nep-ban New Economics Papers
on Banking
Issue of 2020‒03‒30
twelve papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Financial policy in an exuberant world By Walther, Ansgar
  2. Rising Bank Concentration By Dean Corbae; Pablo D'Erasmo
  3. Implications of negative interest rates for the net interest margin and lending of euro area banks By Melanie Klein
  4. Structural developments in global financial intermediation: The rise of debt and non-bank credit intermediation By Robert Patalano; Caroline Roulet
  5. Industrial firms and systemic risk By Thomas J.Flavin; Mardi Dungey; Thomas O'Connor; Michael Wosser
  6. Financial stability committees and the countercyclical capital buffer By Edge, Rochelle M.; Liang, Jean Nellie
  7. The Financial Center Leverage Cycle: Does it Spread Around the World? By Graciela L. Kaminsky; Leandro Medina; Shiyi Wang
  8. Who withdraws first? Line formation during bank runs By Hubert J. Kiss; Ismael Rodriguez-Lara; Alfonso Rosa-Garcia
  9. Model independent WWR for regulatory CVA and for accounting CVA and FVA By Chris Kenyon; Mourad Berrahoui; Benjamin Poncet
  10. Can Regulation Promote Financial Inclusion ? By Chen,Rong - DECID; Divanbeigi,Raian
  11. Real effects of public country-by-country reporting and the firm structure of European banks By Eberhartinger, Eva; Speitmann, Raffael; Sureth-Sloane, Caren
  12. Coronavirus and financial volatility: 40 days of fasting and fear By Claudiu Albulescu

  1. By: Walther, Ansgar
    Abstract: This paper studies optimal financial policy in a world where the financial sector can become excessively optimistic. I decompose the welfare effects of bank capital regulation to demonstrate the effects of exuberance and its interaction with incentive problems in banking. The optimal policy depends not only on the extent, but also on the type of optimism. For example, it is markedly different when the exuberance of banks focuses on neglected downside risk, as opposed to overstated upside opportunities. A central normative conclusion is that “leaning against the wind”, by tightening capital requirements in exuberant times, can be counterproductive. I show that two natural metrics, describing the distortion in perceived upside and downside risk, are sufficient statistics for the policy implications of exuberance. My results shed light on the diverse empirical evidence on the relationship between bank capital and risk-taking. Finally, I investigate the sensitivity of these insights under different assumptions about government rationality and paternalism. JEL Classification: G01, G21, G40
    Keywords: banking, behavioral finance, financial crises, macroprudential policy
    Date: 2020–03
  2. By: Dean Corbae; Pablo D'Erasmo
    Abstract: Concentration of insured deposit funding among the top four commercial banks in the U.S. has risen from 15% in 1984 to 44% in 2018, a roughly three-fold increase. Regulation has often been attributed as a factor in that increase. The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 removed many of the restrictions on opening bank branches across state lines. We interpret the Riegle-Neal act as lowering the cost of expanding a bank's funding base. In this paper, we build an industry equilibrium model in which banks endogenously climb a funding base ladder. Rising concentration occurs along a transition path between two steady states after branching costs decline.
    JEL: E44 G21 L11 L13
    Date: 2020–03
  3. By: Melanie Klein
    Abstract: This paper explores the impact of low (but) positive and negative market interest rates on euro area banks' net interest margin (NIM) and its components, retail lending and retail deposit rates. Using two proprietary bank-level data sets, I find a positive impact of the level of the short-term rate on the NIM, which increases substantially at negative market rates. As low profitability could hamper the ability of banks to expand lending, I also investigate the impact of the NIM on new lending to the non-financial private sector. In general, the NIM is positively related to lending: When lending is less profitable, banks cut lending. However, at negative rates this effect vanishes. This finding suggests that banks adjusted their business practices when servicing new loans, thereby contributing to higher new lending in the euro area since 2014.
