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on Banking |
| By: | Agostino Capponi; Felix C. Corell; Joseph E. Stiglitz |
| Abstract: | Banks usually hold large amounts of domestic public debt which makes them vulnerable to their own sovereign’s default risk. At the same time, governments often resort to costly public bailouts when their domestic banking sector is in trouble. We investigate how the interbank network structure and the distribution of sovereign debt holdings jointly affect the optimal bailout policy in the presence of this "doom loop". Rescuing banks with high domestic sovereign exposure is optimal if these banks are sufficiently central in the network, even though that requires larger bailout expenditures than rescuing low-exposure banks. Our findings imply that highly central banks can use exposure to their own government as a strategic tool to increase the likelihood of being bailed out. Our model thus illustrates how the "doom loop" exacerbates the "too interconnected to fail" problem in banking. |
| JEL: | G01 G21 G28 H63 H81 |
| Date: | 2020–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:27074&r=all |
| By: | Lubberink, Martien |
| Abstract: | This paper examines the association between discretionary capital buffers, capital requirements, and risk for European banks. The discretionary buffers are banks' own buffers, or headroom: the difference between reported and required capital. I exploit capital requirements data that banks started to disclose since the release of a 2015 European Banking Authority opinion. Results using detailed SREP and Pillar 2 data of the largest 99 European banks over 2013-2019 show that less headroom is associated with increased bank risk. An additional examination reveals a positive association between headroom and stress test results for banks subjected to the Single Supervisory Mechanism, a result that runs against supervisory requirements. |
| Keywords: | Banking, European Banks, Pillar 2 requirements, SREP |
| JEL: | G21 |
| Date: | 2020–05–17 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:100445&r=all |
| By: | Anna Burova (Bank of Russia, Russian Federation) |
| Abstract: | A new micro-level database was used to estimate the debt service ratio (DSR)for the private non-banking sector in Russia. This is the first work presenting a loan-based DSR estimate for Russia. The micro-level database contains information on the remaining maturities and lending rates for each loan issued in 2017–2019 by resident banks to the private non-banking sector in Russia. Estimated levels of the DSR were considerably higher than previous results obtained with the assumptions of constant maturity structure and prevailing lending rates. New results revealed that the aggregate assumptions are not sufficiently granular. Utilisation of actual remaining maturity at each estimation point improved the accuracy of DSR estimates by 10 p.p. (from 16% to 26% for 2019 Q4). The loan-level database provides new insight into the composition of the corporate debt servicing burden in Russia: prevalence of domestic currency loans, higher debt servicing cost for debt with shorter remaining maturity, and the sectoral heterogeneity of the DSRs. |
| Keywords: | DSR, debt servicing burden, micro-level database, credit registry. |
| JEL: | E44 F34 G21 |
| Date: | 2020–05 |
| URL: | http://d.repec.org/n?u=RePEc:bkr:wpaper:wps55&r=all |
| By: | Kyriakos T. Chousakos; Gary B. Gorton; Guillermo Ordoñez |
| Abstract: | A financial crisis is an event of sudden information acquisition about the collateral backing short-term debt in credit markets. When investors see a financial crisis coming, however, they react by more intensively acquiring information about firms in stock markets, revealing those that are weaker, which as a consequence end up cut off from credit. This cleansing effect of stock markets’ information on credit markets’ composition discourage information acquisition about the collateral of the firms remaining in credit markets, slowing down credit growth and potentially preventing a crisis. Production of information in stock markets, then, acts as a macroprudential tool in the economy. |
| JEL: | E32 E44 G01 |
| Date: | 2020–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:27113&r=all |
| By: | Delis, Manthos; Iosifidi, Maria; Mylonidis, Nikolaos |
