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on Banking |
| By: | Nicolas Soenen; Rudi Vander Vennet (-) |
| Abstract: | In this paper we empirically analyze the determinants of bank default risk (measured by the banks’ CDS spreads) for European banks during the period 2008-2018. We examine the effect of (1) bank business model characteristics, (2) sovereign default risk and (3) ECB monetary policy. We disentangle the effect of monetary policy in a direct channel and an indirect effect operating through a sovereign risk channel. In terms of business model variables, we find that the capital ratio and the reliance on stable deposits lowers the perceived default risk of banks, while non-performing loans significantly increase the CDS spreads. Hence, the CDS market distinguishes resilient banks from risky banks. In terms of monetary policy, we document that accommodative ECB actions in general lower bank default risk. We also show that the downward effect of monetary policy on bank risk is mainly transmitted through the sovereign risk channel. Our findings confirm the importance of the Basel 3 capital and stable funding rules and they suggest policy implications in terms of bank business model choices as well as approaches to tackle the bank-sovereign loop in Europe. |
| Keywords: | banks, credit risk, bank business model, monetary policy, sovereign risk |
| JEL: | G01 G1 G12 G21 E52 |
| Date: | 2020–05 |
| URL: | http://d.repec.org/n?u=RePEc:rug:rugwps:20/997&r=all |
| By: | NANA DAVIES, Charles |
| Abstract: | We model the supply side of the banking sector, two types of households, and a land asset collateral in a small open economy model that accounts for some of the most enduring features and provisions of the Franc Zone. The model is estimated using the Metropolis-Hasting algorithm and Cameroon's annual data from 1979 to 2016. Four findings stand out. First, sensible posteriors of some deep parameters are obtained when the proportion of rule-of-thumb households is set to forty-eight percent. Second, permanent technology, bank profit, consumption, and foreign inflation shocks are the main drivers of macroeconomic fluctuations. Third, among those shocks, only a bank profit shock, which is associated with a sharp drop of wholesale interest rates, leads to an output expansion. Fourth, fiscal policy matters but through its effects on banks' balance sheet. |
| Keywords: | Cameroon - Franc Zone - Land Collateral - Metropolis-Hasting - Rule-of-Thumb households |
| JEL: | C68 E32 F41 F45 |
| Date: | 2020–04–23 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:100000&r=all |
| By: | Teng Wang |
| Abstract: | This paper studies the role of banks' branching networks in propagating the oil shocks. Banks that were exposed to the oil shocks through their operations in oil-concentrated counties experienced a liquidity drainage in the form of a declining amount of demand deposit inflow as well as an increasing percentage of troubled loans. Banks were forced to sell liquid assets, and contracted lending to small businesses and mortgage borrowers in counties that were not directly affected by the oil shocks. The effect is magnified when banks do not have strong community ties, but is mitigated if banks' branching network is sufficiently dispersed. I also find the decline in local credit supply cannot be completely offset by healthy competing banks' increased lending, providing fresh evidence from the perspective of bank competition. |
| Keywords: | Bank competition; Oil shocks; Out-of-market lending; Transmission of shocks; SME lending |
| JEL: | G20 G21 G30 |
| Date: | 2020–05–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2020-34&r=all |
| By: | Minetti, Raoul (Michigan State University, Department of Economics); Cao, Qingqing (Michigan State University, Department of Economics); Giordani, Paolo (Luiss University); Murro, Pierluigi (Luiss University) |
| Abstract: | Credit frequently flows to the business sector through information-intensive bank-firm relationships. This paper studies the impact of relationship banking on firm entry. Exploiting Italian data, we document that relationship-oriented local credit markets feature lower firm entry, larger size at entry, and relatively more spin-offs than de novo entrepreneurs' entries. Information spillovers from credit relationships to entrants contribute to these effects. A dynamic general equilibrium model calibrated to the Italian data can match the effects when information spillovers are allowed for. Relationship banks' information on incumbents is trans-ferable to incumbents' spin-offs but crowds out information acquisition on de novo entrants. The buildup of incumbents' business wealth during credit relationships can outweigh the aggregate output effect of reduced entry. |
| Keywords: | Credit Relationships; Firm Entry; Information Spillovers; Spin-offs |
| JEL: | E44 G21 O16 |
| Date: | 2020–05–12 |
| URL: | http://d.repec.org/n?u=RePEc:ris:msuecw:2020_010&r=all |
| By: | Matěj Maivald; Petr Teplý |
