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on Banking |
| By: | Elena Carletti; Itay Goldstein; Agnese Leonello |
| Abstract: | This paper analyzes the role of liquidity regulation and its interaction with capital requirements. We ?first introduce costly capital in a bank run model with endogenous bank portfolio choice and run probability, and show that capital regulation is the only way to restore the efficient allocation. We then enrich the model to include ?re sales, and show that capital and liquidity regulation are complements. The key implications of our analysis are that the optimal regulatory mix should be designed considering both sides of banks? balance sheet, and that its effectiveness depend on the costs of both capital and liquidity. |
| Keywords: | illiquidity, insolvency, ?re sales, optimal regulation |
| JEL: | G01 G21 G28 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:baf:cbafwp:cbafwp19128&r=all |
| By: | Thomas Ian Schneider; Philip E. Strahan; Jun Yang |
| Abstract: | We test whether measures of potential influence on regulators affect stress test outcomes. The large trading banks – those most plausibly ‘Too big to Fail’ – face the toughest tests. In contrast, we find no evidence that either political or regulatory connections affect the tests. Stress tests have a greater effect on the value of large trading banks’ portfolios; the large trading banks respond by making more conservative capital plans; and, despite their more conservative capital plans, the large trading banks still fail their tests more frequently than other banks. These results are consistent with a public-interest view of regulation, not regulatory capture. |
| JEL: | G21 |
| Date: | 2020–03 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:26887&r=all |
| By: | Eric Jondeau; Benoit Mojon; Jean-Guillaume Sahuc |
| Abstract: | The cost of bank funding on money markets is typically the sum of a risk-free rate and a spread that reflects rollover risk, i.e., the risk that banks cannot roll over their short-term market funding. This risk is a major concern for policymakers, who need to intervene to prevent the funding liquidity freeze from triggering the bankruptcy of solvent financial institutions. We construct a new indicator of rollover risk for banks, which we have called forward funding spread. It is calculated as the difference between the three-month forward rate of the yield curve constructed using only instruments with a three-month tenor and the corresponding forward rate of the default-free overnight interest swap yield curve. The forward funding spread usefully complements its spot equivalent, the IBOR-OIS spread, in the monitoring of bank funding risk in real time. First, it accounts for the market participants' expectations for how funding costs will evolve over time. Second, it identifies liquidity regimes, which coincide with the levels of excess liquidity supplied by central banks. Third, it has much higher predictive power for economic growth and bank lending in the United States and the euro area than the spot IBOR-OIS, credit default swap spreads or bank bond credit spreads. |
| Keywords: | bank funding risk, bank credit spreads, liquidity supply regimes, multicurve environment, economic activity predictability |
| JEL: | E32 E44 E52 |
| Date: | 2020–04 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:854&r=all |
| By: | Filippo De Marco; Silvio Petriconi |
| Abstract: | We show that competition adversely affects the "specialness" of bank lending. In particular, we observe that the positive abnormal return on the borrowing firm's stock after the announcement of a bank loan is reduced in US states that deregulate interstate branching.The negative effect of competition on the value of bank loans is present only for ex-ante opaque firms (i.e., firms with few tangible assets and bank-dependent borrowers) and for banks that presumably rely more on "soft" information (i.e., small banks).Moreover, we find that the probability of a covenant violation in a syndicated deal and charge-off rates on small business loans are higher in deregulated states. Our results suggest that competition decreases loan quality because it reduces banks' incentives to invest in information. |
| Keywords: | asymmetric information; competition; bank deregulation; loan announcement returns |
| JEL: | G21 G28 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:baf:cbafwp:cbafwp19130&r=all |
| By: | Erica Jiang; Gregor Matvos; Tomasz Piskorski; Amit Seru |
