more generous after the crisis. Bank supervision became stricter and more complex compared with the pre?global financial crisis period. However, supervisory capacity did not increase in proportion to the extent and complexity of new bank regulations. The paper documents the importance of defining bank regulatory capital narrowly, as the quality of capital matters in reducing bank risk. This is particularly true for large banks, because they have more discretion in the computation of risk weights and are better able to issue a variety of capital instruments. |
| Date: | 2019–10–15 |
| URL: | http://d.repec.org/n?u=RePEc:wbk:wbrwps:9044&r=all |
| By: | Chikako Baba; Salvatore Dell'Erba; Enrica Detragiache; Olamide Harrison; Aiko Mineshima; Anvar Musayev; Asghar Shahmoradi |
| Abstract: | Assessing when credit is excessive is important to understand macro-financial vulnerabilities and guide macroprudential policy. The Basel Credit Gap (BCG) – the deviation of the credit-to-GDP ratio from its long-term trend estimated with a one-sided Hodrick-Prescott (HP) filter—is the indicator preferred by the Basel Committee because of its good performance as an early warning of banking crises. However, for a number of European countries this indicator implausibly suggests that credit should go back to its level at the peak of the boom after the credit cycle turns, resulting in large negative gaps that might delay the activation of macroprudential policies. We explore two different approaches—a multivariate filter based on economic theory and a fundamentals-based panel regression. Each approach has pros and cons, but they both provide a useful complement to the BCG in assessing macro-financial vulnerabilities in Europe. |
| Keywords: | Real interest rates;Interest rate policy;Credit booms;Credit expansion;Credit aggregates;Credit Cycle,Credit Gap,Countercyclical Capital Buffer,Macroprudential Policies,WP,BCG,real interest rate,output gap,fundamental variable |
| Date: | 2020–01–17 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:20/6&r=all |
| By: | Marina Moretti; Marc C Dobler; Alvaro Piris Chavarri |
| Abstract: | This paper updates the IMF’s work on general principles, strategies, and tech-niques from an operational perspective in preparing for and managing sys-temic banking crises in light of the experiences and challenges faced during and since the global financial crisis. It summarizes IMF advice concerning these areas from staff of the IMF Monetary and Capital Markets Department (MCM), drawing on Executive Board Papers, IMF staff publications, and country documents (including program documents and technical assistance reports). Unless stated otherwise, the guidance is generally applicable across the IMF membership. |
| Keywords: | Systemic crisis management;Banking crisis;Bank resolution;Bank restructuring;Lender of last resort;Deposit insurance;Non-performing loans;Asset management companies;Systemically important financial institutions;Financial crises;Financial institutions;Macroprudential policies and financial stability;Financial instruments;Systemic crisis,financial crisis,crisis containment,nonperforming loan management,asset management company,DPPP,GFC,depositor,ELA,financial safety net,systemwide |
| Date: | 2020–02–11 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfdep:20/05&r=all |
| By: | Dominique Guégan (UP1 - Université Panthéon-Sorbonne, CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique, Labex ReFi - UP1 - Université Panthéon-Sorbonne, University of Ca’ Foscari [Venice, Italy], IPAG Business School); Christophe Hénot (UP1 - Université Panthéon-Sorbonne, PRISM - Pôle de recherche interdisciplinaire en sciences du management - UP1 - Université Panthéon-Sorbonne) |
| Abstract: | The Fintech industry has facilitated the development of companies using blockchain technology. The use of this technology inside banking system and industry opens the route to several questions regarding the business activity, legal environment and insurance devices. In this paper, considering the creation of small companies interested to develop their business with a public blockchain, we analyse from different aspects why a company (in banking or insurance system, and industry) decides that a blockchain protocal is more legitimate than another one for the business it wants to develop looking at the legal (in case of dispute) points of view. We associate to each blockchain a probative value which permits to assure in case of dispute that a transaction has been really done. We illustrate our proposal using thirteen blockchains providing in that case a ranking between these blockchains for their use in business environment. We associate to this probative value some main characteristics of any blockchain as market capitalization and log returns volatilities that the investors need to take also into account with the new probative value for their managerial strategy. |
| Keywords: | volatility,Regulation,Proof of work,Mining,Attack,Blockchain,Crypto-currency,probative-value,evidential-value,Hash rate,Immutability |
| Date: | 2018–09 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:halshs-01896540&r=all |
| By: | Dräger, Vanessa; Heckmann-Draisbach, Lotta; Memmel, Christoph |
| Abstract: | Using unique data of a survey among small and medium-sized German banks, we analyze various aspects of risk management over a short-term and medium-term horizon. We especially analyze the effect of a 200-bp increase in the interest level. We find that, in the first year, the impairments of banks' bond portfolios are much larger than the reductions in their net interest income, that banks attenuate the resulting write-downs by liquidating hidden reserves and that banks which use interest derivatives have lower impairments in their bond portfolios. In addition, we find that banks' exposures to interest rate risk and to credit risk are remunerated, that banks' try to stabilize the mid-term net interest margin with exposure to interest rate risk and that they act as if they have a risk budget which they allocate either to interest rate risk or credit risk. |
| Keywords: | net interest margin,bond portfolio,interest rate risk,credit risk |
| JEL: | G21 |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubdps:022020&r=all |
| By: | Katya Kartashova |
| Abstract: | This note studies how decreases in mortgage rates affect the behaviour of borrowers in terms of spending on durable goods and repaying debt. It focuses on borrowers with the prevailing five-year fixed-rate mortgage term in Canada who renewed their contracts at lower interest rates between January 2015 and December 2016. |
| Keywords: | Credit and credit aggregates; Housing; Interest rates; Monetary Policy; Transmission of monetary policy |
| JEL: | D12 D14 E43 E52 G21 R31 |
| Date: | 2020–01 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocsan:20-2&r=all |