    Keywords: net interest margin, monetary policy, negative interest rates, bank pro tability, lending
    JEL: G21 E43 E52
    Date: 2020–03
  4. By: Robert Patalano (OECD); Caroline Roulet (OECD)
    Abstract: This paper examines global credit intermediation through the lens of financial markets and financial intermediaries in the post-crisis period during which highly accommodative monetary policies contributed to investors’ search for yield. It reviews the extent to which non-bank intermediation contributed to the rise of sovereign and corporate debt levels and exuberance in global credit markets. It also assesses forms of market-based finance that are contributing to financial vulnerabilities, including leverage loans and collateralised loan obligations (CLOs), fixed-income investment funds, and bank contingent convertible debt. Post-crisis policy frameworks should adapt to the shift toward market-based finance in many countries to allow better consideration of the interactions between monetary, prudential, and regulatory tools with respect to credit intermediation and risks. Policies should also consider the optimal combination of macroprudential and activities-based tools in non-bank credit intermediation to address vulnerabilities without undermining the benefits of market-based finance.
    Keywords: debt sustainability, International lending, international policy mix, non-bank financial intermediation
    JEL: F34 F42 G21 G23
    Date: 2020–03–30
  5. By: Thomas J.Flavin (Department of Economics Finance and Accounting, National University of Ireland, Maynooth); Mardi Dungey (Tasmanian School of Business and Economics, University of Tasmania, Hobart, TAS 7001, Australia); Thomas O'Connor (Department of Economics Finance and Accounting, National University of Ireland, Maynooth); Michael Wosser (Financial Stability Division, Central Bank of Ireland, Dublin, Ireland.)
    Abstract: We investigate the systemic importance of U.S. industrial firms and analyse the firm-specific characteristics that identify systemically important industrials. We compute two firm-specific measures of systemic risk for 367 non-financial corporations and confirm that industrial firms are both vulnerable to systemic shocks and contribute to system-wide risk. Systemic risk measures exhibit substantial variation across firms and over time. Debt and trade credit are related to both dimensions of systemic risk, while a range of other firm characteristics are associated with systemic risk in at least one direction. The differences between the dimensions of risk and their associated characteristics underline the importance of analysing both measures of risk. Finally, we report some striking differences vis-Ã -vis the extant literature on banks and non-bank financials.
    Keywords: Systemic risk; MES; ∆CoVaR; industrial firms; financial crises.
    JEL: G32
    Date: 2020
  6. By: Edge, Rochelle M.; Liang, Jean Nellie
    Abstract: Multi-agency financial stability committees (FSCs) have grown dramatically since the global financial crisis. However, most cannot direct actions or recommend to other agencies that they take actions, and most would influence policy actions only through convening and discussing risks. We evaluate whether the significant variation in FSCs and other financial regulatory structures across countries affect decisions to use the countercyclical capital buffer (CCyB). After controlling for credit growth and the severity of the financial crisis, we find that countries with stronger FSCs are more likely to use the CCyB, especially relative to countries where a bank regulator or the central bank has the authority to set the CCyB. While the experience with the CCyB is still limited, these results are consistent with some countries creating FSCs with strong governance to take actions, but most countries instead creating weak FSCs without mechanisms to promote actions, consistent more with a symbolic political delegation motive and raising questions about accountability for financial stability.
    Keywords: Financial stability committees,Bank regulators,Delegation,Macroprudential policy,Countercyclical capital buffer,Credit growth
    JEL: H11 G21 G28 P16
    Date: 2020
  7. By: Graciela L. Kaminsky; Leandro Medina; Shiyi Wang
    Abstract: With a novel database, we examine the evolution of capital flows to the periphery since the collapse of the Bretton Woods System in the early 1970s. We decompose capital flows into global, regional, and idiosyncratic factors. In contrast to previous findings, which mostly use data from the 2000s, we find that booms and busts in capital flows are mainly explained by regional factors and not the global factor. We then ask, what drives these regional factors. Is it the leverage cycle in the financial center? What triggers the leverage cycle in the financial center? Is it a change in global investors’ risk appetite? Or, is it a change in the demand for capital in the periphery? We link leverage in the financial center to regional capital flows and the cost of borrowing in international capital markets to answer these questions. Our estimations indicate that regional capital flows are driven by supply shocks. Interestingly, we find that the leverage in the financial center has a time-varying behavior, with a movement away from lending to the emerging periphery in the 1970s to the 1990s towards lending to the advanced periphery in the 2000s.
    JEL: F30 F34 F65
    Date: 2020–02
  8. By: Hubert J. Kiss (Department of Economics, Eotvos Lorand University.); Ismael Rodriguez-Lara (Department of Economic Theory and Economic History, University of Granada.); Alfonso Rosa-Garcia (Department of Economics, University of Murcia.)
