|
on Banking |
| By: | Darracq Pariès, Matthieu; Karadi, Peter; Körner, Jenny; Kok, Christoffer; Mazelis, Falk; Nikolov, Kalin; Rancoita, Elena; Van der Ghote, Alejandro; Cozzi, Guido; Weber, Julien |
| Abstract: | This paper examines the interactions of macroprudential and monetary policies. We find, using a range of macroeconomic models used at the European Central Bank, that in the long run, a 1% bank capital requirement increase has a small impact on GDP. In the short run, GDP declines by 0.15-0.35%. Under a stronger monetary policy reaction, the impact falls to 0.05-0.25%. The paper also examines how capital requirements and the conduct of macroprudential policy affect the monetary transmission mechanism. Higher bank leverage increases the economy's vulnerability to shocks but also monetary policy's ability to offset them. Macroprudential policy diminishes the frequency and severity of financial crises thus eliminating the need for extremely low interest rates. Counter-cyclical capital measures reduce the neutral real interest rate in normal times. JEL Classification: E4, E43, E5, E52, G20, G21 |
| Keywords: | bank stability, credit, monetary policy |
| Date: | 2020–02 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20202376&r=all |
| By: | Delis, Manthos; Kim, Suk-Joong; Politsidis, Panagiotis; Wu, Eliza |
| Abstract: | We quantify the differences between market and regulatory assessments of bank portfolio risk, showing that larger differences significantly reduce corporate lending rates. Specifically, to entice borrowers, banks reduce spreads by approximately 4.1% following a one standard deviation increase in our measure for bank asset-risk differences. This amounts to an interest income loss of USD 1.95 million on a loan of average size and duration. The separate effects of market and regulatory risk are much less potent. Our study reveals a disciplinary-competition effect in favor of corporate borrowers when there is information asymmetry between investors and bank regulators. |
| Keywords: | bank portfolio risk; markets vs. regulators; syndicated loans; cost of credit; market discipline; competition |
| JEL: | G2 G21 G33 |
| Date: | 2020–02–08 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:98548&r=all |
| By: | Joao A. C. Santos; Gara M. Afonso |
| Abstract: | As we discussed in our post on Monday, the Dodd-Frank Act includes provisions to address whether banks remain ?too big to fail.? Title II of the Act creates an orderly liquidation mechanism for the Federal Deposit Insurance Corporation (FDIC) to resolve failed systemically important financial institutions (SIFIs). In December 2013, the FDIC outlined a ?single point of entry? (SPOE) strategy for resolving failing SIFIs that, in principle, should obviate bailouts. Under the SPOE, the FDIC will be appointed receiver of the top-tier parent holding company, and losses of a subsidiary bank will be assigned to shareholders and unsecured creditors of the holding company (in a ?bail-in? arrangement). The company may be restructured by shrinking businesses, breaking it into smaller entities, liquidating assets, or closing operations to ensure that the resulting entities can be resolved in bankruptcy. Crucially, during this process, the healthy subsidiaries of the company, including any banks, will maintain normal operation, thus avoiding the need for bailouts to prevent systemic instability. |
| Keywords: | Financial markets; TBTF; Dodd-Frank Act |
| JEL: | G2 G1 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednls:87041&r=all |
| By: | Rising Odegua |
| Abstract: | Loan default prediction is one of the most important and critical problems faced by banks and other financial institutions as it has a huge effect on profit. Although many traditional methods exist for mining information about a loan application, most of these methods seem to be under-performing as there have been reported increases in the number of bad loans. In this paper, we use an Extreme Gradient Boosting algorithm called XGBoost for loan default prediction. The prediction is based on a loan data from a leading bank taking into consideration data sets from both the loan application and the demographic of the applicant. We also present important evaluation metrics such as Accuracy, Recall, precision, F1-Score and ROC area of the analysis. This paper provides an effective basis for loan credit approval in order to identify risky customers from a large number of loan applications using predictive modeling. |
| Date: | 2020–01 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2002.02011&r=all |
| By: | Qi, Yingjie (Stockholm School of Economics & Swedish House of Finance) |
