nep-ban New Economics Papers
on Banking
Issue of 2020‒04‒13
nineteen papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Unexpected deposit flows, off-balance sheet funding liquidity risk and bank loan production By Thierno Barry; Alassane Diabaté; Amine Tarazi
  2. Liquidity Management of Heterogeneous Banks during the Great Recession By Toshiaki Ogawa
  3. Long-term bank lending and the transfer of aggregate risk By Reiter, Michael; Zessner-Spitzenberg, Leopold
  4. Market Power and Cost Efficiency in the African Banking Industry By Simplice A. Asongu; Rexon T. Nting; Joseph Nnanna
  5. Non-traditional Monetary Policy and the Future of the Financial Industries By Willem THORBECKE
  6. Does Geographical Complexity of Colombian Financial Conglomerates Increase Banks’ Risk? The Role of Diversification, Regulatory Arbitrage and Funding Costs By Cardozo, Pamela; Morales-Acevedo, Paola; Murcia, Andrés; Pacheco, Beatriz
  7. Welfare Implications of Bank Capital Requirements under Dynamic Default Decisions By Toshiaki Ogawa
  8. The effect of possible EU diversification requirements on the risk of banks’ sovereign bond portfolios By Craig, Ben; Giuzio, Margherita; Paterlini, Sandra
  9. The market impact of systemic risk capital surcharges By Gündüz, Yalin
  10. Burning Money? Government Lending in a Credit Crunch By Gabriel Jiménez; José-Luis Peydró; Rafael Repullo; Jesús Saurina
  11. Liquidity Regulation and Bank Lending By Foly Ananou; Amine Tarazi; John O.S Wilson
  12. Loan loss provisions under regulatory pressure: public versus private banks in Tunisia By FENDRI ZOUARI, Nawel; NEIFAR, MALIKA
  13. Bank Capital Forbearance By Natalya Martynova; Enrico Perotti; Javier Suarez
  14. Distance in Bank Lending: The Role of Social Networks By Oliver Rehbein; Simon Rother
  15. Monetary Policy, Macroprudential Policy, and Financial Stability By David Martinez-Miera; Rafael Repullo
  16. Firm-bank credit networks, business cycle and macroprudential policy By Riccetti, Luca; Russo, Alberto; Gallegati, Mauro
  17. Conditional Return Asymmetries in the Sovereign-Bank Nexus By Julio Gálvez; Javier Mencía
  18. Low-Income Consumers and Payment Choice By Oz Shy
  19. The Value of Opacity in a Banking Crisis By Haelim Anderson; Adam Copeland

  1. By: Thierno Barry (LAPE - Laboratoire d'Analyse et de Prospective Economique - GIO - Gouvernance des Institutions et des Organisations - UNILIM - Université de Limoges); Alassane Diabaté (LAPE - Laboratoire d'Analyse et de Prospective Economique - GIO - Gouvernance des Institutions et des Organisations - UNILIM - Université de Limoges); Amine Tarazi (LAPE - Laboratoire d'Analyse et de Prospective Economique - GIO - Gouvernance des Institutions et des Organisations - UNILIM - Université de Limoges)
    Abstract: In this paper, we use U.S. commercial banks' data to investigate whether the effect of unexpected deposit flows on loan production depends on banks' exposure to off-balance sheet funding liquidity risk. We find that lending is sensitive to deposit shocks at small banks but not at large ones. Furthermore, for small banks, the increase in lending explained by unexpected deposit inflows depends on how much they are exposed to funding liquidity risk stemming from their off-balance sheets, as measured by the level of unused commitments. Small banks more exposed to such funding liquidity risk tend to extend fewer new loans. Our results indicate that unexpected deposit inflows from, for instance, the failure of other banks or market disruptions might not as easily be fueled again to borrowers.
