nep-ban New Economics Papers
on Banking
Issue of 2020‒03‒09
nineteen papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Foreign banks, liquidity shocks, and credit stability By Daniel Belton; Leonardo Gambacorta; Sotirios Kokas; Raoul Minetti
  2. The benefits are at the tail: uncovering the impact of macroprudential policy on growth-at-risk By Jorge E. Galán
  3. Variability in risk-weighted assets: what does the market think? By Edson Bastos e Santos; Neil Esho; Marc Farag; Christopher Zuin
  4. Effects of State-Owned Banks’ Programs to Stimulate Credit: evidence from Brazil By Emerson Erik Schmitz
  5. Financial Crises and Innovation By Bryan Harcy; Can Sever
  6. Sustainable banking: the role of multilateral development banks as norm entrepreneurs By Mendez, Alvaro; Houghton, David Patrick
  7. Countercyclical liquidity policy and credit cycles: Evidence from macroprudential and monetary policy in Brazil By João Barata R. Blanco Barroso; Rodrigo Barbone Gonzalez; José-Luis Peydró; Bernardus F. Nazar Van Doornik
  8. Central Clearing and Systemic Liquidity Risk By G. Thomas Kingsley; Anna L. Paulson; Todd Prono; Travis D. Nesmith
  9. Investigating the Role of BNDES as a Tool to Transmit Countercyclical Policy Decisions: Evidence from 2002-2016 By Marco Carreras
  10. Bank Capital and Risk: Cautionary or Precautionary? By James Vickery; Beverly Hirtle; Anna Kovner
  11. Network-Aware Strategies in Financial Systems By P\'al Andr\'as Papp; Roger Wattenhofer
  12. Heterogeneity and state dependence in firms’ access to credit: Microevidence from the euro area By Gabriele Angori; David Aristei
  13. Elite Capture of Foreign Aid : Evidence from Offshore Bank Accounts By Andersen,Jorgen Juel; Johannesen,Niels; Rijkers,Bob
  14. Collateral Damage By Savvakis C. Savvides
  15. Were Banks Ever 'Boring'? By Nicola Cetorelli
  16. Negative interest rate, bank profitability and risk-taking By Whelsy Boungou
  17. On the statistics of scaling exponents and the Multiscaling Value at Risk By Giuseppe Brandi; T. Di Matteo
  18. Debt Collection Agencies and the Supply of Consumer Credit By Viktar Fedaseyeu
  19. Concentration in Mortgage Markets: GSE Exposure and Risk-Taking in Uncertain Times By Deeksha Gupta; Ronel Elul; David K. Musto

  1. By: Daniel Belton; Leonardo Gambacorta; Sotirios Kokas; Raoul Minetti
    Abstract: We empirically assess the responses of banks in the United States to a regulatory change that influenced the distribution of funding in the banking system. Following the 2011 FDIC change in the assessment base, insured banks found wholesale funding more costly, while uninsured branches of foreign banks enjoyed cheaper access to wholesale liquidity. We use quarterly bank balance sheet data and a rich data set of syndicated loans with borrower and lender characteristics to show that uninsured foreign banks, which faced a relatively positive shock, engaged in liquidity hoarding. Hence, they accumulated more reserves but extended fewer total syndicated loans and became more passive in the syndicated loan deals in which they participated. These results contribute to the discussion on the role of foreign banks in credit creation, especially in a country like the United States where foreign banks also have a crucial role in managing USD money market operations at the group level.
    Keywords: foreign banks, liquidity shocks, wholesale funding, syndicated loans
    JEL: G21 G28 E44
    Date: 2020–03
  2. By: Jorge E. Galán (Banco de España. Financial Stability and Macroprudential Policy Department)
    Abstract: This paper brings together recent developments on the growth-at-risk methodology and the literature on the impact of macroprudential policy. For this purpose, I extend the recent proposals on the use of quantile regressions of GDP growth by including macrofinancial variables with early warning properties of systemic risk, and macroprudential measures. I identify heterogeneous effects of macroprudential policy on GDP growth, uncovering important benefits on the left tail of its distribution. The positive effect of macroprudential policy on reducing the downside risk of GDP is found to be larger than the negative impact on the median, suggesting a net positive effect in the mid-term. Nonetheless, I identify heterogeneous effects depending on the position in the financial cycle, the direction of the policy, the type of instrument, and the time elapsed since its implementation. In particular, tightening capital measures during expansions may take up to two years in evidencing benefits on growth-at-risk, while the positive impact of borrower-based measures is rapidly observed. This suggests the need of implementing capital measures, such as the countercyclical capital buffer, early enough in the cycle; while borrower-based measures can be tightened in more advanced stages. Conversely, in downturns the benefits of loosening capital measures are immediate, while those of borrower-based measures are limited. Overall, this study provides a useful framework to assess costs and benefits of macroprudential policy in terms of GDP growth, and to identify the term-structure of specific types of instruments.
