|
on Banking |
| By: | Takuji Kawamoto (Bank of Japan); Taichi Matsuda (Bank of Japan); Koji Takahashi (Bank of Japan); Yoichiro Tamanyu (Bank of Japan) |
| Abstract: | We examine banks' risk taking in lending to small and medium-sized enterprises under the prolonged low interest rate environment in Japan. Specifically, we identify "low-return borrowers," whose borrowing interest rates are low relative to their financial soundness. Using bank-firm level data for millions of Japanese small and medium-sized enterprises, we find that bank loans to low-return borrowers have increased more than those to other normal firms in recent years and such risk taking by banks has been driven by the low interest rate environment as well as the increase in competition among banks. In addition, we show that highly capitalized banks with low profitability increased loans to such vulnerable borrowers more than lowly capitalized banks. These results suggest riskiness of credit allocation has increased in Japan's loan market, but it does not seem to pose an immediate threat to financial stability. |
| Keywords: | risk-taking channel; bank competition; credit allocation; low interest rate |
| JEL: | G21 E52 E44 |
| Date: | 2020–02–13 |
| URL: | http://d.repec.org/n?u=RePEc:boj:bojwps:wp20e01&r=all |
| By: | Brei, Michael; Gambacorta, Leonardo; Lucchetta, Marcella; Parigi, Bruno |
| Abstract: | The paper investigates whether impaired asset segregation tools, otherwise known as bad banks, and recapitalisation lead to a recovery in the originating banks' lending and a reduction in non-performing loans (NPLs). Results are based on a novel data set covering 135 banks from 15 European banking systems over the period 2000-16. The main finding is that bad bank segregations are effective in cleaning up balance sheets and promoting bank lending only if they combine recapitalisation with asset segregation. Used in isolation, neither tool will suffice to spur lending and reduce future NPLs. Exploiting the heterogeneity in asset segregation events, we find that asset segregation is more effective when: (i) asset purchases are funded privately; (ii) smaller shares of the originating bank's assets are segregated; and (iii) asset segregation occurs in countries with more efficient legal systems. Our results continue to hold when we address the potential endogeneity problem associated with the creation of a bad bank. |
| Keywords: | bad banks; lending; Non-performing loans; recapitalisations; rescue packages; resolutions |
| JEL: | E41 G01 G21 |
| Date: | 2020–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:14379&r=all |
| By: | Dieckelmann, Daniel |
| Abstract: | This paper introduces a new transmission channel of banking crises where sizable cross-border bank claims on foreign countries with high domestic crisis risk enable contagion to the home economy. This asset-side channel opposes traditional views that see banking crises originating from either domestic credit booms or from cross-border borrowing. I propose a combined model that predicts banking crises using both domestic and foreign factors. For developed economies, the channel is predictive of crises irrespective of other types of capital ows, while it is entirely inactive for emerging economies. I show that policy makers can significantly enhance current early warning models by incorporating exposure-based risk from cross-border lending. |
| Keywords: | cross-border bank lending,banking crises,systemic risk,financial linkages |
| JEL: | C53 E44 F34 G01 G21 |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:fubsbe:202013&r=all |
| By: | Gropp, Reint; Koetter, Michael; McShane, William |
| Abstract: | We conduct stress tests for a large sample of German banks across different recoveries from the Corona recession. We find that, depending on how quickly the economy recovers, between 6% to 28% of banks could become distressed from defaulting corporate borrowers alone. Many of these banks are likely to require regulatory intervention or may even fail. Even in our most optimistic scenario, bank capital ratios decline by nearly 24%. The sum of total loans held by distressed banks could plausibly range from 127 to 624 billion Euros and it may take years before the full extent of this stress is observable. Hence, the current recession could result in an acute contraction in lending to the real economy, thereby worsening the current recession , decelerating the recovery, or perhaps even causing a "double dip" recession. Additionally, we show that the corporate portfolio of savings and cooperative banks is more than five times as exposed to small firms as that of commercial banks and Landesbanken. The preliminary evidence indicates small firms are particularly exposed to the current crisis, which implies that cooperative and savings banks are at especially high risk of becoming distressed. Given that the financial difficulties may seriously impair the recovery from the Covid-19 crisis, the pressure to bail out large parts of the banking system will be strong. Recent research suggests that the long run benefits of largely resisting these pressures may be high and could result in a more efficient economy. |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:iwhonl:42020&r=all |