    Keywords: unexpected deposit flows,loan production,off-balance sheet funding liquidity risk
    Date: 2020–03–24
  2. By: Toshiaki Ogawa (Deputy Director and Economist, Institute for Monetary and Economic Studies, Bank of Japan (E-mail:
    Abstract: I construct a dynamic stochastic general equilibrium model to investigate how the liquidity management of different size banks responds to liquidity and loan demand shocks. My investigation shows the following. Compared with small banks, large banks tend to be net borrowers and thus more exposed to liquidity risk. In response to negative liquidity shocks, large banks decrease their credit supply while small ones increase theirs. In response to negative loan demand shocks, both large and small banks decrease their credit supply. Connecting these implications with the panel data, I argue that negative liquidity shocks served as the main driver of the Great Recession initially, and negative demand shocks did so later, and that demand shocks accounted for two thirds of the greatest fall in aggregate loans during the recession.
    Keywords: Great Recession, Bank liquidity management, Occasionally binding constraints, Heterogeneous bank model, General equilibrium model
    JEL: E00 G01 G18 G20 G21
    Date: 2020–03
  3. By: Reiter, Michael (IHS, Vienna and NYU Abu Dhabi); Zessner-Spitzenberg, Leopold (Vienna Graduate School of Economics and IHS, Vienna)
    Abstract: Long-term debt contracts transfer aggregate risk from borrowing firms to lending banks. When aggregate shocks increase the future default probability of firms, banks are not compensated for the default risk of existing contracts. If banks are highly leveraged, this can lead to financial instability with severe repercussions in the real economy. To study this mechanism quantitatively, we build a macroeconomic model of financial intermediation with long-term defaultable loan contracts and calibrate it to match aggregate firm and bank exposure to business cycle risks. Our model exhibits banking crises that closely resemble observed crisis episodes. We find that such crises do not arise in an economy with short-term debt. Our results on the role of long-term debt completely reverse if financial regulation is implemented to increase banks' risk bearing capacity. The financial sector is then well equipped to take on the aggregate risk, such that long-term lending stabilizes the business cycle by providing insurance to the corporate sector.
    Keywords: Banking, Financial frictions, Maturity transformation
    JEL: E32 E43 E44 G01 G21
    Date: 2020–04
  4. By: Simplice A. Asongu (Yaounde, Cameroon); Rexon T. Nting (University of Wales, London, UK); Joseph Nnanna (The Development Bank of Nigeria, Abuja, Nigeria)
    Abstract: Purpose- In this study, we test the so-called ‘Quiet Life Hypothesis’ (QLH) which postulates that banks with market power are less efficient. Design/methodology/approach- We employ instrumental variable Ordinary Least Squares, Fixed Effects, Tobit and Logistic regressions. The empirical evidence is based on a panel of 162 banks consisting of 42 African countries for the period 2001-2011. There is a two-step analytical procedure. First, we estimate Lerner indices and cost efficiency scores. Then, we regress cost efficiency scores on Lerner indices contingent on bank characteristics, market features and the unobserved heterogeneity. Findings- The empirical evidence does not support the QLH because market power is positively associated with cost efficiency. Originality/value- Owing to data availability constraints, this is one of the few studies to test the QLH in African banking.