| Abstract: | The paper examines the impact of a low interest rate environment on banks’ credit risk measured by the non-performing loan (NPL)/total loans ratio. We analyse a unique sample of annual data on 823 banks from the Eurozone, Denmark, Japan, Sweden, and Switzerland for the 2011-2017 period, which also covers the period of zero and negative rates. We conclude that after 1 year of low interest rates, the NPL ratio increases. Our results are mostly consistent with the findings of previous research, and the majority of differences can be explained by the changes in the economic environment during the period with low interest rates. |
| Keywords: | banks, credit risk, low interest rates, non-performing loans |
| JEL: | C33 E43 G21 |
| Date: | 2020–02–17 |
| URL: | http://d.repec.org/n?u=RePEc:prg:jnlwps:v:2:y:2020:id:2.002&r=all |
| By: | Chao Gu; Cyril Monnet; Ed Nosal; Randall Wright |
| Abstract: | Are financial intermediaries inherently unstable and, if so, why? To address this, we analyse whether model economies with financial intermediation are particularly prone to multiple, cyclic or stochastic equilibria. Several formalisations are considered: a dynamic version of Diamond-Dybvig banking incorporating reputational considerations; a model with fixed costs and delegated investment as in Diamond; one with bank liabilities serving as payment instruments similar to currency in Lagos-Wright; and one with intermediaries as dealers in decentralised asset markets, similar to Duffie et al. Although the economics and mathematics differ across specifications, in each case financial intermediation engenders instability in a precise sense. |
| Keywords: | banking, financial intermediation, instability, volatility |
| JEL: | D02 E02 E44 G21 |
| Date: | 2020–05 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:862&r=all |
| By: | Marcin Borsuk (Narodowy Bank Polski); Oskar Krzesicki (Narodowy Bank Polski) |
| Abstract: | Stress testing is one of the fastest growing fields in the prudential world. It has recently gained importance as a tool for both microprudential and macroprudential purposes. In recent years Narodowy Bank Polski (NBP) has been developing an integrated stress-testing approach (InSTA), which captures the various sources of risk to solvency and liquidity as well as spillover effects that banks operating in Poland may face. The aim of this article it to present and discuss NBP’s approach to conducting macro stress tests. We also point out the main areas where further analytical work should be focused on. |
| Keywords: | stress-tests, financial stability, systemic risk, macroprudential policy |
| JEL: | E47 E44 E58 G21 |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:nbp:nbpmis:325&r=all |
| By: | Ge Gao (University of Birmingham); Mustafa Caglayan (Heriot-Watt University); Yuelei Li (Tianjin University); Oleksandr Talavera (University of Birmingham) |
| Abstract: | This paper investigates expert bidding imitation in peer-to-peer lending platforms. We employ data from Renrendai.com, which contains information about 169,779 investors who placed 3,947,996 bids on 111,284 loan listings from 2010 to 2018. The experts are defined as investors who either have more central roles or who spend more time or money on the network. We find that an average investor mimics the bids of expert lenders. Inactive lenders learn top investors' lending behaviour through observational learning and then follow their actions, although they do not know the experts' identity. Finally, we show that experts rarely imitate other experts, yet they exhibit herding behaviour. |
| Keywords: | Peer-to-Peer Lending; Network Analysis; Expert Imitation; Big Data; Financial Technology |
| JEL: | G11 G21 |
| Date: | 2020–05 |
| URL: | http://d.repec.org/n?u=RePEc:bir:birmec:20-10&r=all |
| By: | Gajendran Raveendranathan; Georgios Stefanidis |
| Abstract: | Revolving credit in the U.S. declined drastically in the last decade after several years of upward trending growth. We show that the Ability to Pay provision of the Credit CARD Act of 2009, which places restrictions on credit card limits, accounts for this decline. Extending a model of revolving credit to analyze this policy, we account for changes in credit statistics by income and age. Although the goal was consumer protection, the policy has led to welfare losses. Even consumers with time inconsistent preferences who could benefit from tighter credit constraints are worse off. An alternative policy considered by policymakers - an interest rate cap - improves welfare. |
| Keywords: | revolving credit; credit limits; Ability to Pay; Credit CARD Act |
| JEL: | E21 E44 E65 G28 |
| Date: | 2020–05 |
| URL: | http://d.repec.org/n?u=RePEc:mcm:deptwp:2020-05&r=all |
| By: | Shalva Mkhatrishvili (Macroeconomic Research Division, National Bank of Georgia); Giorgi Tsutskiridze (Macroeconomic Research Division, National Bank of Georgia); Lasha Arevadze (Macroeconomic Research Division, National Bank of Georgia) |