| Abstract: | Using unique micro-data that contain the internal information on all corporate customers of a large Nordic bank, I show that combining loan and non-loan products (cross-selling) has two benefits. First, it increases credit supply, especially in recessions. Second, it increases the likelihood of receiving lenient treatment in delinquency. I argue that non-loan relationships play an important role in determining credit supply and debt renegotiation, not only by (i) mitigating information asymmetries (as suggested in earlier literature), but also by (ii) increasing the profitability of the relationship. Exploiting an exogenous and differential change in similar products' profitability due to the Basel II implementation, I estimate the causal effect of this new profit channel on credit supply. A 20 percent decrease in non-loan products' profitability (i) reduces credit supply to affected firms by 13 percent (600,000 USD) compared with unaffected firms, and (2) reduces likelihood of receiving lenient treatment for affected firms by 30 percent (13 pp) compared with unaffected firms, conditional on being delinquent. |
| Keywords: | relationship banking; cross-selling; credit allocation; debt renegotiation; financial distress |
| JEL: | G01 G21 G28 |
| Date: | 2020–01–01 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:rbnkwp:0384&r=all |
| By: | Aguilar, Pablo; Fahr, Stephan; Gerba, Eddie; Hurtado, Samuel |
| Abstract: | This paper contributes by providing a new approach to study optimal macroprudential policies based on economy wide welfare. Following Gerba (2017), we pin down a welfare function based on a first-and second order approximation of the aggregate utility in the economy and use it to determine the merits of different macroprudential rules for the Euro Area. With the aim to test this framework, we apply it to the model of Clerc et al (2015). In this model, we find that the optimal level of capital is 15.6 percent, or 2.4 percentage points higher than the 2001-2015 value. Optimal capital reduces significantly the volatility of the economy while increasing somewhat the total level of welfare in steady state, even with a time-invariant instrument. Expressed differently, bank default rates would have been 3.5 percentage points lower while credit (GDP) 5% (0.8%) higher had optimal capital level been in place during the 2011-13 crisis. Further, we find that the optimal Countercyclical Capital Buffer rule depends on whether observed or optimal capital levels are already in place. Conditional on optimal capital level, optimal CCyB rule should respond to movements in total credit and mortgage lending spreads. Gains in welfare from an optimal combination of instruments is higher than the sum of their individual effects due to synergies and spillovers. |
| Keywords: | Financial stability; global welfare analysis; financial DSGE model |
| JEL: | G21 G28 G17 E58 E61 |
| Date: | 2020–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpm:dynare:053&r=all |
| By: | Kauko, Karlo |
| Abstract: | Chinese banks likely have more non-performing loans (NPLs) than officially reported. As hidden NPLs earn no interest income, loan quality problems may erode the gross interest income of banks. Using stochastic frontier analysis, we estimate the interest income of a hypothetical profit-maximising Chinese bank with no credit quality problems. Taking the deviation of actual interest income from the calculated efficient income, we then attempt to reveal the amount of hidden NPLs in Chinese banks. Our results uncover a substantial weakening in the quality of Chinese bank loan portfolios in 2016. Big banks are found to have the largest reservoirs of hidden NPLs. Dependence on interbank funding also seems to be a determinant in the size of hidden NPL portfolios. |
| JEL: | G21 O53 |
| Date: | 2020–02–05 |
| URL: | http://d.repec.org/n?u=RePEc:bof:bofitp:2020_002&r=all |
| By: | Emanuele Ciani (Bank of Italy); Marco Gallo (Bank of Italy); Zeno Rotondi (UniCredit) |
| Abstract: | In this paper we study the functioning of the Italian public guarantee fund (“Fondo Centrale di Garanzia”, FCG) for Small and Medium Enterprises (SMEs). Using an instrumental variable strategy, based on the eligibility for the FCG, we investigate whether the guarantee generated additional loans and/or lower interest rates to SMEs. Differently from previous literature, by focusing on the lending activity of a single large Italian lender we control for the probability of default as assessed by the bank’s internal rating model, and we examine whether the effects of the guarantee differ across firms belonging to different classes of risk. We find that guaranteed firms receive an additional amount of credit equal to 7-8 percent of their total banking exposure. We also estimate a reduction of about 50 basis points of interest rates applied to term loans granted to guaranteed firms. The effects on credit availability are concentrated in the intermediate class of solvent firms, i.e. those neither too safe nor too risky. Conversely, interest rate effects are present in all classes, but for the least risky firms. Finally, we observe a stronger impact of the guarantee for solvent firms with a longer relationship with the bank. This finding questions their ability to reduce financial frictions for very young firms. |
| Keywords: | credit guarantees, access to credit, banking |