    Keywords: Finance; Savings banks; Competition; Efficiency; Quiet life hypothesis
    JEL: E42 E52 E58 G21 G28
    Date: 2019–01
  5. By: Willem THORBECKE
    Abstract: This paper investigates how expansionary monetary policy after the Global Financial Crisis (GFC) has affected the U.S. banking sector. In response to the GFC the Federal Reserve first lowered the overnight federal funds rate from 5.25% in August 2007 to zero in December 2008. It then turned to quantitative easing, purchasing housing agency debt, mortgage-backed securities, and longer-term Treasury bonds to stimulate the economy. While these policies helped the overall economy to recover, they may have harmed the banking sector. Banks accept safe short-term deposits and transform these into risky longer-term loans. They make a profit on the difference between the interest rate they earn on longer-term assets and the rate they pay of short-term deposits (the net interest margin). Low short-term interest rates and compressed spreads between long- and short-term interest rates may impair bank profitability. Bernanke and Gertler (1995) have shown that reduced bank profitability can hinder their ability to extend loans. Bernanke (1993) noted that this is problematic because banks play a special role in channeling savings to promising borrowers. Financial markets are plagued by information imperfections. Savers release funds today for the promise of obtaining funds later. Whether they get repaid depends on the character of the borrower, the quality of the investment, the collateral that the borrower can provide, and other factors. The lender needs to consider these items and not just interest rates. Asymmetric information can thus hinder the flow of funds from savers to small businesses and other borrowers whose quality is hard to evaluate. Banks can bridge imperfect information problems because they have a comparative advantage because of: 1) economies of specialization, as lending officers gain expertise in a particular industry; 2) economies of scale, as it is cheaper for bank to evaluate a loan than for small savers to; and 3) economies of scope, as it is cheaper to provide lending services together with other services. This paper investigates how lower short-term rates and falls in the spread between long-and short-term rates affect bank profitability. To do this it investigates how these variables affect bank stock prices. Stock prices provide valuable information since they are the expected present value of future cash flows. The results indicate that falls in short rates and in the spread have caused large drops in bank stock returns after the GFC. Banks are also facing competitive pressures from Fin Tech firms and big technology firms. Their performance after the GFC has lagged other parts of the U.S. economy. They are thus vulnerable to negative shocks that could arise during a downturn or a crisis. The Fed should take account of the impact of their policies on the banking sector, since an interruption on the flow of credit through the financial system could prevent funds from going to the most promising firms. This misallocation of resources could then hinder long-term economic growth.
    Date: 2020–03
  6. By: Cardozo, Pamela; Morales-Acevedo, Paola; Murcia, Andrés; Pacheco, Beatriz
    Abstract: During the last decade Colombian international financial conglomerates (IFC) expanded abroad, significantly increasing their geographical complexity. This paper analyzes the effect of this change in geographical complexity on the risk level of individual Colombian banks. We use monthly bank-level data on financial indicators and complexity measures for the period 2007- 2018. We use the Z-score as a measure of bank risk and the number of countries in which a Colombian IFC has foreign banks subsidiaries as a measure of geographical complexity. Our results suggest that complexity is associated with higher levels of individual bank risk, as a result of an expansion to countries with large GDP co-movements and lower regulatory qualities. In addition, we find that banks with access to international funding respond differently to monetary policy changes. In particular, during periods of domestic monetary policy tightening (loosening), individual banks of complex IFCs present higher (lower) levels of risk, suggesting that the monetary policy risk taking channel is affected by the level of geographical complexity.
    Keywords: Bank risk; Geographical complexity; Monetary policy
    JEL: E52 F65 G21 G28 G32
    Date: 2020–04
  7. By: Toshiaki Ogawa (Deputy Director and Economist, Institute for Monetary and Economic Studies, Bank of Japan (E-mail:
    Abstract: This paper studies capital requirements and their welfare implications in a dynamic general equilibrium model of banking. I embed two, less commonly considered but important, mechanisms. Firstly, banks choose entry and exit, which lets the number of banks change endogenously. Strengthening capital requirements reduces banks' franchise value and damages their liquidity providing function through the extensive margin. Secondly, since equity issuance is costly for banks, they precautionarily hold capital buffers against future liquidity shocks. This behavior makes present capital requirements only occasionally binding. My model shows that the optimal capital requirement would be lower than that in the literature because of the expanded negative effects of capital requirements. To maintain financial stability without damaging banks' liquidity provision, strengthening capital requirements needs to be accompanied by reducing the cost of equity issuance for banks.