| Abstract: | We examine the transmission of the risk-taking channel to different industries using syndicated loans to U.S. borrowers from 1984 to 2018. We find that a one percentage point decrease in the shadow rate increases loan spreads by more than 30 basis points in the mining & construction and manufacturing sectors. The equivalent effect is lower in the services and trade industries, whereas the effect on the transportation & utilities and finance industries is less pronounced. Our results survive in several sensitivity tests and are immune to time-varying demand-side explanations. The identified differences in the potency of the risk-taking channel explain a significant part of the inferior performance of highly affected sectors compared to less-affected sectors in the year after a loan origination. |
| Keywords: | Bank risk-taking; Monetary policy; U.S.; Syndicated loans; Different industries |
| JEL: | E43 E52 G01 G21 |
| Date: | 2020–05–16 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:100433&r=all |
| By: | Iñaki Aldasoro; Leonardo Gambacorta; Paolo Giudici; Thomas Leach |
| Abstract: | Cyber incidents are becoming more sophisticated and their costs difficult to quantify. Using a unique database of more than 100,000 cyber events across sectors, we document the characteristics of cyber incidents. Cyber costs are higher for larger firms and for incidents that impact several organisations simultaneously. The financial sector is exposed to a larger number of cyber attacks but suffers lower costs, on average, thanks to proportionately greater investment in information technology (IT) security. The use of cloud services is associated with lower costs, especially when cyber incidents are relatively small. As cloud providers become systemically important, cloud dependence is likely to increase tail risks. Crypto-related activities, which are largely unregulated, are particularly vulnerable to cyber attacks. |
| Keywords: | cyber risk, cloud services, financial institutions, bitcoin, cryptocurrencies, cyber cost, cyber regulation |
| JEL: | D5 D62 D82 G2 H41 |
| Date: | 2020–05 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:865&r=all |
| By: | Christopher F Baum (Boston College; DIW Berlin); Dorothea Schäfer (DIW Berlin; Jönköping International Business School); Caterina Forti Grazzini (European Central Bank; FU Berlin) |
| Abstract: | This paper analyzes the causal relationship between institutional diversity in domestic banking sectors and bank stability. We use a large bank- and country-level unbalanced panel data set covering the EU member states’ banking sectors between 1998 and 2014. Constructing two distinct indicators for measuring institutional diversity, we find that a high degree of institutional diversity in the domestic banking sector positively affects bank stability. The positive relationship between domestic institutional diversity and bank stability is stronger in times of crisis, providing evidence that diversity can help to absorb both financial and real shocks. In particular, greater institutional diversity smooths bank earnings risk in times of crisis. Our results are economically meaningful and offer important insights to the ongoing economic policy debate on how to reshape the architecture of the banking sector. |
| Keywords: | Institutional Diversity; Shannon Index; Gini-Simpson Index; Bank Stability; Financial Crisis; Bank Competition |
| JEL: | G01 G20 G21 G28 |
| Date: | 2020–05–09 |
| URL: | http://d.repec.org/n?u=RePEc:boc:bocoec:1008&r=all |
| By: | Carlos Madeira |
| Abstract: | I study the impact on consumer markets from three laws that reduced the information of the Chilean credit bureau. A 2010 law deleted the delinquency information on short-term unemployed recipients. A 2011 law excluded borrower inquiries from the credit score. A 2012 law deleted the delinquency of borrowers with moderate amounts in arrears. Using a unique dataset, I show the 2010 law increased loan access, total credit and welfare, while the 2012 law had the opposite effect. The 2011 law had small welfare effects. This result is consistent with theoretical predictions that less borrower information can improve welfare if their effect on moral hazard is limited. |
| Date: | 2020–04 |
| URL: | http://d.repec.org/n?u=RePEc:chb:bcchwp:873&r=all |
| By: | Wenqian Huang; Előd Takáts |
| Abstract: | During the Covid-19-induced financial turbulence, central counterparties (CCPs) issued large margin calls, weighing on the liquidity of clearing member banks. In spite of the turbulence, CCPs remained resilient, as intended by the post-crisis reforms of financial market infrastructures. Higher margins should be expected during heightened turbulence, but the extent of the procyclicality of margining is the consequence of various design choices. Systemic considerations call to examine the nexus between banks and CCPs. Therefore, when thinking about margining, central banks need to assess banks and CCPs jointly rather than in isolation. |
| Date: | 2020–05–11 |
| URL: | http://d.repec.org/n?u=RePEc:bis:bisblt:13&r=all |
