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on Banking |
| By: | Ivashina, Victoria; Laeven, Luc; Moral-Benito, Enrique |
| Abstract: | Using credit-registry data for Spain and Peru, we document that four main types of commercial credit-asset-based loans, cash flow loans, trade finance and leasing-are easily identifiable and represent the bulk of corporate credit. We show that credit growth dynamics and bank lending channels vary across these loan types. Moreover, aggregate credit supply shocks previously identified in the literature appear to be driven by individual loan types. The effects of monetary policy and the effects of the financial crisis propagating through banks' balance sheets are primarily driven by cash flow loans, whereas asset-based credit appears to be largely insensitive to these types of effects. |
| Keywords: | Bank credit; bank lending channel; Credit registry; Loan types |
| JEL: | E5 G21 |
| Date: | 2020–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:14459&r=all |
| By: | Belton, Daniel; Gambacorta, Leonardo; Kokas, Sotirios; Minetti, Raoul |
| Abstract: | We empirically assess the responses of banks in the United States to a regulatory change that influenced the distribution of funding in the banking system. Following the 2011 FDIC change in the assessment base, insured banks found wholesale funding more costly, while uninsured branches of foreign banks enjoyed cheaper access to wholesale liquidity. We use quarterly bank balance sheet data and a rich data set of syndicated loans with borrower and lender characteristics to show that uninsured foreign banks, which faced a relatively positive shock, engaged in liquidity hoarding. Hence, they accumulated more reserves but extended fewer total syndicated loans and became more passive in the syndicated loan deals in which they participated. These results contribute to the discussion on the role of foreign banks in credit creation, especially in a country like the United States where foreign banks also have a crucial role in managing USD money market operations at the group level. |
| Keywords: | foreign banks; liquidity shocks; syndicated loans; Wholesale funding |
| JEL: | E44 G21 G28 |
| Date: | 2020–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:14504&r=all |
| By: | Kaiji Chen; Patrick C. Higgins; Tao Zha |
| Abstract: | Lending standards are a direct measure of credit conditions. We use the micro data merged from three separate sources to construct this measure and document that an uncertain macroeconomic outlook, rather than banks' balance sheet positions, was an important reason that a majority of banks tightened bank lending standards during the Great Recession. Our extensive data analysis disciplines how we introduce credit frictions in the banking sector into a macroeconomic model. The model estimation reveals that an exogenous shock to credit supply drives cyclical lending standards and accounts for a significant portion of fluctuations in bank loans and aggregate output. |
| JEL: | C51 C81 C82 E32 E44 G21 |
| Date: | 2020–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:27214&r=all |
| By: | Harris, Milton; Opp, Christian; Opp, Marcus M. |
| Abstract: | We propose a novel conceptual approach to transparently characterizing credit market outcomes in economies with multi-dimensional borrower heterogeneity. Based on characterizations of securities' implicit demand for bank equity capital, we obtain closed-form expressions for the composition of credit, including a sufficient statistic for the provision of bank loans, and a novel cross-sectional asset pricing relation for securities held by regulated levered institutions. Our framework sheds light on the compositional shifts in credit prior to the 07/08 financial crisis and the European debt crisis, and can provide guidance on the allocative effects of shocks affecting both banks and the cross-sectional distribution of borrowers. |
| Keywords: | Bailouts; bank capital; Composition of credit; Credit rationing; Crowding out; Institutional asset pricing; Non-bank competition; Overinvestment |
| JEL: | G12 G21 G23 G28 |
| Date: | 2020–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:14524&r=all |
| By: | Jin-Hyuk Kim; Frank Stähler |
| Abstract: | We investigate the impact of peer-to-peer lending on the small business loans originated by US depository institutions that are subject to the Community Reinvestment Act. We present a model where a borrower can choose between a traditional bank and a crowdlending platform and show that the entry of crowdlending can induce a switching effect as well as a credit expansion effect. Using the staggered entry of LendingClub across states between 2009 and 2017, we find that the platform entry reduced the small business loans originated by banks, in particular, in the low- or moderate-income tracts as well as in the distressed middle-income tracts with a high poverty rate. A conservative estimate suggests that the crowdlending entry may have reduced the aggregate lending volume to small businesses. |
| Keywords: | crowdfunding, marketplace lending, fintech, Community Reinvestment Act |
| JEL: | G21 G28 |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_8268&r=all |
| By: | Bos, Jaap; de Haas, Ralph; Millone, Matteo |