| Abstract: | It is widely believed that sterilized interventions do not affect domestic currency interest rates. The reason is the word "sterilized". Yet we show in this paper that when collateral base for central bank operations isn't huge, sterilized interventions may still affect interest rates, loan extension and, hence, real economy (beyond the effects of altered exchange rate). The mechanism is simple: when banks make decisions about loan extension and, hence, deposit (money) creation, they take liquidity risk into account. When collateral base for central bank operations isn't big enough, even if collateral constraint isn't currently binding, banks may still fear (massive) withdrawals that, in principle, can get them to the constraint. This fear is reduced when they get permanent liquidity (from the central bank that buys FX) as opposed to getting the same amount of liquidity by borrowing from the central bank (that requires collateral). Reduction in this fear will then result in loan interest rate reduction and/or easier terms for loans. We demonstrate the importance of this mechanism through three different approaches: accounting, theoretical and empirical. The quantitative importance of this channel depends on the amount of unused collateral: the more the collateral the lower the liquidity risk and associated interestrate-effects of FX interventions. In addition, the framework provides other interesting insights about the relationship between liquidity risk and reserve requirements. |
| Keywords: | Sterilized FX interventions; Interest rates; Collateral constraint; Central bank operations |
| JEL: | E43 E58 F31 |
| Date: | 2020–04 |
| URL: | http://d.repec.org/n?u=RePEc:aez:wpaper:02/2020&r=all |
| By: | Ulf Lewrick; Christian Schmieder; Jhuvesh Sobrun; Elod Takats |
| Abstract: | Banks globally entered the Covid-19 crisis with roughly US$ 5 trillion of capital above their Pillar 1 regulatory requirements. The amount of additional lending will depend on how hard banks' capital is hit by the crisis, on their willingness to use the buffers and on other policy support. In an adverse stress scenario such as the savings and loan crisis, banks' usable buffers would decline to US$ 800 billion, which could support US$ 5 trillion of additional loans (6% of total loans outstanding). Yet in a severely adverse scenario, similar to the Great Financial Crisis, the corresponding figures would be only US$ 270 billion and US$ 1 trillion (1.3% of total loans). |
| Date: | 2020–05–05 |
| URL: | http://d.repec.org/n?u=RePEc:bis:bisblt:11&r=all |
| By: | Anne-Laure Delatte; Adrien Matray; Noémie Pinardon-Touati |
| Abstract: | Formally independent private banks change their supply of credit to the corporate sector for the constituencies of contested political incumbents in order to improve their reelection prospects. In return, politicians grant such banks access to the profitable market for loans to local public entities among their constituencies. We examine French credit registry data for 2007--2017 and find that credit granted to the private sector increases by 9%--14% in the year during which a powerful incumbent faces a contested election. In line with politicians returning the favor, banks that grant more credit to private firms in election years gain market share in the local public entity debt market after the election is held. Thus we establish that, if politicians can control the allocation of rents, then formal independence does not ensure the private sector's effective independence from politically motivated distortions. |
| Keywords: | politics and banking;moral suasion;local government financing |
| JEL: | G21 G30 H74 H81 |
| Date: | 2020–04 |
| URL: | http://d.repec.org/n?u=RePEc:cii:cepidt:2020-06&r=all |
| By: | Claudiu Albulescu (CRIEF - Centre de Recherche sur l'Intégration Economique et Financière - Université de Poitiers) |
| Abstract: | Using data on 17 listed public banks from Russia over the period 2008 to 2016, we analyze whether international oil prices affect the bank stability in an oil-dependent country. We posit that a decrease in international oil prices has a negative long-run macroeconomic impact for an oil-exporting country, which further deteriorates the bank financial stability. More specifically, a decrease in international oil prices leads for an oil-exporting country as Russia to a currency depreciation and to a deterioration of the fiscal stance. In addition, given the positive correlation of oil and stock prices documented by numerous previous studies, a decrease in international oil prices represents a negative signal for the stock markets investors, negatively affecting banks' share prices and thus, their capacity to generate sustainable earnings. In this context, the bank financial stability can be menaced. With a focus on public listed banks and using a Pool Mean Group (PMG) estimator, we show that an increase in international oil prices and in the price to book value ratio has a long-run positive effect on Russian public banks stability, and conversely. While positive oil-price shocks contribute to bank stability in the long run, an opposite effect is recorded for negative shocks. However, no significant impact is documented in the short run. Our findings are robust to different bank stability specifications, different samples and control variables. |
| Keywords: | bank financial stability,international oil prices,bank valuation,Russian public banks,panel data estimation |
| Date: | 2020–04–25 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:hal-02554299&r=all |