| Abstract: | Is bank capital structure designed to extract deposit subsidies? We address this question by studying capital structure decisions of shadow banks: intermediaries that provide banking services but are not funded by deposits. We assemble, for the first time, call report data for shadow banks which originate one quarter of all US household debt. We document five facts. (1) Shadow banks use twice as much equity capital as equivalent banks, but are substantially more leveraged than non-financial firms. (2) Leverage across shadow banks is substantially more dispersed than leverage across banks. (3) Like banks, shadow banks finance themselves primarily with short-term debt and originate long-term loans. However, shadow bank debt is provided primarily by informed and concentrated lenders. (4) Shadow bank leverage increases substantially with size, and the capitalization of the largest shadow banks is similar to banks of comparable size. (5) Uninsured leverage, defined as uninsured debt funding to assets, increases with size and average interest rates on uninsured debt decline with size for both banks and shadow banks. Modern shadow bank capital structure choices resemble those of pre-deposit-insurance banks both in the U.S. and Germany, suggesting that the differences in capital structure with modern banks are likely due to banks’ ability to access insured deposits. Our results suggest that banks’ level of capitalization is pinned down by deposit subsidies and capital regulation at the margin, with small banks likely to be largest recipients of deposit subsidies. Models of financial intermediary capital structure then have to simultaneously explain high (uninsured) leverage, which increases with the size of the intermediary, and allow for substantial heterogeneity across capital structures of firms engaged in similar activities. Such models also need to explain high reliance on short-term debt of financial intermediaries. |
| JEL: | G2 L5 |
| Date: | 2020–03 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:26903&r=all |
| By: | Kris James Mitchener; Gary Richardson |
| Abstract: | The Great Depression is infamous for banking panics, which were a symptomatic of a phenomenon that scholars have labeled a contagion of fear. Using geocoded, microdata on bank distress, we develop metrics that illuminate the incidence of these events and how banks that remained in operation after panics responded. We show that between 1929-32 banking panics reduced lending by 13%, relative to its 1929 value, and the money multiplier and money supply by 36%. The banking panics, in other words, caused about 41% of the decline in bank lending and about nine-tenths of the decline in the money multiplier during the Great Depression. |
| Keywords: | banking panics, Great Depression, contagion, monetary deflation |
| JEL: | E44 G01 G21 L14 N22 |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_8172&r=all |
| By: | Matthew Baron; Emil Verner; Wei Xiong |
| Abstract: | We examine historical banking crises through the lens of bank equity declines, which cover a broad sample of episodes of banking distress both with and without banking panics. To do this, we construct a new dataset on bank equity returns and narrative information on banking panics for 46 countries over the period 1870-2016. We find that even in the absence of panics, large bank equity declines are associated with substantial credit contractions and output gaps. While panics can be an important amplification mechanism, our results indicate that panics are not necessary for banking crises to have severe economic consequences. Furthermore, panics tend to be preceded by large bank equity declines, suggesting that panics are the result, rather than the cause, of earlier bank losses. We also use bank equity returns to uncover a number of forgotten historical banking crises and to create a banking crisis chronology that distinguishes between bank equity losses and panics. |
| JEL: | G01 G21 |
| Date: | 2020–03 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:26908&r=all |
| By: | Nikolay Hristov; Oliver Hülsewig; Johann Scharler |
| Abstract: | We explore the effects of the ECB’s unconventional monetary policy on the banks’ sovereign debt portfolios. In particular, using panel vector autoregressive (VAR) models we analyze whether banks increased their domestic government bond holdings in response to non-standard monetary policy shocks, thereby possibly promoting the sovereign-bank nexus, i.e. the exposure of banks to the debt issued by the national government. Our results suggest that euro area crisis countries’ banks enlarged their exposure to domestic sovereign debt after innovations related to unconventional monetary policy. Moreover, the restructuring of sovereign debt portfolios was characterized by a home bias. |
| Keywords: | European Central Bank, unconventional monetary policy, panel vector autoregressive model, sovereign-bank nexus |
| JEL: | C32 E30 E52 E58 G21 H63 |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_8178&r=all |
| By: | Mpho Rapapali; Daan Steenkamp |