    Keywords: Bank capital requirements, Occasionally binding constraints, Endogenous default, Entry and exit, General equilibrium model
    JEL: E00 G21 G28
    Date: 2020–03
  8. By: Craig, Ben; Giuzio, Margherita; Paterlini, Sandra
    Abstract: Recent policy discussion includes the introduction of diversification requirements for sovereign bond portfolios of European banks. In this paper, we evaluate the possible effects of these constraints on risk and diversification in the sovereign bond portfolios of the major European banks. First, we capture the dependence structure of European countries' sovereign risks and identify the common factors driving European sovereign CDS spreads by means of an independent component analysis. We then analyse the risk and diversification in the sovereign bond portfolios of the largest European banks and discuss the role of “home bias”, i.e. the tendency of banks to concentrate their sovereign bond holdings in their domicile country. Finally, we evaluate the effect of diversification requirements on the tail risk of sovereign bond portfolios. Under our assumptions about how banks rebalance their portfolio to respond to the new requirements, demanding that banks modify their holdings to increase their portfolio diversification may be ineffective in reducing portfolio risk, including tail risk. JEL Classification: G01, G11, G21, G28
    Keywords: bank regulation, diversification, home bias, sovereign-bank nexus, sovereign risk
    Date: 2020–03
  9. By: Gündüz, Yalin
    Abstract: This paper tests whether an increase or decrease of the capital surcharge for being a global systemically important bank (G-SIB) envisaged by regulators has an impact on the CDS prices of these banks. We find evidence that the CDS spreads of a G-SIB bank increase (decrease) after the announcement of a higher (lower) capital surcharge. However, this effect is temporary, as the mean CDS spreads revert to pre-announcement level, dropping sharply after the initial rise. Our analysis contributes to the debate on whether being designated as a G-SIB bank necessarily leads to implicit "too-big-to-fail" subsidies. The findings imply that the investors immediately update their beliefs on the systemic risk of the bank after the bucket reallocation announcement and temporarily demand more hedging against systemic risk.
    Keywords: Too-big-to-fail,CDS spreads,systemically important banks,G-SIBs,G-SIB capital surcharges
    JEL: G21 G28
    Date: 2020
  10. By: Gabriel Jiménez (Banco de España); José-Luis Peydró (Universitat Pompeu Fabra, CREI, and Barcelona GSE); Rafael Repullo (CEMFI, Centro de Estudios Monetarios y Financieros); Jesús Saurina (Banco de España)
    Abstract: We analyze a small, new credit facility of a Spanish state-owned-bank during the crisis, using its continuous credit scoring system, firm-level scores, and credit register data. Compared to privately-owned banks, the state-owned bank faces worse applicants, softens (tightens) its credit supply to unobserved (observable) riskier firms, and has much higher defaults. In a regression discontinuity design, the supply of public credit causes: large positive real effects to financially-constrained firms (whose relationship banks reduced substantially credit supply); crowding-in of new private-bank credit; and positive spillovers to other firms. Private returns of the credit facility are negative, while social returns are positive.
    Keywords: Real effects of public credit, credit scoring, credit crunch, crowding-in, adverse selection, state-owned banks.
    JEL: E44 G01 G21 G28
    Date: 2018–10
  11. By: Foly Ananou (LAPE - Laboratoire d'Analyse et de Prospective Economique - GIO - Gouvernance des Institutions et des Organisations - UNILIM - Université de Limoges); Amine Tarazi (LAPE - Laboratoire d'Analyse et de Prospective Economique - GIO - Gouvernance des Institutions et des Organisations - UNILIM - Université de Limoges); John O.S Wilson (Centre for Responsible Banking & Finance, University of St Andrews Gateway Building, St Andrews, Fife KY16 9RJ, UK)
    Abstract: Bank liquidity shortages during the global financial crisis of 2007-2009 led to the introduction of liquidity regulations, the impact of which has attracted the attention of academics and policymakers. In this paper, we investigate the impact of liquidity regulation on bank lending. As a setting, we use the Netherlands, where a Liquidity Balance Rule (LBR) was introduced in 2003. The LBR was imposed on Dutch banks only and did not apply to other banks operating elsewhere within the Eurozone. Using this differential regulatory treatment to overcome identification concerns, we investigate whether there is a causal link from liquidity regulation to the lending activities of banks. Using a difference-indifferences approach, we find that stricter liquidity requirements following the implementation of the LBR did not reduce lending. However, the LBR did lead Dutch banks to modify the structure of loan portfolios by increasing corporate lending and reducing mortgage lending. During this period Dutch banks experienced a significant increase in deposits and issued more equity. Overall, the findings of this study have relevance for policymakers tasked with monitoring the impact of post-crisis liquidity regulations on bank behavior.