    Abstract: We study how lines form in front of banks. In our model, depositors choose first the level of effort to arrive early at the bank and then whether or not to withdraw their deposit. We argue that the informational environment (i.e. the possibility of observing the action of others) affects the emergence of bank runs and should, therefore, influence the line formation. We test it experimentally and find that the informational environment has no effect on the line formation, while expectations on the occurrence of bank runs, irrationality of depositors and their loss aversion are important factors to explain it.
    Keywords: bank run, beliefs, experimental economics, line formation, loss aversion, observability.
    JEL: C91 D90 G21 J16
    Date: 2020–03–15
  9. By: Chris Kenyon; Mourad Berrahoui; Benjamin Poncet
    Abstract: Wrong way risk (WWR) is a consideration for regulatory capital for credit valuation adjustment (CVA). WWR is also of interest for pricing and accounting and in these cases must include funding as well as exposure and default in CVA and FVA calculation. Here we introduce a model independent approach to WWR for regulatory CVA and also for accounting CVA and FVA. This model independent approach is extremely simple: we just re-write the CVA and FVA integral expressions in terms of their components and then calibrate these components. This provides transparency between component calibration and CVA/FVA effect because there is no model interpretation in between. Including funding in WWR means that there are now two WWR terms rather than the usual one. Using a regulatory inspired calibration from MAR50 we investigate WWR effects for vanilla interest rate swaps and show that the WWR effects for FVA are significantly more material than for CVA. This model independent approach can also be used to compare any WWR model by simply calibrating to it for a portfolio and counterparty, to demonstrate the effects of the model under investigation in terms of components of CVA/FVA calculations.
    Date: 2020–03
  10. By: Chen,Rong - DECID; Divanbeigi,Raian
    Abstract: Despite the commitments of the development community toward broader access to finance, financial inclusion rates worldwide are rather unsatisfactory. To date, around two billion adults do not have access to basic financial services such as savings and checking accounts. Attempting to bridge such gap between policy objectives and outcomes, several economists have probed the determinants of financial inclusion. This paper contributes to the debate by investigating the role played by financial regulation. First, the paper proposes a broad index of regulatory quality for financial inclusion, emphasizing the role of nontraditional delivery models, for example, branchless banking, and actors, for example, nonbank lending institutions. Second, the paper tests the relationship between regulatory quality and financial inclusion outcomes. The analysis finds that in countries where regulatory quality is within the top quartile, individuals are 12.4 percent more likely to have an account at a financial institution with respect to bottom quartile countries.
    Keywords: Financial Structures,Financial Sector Policy,Microfinance,Rural Microfinance and SMEs,Banks&Banking Reform
    Date: 2019–01–18
  11. By: Eberhartinger, Eva; Speitmann, Raffael; Sureth-Sloane, Caren
    Abstract: European regulation mandates public country-by-country reporting for banks and is expected to increase costs of tax haven activities. We hand-collect data from IFRS consolidation scopes for European banks and test whether the availability of additional public information on banks' global activity reduces their tax haven presence. In a difference-in-difference analysis, we find that indeed tax haven presence has declined significantly after the introduction of mandatory public country-by-country reporting for European banks, as compared to the insurance industry, which is not subject to this regulation. In further tests, we show that this negative association is particularly driven by a reduction of subsidiaries in "Dot-Havens" and tax havens with high financial secrecy.
    Keywords: country-by-country reporting,real effects,tax haven,tax disclosure
    Date: 2020
  12. By: Claudiu Albulescu (CRIEF - Centre de Recherche sur l'Intégration Economique et Financière - Université de Poitiers)
    Abstract: 40 days after the start of the international monitoring of COVID-19, we search for the effect of official announcements regarding new cases of infection and death ratio on the financial markets volatility index (VIX). Whereas the new cases reported in China and outside China have a mixed effect on financial volatility, the death ratio positively influences VIX, that outside China triggering a more important impact. In addition, the higher the number of affected countries, the higher the financial volatility is.
    Keywords: coronavirus,financial volatility,VIX,announcement effect
    Date: 2020–03–08

This nep-ban issue is ©2020 by Christian Calmès. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.