    Keywords: financial stability, growth-at-risk, systemic risk, macroprudential policy, quantile regressions
    JEL: C32 E32 E58 G01 G28
    Date: 2020–03
  3. By: Edson Bastos e Santos; Neil Esho; Marc Farag; Christopher Zuin
    Abstract: The global financial crisis highlighted a number of weaknesses in the regulatory framework, including concerns about excessive variability in banks' risk-weighted assets (RWAs) stemming from their use of internal models. The Basel III reforms that were finalised in 2017 by the Basel Committee on Banking Supervision seek to reduce this excessive RWA variability. This paper develops a novel approach to measuring RWA variability - the variability ratio - by comparing a market-implied measure of RWAs with banks' reported regulatory RWAs. Using a panel data set comprising a large sample of internationally-active banks over the period 2001 to 16, we find that there was a wide degree of RWA variability among banks, and that market-implied RWA estimates were persistently higher than regulatory RWAs. We then assess the determinants of this variability, and find a strong and statistically-significant association between our measure of RWA variability and (i) the share of opaque assets held by banks (eg derivatives); (ii) the degree to which a bank is capital constrained; and (iii) jurisdiction-specific factors. These results suggest that market participants may be applying an 'opaqueness' premium for banks that hold highly-complex instruments, and that the incentive for banks to game their internal models is particularly acute for capital-constrained banks. The results also point to the importance of jurisdiction-specific factors in explaining RWA variability. In addition, we find that RWA variability directly affects banks' own profitability through higher funding costs. Finally, we find that the 2017 Basel III reforms - most notably the output floor - help to reduce excessive RWA variability.
    Keywords: bank regulation, capital, Basel III, risk-weighted assets, financial stability
    JEL: G20 G21 G28
    Date: 2020–02
  4. By: Emerson Erik Schmitz
    Abstract: This paper examines the impact of two programs carried out by Brazilian federal banks aimed at ameliorating credit conditions and expanding access to credit to individuals and SMEs. These initiatives involve the raise of credit limits, extension of loan terms and the reduction of lending rates to targeted borrowers. I study the consequences of these credit policies on banks’ risk-taking behavior and credit allocation in the corporate credit market. I document that federal banks increase credit operations relatively more with small firms all over the country, especially in Brazilian states with lower economic output, although loading more risky firms to their portfolios. In response to federal banks’ programs, foreign banks enlarge the provision of credit to less risky small firms in Brazilian states with higher economic output, consistently with a “cherry-picking” behavior, while private domestic banks focus on keeping safer and profitable credit operations, increasing their market share in the large firms’ segment. Overall, my findings suggest that federal banks’ initiatives to expand the access to credit in Brazil have a significant impact on the credit allocation to SMEs and indirect effects on the credit allocation to larger firms.
  5. By: Bryan Harcy; Can Sever
    Abstract: Financial crises are accompanied by permanent drops in economic growth and output. Technological progress and innovation are important drivers of economic growth. This paper studies how financial crises affect innovative activities. Using cross-country panel data on patenting at the industry-level, we identify a financial channel whereby disruptions in financial markets impact patenting activity. Specifically, we find that patenting decreases more following banking crises for industries that are more dependent on external finance. This financial channel is not at play during currency crises, sovereign debt crises, or recessions more generally, suggesting that disruption in banking activity matters for investment in innovative activities. The effect on patenting is economically large and long-lasting, resulting in less patenting, in terms of both total quantity and quality, for 10 years or longer after a banking crisis. The average patent quality, however, does not appear to decline. We show the results are not likely to be driven by reverse causality or omitted variables. These findings provide a link between banking crises and the observed patterns of lower long-term growth. Liquidity support in the aftermath of banking crises appears to help reduce the effects through the financial channel over the short term.