| Abstract: | We analyze contract-level data on approved and rejected microloans to assess the impact of a new credit registry in Bosnia and Herzegovina, a country with a competitive microcredit market. Our findings are threefold. First, information sharing reduces defaults, especially among new borrowers, and increases the return on lending. Second, lending tightens at the extensive margin as loan officers, using the new registry, reject more applications. Third, lending also tightens at the intensive margin: microloans become smaller, shorter and more expensive. This affects both new borrowers and lending relationships established before the registry. In contrast, repeat borrowers whose lending relationship started after the registry introduction begin to benefit from larger loans at lower interest rates. |
| Keywords: | Credit registry; information sharing; microcredit; overborrowing |
| JEL: | D04 D82 G21 G28 |
| Date: | 2020–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:14464&r=all |
| By: | Xiuwei TANG; UCHIDA Hirofumi |
| Abstract: | We investigate differences in the use of credit guarantees among banks by using a bank-firm matched dataset from Japan. By following Khwaja and Mian (2008) to control for borrower characteristics and the supply factors of guarantees using firm fixed effects, we extract the part of the ratio of guaranteed loans to total loans that depends solely on banks' factors for the demand for guarantees. We find significant differences in this after-control ratio for some banks, and the distribution of the ratio is significantly different from that of an uncontrolled ratio based on publicly available data. We further find that the controlled ratio does not depend on the financial conditions of the respective banks such as the capital ratio of the banks, which indicates that other observable and/or unobservable bank characteristics determine these differences in the use of credit guarantees across banks. |
| Date: | 2020–04 |
| URL: | http://d.repec.org/n?u=RePEc:eti:dpaper:20029&r=all |
| By: | Yifei Wang; Toni M. Whited; Yufeng Wu; Kairong Xiao |
| Abstract: | We quantify the impact of bank market power on monetary policy transmission through banks to borrowers. We estimate a dynamic banking model in which monetary policy affects imperfectly competitive banks’ funding costs. Banks optimize the pass-through of these costs to borrowers and depositors, while facing capital and reserve regulation. We find that bank market power explains much of the transmission of monetary policy to borrowers, with an effect comparable to that of bank capital regulation. When the federal funds rate falls below 0.9%, market power interacts with bank capital regulation to produce a reversal of the effect of monetary policy. |
| JEL: | E51 E52 G21 G28 |
| Date: | 2020–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:27258&r=all |
| By: | Ahnert, Toni; Kuncl, Martin |
| Abstract: | We examine loan insurance when lenders can screen at origination, learn loan quality over time, and can sell loans in secondary markets. Loan insurance reduces lending standards but improves market liquidity. Lenders with worse screening ability insure, which commits them to not exploiting future private information about loan quality and improves the quality of uninsured loans traded. This externality implies insufficient insurance. A regulator achieves constrained efficiency by (i) guaranteeing a minimum price of uninsured loans to eliminate a welfare-dominated illiquid equilibrium; and (ii) subsidizing loan insurance in the liquid equilibrium. Our results can inform the design of government-sponsored mortgage guarantees. |
| Keywords: | Adverse Selection; Loan insurance; market liquidity; screening |
| JEL: | G01 G21 G28 |
| Date: | 2020–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:14458&r=all |
| By: | Fatouh, Mahmoud; Neamtu, Ioana; van Wijnbergen, Sweder |
| Abstract: | We assess the impact of contingent convertible (CoCo) bonds and the wealth transfers they imply conditional on conversion on risk-taking behaviour of the issuing bank. We also test for regulatory arbitrage: do banks by issuing CoCos try to maintain risk taking incentives when regulators reduce them by insisting on higher capitalization ratios? While we test for and reject sample selection bias, we show that CoCo bonds issuance has a strong positive effect on risk-taking behaviour, and so do conversion parameters that reduce dilution of existing shareholders upon conversion. Higher volatility amplifies the impact of CoCos on risk taking. |
| Keywords: | Bank Capital Structure; Contingent Convertible Bonds; Risk Taking |
| JEL: | G01 G11 G21 G32 |
| Date: | 2020–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:14530&r=all |
| By: | Kei-Ichiro Inaba (Director and Senior Economist, Institute for Monetary and Economic Studies, Bank of Japan (E-mail: keiichirou.inaba@boj.or.jp)) |
| Abstract: | This article investigates the determinants of cash holdings by publicly-traded firms for 20 advanced and emerging countries over the last decade, with a focus on ratios of the firms' aggregate cash to their total assets. Panel-data regressions find that higher cash ratios were associated with fewer non-cash current assets, smaller costs of carry, larger contemporaneous cash inflows, fewer interest-bearing liabilities, greater expected investment opportunities, including research and development projects, greater uncertainty, and the state of corporate governance. Regarding the last result, higher cash ratios were associated with managers with worse ethical behavior, lower accountability to investors and board members, weaker investor protection, harsher auditing and reporting standards, and greater potential to face holdup problems by lending banks. The agency motive was greater than the precautionary and transaction-costs motives in terms of marginal impact while being limited in terms of explanatory power over total variation in the cash ratios. |