| By: | Antunes, António; Cavalcanti, Tiago; Mendicino, Caterina; Peruffo, Marcel; Villamil, Anne |
| Abstract: | How does bankruptcy protection affect household balance sheet adjustments and aggregate consumption when credit tightens? Using a tractable model of unsecured consumer credit we quantify the trade-off between the insurance and the creditworthiness effects of bankruptcy in response to tighter credit. We show that bankruptcy dampens the effect of tighter credit on aggregate consumption on impact. This is because it allows borrowers to sustain consumption against severe financial distress. However, by leading to consumers' exclusion from the credit market for a certain period, bankruptcy also reduces their ability to smooth consumption over time, implying a slower recovery. The bankruptcy code establishes how costly it is to default, and, thus, plays a crucial role in determining consumers' bankruptcy decisions and in shaping consumption dynamics. We quantify that the 2005 BAPCPA reform, by making filing for bankruptcy more costly, worsened the negative welfare effects of the subsequent credit tightening. |
| Keywords: | BAPCPA; Chapter 7; Deleveraging |
| JEL: | E44 E52 E58 G21 G32 |
| Date: | 2020–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:14330&r=all |
| By: | Carletti, Elena; Ongena, Steven; Siedlarek, Jan-Peter; Spagnolo, Giancarlo |
| Abstract: | The effect of regulations on the banking sector is a key question for financial intermediation. This paper provides evidence that merger control regulation, although not directly targeted at the banking sector, has substantial economic effects on bank mergers. Based on an extensive sample of European countries, we show that target announcement premia increased by up to 16 percentage points for mergers involving control shifts after changes in merger legislation, consistent with a market expectation of increased profitability. These effects go hand-in-hand with a reduction in the propensity for mergers to create banks that are too-big-to-fail in their country. |
| Keywords: | Antitrust; banks; Merger Control; mergers and acquisitions; regulation |
| JEL: | G21 G34 K21 L40 |
| Date: | 2020–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:14449&r=all |
| By: | Ricardo Correa; Linda S. Goldberg |
| Abstract: | Bank holding companies (BHCs) can be complex organizations, conducting multiple lines of business through many distinct legal entities and across a range of geographies. While such complexity raises the costs of bank resolution when organizations fail, the effect of complexity on BHCs’ broader risk profiles is less well understood. Business, organizational, and geographic complexity can engender explicit trade-offs between the agency problems that increase risk and the diversification, liquidity management, and synergy improvements that reduce risk. The outcomes of such trade-offs may depend on bank governance arrangements. We test these conjectures using data on large U.S. BHCs for the 1996-2018 period. Organizational complexity and geographic scope tend to provide diversification gains and reduce idiosyncratic and liquidity risks while also increasing BHCs’ exposure to systematic and systemic risks. Regulatory changes focused on organizational complexity have significantly reduced this type of complexity, leading to a decrease in systemic risk and an increase in liquidity risk among BHCs. While bank governance structures have, in some cases, significantly affected the buildup of BHC complexity, better governance arrangements have not moderated the effects of complexity on risk outcomes. |
| Keywords: | too big to fail; diversification; bank complexity; regulation; corporate governance; global banks; liquidity; agency problem; risk taking |
| JEL: | G21 G28 G32 |
| Date: | 2020–06–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:88198&r=all |
| By: | Mendicino, Caterina; Nikolov, Kalin; Rubio-Ramírez, Juan Francisco; Suarez, Javier; Supera, Dominik |