    Keywords: innovation, financial crises, banking crises, patents, growth
    JEL: E44 F30 G15 G21 O31
    Date: 2020–03
  6. By: Mendez, Alvaro; Houghton, David Patrick
    Abstract: This article explores the role of multilateral development banks (MDBs) in originating norms of sustainable banking that have attracted and supported green private finance, a role not widely known in the management literature. Any prospect of achieving the United Nations (UN) Sustainable Development Goals by 2030 presupposes mobilizing the estimated US$23.3 trillion currently locked‐up in risk‐averse private savings to bridge the gap between developing countries’ demand for capital and the current global financial architecture’s capacity to supply it. The three biggest obstacles to sustainable banking identified by the authors are discussed: (1) The uncertain bankability of projects; (2) non‐transparency in tracking sustainable capital flows; and (3) no universal mechanism capable of making matches between green investment supply and demand; and what MDBs have actually done to overcome these roadblocks, and might do in future, is also discussed. Seen through the lens of “applied constructivism”, MDBs are revealed to be norm entrepreneurs proactive since at least the 1970s in socially constructing most of the basic norms and practices of sustainable banking which the private sector relies on or is now striving to take up. MDBs are typically the first “port of call” for international governmental organizations (IGOs) and civil society organizations wishing to establish a sustainable financial framework for development; and are the likeliest political agents to pioneer sustainable banking in future. MDBs would do well to develop an awareness of the methods of Constructivism, which they have actually been unwittingly using, to empower themselves to meet the challenges of the 21st century
    Keywords: sustainable banking; multilateral development banks (MDBs); norm entrepreneurs; constructivism; sustainable development goals; international development; commercial banks
    JEL: F3 G3
    Date: 2020–01–29
  7. By: João Barata R. Blanco Barroso; Rodrigo Barbone Gonzalez; José-Luis Peydró; Bernardus F. Nazar Van Doornik
    Abstract: We show that countercyclical liquidity policy smooths credit supply cycles, with stronger crisis effects. For identification, we exploit the Brazilian supervisory credit register and liquidity policy changes on reserve requirements, that affected banks differentially and have a monetary and prudential purpose. Liquidity policy strongly attenuates both the credit crunch in bad times and high credit supply in booms. Strong economic effects are twice as large during the crisis easing than during the boom tightening. Finally, in crises, liquidity easing: increase less credit supply by more financially constrained banks; and collateral requirements increase substantially, especially by banks providing higher credit supply.
    Keywords: Liquidity; reserve requirements; credit cycles; macroprudential and monetary policy.
    JEL: E51 E52 E58 G01 G21 G28
    Date: 2020–02
  8. By: G. Thomas Kingsley; Anna L. Paulson (Federal Reserve Bank of Chicago); Todd Prono; Travis D. Nesmith
    Abstract: By stepping between bilateral counterparties, a central counterparty (CCP) transforms credit exposure. CCPs generally improve financial stability. Nevertheless, large CCPs are by nature concentrated and interconnected with major global banks. Moreover, although they mitigate credit risk, CCPs create liquidity risks, because they rely on participants to provide cash. Such requirements increase with both market volatility and default; consequently, CCP liquidity needs are inherently procyclical. This procyclicality makes it more challenging to assess CCP resilience in the rare event that one or more large financial institutions default. Liquidity-focused macroprudential stress tests could help to assess and manage this systemic liquidity risk.
    Keywords: margin; financial systems; Central Counterparties (CCPs); procyclicality; liquidity risk; financial stability
    JEL: G28 E58 N22 G21 G23
    Date: 2019–12–01
  9. By: Marco Carreras (Science Policy Research Unit (SPRU), University of Sussex)
    Abstract: I evaluate the impact of BNDES disbursements on Brazilian commercial banks’ disbursement using balance-sheet data for the period of 2002-2016. Using dynamic panel data techniques, I find BNDES disbursement for both investment in innovation and fixed capital investments crowded-in commercial banks’ disbursement. Further, the results obtained considering the distribution before and after 2008, suggest the beginning of the crowding-in impact together with the countercyclical role adopted by the bank at the beginning of the financial crisis.