| Keywords: | Corporate finance, Cash holdings, Precautionary saving motive, Corporate governance, Agency problem |
| JEL: | C23 E41 G32 G34 H32 |
| Date: | 2020–06 |
| URL: | http://d.repec.org/n?u=RePEc:ime:imedps:20-e-07&r=all |
| By: | Mitchener, Kris James; Richardson, Gary |
| 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; contagion; Great Depression; monetary deflation |
| JEL: | E44 G01 G21 N22 |
| Date: | 2020–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:14510&r=all |
| By: | Kolliopoulos, Athanasios |
| Abstract: | This article explores the determinants of the three bank bailouts in Greece during the recent financial crisis. Building on literature from comparative studies applying the “Varieties of Financial Capitalism” framework, the paper analyzes the factors contributing to bank rescue package design. Although this analysis verifies the institutionalist hypotheses in the case of the two fist recapitalizations, the article attempts to explain the significant changes in the domestic banking system and the transfer of control of systemic banks to foreign hands, which were caused after the third recapitalization in 2015. Interpreting such an exceptional case, we focus on the ECB’s lender of last resort tools as a catalyst for bank restructuring. |
| Keywords: | Greek banks; dehellenization; Varieties of Capitalism; bailout; Emergency Liquidity Assistance |
| JEL: | F3 G3 J1 N0 |
| Date: | 2020–05–01 |
| URL: | http://d.repec.org/n?u=RePEc:ehl:lserod:105072&r=all |
| By: | Johannesen, Niels; Juel Andersen, Jørgen; Rijkers, Bob |
| Abstract: | Do elites capture foreign aid? This paper documents that aid disbursements to highly aid-dependent countries coincide with sharp increases in bank deposits in offshore financial centers known for bank secrecy and private wealth management, but not in other financial centers. The estimates are not confounded by contemporaneous shocks such as civil conflicts, natural disasters and financial crises, and are robust to instrumenting with predetermined aid commitments. The implied leakage rate is around 7.5\% at the sample mean and tends to increase with the ratio of aid to GDP. The findings are consistent with aid capture in the most aid-dependent countries. |
| Keywords: | Corruption; foreign aid; Offshore Financial Centers |
| Date: | 2020–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:14481&r=all |
| By: | Braggion, Fabio; Frehen, Rik; Jerphanion, Emiel |
| Abstract: | We study the relationship between credit, stock trading and asset prices. There is a wide array of channels through which credit provision can fuel stock prices. On one extreme, cheap credit reduces the cost of capital (discount rate) and boosts prices without trading or wealth transfers. On the other extreme, extrapolators use credit to ride a bubble and lose money. We construct a novel database containing every individual stock transaction for three major British companies during the 1720 South Sea Bubble. We link each trader's stock transactions to daily margin loan positions and subscriptions of new share issues. We find that margin loan holders are more likely to buy (sell) following high (low) returns. Loan holders also sign up to buy new shares of overvalued companies and incur large trading losses as a result of the bubble. |
| Keywords: | Bubble; Credit Provision; Investor Behavior; Margin Loans |
| JEL: | G01 G12 G21 N23 |
| Date: | 2020–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:14532&r=all |
| By: | Gropp, Reint; Koetter, Michael; McShane, William |
| Abstract: | The German government launched an unprecedented range of support programmes to mitigate the economic fallout from the Covid-19 pandemic for employees, self-employed, and firms. Fiscal transfers and guarantees amount to approximately €1.2 billion by now and are supplemented by similarly impressive measures taken at the European level. We argue in this note that the pandemic poses, however, also important challenges to financial stability in general and bank resilience in particular. A stable banking system is, in turn, crucial to ensure that support measures are transmitted to the real economy and that credit markets function seamlessly. Our analysis shows that banks are exposed rather differently to deteriorated business outlooks due to marked differences in their lending specialisation to different economic sectors. Moreover, a number of the banks that were hit hardest by bleak growth prospects of their borrowers were already relatively thinly capitalised at the outset of the pandemic. This coincidence can impair the ability and willingness of selected banks to continue lending to their mostly small and medium sized entrepreneurial customers. Therefore, ensuring financial stability is an important pre-requisite to also ensure the effectiveness of fiscal support measures. We estimate that contracting business prospects during the first quarter of 2020 could lead to an additional volume of non-performing loans (NPL) among the 40 most stressed banks ‒ mostly small, regional relationship lenders ‒ on the order of around €200 million. Given an initial stock of NPL of €650 million, this estimate thus suggests a potential level of NPL at year-end of €1.45 billion for this fairly small group of banks already. We further show that 17 regional banking markets are particularly exposed to an undesirable coincidence of starkly deteriorating borrower prospects and weakly capitalised local banks. Since these regions are home to around 6.8% of total employment in Germany, we argue that ensuring financial stability in the form of healthy bank balance sheets should be an important element of the policy strategy to contain the adverse real economic effects of the pandemic. |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:iwhonl:22020&r=all |
