nep-ban New Economics Papers
on Banking
Issue of 2020‒06‒29
twelve papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. iConVis: Interactive Visual Exploration of the Default Contagion Risk for Networked-guarantee Loans By Zhibin Niu; Runlin Li; Junqi Wu; Dawei Cheng; Jiawan Zhang
  2. Searching for Approval By Sumit Agarwal; John Grigsby; Ali Hortaçsu; Gregor Matvos; Amit Seru; Vincent Yao
  3. Systemic Banking Crises Database: A Timely Update in COVID-19 Times By Laeven, Luc; Valencia, Fabian
  4. Bank Lending, Monetary Policy Transmission, and Interest on Excess Reserves: a FAVAR Analysis By Chetan Dave; Scott J. Dressler; Lei Zhang
  5. Macro-Financial Linkages in a Structural Model of the Irish Economy By McInerney, Niall
  6. The Anatomy of the Transmission of Macroprudential Policies By Viral V. Acharya; Katharina Bergant; Matteo Crosignani; Tim Eisert; Fergal J. McCann
  7. The costs of macroprudential deleveraging in a liquidity trap By Chen, Jiaqian; Finocchiaro, Daria; Lindé, Jesper; Walentin, Karl
  8. Macroprudential policy, mortgage cycles and distributional effects: Evidence from the UK By José-Luis Peydró; Francesc R. Tous; Jagdish Tripathy; Arzu Uluc
  9. Central bank independence and systemic risk By Andrieș, Alin Marius; Podpiera, Anca Maria; Sprincean, Nicu
  10. Macroprudential Policy and Household Debt: What is Wrong with Swedish Macroprudential Policy? By Svensson, Lars E.O.
  11. Interbank relationship lending in Colombia By Carlos León; Javier Miguélez
  12. Performance assessment and definition of improvement paths for microfinance institutions: An application to a network of village banks in Cameroon By Isabelle Piot-Lepetit; Joseph Nzongang

  1. By: Zhibin Niu; Runlin Li; Junqi Wu; Dawei Cheng; Jiawan Zhang
    Abstract: Groups of enterprises can guarantee each other and form complex networks to obtain loans from commercial banks. During economic slowdown period, the corporate default may spread like a virus and lead to large-scale defaults or even systemic financial crises. To help the financial regulatory authorities and banks manage the risk brought by the networked loans, we identified the default contagion risk as a pivotal issue to take preventive measures, and develop iConVis, an interactive visual analysis tool, to facilitate the closed-loop analysis process. A novel financial metric - contagion effect is formulated to quantify the infectious consequence of the guarantee chains in the network. Based on the metric, we design and implement a serial of novel and coordinated views to address the analysis the financial problem. Experts evaluated the system using real-world financial data. The proposed approach grants them the ability to overturn the previous ad hoc analysis methodology and extends the coverage of the conventional Capital Accord in the banking industry.
    Date: 2020–06
  2. By: Sumit Agarwal; John Grigsby; Ali Hortaçsu; Gregor Matvos; Amit Seru; Vincent Yao
    Abstract: We study the interaction of search and application approval in credit markets. We combine a unique dataset, which details search behavior for a large sample of mortgage borrowers, with loan application and rejection decisions. Our data reveal substantial dispersion in mortgage rates and search intensity, conditional on observables. However, in contrast to predictions of standard search models, we find a novel non-monotonic relationship between search and realized prices: borrowers, who search a lot, obtain more expensive mortgages than borrowers' with less frequent search. The evidence suggests that this occurs because lenders screen borrowers' creditworthiness, rejecting unworthy borrowers, which differentiates consumer credit markets from other search markets. Based on these insights, we build a model that combines search and screening in presence of asymmetric information. Risky borrowers internalize the probability that their application is rejected, and behave as if they had higher search costs. The model rationalizes the relationship between search, interest rates, defaults, and application rejections, and highlights the tight link between credit standards and pricing. We estimate the parameters of the model and study several counterfactuals. The model suggests that overpayment may be a poor proxy for consumer unsophistication since it partly represents rational search in presence of rejections. Moreover, the development of improved screening technologies from AI and big data (i.e., fintech lending) could endogenously lead to more severe adverse selection in credit markets. Finally, place based policies, such as the Community Reinvestment Act, may affect equilibrium prices through endogenous search responses rather than increased credit risk.