    Keywords: BNDES, development bank, countercyclical policies, crowding-in/out
    Date: 2020–02
  10. By: James Vickery; Beverly Hirtle; Anna Kovner (Harvard University; Federal Reserve Bank)
    Abstract: Do riskier banks have more capital? Banking companies with more equity capital are better protected against failure, all else equal, because they can absorb more losses before becoming insolvent. As a result, banks with riskier income and assets would hopefully choose to fund themselves with relatively more equity and less debt, giving them a larger equity cushion against potential losses. In this post, we use a top-down stress test model of the U.S. banking system?the Capital and Loss Assessment under Stress Scenarios (CLASS) model?to assess whether banks that are forecast to lose capital in a severe downturn do indeed have more capital, and how the relationship between capital and risk has evolved over time.
    Keywords: Bank Capital; Stress Testing; Financial Stability
    JEL: G2
  11. By: P\'al Andr\'as Papp; Roger Wattenhofer
    Abstract: We study the incentives of banks in a financial network, where the network consists of debt contracts and credit default swaps (CDSs) between banks. One of the most important questions in such a system is the problem of deciding which of the banks are in default, and how much of their liabilities these banks can pay. We study the payoff and preferences of the banks in the different solutions to this problem. We also introduce a more refined model which allows assigning priorities to payment obligations; this provides a more expressive and realistic model of real-life financial systems, while it always ensures the existence of a solution. The main focus of the paper is an analysis of the actions that a single bank can execute in a financial system in order to influence the outcome to its advantage. We show that removing an incoming debt, or donating funds to another bank can result in a single new solution that is strictly more favorable to the acting bank. We also show that increasing the bank's external funds or modifying the priorities of outgoing payments cannot introduce a more favorable new solution into the system, but may allow the bank to remove some unfavorable solutions, or to increase its recovery rate. Finally, we show how the actions of two banks in a simple financial system can result in classical game theoretic situations like the prisoner's dilemma or the dollar auction, demonstrating the wide expressive capability of the financial system model.
    Date: 2020–02
  12. By: Gabriele Angori (Università degli Studi di Ferrara); David Aristei (University of Perugia)
    Abstract: Using detailed firm-level longitudinal data, this paper analyses the main factors affecting firms’ access to bank credit in eleven euro area countries over the period 2014-2018. We focus on firms’ loan demand behaviour and on banks’ actual credit granting decision, using alternative measures of financing constraints and controlling for endogenous sample selection and individual heterogeneity. Furthermore, we explicitly analyse the dynamics of firms’ access to credit and account for state dependence in loan demand and credit rationing probabilities. Empirical results show that small and informationally opaque businesses, with deteriorated public support and credit history, experience greater difficulties in accessing to bank loans. Moreover, we provide evidence of significant state dependence in access to credit over time. In particular, firms having already experienced credit restrictions in the past are more likely to face further financing constraints, while enterprises that repeatedly recur to external financing seem to have an easier access to credit. Finally, focusing on the subset of firms that actually need bank financing, we find that previous credit restrictions significantly reduce current demand probability, thus providing evidence of a significant credit discouragement effect.
    Keywords: Access to credit; Financing constraints; State dependence; Sample selection; Unobserved heterogeneity; Panel data
    JEL: G32 G21 D22 C23 C34
    Date: 2020–02
  13. By: Andersen,Jorgen Juel; Johannesen,Niels; Rijkers,Bob
    Abstract: Do elites capture foreign aid? This paper documents that aid disbursements to highly aid-dependent countries coincide with sharp increases in bank deposits in offshore financial centers known for bank secrecy and private wealth management, but not in other financial centers. The estimates are not confounded by contemporaneous shocks such as civil conflicts, natural disasters, and financial crises, and are robust to instrumenting with predetermined aid commitments. The implied leakage rate is around 7.5 percent at the sample mean and tends to increase with the ratio of aid to GDP. The findings are consistent with aid capture in the most aid-dependent countries.
    Date: 2020–02–18
  14. By: Savvakis C. Savvides (Visiting Lecturer, John Deutsch Institute for the Study of Economic Policy, Queen’s University, Canada)
    Abstract: It is argued that lending where the overwhelming criterion is the collateral rather than the repayment capability of the project and the borrower is highly likely to be unproductive and will inevitably lead to a transfer of wealth. If this is done on a systematic and massive scale as was the case in Cyprus in the years leading to the 2013 crisis it is also likely to cause a long and deep balance sheet recession. Banks should therefore be in check and held accountable for such professional malpractices.