| JEL: | L25 O12 G28 |
| Date: | 2020–02 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:wptemi:td_1265_20&r=all |
| By: | Martijn Boermans; Bram van der Kroft |
| Abstract: | This study investigates whether banks and insurance corporations perform regulatory arbitrage by buying bonds with inflated credit ratings. We argue that flaws in minimum capital requirements incentivize risk-taking behavior by financial institutions, diminishing financial stability. We estimate the probability of a bond having an inflated credit rating using conditional credit default swap spread distributions. We merge this data with a unique bond-level portfolio holdings dataset. The results show that banks and insurance corporations invest more in bonds with inflated credit ratings, while this effect is absent for investors who do not face capital requirements based on credit ratings. Consequently, the regulatory capital buffers of banks and insurance corporations are effectively reduced by respectively 13 and 28 percent. |
| Keywords: | Inflated credit ratings; capital requirements; regulatory arbitrage; Basel III; Solvency II; portfolio choice; securities holdings statistics |
| JEL: | G11 G21 G22 G24 G28 |
| Date: | 2020–02 |
| URL: | http://d.repec.org/n?u=RePEc:dnb:dnbwpp:673&r=all |
| By: | Matthieu Garcin (Natixis Asset Management, Labex ReFi - UP1 - Université Panthéon-Sorbonne); Dominique Guegan (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique, Labex ReFi - UP1 - Université Panthéon-Sorbonne); Bertrand Hassani (Grupo Santander, CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique, Labex ReFi - UP1 - Université Panthéon-Sorbonne) |
| Abstract: | The definition of multivariate Value at Risk is a challenging problem, whose most common solutions are given by the lower- and upper-orthant VaRs, which are based on copulas: the lower-orthant VaR is indeed the quantile of the multivariate distribution function, whereas the upper-orthant VaR is the quantile of the multivariate survival function. In this paper we introduce a new approach introducing a total-order multivariate Value at Risk, referred to as the Kendall Value at Risk, which links the copula approach to an alternative definition of multivariate quantiles, known as the quantile surface, which is not used in finance, to our knowledge. We more precisely transform the notion of orthant VaR thanks to the Kendall function so as to get a multivariate VaR with some advantageous properties compared to the standard orthant VaR: it is based on a total order and, for a non-atomic and Rd-supported density function, there is no distinction anymore between the d-dimensional VaRs based on the distribution function or on the survival function. We quantify the differences between this new kendall VaR and orthant VaRs. In particular, we show that the Kendall VaR is less (respectively more) conservative than the lower-orthant (resp. upper-orthant) VaR. The definition and the properties of the Kendall VaR are illustrated using Gumbel and Clayton copulas with lognormal marginal distributions and several levels of risk. |
| Keywords: | total order,copula,Value at Risk,multivariate quantile,risk measure,Kendall function |
| Date: | 2018–04 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:halshs-01467857&r=all |
| By: | Lucia Esposito (Bank of Italy); Davide Fantino (Bank of Italy); Yeji Sung (Columbia University) |
| Abstract: | This paper evaluates the impact of the second series of Targeted Longer-Term Refinancing Operations (TLTRO2) on the amount of credit granted to non-financial private corporations and on the interest rates applied to loans in Italy, using data on credit transactions, bank and firm characteristics and a difference-in-differences approach. We find that TLTRO2 had a positive impact on the Italian credit market, encouraging medium-term lending to firms and reducing credit interest rates. While firms overall benefited from TLTRO2 irrespective of their risk category and size, we document heterogeneous treatment effects. Regarding firms’ risk category, the effects on credit quantities are larger for low-risk firms while those on credit interest rate are larger for high-risk firms. Regarding firms’ size, smaller firms benefited the most both in terms of amounts borrowed and interest rates. Furthermore, our evidence suggests that monetary policy transmission of TLTRO2 is stronger for banks with a low bad debt ratio in their balance sheets. |
| Keywords: | Unconventional Monetary Policy, Pass-through, Policy Evaluation |
| JEL: | E51 E52 |
| Date: | 2020–02 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:wptemi:td_1264_20&r=all |
| By: | Heather Wiggins (Federal Reserve Board of Governors’ Division of Monetary Affairs); Laura Lipscomb (Federal Reserve Board of Governors’ Division of Monetary Affairs); Antoine Martin |
