nep-ban New Economics Papers
on Banking
Issue of 2020‒04‒27
ten papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Macroprudential Ring-Fencing By Tomas Konecny; Lukas Pfeifer
  2. Market microstructure, banks' behaviour and interbank spreads: evidence after the crisis By Kapar, Burcu; Iori, Giulia; Gabbi, Giampaolo; Germano, Guido
  3. Financial Stability Committees and Basel III Macroprudential Capital Buffers By Rochelle M. Edge; J. Nellie Liang
  4. What role does the housing market play for the transmission mechanism? By Wilhelmsson, Mats
  5. Banks to basics! Why banking regulation should focus on equity By Pierre Durand; Gaëtan Le Quang
  6. Monetary policy, investment and firm heterogeneity By Ferrando, Annalisa; Vermeulen, Philip; Durante, Elena
  7. The Social Efficiency for Sustainability: European Cooperative Banking Analysis By Leire San-Jose; Jose Retolaza; Eric Lamarque
  8. Overcoming Borrowing Stigma: The Design of Lending-of-Last-Resort Policies By Zhang, Hanzhe; Hu, Yunzhi
  9. On the informative value of the EU-wide stress tests and the determinants of banks’ stock return reactions By Georgoutsos, Dimitris; Moratis, George
  10. The COVID-19 Pandemic and the Fed’s Response By Michael J. Fleming; Asani Sarkar; Peter Van Tassel

  1. By: Tomas Konecny; Lukas Pfeifer
    Abstract: This paper focuses on ring-fencing in the specific context of macroprudential policy and its effects on financial integration in the EU over time. It views macroprudential ring-fencing as a restriction on the regulatory capital mobility of cross-border banking groups as a result of macroprudential measures. We find two main factors behind the observed heterogeneity of macroprudential policy with the potential for ring-fencing - credit risk materialisation and the share of foreign-owned banks' assets related to the gradual phase-in of capital reserves. The heterogeneity of risk weights should be partly limited by the new CRD V/CRR II regulatory package and other prudential backstops (such as the leverage ratio requirement and the output floor). On the other hand, the new regulatory package contains limits on structural reserves, which may lead to a situation where regulatory design precludes the application of macroprudential measures corresponding to the level of systemic risk.
    Keywords: Financial stability, macroprudential policy, ring-fencing
    JEL: E58 E61 G18
    Date: 2019–12
  2. By: Kapar, Burcu; Iori, Giulia; Gabbi, Giampaolo; Germano, Guido
    Abstract: We present a study of the European electronic interbank market of overnight lending (e-MID) before and after the beginning of the financial crisis. The main goal of the paper is to explain the structural changes of lending/borrowing features due to the liquidity turmoil. Unlike previous contributions that focused on banks’ dependent and macro information as explanatory variables, we address the role of banks’ behaviour and market microstructure as determinants of the credit spreads. We show that all banks experienced significant variations in their liquidity costs due to the sensitivity of interbank rates to the timing and side of trades. We argue that, while larger banks did experience better funding conditions after the crisis, this was not just a consequence of the “too big to fail” perception of the market. Larger banks have been able to play more strategically when managing their liquidity by taking advantage of the changing market microstructure.
    Keywords: interbank lending; market microstructure; subprime crisis; liquidity manahement
    JEL: F3 G3
    Date: 2020–01–01
  3. By: Rochelle M. Edge; J. Nellie Liang
    Abstract: We evaluate how a country’s governance structure for macroprudential policy affects its implementation of Basel III macroprudential capital buffers. We find that the probabilities of using the countercyclical capital buffer (CCyB) are higher in countries that have financial stability committees (FSCs) with stronger governance mechanisms and fewer agencies, which reduces coordination problems. These higher probabilities are more sensitive to credit growth, consistent with the CCyB being used to mitigate systemic risk. A country’s probability of using the CCyB is even higher when the FSC or ministry of finance has direct authority to set the CCyB, perhaps because setting the CCyB involves establishing a new macro-financial analytical process to regularly assess systemic risks and allows these new entities to influence the process. These results are consistent with elected officials creating the FSCs with the strongest governance and fewer agencies for functional delegation reasons, but most FSCs are created for symbolic political reasons.
    Keywords: Delegation; Financial stability committees; Credit growth; Macroprudential policy; Countercyclical capital buffer; Bank regulators
    JEL: G21 G28 H11 P16
    Date: 2020–02–18
  4. By: Wilhelmsson, Mats (Department of Real Estate and Construction Management, Royal Institute of Technology)
    Abstract: The main objective is to answer the question of what role does the housing market play for the transmission mechanism and especially is the impact constant over time. The research question also includes analyzing the importance of the housing market for the transmission mechanism. We estimate an eight-variable structural vector autoregression (SVAR) model of the Swedish economy over the period 1993 and 2018, covering both the internet bubble in 2000 and the financial crises in 2008. The results indicate that interest rates have both a direct effect on housing prices and an indirect impact through the bank lending channel. Overtime has the traditional interest rate channel importance has been stable. On the other hand, the role of the bank lending channel has increased over time. Household debt has increased substantially in Sweden and elsewhere. That means that the interest rate sensitivity in society has increased. Based on the results, it is possible to evaluate and forecast potential house price effects (both direct and indirect) when the interest rate changes.