    Keywords: Economic development, repayment capability, project evaluation, corporate lending, credit risk
    JEL: D61 G17 G21 G32 G33 H43
    Date: 2019
  15. 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 a previous post, I documented that much of the expansion into nontraditional activities by U.S. banks began well before the passage of the Gramm-Leach-Bliley Act in 1999, the legislation that repealed much of the Glass-Steagall Act of 1933. The historical record actually contains many prior instances of the Glass-Steagall restrictions being circumvented, with nonbank firms allowed to operate as financial conglomerates and engage in activities that go beyond traditional banking. These broad industry dynamics might indicate that the business of banking tends to expand firm boundaries beyond a traditional??boring??perimeter.
    Keywords: Business Scope; Banks; Glass Steagall
    JEL: G2
  16. By: Whelsy Boungou (Larefi, University of Bordeaux)
    Keywords: Negative interest rates, bank profitability, Bank risk taking, European Union countries,dynamic panel data model
    JEL: E43 E52 E58 G21
    Date: 2019–07
  17. By: Giuseppe Brandi; T. Di Matteo
    Abstract: Scaling and multiscaling financial time series have been widely studied in the literature. The research on this topic is vast and still flourishing. One way to analyse the scaling properties of time series is through the estimation of scaling exponents. These exponents are recognized as being valuable measures to discriminate between random, persistent, and anti-persistent behaviours in time series. In the literature, several methods have been proposed to study the multiscaling property and in this paper we use the generalized Hurst exponent (GHE). On the base of this methodology, we propose a novel statistical procedure to robustly estimate and test the multiscaling property and we name it RNSGHE. This methodology, together with a combination of t-tests and F-tests to discriminated between real and spurious scaling. Moreover, we also introduce a new methodology to estimate the optimal aggregation time used in our methodology. We numerically validate our procedure on simulated time series using the Multifractal Random Walk (MRW) and then apply it to real financial data. We also present results for times series with and without anomalies and we compute the bias that such anomalies introduce in the measurement of the scaling exponents. Finally, we show how the use of proper scaling and multiscaling can ameliorate the estimation of risk measures such as Value at Risk (VaR). We also propose a methodology based on Monte Carlo simulation, that we name Multiscaling Value at Risk (MSVaR), which takes into account the statical properties of multiscaling time series. We show that by using this statistical procedure in combination with the robustly estimated multiscaling exponents, the one year forecasted MSVaR mimics the VaR on the annual data for the majority of the stocks analysed.
    Date: 2020–02
  18. By: Viktar Fedaseyeu
    Abstract: This paper finds that stricter laws regulating third-party debt collection reduce the number of third-party debt collectors, lower the recovery rates on delinquent credit card loans, and lead to a modest decrease in the openings of new revolving lines of credit. Further, stricter third-party debt collection laws are associated with fewer consumer lawsuits against third-party debt collectors but not with a reduction in the overall number of consumer complaints. Overall, stricter third-party debt collection laws appear to restrict access to new revolving credit but have an ambiguous effect on the nonpecuniary costs that the debt collection process imposes on borrowers.
    Keywords: creditor rights; law and finance; contract enforcement; household finance; consumer credit; debt col-lection
    JEL: G20 D18 D12 K35 G18
    Date: 2020–02–12
  19. By: Deeksha Gupta (Carnegie Mellon University); Ronel Elul (Federal Reserve Bank); David K. Musto (Wharton School; National Bureau of Economic Research)
    Abstract: When home prices threaten to decline, lenders bearing more of a community’s mortgage risk have an incentive to combat this decline with new lending that boosts demand. We test whether this incentive drove the government-sponsored enterprises (GSEs) to guarantee riskier mortgages in early 2007, as the chance of substantial declines grew from small to significant. To identify the effect we relate new risky lending to regional variation in the GSEs’ exposure and the interaction of this variation with home-price elasticity. We focus on the GSEs’ discretion across potential purchases by reference to the credit-score threshold that triggers manual underwriting. We conclude that this incentive helps explain the GSEs’ expansion of risky lending shortly before the financial crisis.
    Keywords: GSEs; Risk Exposure; Concentration
    JEL: R31 L25 G01 G21
    Date: 2020–01–27

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