    Keywords: Bank Lending,Basel III,Liquidity Regulation,Liquidity Balance Rule,Liquidity Coverage Ratio,Propensity Score Matching
    Date: 2020–03–24
    Abstract: We study the effect of capital regulation on bank’s loan loss provisions. Using hand collected data on 13 Tunisian banks during the period 2006-2016, we show that Tunisian banks discretionnary decrease loan loss provisions under regulatory pressure. When studying private banks and public banks, we find that they don’t respond to the same capital regulatory constraints. Private banks discretionary reduce provisions in reaction to an increase in capital requirements when they are under pressure to meet regulatory eligible capital. However, the provisioning behavior of public banks is influenced by its regulatory capital position: they take lower loan loss provisions to enhance capital positions through the year and higher levels of loans loss provisions when coming into the year with stronger capital positions. Our analyses indicate that Tunisian banks use discretionary capital management to appear to be better capitalized but their overall ability to absorb loan losses is reduced. Regulators must be aware of this association and are requested to further strengthen regulation in loan classification and provisioning.
    Keywords: Tunisian banks, capital ratios, eligible capital, capital management, loan loss provisions, capital regulatory pressure, discretionary loan loss provisions, Panel Data
    JEL: C3 C33 G28 M41
    Date: 2020–03–12
  13. By: Natalya Martynova (Deutsche Bunderbank); Enrico Perotti (University of Amsterdam); Javier Suarez (CEMFI, Centro de Estudios Monetarios y Financieros)
    Abstract: We analyze the strategic interaction between undercapitalized banks and a supervisor who may intervene by preventive recapitalization. Supervisory forbearance emerges because of a commitment problem, reinforced by fiscal costs and constrained capacity. Private incentives to comply are lower when supervisors have lower credibility, especially for highly levered banks. Less credible supervisors (facing higher cost of intervention) end up intervening more banks, yet producing higher forbearance and systemic costs of bank distress. Importantly, when public intervention capacity is constrained, private recapitalization decisions become strategic complements, leading to equilibria with extremely high forbearance and high systemic costs of bank failure.
    Keywords: Bank supervision, bank recapitalization, forbearance.
    JEL: G21 G28
    Date: 2019–03
  14. By: Oliver Rehbein; Simon Rother
    Abstract: This paper provides empirical evidence that banks leverage social connections as an information channel. Using county-to-county friendship-link data from Facebook, we find that strong social ties increase loan volumes, especially if screening incentives are large. This effect is distinct from physical and cultural distances. Physical distance becomes significantly less relevant when accounting for social connections. Moreover, sufficiently strong social ties prevent cultural differences from constituting a lending barrier. The effect of social connectedness is more supply-side driven for small banks but demand-side driven for large banks. To bolster identification, we exploit highway connections, historical travel costs, and the quasi-random staggered introduction of Facebook as instruments. Our results reveal the important role of social connectedness as an information channel, speak to the nature of borrowing constraints, and point toward implications for bank-lending strategies and anti-trust policies.