| Abstract: | In a previous post, we described some reasons why it is beneficial to pay interest on required reserve balances. Here we turn to arguments in favor of paying interest on excess reserve balances. Former Federal Reserve Chairman Ben Bernanke and former Vice Chairman Donald Kohn recently discussed many potential benefits of paying interest on excess reserve balances and some common misunderstandings, including that paying interest on reserves restricts bank lending and provides a subsidy to banks. In this post, we focus primarily on benefits related to the efficiency of the payment system and the reduction in the need for the provision of credit by the Fed when operating in a framework of abundant reserves. |
| Keywords: | monetary policy; reserve requirements; interest on reserves |
| JEL: | E5 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednls:87214&r=all |
| By: | Tobias Adrian; Nina Boyarchenko |
| Abstract: | The financial crisis of 2007-09 highlighted the central role that financial intermediaries play in the propagation and amplification of shocks. Intermediaries increase leverage during the boom, which then makes them more vulnerable to adverse economic developments. In this post, we review evidence on the balance-sheet behavior of financial intermediaries and describe a channel that allows intermediaries to increase leverage during booms when asset market volatility tends to be low, which in turn forces them to dramatically reduce leverage once volatility increases. As shown during the financial crisis of 2007-08, the contraction of intermediary leverage is accompanied by increases in borrowing rates for households and a contraction of credit. The formal modeling of this amplification mechanism allows a welfare analysis of the tightness of regulatory capital requirements. We find that while loose capital constraints generate excessive risk-taking by intermediaries, tight funding constraints inhibit intermediaries? risk-sharing and investment functions, which then lowers welfare. |
| Keywords: | macroprudential policy; leverage cycle; Capital regulation; systemic risk |
| JEL: | G1 G2 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednls:86906&r=all |
| By: | Brandon Zborowski (Research and Statistics Group); Peter Van Tassel; Anna Kovner (Harvard University; Federal Reserve Bank) |
| Abstract: | In response to the financial crisis nearly a decade ago, a number of regulations were passed to improve the safety and soundness of the financial system. In this post and our related staff report, we provide a new perspective on the effect of these regulations by estimating the cost of capital for banks over the past two decades. We find that, while banks? cost of capital soared during the financial crisis, after the passage of the Dodd-Frank Act (DFA), banks experienced a greater decrease in their cost of capital than nonbanks and nonbank financial intermediaries (NBFI). |
| Keywords: | Bank Regulation; Banks; Beta; Cost of Capital; Dodd Frank |
| JEL: | G3 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednls:87278&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); Linda S. Goldberg |
| Abstract: | As financial markets have become increasingly globalized, banks have developed growing networks of branches and subsidiaries in foreign countries. This expansion of banking across borders is changing the way banks manage their balance sheets, and the ways home markets and foreign markets respond to disturbances to financial markets. Based on our recent research, this post shows how global banks used their foreign affiliates for accessing scarce dollars during the financial crisis?a liquidity strategy that helped transmit shocks internationally while reducing some of the consequences in the stressed locations. |
| Keywords: | global bank; international; internal capital market |
| JEL: | F00 G2 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednls:86755&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) |
| Abstract: | In the previous posts in this series on the evolution of banks and financial intermediaries, my colleagues and I considered the extent to which banks still play a central role in financial intermediation, given the rise of the shadow banking system. There?s no arguing that financial intermediation has grown in complexity. And there?s also little doubt that the balance sheet of banks is not as representative of financial intermediation activity, and the associated risks, as it once was. Yet as we?ve argued, regulated bank entities have remained very much involved in virtually every aspect of modern financial intermediation, either directly or indirectly providing support to other entities that themselves operate more in the regulatory shadow. I suggest in this post that the insights from the series can be relevant to the design of modern regulation as well. |
| Keywords: | Financial innovation; Bank evolution; Financial intermediation |
| JEL: | G2 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednls:86821&r=all |
| By: | Amanda Carmignani (Bank of Italy); Marco Manile (Bank of Italy); Andrea Orame (Bank of Italy); Marcello Pagnini (Bank of Italy) |