    JEL: G21 L00
    Date: 2020–06
  3. By: Laeven, Luc; Valencia, Fabian
    Abstract: This paper updates the database on systemic banking crises presented in Laeven and Valencia (2013a). Drawing on 151 systemic banking crises episodes around the globe during 1970-2017, the database includes information on crisis dates, policy responses to resolve banking crises, and the fiscal and output costs of crises. We provide new evidence that crises in high-income countries tend to last longer and be associated with higher output losses, lower fiscal costs, and more extensive use of bank guarantees and expansionary macro policies than crises in low- and middle-income countries. We complement the banking crises dates with sovereign debt and currency crises dates to find that sovereign debt and currency crises tend to coincide with or follow banking crises.
    Keywords: Bank Restructuring; Banking Crisis; Crisis Resolution; financial crisis
    JEL: E50 E60 G20
    Date: 2020–04
  4. By: Chetan Dave (Department of Economics, University of Alberta); Scott J. Dressler (Department of Economics, Villanova School of Business, Villanova University); Lei Zhang (Department of Agribusiness and Applied Economics, North Dakota State University)
    Abstract: Has paying interest on excess reserves (IOER) impacted monetary policy transmission? We employ a factor-augmented VAR (i.e. FAVAR) to analyze a traditional bank lending channel (BLC) as well as a potential reserves channel. Our main results are: (i) the bank-lending response to an exogenous monetary policy innovation in the Federal Funds rate (i.e. the BLC) remains active but smaller than pre-2008 measures; (ii) the bank-lending response to any IOER-based liquidity innovations (i.e. the reserves channel) either mimics the BLC or is largely insignificant. These results provide little evidence that IOER has significantly impacted bank lending or monetary transmission.
    Keywords: Bank Lending Channel; FAVAR; IOER; Monetary Policy
    JEL: E51 E52 C32
    Date: 2020–05
  5. By: McInerney, Niall (Central Bank of Ireland)
    Abstract: We specify and estimate a system of macro-financial linkages that incorporate transmission channels for both borrower- and lender-based macroprudential instruments. We then embed these linkages in a structural macro model of the Irish economy. To illustrate the usefulness of the model for policy analysis, we simulate several scenarios. We first show that regulatory changes to LTI and LTV ratios have a relatively large impact on the real economy, primarily through consumption. We next examine the stabilising properties of the countercyclical capital buffer. We find that releasing this buffer in response to an adverse real and financial shock can partially attenuate of the ensuing contraction in credit and output. Finally, we consider the impact of an exogenous fall in commercial real estate prices and demonstrate that this sector can generate significant macro-financial volatility.
    Keywords: Banking, macroprudential, house prices, structural modelling
    JEL: E5 E53 E52 G21
    Date: 2020–05
  6. By: Viral V. Acharya; Katharina Bergant; Matteo Crosignani; Tim Eisert; Fergal J. McCann
    Abstract: We analyze how regulatory constraints on household leverage—in the form of loan-to-income and loan-to-value limits—affect residential mortgage credit and house prices as well as other asset classes not directly targeted by the limits. Supervisory loan level data suggest that mortgage credit is reallocated from low-to high-income borrowers and from urban to rural counties. This reallocation weakens the feedback loop between credit and house prices and slows down house price growth in “hot” housing markets. Consistent with constrained lenders adjusting their portfolio choice, more-affected banks drive this reallocation and substitute their risk-taking into holdings of securities and corporate credit.