    Keywords: bank lending, social networks, information frictions, culture, distance
    JEL: D82 D83 G21 O16 L14 Z13
    Date: 2020–03
  15. By: David Martinez-Miera (Universidad Carlos III de Madrid); Rafael Repullo (CEMFI, Centro de Estudios Monetarios y Financieros)
    Abstract: This paper reexamines from a theoretical perspective the role of monetary and macroprudential policies in addressing the build-up of risks in the financial system. We construct a stylized general equilibrium model in which the key friction comes from a moral hazard problem in firms' financing that banks' equity capital serves to ameliorate. Tight monetary policy is introduced by open market sales of government debt, and tight macroprudential policy by an increase in capital requirements. We show that both policies are useful, but macroprudential policy is more effective in terms of financial stability and leads to higher social welfare.
    Keywords: Bank monitoring, intermediation margin, monetary policy, macroprudential policy, capital requirements, financial stability.
    JEL: G21 G28 E44 E52
    Date: 2019–02
  16. By: Riccetti, Luca; Russo, Alberto; Gallegati, Mauro
    Abstract: We present an agent-based model to study firm-bank credit market interactions in different phases of the business cycle. The business cycle is exogenously set and it can give rise to various scenarios. Compared to other models in this literature strand, we improve the mechanism according to which the dividends are distributed, including the possibility of stock repurchase by firms. In addition, we locate firms and banks over a space and firms may ask credit to many banks, resulting in a complex spatial network. The model reproduces a long list of stylized facts and their dynamic evolution as described by the cross-correlations among model variables. The model allows us to test the effectiveness of rules designed by the current financial regulation, such as the Basel 3 countercyclical capital buffer. We find that the effectiveness of this rule changes in different business cycle environments and this should be considered by policy makers.
    Keywords: Agent-based modeling, credit network, business cycle, financial regulation, macroprudential policy
    JEL: C63 E32 E52 G1
    Date: 2020–01
  17. By: Julio Gálvez (Banco de España); Javier Mencía (Banco de España)
    Abstract: We estimate the time-varying skewness of European banks' stock and sovereign bond returns using quantile methods. We obtain a negative relationship between sovereigns' and banks' return asymmetries, which we relate to the safe haven features of sovereign debt. However, this feature reverses for peripheral European countries (GIIPS). Furthermore, although better capitalized and less risky banks tend to offer less negatively skewed stock returns, these benefits do not reach similarly strong GIIPS-headquartered banks. Finally, we identify a risk premium related to sovereign negative skewness for both large financial and non-financial European firms, which is stronger for firms headquartered in GIIPS.
    Keywords: Banks, sovereign bonds, conditional asymmetry, negative risk premium.
    JEL: G12 G15 G21
    Date: 2018–12
  18. By: Oz Shy
    Abstract: Low-income consumers are not only constrained with spending, but also with the type and variety of payment methods available to them. Using a representative sample of the U.S. adult population, this paper analyzes the low possession (adoption) of credit and debit cards among low-income consumers who are also unbanked. Using a random utility model, I estimate the potential welfare gains associated with policy options suggested in the literature to provide subsidized and unsubsidized debit cards to this consumer population.
    Keywords: consumer payment choice; household income; diversity; unbanked consumers; random utility analysis; unbanked; financial inclusion; consumer surveys; consumer behavior
    JEL: D90 E42
    Date: 2020–02–01
  19. By: Haelim Anderson; Adam Copeland
    Abstract: During moments of heightened economic uncertainty, authorities often need to decide on how much information to disclose. For example, during crisis periods, we often observe regulators limiting access to bank‑level information with the goal of restoring the public's confidence in banks. Thus, information management often plays a central role in ending financial crises. Despite the perceived importance of managing information about individual banks during a financial crisis, we are not aware of any empirical work that quantifies the effect of such policies. In this blog post, we highlight results from our recent working paper, demonstrating that in a crisis, a policy of suppressing information about banks' balance sheets has a significant and positive effect on deposits.
    Keywords: Information management; Bank Opacity; Great Depression; Banking Crisis
    JEL: G1 G2 N0
    Date: 2020–04–02

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