| Abstract: | Notwithstanding internet banking is now widely used by retail customers, little is known about its effect on the banking industry. In this paper we study how internet banking relates to branching policies in Italian local credit markets. Focusing on the period 2012-2015, we show that branch closures were more intense for those local markets and banks where the diffusion of digital banking services was higher. |
| Keywords: | online banking services, bank branch networks |
| JEL: | G21 G34 |
| Date: | 2020–02 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:opques:qef_543_20&r=all |
| By: | Thomas Philippon |
| Abstract: | The cost of financial intermediation has declined in recent years thanks to technology and increased competition in some parts of the finance industry. I document this fact and I analyze two features of new financial technologies that have stirred controversy: returns to scale and the use of big data and machine learning. I argue that the nature of fixed versus variable costs in robo-advising is likely to democratize access to financial services. Big data is likely to reduce the impact of negative prejudice in the credit market but it could reduce the effectiveness of existing policies aimed at protecting minorities. |
| Keywords: | fintech, discrimination, robo advising, credit scoring, big data, machine learning |
| JEL: | E2 G2 N2 |
| Date: | 2020–02 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:841&r=all |
| By: | Mark Mink; Rodney Ramcharan; Iman van Lelyveld |
| 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: | 2020–01 |
| URL: | http://d.repec.org/n?u=RePEc:dnb:dnbwpp:669&r=all |
| By: | Jesús Fernández-Villaverde; Daniel Sanches; Linda Schilling; Harald Uhlig |
| Abstract: | The introduction of a central bank digital currency (CBDC) allows the central bank to engage in large-scale intermediation by competing with private financial intermediaries for deposits. Yet, since a central bank is not an investment expert, it cannot invest in long-term projects itself, but relies on investment banks to do so. We derive an equivalence result that shows that absent a banking panic, the set of allocations achieved with private financial intermediation will also be achieved with a CBDC. During a panic, however, we show that the rigidity of the central bank's contract with the investment banks has the capacity to deter runs. Thus, the central bank is more stable than the commercial banking sector. Depositors internalize this feature ex-ante, and the central bank arises as a deposit monopolist, attracting all deposits away from the commercial banking sector. This monopoly might endangered maturity transformation. |
| JEL: | E58 G21 |
| Date: | 2020–02 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:26753&r=all |
| By: | Beverly Hirtle; Anna Kovner (Harvard University; Federal Reserve Bank); Meru Bhanot; James Vickery |
| Abstract: | Central banks and bank supervisors have increasingly relied on capital stress testing as a supervisory and macroprudential tool. Stress tests have been used by central banks and supervisors to assess the resilience of individual banking companies to adverse macroeconomic and financial market conditions as a way of gauging additional capital needs at individual firms and as a means of assessing the overall capital strength of the banking system. In this post, we describe a framework for assessing the impact of various macroeconomic scenarios on the capital and performance of the U.S. banking system?the Capital and Loss Assessment under Stress Scenarios (CLASS) model?and present some of its key outputs. |
| Keywords: | Bank Capital; Stress Testing |
| JEL: | G2 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednls:86951&r=all |
| By: | Calimani, Susanna; Hałaj, Grzegorz; Żochowski, Dawid |
| Abstract: | We develop an agent-based model of traditional banks and asset managers to investigate the contagion risk related to fire sales and balance sheet interactions. We take a structural approach to the price formation in fire sales as in Bluhm et al. (2014) and introduce a market clearing mechanism with endogenous formation of asset prices. We find that, first, banks which are active in both the interbank and securities markets may channel financial distress between the two markets. Second, while higher bank capital requirements decrease default risk and funding costs, they make it also more profitable to invest into less-liquid assets financed by interbank borrowing. Third, asset managers absorb small liquidity shocks, but they exacerbate contagion when their voluntary liquid buffers are fully utilised. Fourth, a system with larger and more interconnected agents is more prone to contagion risk stemming from funding shocks. JEL Classification: C6, G21, G23 |
| Keywords: | agent-based model, asset managers, contagion, fire sales, systemic risk |
| Date: | 2020–02 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20202373&r=all |
| By: | Iñaki Aldasoro; Leonardo Gambacorta; Paolo Giudici; Thomas Leach |