    JEL: E21 E44 E58 G21 R21
    Date: 2020–05
  7. By: Chen, Jiaqian; Finocchiaro, Daria; Lindé, Jesper; Walentin, Karl
    Abstract: We examine the effects of various borrower-based macroprudential tools in a New Keynesian environment where both real and nominal interest rates are low. Our model features long-term debt, housing transaction costs and a zero lower bound constraint on policy rates. We find that the long-term costs, in terms of forgone consumption, of all the macroprudential tools we consider are moderate. Even so, the short-term costs differ dramatically between alternative tools. Specifically, a loan-to-value tightening is more than twice as contractionary compared to a loan-to-income tightening when debt is high and monetary policy cannot accommodate.
    Keywords: Collateral and borrowing constraints; Household Debt; housing prices; Mortgage interest deductibility; New Keynesian Model; zero lower bound
    JEL: E52 E58
    Date: 2020–04
  8. By: José-Luis Peydró; Francesc R. Tous; Jagdish Tripathy; Arzu Uluc
    Abstract: Macroprudential regulators worldwide have introduced regulations to limit household leverage in light of existing evidence which suggests that high leverage is associated with household distress during crisis. We analyse the distributional effects of such a macroprudential policy on mortgage and house price cycles. For identification, we exploit the universe of UK mortgages and a 15%-limit imposed in 2014 on lenders—not households—for high loan-to-income ratio (LTI) mortgages. Despite some regulatory arbitrage (e.g. increases in LTV and average loan size), more-constrained lenders issue fewer high-LTI mortgages. Partial substitution by less-constrained lenders leads to overall credit contraction to low-income borrowers in local-areas more exposed to constrained-lenders, lowering house price growth. Following the Brexit referendum (which led to house-price correction), the 2014-policy strongly implies—via lower pre-correction debt—better house prices and mortgage defaults during an episode of house price correction.
    Keywords: macroprudential policy; mortgages; credit cycles; inequality; house prices.
    JEL: E5 G01 G21 G28
    Date: 2020–06
  9. By: Andrieș, Alin Marius; Podpiera, Anca Maria; Sprincean, Nicu
    Abstract: We investigate the relationship of central bank independence and banks’ systemic risk measures. Our results support the case for central bank independence, revealing that central bank independence has a robust, negative, and significant impact on the contribution and exposure of a bank to systemic risk. Moreover, the impact of central bank independence is similar for the stand-alone risk of individual banks. Secondarily, we study how the central bank independence affects the impact of selected country and banking system indicators on these systemic measures. The results show that central bank independence may exacerbate the effect of a crisis on the contribution of banks to systemic risk. However, central bank independence seems to mitigate the harmful effect of a bank’s high market power on its systemic risk contribution.
    JEL: G21 E58 G28
    Date: 2020–06–16
  10. By: Svensson, Lars E.O.
    Abstract: Much is right with Swedish macroprudential policy. But regarding risks associated with household debt, the policy does not pass a cost-benefit test. The substantial credit tightening that Finansinspektionen (the FI, the Swedish Financial Supervisory Authority) has achieved â?? through amortization requirements and more indirect ways â?? has no demonstrable benefits but substantial costs. The FI - and the international organizations that have commented on risks associated with Swedish household debt - use a flawed theoretical framework for assessing macroeconomic risks from household debt. The tightening was undertaken for mistaken reasons. Several reforms are required for a better-functioning mortgage market. A reform of the governance of macroprudential policy â?? including a decision-making committee and improved accountability â?? may reduce risks of policy mistakes.