    Keywords: Monetary policy; transmission mechanism; bank lending; house prices; structured VAR; Granger causality
    JEL: C54 E52 E63 R31 R32
    Date: 2020–04–14
  5. By: Pierre Durand; Gaëtan Le Quang
    Abstract: Banking regulation faces multiple challenges that call for rethinking the way it is designed in order to tackle the specific risks associated with banking activities. In this paper, we argue that regulators should focus on designing strong equity requirements instead of implementing several complex rules. Such a constraint in equity is however opposed by the banking industry because of its presumed adverse impact on banks' performance. Resorting to Random Forest regressions on a large dataset of banks balance sheet variables, we show that the ratio of equity over total assets has a clear positive effect on banks' performance, as measured by the return on assets. On the contrary, the impact of this ratio on the shareholder value, as measured by the return on equity, is most of the time weakly negative. Strong equity requirements do not, therefore, impede banks' performance but do reduce the shareholder value. This may be the reason why the banking industry so fiercely opposes strong equity requirements.
    Keywords: Banking regulation ; Capital requirements ; Basel III ; Random Forest Regression
    JEL: C44 G21 G28
    Date: 2020
  6. By: Ferrando, Annalisa; Vermeulen, Philip; Durante, Elena
    Abstract: This paper provides new evidence on the channels of monetary policy transmission combining 9 million observations on firm level investment and high-frequency identified monetary policy shocks. We show that the reaction of firms’ investment to a monetary policy shock is heterogeneous along dimensions that correspond to the two main channels of monetary policy transmission. First, we show that young firms are more sensitive to monetary policy shocks, supporting the existence of a credit channel of monetary policy. Second, we document large cross-sectional heterogeneity related to the industry the firm operates in. We find that firms producing durable goods react more than others, which is consistent with traditional interest rate channel effects of monetary policy. Third, we find that the effect of monetary policy shocks is longer lived for firms that are durable goods producers than for young firms indicating that demand effects last longer than credit effects. JEL Classification: E22, E52
    Keywords: investment, monetary policy shocks, monetary policy transmission
    Date: 2020–04
  7. By: Leire San-Jose (UPV/EHU - Universidad del Pais Vasco / Euskal Herriko Unibertsitatea [Espagne]); Jose Retolaza (DEUSTO - Universidad de Deusto [Bilbao] - University of Deusto); Eric Lamarque (IAE Paris - Sorbonne Business School)
    Abstract: This paper seeks to establish the relationship between economic efficiency and social efficiency to analyze the sustainability of banking in Europe. The type-effect has been analyzed, as stakeholder value banks-cooperatives and saving banks-should not be less socially and economically efficient than commercial banks. This European analysis was made using the Bankscope database, as it provides a unique insight into the stakeholder view that clarifies, by an analysis of two-stage boundaries, that there is no single model of social and economic efficiency according to the type of financial entity in Europe. These findings contribute to the social cost paradox and shared value perspective, and more broadly to stakeholder theory. It is established that a tradeoff between economic and social efficiency is not needed. There are different behaviors in different European countries. Moreover, our results could lead to the development of social indicators of the sustainability aspects of organizations without resorting to traditional accounting.
    Keywords: Data Envelopment Analysis (DEA),cooperative banks,stakeholder theory,sustainability,risk,social efficiency,banking
    Date: 2018–09–13
  8. By: Zhang, Hanzhe (Michigan State University, Department of Economics); Hu, Yunzhi (Kenan-Flagler Business School, University of North Carolina)
    Abstract: How should the government effectively provide liquidity to banks during periods of financial distress? During the 2008-2010 crisis, banks avoided borrowing from the Fed’s long-standing discount window (DW), but actively participated in its special monetary program, the TermAuction Facility (TAF), although both programs had the same borrowing requirements. Us-ing an adverse selection model with endogenous borrowing decisions, we explain why two programs suffer from different stigma and how the introduction of TAF incentivized banks’ borrowing. Empirically, we combine several data sources to confirm the theoretical prediction that weaker banks borrowed relatively more from the DW.
    Keywords: lending of last resort; discount window stigma; Term Auction Facility; adverse selection
    JEL: D44 E52 E58 G01
    Date: 2020–04–19
  9. By: Georgoutsos, Dimitris; Moratis, George
    Abstract: We examine the informative value of the 2016 and 2018 supervisory EU stress tests on the basis of the bank stock and CDS abnormal returns they have caused. Our conclusions are based on results from event study analysis and from regressions on the determinants of bank stocks’ abnormal returns. We conclude that the 2018 stress test has been comparatively more informative for investors but only for a sub-group of banks based on sovereign debt-ridden and non-Eurozone countries. The robustness of our results is tested by applying an exhaustive set of event study test statistics on abnormal returns generated from both single and Fama-French factor models. The equity Tier I, leverage and profitability ratios are important determinants of abnormal bank stock returns for the same group of countries as in the event study analysis. Non-linear reactions highlight the fact that investors assign varying degrees of importance on the information they get from the stress tested financial ratios. Overall, our results substantiate the claim that the recent EU stress tests have been calibrated towards revealing the weaknesses of the banking sectors of peripheral Eurozone and non-Eurozone countries.
    Keywords: EBA stress tests, event study analysis, factor models, quantile regression analysis
    JEL: G28
    Date: 2020–02
  10. By: Michael J. Fleming; Asani Sarkar; Peter Van Tassel
    Abstract: The Federal Reserve has taken unprecedented actions to mitigate the effects of the COVID-19 pandemic on U.S. households and businesses. These measures include cutting the Fed’s policy rate to the zero lower bound, purchasing Treasury and mortgage-backed securities (MBS) to promote market functioning, and establishing several liquidity and credit facilities. In this post, we briefly review the developments motivating these actions, summarize what the Fed has done and why, and compare the Fed’s response with its response to the 2007-09 financial crisis.
    Keywords: COVID-19; coronavirus; pandemic; Federal Reserve
    JEL: E52
    Date: 2020–04–15

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