| By: | Victoria Ivashina; Boris Vallee |
| Abstract: | Using novel data on 1,240 credit agreements, we investigate sources of contractual complexity in the leveraged loan market. While negative covenants are widespread, carve-out and deductible clauses that weaken them are as frequent. We propose simple measures of contractual weakness, which uniquely explain the market-wide price reaction that followed the 2017 J.Crew restructuring, a high profile use of such contractual elements. Leveraged buyouts have significantly weaker loan agreements, and a larger non-bank funding of a loan is conducive to weaker contractual terms. Weak covenants translate to modestly higher issuance spreads. Overall, our findings are consistent with sophisticated borrowers catering to a reaching-for-yield phenomenon by exploiting contractual complexity. |
| JEL: | G23 G32 |
| Date: | 2020–06 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:27316&r=all |
| By: | Oliver de Groot (University of Liverpool Management School & CEPR); Grzegorz Wesołowski (Narodowy Bank Polski) |
| Abstract: | We investigate business cycle implications of banking system complexity and bank heterogeneity in individual leverage. We show that a more complex banking network generates higher individual bank leverage and increases economic volatility. Then, we build a general equilibrium business cycle model with three types of banks: deposittaking, intermediary and lending. Keeping constant aggregate leverage in the banking system, we vary individual leverage and show that an increase in lending bank leverage increases costs of business cycle fluctuations. We argue that this can be mitigated by policymakers taxing the returns of lending banks. |
| Keywords: | Financial intermediation; Network theory; Leverage; Welfare |
| JEL: | E32 E44 E51 |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:nbp:nbpmis:330&r=all |
| By: | Barone, Guglielmo; Schivardi, Fabiano; Sette, Enrico |
| Abstract: | We study the effects on loan rates of a quasi-experimental change in the Italian legislation which forbids interlocking directorates between banks. We use a difference-in-differences approach and exploit multiple banking relationships to control for unobserved heterogeneity. We find that the reform decreased rates charged by previously interlocked banks to common customers by between 10-30 basis points. The effect is stronger if the firm had a weaker bargaining power vis-a-vis the interlocked banks. Consistent with the assumption that interlocking directorates facilitate collusion, interest rates on loans from interlocked banks become more dispersed after the reform. |
| Keywords: | Banking; Competition; Interlocking directorates |
| Date: | 2020–04 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:14654&r=all |
| By: | Michael R. Roberts; Michael Schwert |
| Abstract: | We show that variation in short-term nominal interest rates produces an endogenous response in the design of and commitment to corporate loan contracts. Interest rates are negatively related to the cash flow rights and positively related to the control rights granted to creditors. An implication of this contractual response is a sharp increase in the ex post renegotiation of contracts originated in low interest rate environments, as well as a muted effect of interest rate variation on the cost of debt capital. Our findings illustrate how the design of financial contracts in practice reflects a multi-dimensional tradeoff among contract features that aligns incentives and apportions risk among the contracting parties in a state-contingent manner. |
| JEL: | E44 G21 |
| Date: | 2020–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:27195&r=all |
| By: | Luc Bridet; Peter Schwardmann |
| Abstract: | We propose a simple model of borrower optimism in competitive lending markets with asymmetric information. Borrowers in our model engage in self-deception to arrive at a belief that optimally trades off the anticipatory utility benefits and material costs of optimism. Lenders’ contract design shapes these benefits and costs. The model yields three key results. First, the borrower’s motivated cognition increases her material welfare, regardless of whether or not she ends up being optimistic in equilibrium. Our model thus helps explain why wishful thinking is not driven out of markets. Second, in line with empirical evidence, a low cost of lending and a booming economy lead to optimism and the widespread collateralization of loans. Third, equilibrium collateral requirements may be inefficiently high. |
| Keywords: | optimal expectations, motivated cognition, wishful thinking, financial crisis, lending markets, screening |
| JEL: | D86 D82 G33 |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_8271&r=all |