| By: | Abbassi, Puriya; Iyer, Rajkamal; Peydró, José-Luis; Soto, Paul |
| Abstract: | Regulation needs effective supervision; but regulated entities may deviate with unobserved actions. For identification, we analyze banks, exploiting ECB’s asset-quality-review (AQR) and supervisory security and credit registers. After AQR announcement, reviewed banks reduce riskier securities and credit (also overall securities and credit supply), with largest impact on riskiest securities (not on riskiest credit), and immediate negative spillovers on asset prices and firm-level credit supply. Exposed (unregulated) nonbanks buy the shed risk. AQR drives the results, not the end-of-year. After AQR compliance, reviewed banks reload riskier securities, but not riskier credit, with medium-term negative firm-level real effects (costs of supervision/safe-assets increase). |
| Keywords: | asset quality review,stress tests,supervision,risk-masking,costs of safe assets |
| JEL: | E58 G21 G28 H63 L51 |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:esprep:217048&r=all |
| By: | Arvind Krishnamurthy; Wenhao Li |
| Abstract: | We develop a model of financial crises with both a financial amplification mechanism, via frictional intermediation, and a role for sentiment, via time-varying beliefs about an illiquidity state. We confront the model with data on credit spreads, equity prices, credit, and output across the financial crisis cycle. In particular, we ask the model to match data on the frothy pre-crisis behavior of asset markets and credit, the sharp transition to a crisis where asset values fall, disintermediation occurs and output falls, and the post-crisis period characterized by a slow recovery in output. We find that a pure amplification mechanism quantitatively matches the crisis and aftermath period but fails to match the pre-crisis evidence. Mixing sentiment and amplification allows the model to additionally match the pre-crisis evidence. We consider two versions of sentiment, a Bayesian belief updating process and one that overweighs recent observations. We find that both models match the crisis patterns qualitatively, generating froth pre-crisis, non-linear behavior in the crisis, and slow recovery. The non-Bayesian model improves quantitatively on the Bayesian model in matching the extent of the pre-crisis froth. |
| JEL: | G01 |
| Date: | 2020–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:27088&r=all |
| By: | Andrew F. Haughwout; Donghoon Lee; Joelle Scally; Wilbert Van der Klaauw |
| Abstract: | Today, the New York Fed’s Center for Microeconomic Data released the Quarterly Report on Household Debt and Credit for 2020:Q1. Because consumer debt servicing statements are typically furnished to credit bureaus only once during every statement period, our snapshot of consumer credit reports as of March 31, 2020 is, in effect, largely a pre‑COVID‑19 view of the consumer balance sheet. While significant indications of the pandemic are yet to appear in our Consumer Credit Panel (CCP—the data source for the Quarterly Report, based on anonymized Equifax credit reports), we are able to observe the credit position of the American consumer just as the pandemic and associated lockdowns struck the United States. |
| Keywords: | COVID-19; household finance; consumer credit panel |
| JEL: | D14 |
| Date: | 2020–05–05 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednls:87895&r=all |
| By: | Jézabel Couppey-Soubeyran; Erica Perego; Fabien Tripier |
| Abstract: | European banks are stronger today than they were on the eve of the 2007-2008 financial crisis, thanks to the reforms that have taken place since then. But will they be strong enough in the face of a health crisis closer to the Great Depression of the 1930s than the stress-test scenarios envisaged by the European Banking Authority for 2020? Access to central bank liquidity probably eliminates the risk of bank illiquidity, but it is not unthinkable that a bank insolvency crisis would have to be managed. The non-repayment of one in five loans would be enough to exhaust the current level of capital. The resolution mechanism would then have to be mobilised, which is unlikely to be sufficient in a context where, according to the European Systemic Risk Board, the risk of simultaneous defaults is increasing sharply. It would then be possible to mobilise the European Stability mechanism. Should this instrument prove insufficient, the risk of the re-emergence of a sovereign debt crisis would increase. |
| Keywords: | Banks;Banking regulation;Basel Agreements;Monetary policy;Macroprudential policy;Europe |
| JEL: | G21 G28 E58 |
| Date: | 2020–05 |
| URL: | http://d.repec.org/n?u=RePEc:cii:cepipb:2020-32&r=all |