    Keywords: Household Debt; Housing; Macroeconomic Risk; macroprudential policy; Mortgages
    JEL: E21 G1 G21 G23 G28 R21
    Date: 2020–04
  11. By: Carlos León (Banco de la República de Colombia); Javier Miguélez (Banco de la República de Colombia)
    Abstract: Stable and strong lending relations among financial institutions have been credited as the mainstay of interbank markets and financial stability. They are an indicator of trust among financial institutions. From a network perspective, we measure how stable relations are in the Colombian unsecured interbank lending market. We calculate the survival ratio of interbank networks, which corresponds to the fraction of linkages found in consecutive interbank lending networks. From January 2014 to September 2019, on average, about 58 per cent of linkages survive from one day to the next. About 36, 28, and 22 per cent of linkages survive during a 5-, 10-, and 20-day period, respectively. Regarding the strength of lending relations, results are robust to the exclusion of low-value linkages and non-banking institutions. A non-parametric test discards randomness as a plausible source of observed survival ratios. Preliminary examination of survival ratios during the first weeks of the financial turmoil caused by Covid-19 pandemic and falling oil prices suggests that trust in the interbank market was not seriously affected. Therefore, it is fair to conclude that stable and strong interbank lending relations exist in the Colombian market. From a financial stability perspective, the survival ratio may aid financial authorities in their quest for monitoring financial institutions’ willingness to exchange funds among them. **** RESUMEN: Las relaciones estables y fuertes entre las instituciones financieras son consideradas como fundamentales para los mercados interbancarios y la estabilidad financiera. Estas relaciones son un indicador de confianza entre instituciones financieras. En este artículo medimos cuán estables son las relaciones en el mercado interbancario colombiano no colateralizado desde una perspectiva de análisis de redes. Para tal fin calculamos el coeficiente de sobrevivencia de las redes interbancarias, el cual se obtiene como la fracción de conexiones que se encuentran en redes de préstamo interbancario de manera consecutiva. Desde enero de 2014 hasta septiembre de 2019, encontramos que en promedio el 58 por ciento de las conexiones sobrevive de un día para otro. Para periodos de 5, 10 y 20 días este coeficiente se reduce a 36, 28 y 22 por ciento, respectivamente. Los resultados son robustos a la exclusión de conexiones de bajo monto y de instituciones no bancarias. Una prueba no paramétrica demuestra que los coeficientes de sobreviviencia obtenidos no son atribuibles a la aleatoriedad. Una revisión preliminar de los coeficientes de sobrevivencia durante las primeras semanas de estrés relacionado con la pandemia de Covid-19 y la caída de los precios del petróleo sugiere que la confianza en el mercado interbancario no resultó afectada seriamente. En consecuencia, puede concluirse que existen relaciones de préstamo interbancario en el mercado colombiano. Desde una perspectiva de estabilidad financiera, los coeficientes de sobrevivencia pueden ayudar a que las autoridades monitoreen la voluntad de intercambio de liquidez entre instituciones financieras.
    Keywords: Interbank, lending, survival, linkage, network, interbancario, préstamo, sobrevivencia, conexiones, redes
    JEL: G10 G21 G23 L14
    Date: 2020–06
  12. By: Isabelle Piot-Lepetit (UMR MOISA - Marchés, Organisations, Institutions et Stratégies d'Acteurs - Cirad - Centre de Coopération Internationale en Recherche Agronomique pour le Développement - INRA - Institut National de la Recherche Agronomique - CIHEAM-IAMM - Centre International de Hautes Etudes Agronomiques Méditerranéennes - Institut Agronomique Méditerranéen de Montpellier - CIHEAM - Centre International de Hautes Études Agronomiques Méditerranéennes - Montpellier SupAgro - Institut national d’études supérieures agronomiques de Montpellier - Montpellier SupAgro - Centre international d'études supérieures en sciences agronomiques); Joseph Nzongang
    Abstract: The objective of this paper is an assessment of the financial and social performance of a network of village banks in Cameroon and the provision of data-driven guidance to managers helping them in their decision making process. An analysis framework in three stages is developed. First, a Data Envelopment Analysis (DEA) analysis is implemented for measuring efficiency, identifying best-practices, and setting goals to less efficient MFIs. Then, a DEA operating frontiers (DEA-OF) model is designed to identify improvement paths setting short-term goals towards their long-term DEA objective and providing effective and time dependent guidance to managers in their efficiency improvement process. Finally, DEA and DEA-OF results are translated into financial and non-financial indicators daily used by managers through three different and interrelated scorecards. Besides, results of this third stage are used for identifying village banks ready for the new phase of development of the network aiming to funding community projects.
    Keywords: financial performance,social performance,data envelopment analysis,community growth mutual funds,DEA operating frontiers,benchmarking,financial and social efficiency,performance indicator,improvement path,financial sustainability,outreach to the poor,microfinance,mission drift
    Date: 2019

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