| Abstract: | This paper provides an assessment of developments in South African bank funding costs since the global financial crisis. We construct aggregate bank funding cost proxies by weighting the average cost of different forms of bank funding in South Africa and compare these to a summary measure of actual bank funding costs based on a one-off survey of major banks. We show that, in contrast to the behaviour of advanced economy banks, South African banks have not significantly adjusted their funding composition since the global financial crisis. We show that bank funding costs have increased over recent years, in line with higher money market liquidity premia, a higher policy rate and higher market interest rates. A one-off survey of the six largest banks suggests that our average funding cost proxy is within a plausible range of actual bank funding costs and follows a similar profile over time. |
| Date: | 2020–03–30 |
| URL: | http://d.repec.org/n?u=RePEc:rbz:wpaper:9818&r=all |
| By: | Helene Olsen; Harald Wieslander |
| Abstract: | We search for leading determinants of financial instability in Norway using a signaling approach, and examine how these respond to a monetary policy shock with the use of structural VAR models. We find that the wholesale funding ratio and gap, credit-to-GDP gap, house price-to-income ratio and gap, and credit growth provide good signals of future financial instability. Following a contractionary monetary policy shock, the credit-to-GDP gap and house price-to-income ratio decrease significantly. The implication of our findings is that the central bank can respond to an increase in these indicators by increasing the interest rate, which in turn will decrease the indicators and thereby the probability of financial distress. |
| Keywords: | Financial stability, Monetary policy, Structural VAR, Signaling Approach |
| Date: | 2020–03 |
| URL: | http://d.repec.org/n?u=RePEc:bny:wpaper:0085&r=all |
| By: | Hidenobu Okuda; Daiju Aiba |
| Abstract: | Abstract Regulating a banking sector requires a deep understanding of the industry structure and behavior of banks, and their current market performance. The Cambodian banking sector has rapidly expanded in recent decades, in line with the Country’s sustained high economic growth. However, there are concerns about the performance of Cambodian banks and the country’s banking sector. The problem is that there is a paucity of empirical evidence to clarify the real issues in the banking sector, and this lack of evidence also makes it difficult to formulate effective policy measures to address any potential problems. In this study we provide empirical evidence on the behavior of Cambodian commercial banks by estimating the industry cost function and their cost efficiencies. Our study covers 34 commercial banks over the period from 2012 to 2015. We find that average cost efficiency scores range from 0.26 to 0.29 (depending on the output definition) for Cambodian commercial banks, suggesting that if they operated more efficiently they could cut costs by 71% to 74% while keeping the same output level. We also find that the Cambodian banking industry realizes economies of scale. Furthermore, by estimating the determinants of cost efficiency we find that expanding a branch network into local areas is inefficient for bank management. Secondly, holding excessive liquidity is associated with greater inefficiency, but diversification in bank business operations is positively associated with the improved cost efficiency of Cambodian commercial banks. |
| Keywords: | Cambodia, Cost Function, Efficiency, Banking, Stochastic Frontier Analysis |
| Date: | 2020–04 |
| URL: | http://d.repec.org/n?u=RePEc:jic:wpaper:208&r=all |
| By: | Fittje, Jens; Wagner, Helmut |
| Abstract: | The topography of China's financial network is unique. Is it also uniquely robust to contagion? We explore this question using network theory. We find that networks that are more concentrated are less fragile when connectivity is low. However, they remain in a robust-yet-fragile state longer than decentralized networks, when connectivity is increased. We implement Chinese characteristics into our model and simulate it numerically. The simulations show, that the large state-controlled banks act as effective stop-gaps for contagion, which makes the Chinese network relatively robust. This robustness is significantly reduced, if a significant share of the smaller banks are high-risk institutions. |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:ceames:172020&r=all |
| By: | Gianluca Cafiso |
| Abstract: | We study loans from banking and non-banking lenders to different groups of borrowers in order to unveil significant differences on how those respond to a shock and evaluate possible alternative explanations for such differences. The objective is to gain insights useful to explain the loan puzzle: the unexpected increase of loans to firms in case of a monetary tightening. The analysis is based on a vector autoregression, estimated using Bayesian techniques, and has as object the US economy. |
| Keywords: | loan puzzle, households, corporate businesses, non-corporate businesses, VAR, Bayesian estimation |
| JEL: | E44 E51 G20 G21 C11 |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_8175&r=all |