| Abstract: | We use a unique cross-country dataset at the loss event level to document the evolution and characteristics of banks' operational risk. After a spike following the great financial crisis, operational losses have declined in recent years. The spike is largely accounted for by losses due to improper business practices in large banks that occurred in the run-up to the crisis but were recognised only later. Operational value-at-risk can vary substantially - from 6% to 12% of total gross income - depending on the method used. It takes, on average, more than a year for operational losses to be discovered and recognised in the books. However, there is significant heterogeneity across regions and event types. For instance, improper business practices and internal fraud events take longer to be discovered. Operational losses are not independent of macroeconomic conditions and regulatory characteristics. In particular, we show that credit booms and periods of excessively accommodative monetary policy are followed by larger operational losses. Better supervision, on the other hand, is associated with lower operational losses. We provide an estimate of losses due to cyber events, a subset of operational loss events. Cyber losses are a small fraction of total operational losses, but can account for a significant share of total operational value-at-risk. |
| Keywords: | operational risks, financial institutions, cyber risks, time to discovery, value-at-risk |
| JEL: | D5 D62 D82 G2 H41 |
| Date: | 2020–02 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:840&r=all |
| By: | International Monetary Fund |
| Abstract: | Housing finance is broadly resilient, but pockets of vulnerabilities exist. Mortgage finance is dominated by domestic systemically important financial institutions (D-SIFIs) and supported by the government via mortgage insurance, securitization guarantees, and other policies. With a market share of about 70 percent, D-SIFIs focus on prime borrowers, and their lending is backed by their strong balance sheets. The smaller (uninsured) non-prime lending segment is largely served by smaller banks and prudentially unregulated lenders, which are comparatively less resilient. Some of these lenders rely on less stable, higher-cost funding such as brokered deposits or redeemable equity, and their lending is concentrated in regions with large housing market imbalances. Market concerns about the business model of non-prime lending were manifested by the liquidity crisis at a mid-sized deposit-taking institution in 2017. |
| Date: | 2020–01–24 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfscr:20/17&r=all |
| By: | Allen, Franklin; Covi, Giovanni; Gu, Xian; Kowalewski, Oskar; Montagna, Mattia |
| Abstract: | This study documents significant differences in the interbank market lending and borrowing levels across countries. We argue that the existing differences in interbank market usage can be explained by the trust of the market participants in the stability of the country’s banking sector and counterparties, proxied by the history of banking crises and failures. Specifically, banks originating from a country that has lower level of trust tend to have lower interbank borrowing. Using a proprietary dataset on bilateral exposures, we investigate the Euro Area interbank network and find the effect of trust relies on the network structure of interbank markets. Core banks acting as interbank intermediaries in the network are more significantly influenced by trust in obtaining interbank funding, while being more exposed in a community can mitigate the negative effect of low trust. Country-level institutional factors might partially substitute for the limited trust and enhance interbank activity. JEL Classification: G01, G21, G28, D85 |
| Keywords: | centrality, community detection, interbank market, networks, trust |
| Date: | 2020–02 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20202374&r=all |
| By: | Joost Bats |
| Abstract: | This paper investigates whether ECB corporate sector purchases impact the funding structure of non-financial corporates. Regression models are estimated using a unique microdata panel, combining data on all Eurosystem corporate sector purchases and individual balance sheets of 672 non-financial corporations headquartered in the euro area with access to capital markets. The findings indicate that ECB purchases of corporate bonds reduce the dependence on bank financing of corporates whose debt is purchased. The effects vary according to corporates' interest paid, financial expenses and price-to-book ratio. In addition, this paper shows that the relationship between central bank purchases and corporates' dependence on bank financing is non-linear. The downward effect on bank dependence is largest for those corporates of which most debt is purchased under the CSPP, relative to their total stock of debt. |
| Keywords: | Non-financial corporates; bank dependence; ECB corporate sector purchases; monetary policy |
| JEL: | E44 E58 G10 G21 |
| Date: | 2020–01 |
| URL: | http://d.repec.org/n?u=RePEc:dnb:dnbwpp:667&r=all |