| Abstract: | We study the interaction between borrowers' and banks' solvency in a quantitative macroeconomic model with financial frictions in which bank assets are a portfolio of defaultable loans. We show that ex-ante imperfect diversification of bank lending generates bank asset returns with limited upside but significant downside risk. The asymmetric distribution of these returns and their implications for the evolution of bank net worth are important for capturing the frequency and severity of twin default crises -simultaneous rises in firm and bank defaults associated with sizeable negative effects on economic activity. As a result, our model implies higher optimal capital requirements than common specifications of bank asset returns, which neglect or underestimate the impact of borrower default on bank solvency. |
| Keywords: | Bank Fragility; Capital requirements; Default Risk; loan returns; non-diversifiable risk |
| JEL: | E3 E44 G01 G21 |
| Date: | 2020–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:14427&r=all |
| By: | Byrne, David (Central Bank of Ireland); Holton, Sarah (Central Bank of Ireland); Parle, Conor (Central Bank of Ireland) |
| Abstract: | The Bank Lending Survey indicates that credit conditions remained relatively stable in the first quarter of 2020, but changes are coming. On the supply side, banks expect to tighten lending criteria in the second quarter of the year. Credit demand from households is expected to weaken substantially. Banks expect increased demand for short-term loans from firms, but less demand for long-term loans, reflecting liquidity needs of businesses and the downturn in investment prospects. Banks expect that monetary policy measures, that provide liquidity support and ease financing conditions, will support their balance sheets, which can help stabilise credit supply to the real economy. |
| Date: | 2020–05 |
| URL: | http://d.repec.org/n?u=RePEc:cbi:ecolet:05/el/20&r=all |
| By: | Financial System and Bank Examination Department of the Bank of Japan (Bank of Japan); Supervision Bureau of the Financial Services Agency (Financial Services Agency) |
| Abstract: | In recent years, the markets for leveraged loans and collateralized loan obligations (CLOs) -- securitized products backed by multiple leveraged loans -- have expanded in the United States and Europe, and Japanese financial institutions have increased their holdings of such products. Since 2019, the Bank of Japan and the Financial Services Agency have been conducting joint surveys to ascertain effectively the current situation of such overseas credit investment and lending by Japanese financial institutions, ensure appropriate risk management by these institutions, and share a proper assessment of the financial stability implications for such investment and lending. Based on the findings from the first round of the survey, this paper outlines the scale and characteristics of overseas credit investment and lending by major banks, whose exposure is dominant among Japanese financial institutions. |
| Date: | 2020–06–26 |
| URL: | http://d.repec.org/n?u=RePEc:boj:bojrev:rev20e02&r=all |
| By: | Viral V. Acharya; Katharina Bergant; Matteo Crosignani; Tim Eisert; Fergal McCann |
| Abstract: | We analyze how regulatory constraints on household leverage—in the form of loan-to-income and loan-to-value limits—a?ect 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-a?ected banks drive this reallocation and substitute their risk-taking into holdings of securities and corporate credit. |
| Keywords: | Financial crises;Macroprudential policies and financial stability;Bank credit;Central banks;Economic conditions;Macroprudential Regulation,Household Leverage,Residential Mortgage Credit,House Prices,WP,mortgage credit,reallocation,borrower,LTV,central bank of Ireland |
| Date: | 2020–05–22 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:20/58&r=all |
| By: | Bertay,Ata Can; Calice,Pietro; Diaz Kalan,Federico Alfonso; Masetti,Oliver |
| Abstract: | This paper revisits trends in bank privatization and analyzes their economic impact over the past 25 years. Building on a novel data set of privatization events for 70 developed and developing countries, it shows that bank privatization became more frequent since the Global Financial Crisis, especially in emerging markets such as China and India, but also smaller in that the fraction of a bank's ownership relinquished during privatization events declined. The majority of privatizations happened via public sales in domestic capital markets. The banks that were chosen to be privatized tended to underperform their peers and had weaker asset quality pre-privatization, but the empirical evidence on banks'post-privatization performance is mixed. The paper finds that privatized banks turn toward more traditional banking models and increase credit extension with no apparent negative distributional implications. However, the analysis does not reveal significant differences in bank profitability post-privatization, although differences exist between developed and developing countries. Notably, banks that have been recapitalized prior to privatization perform significantly better afterward privatization. |
| Date: | 2020–07–13 |
| URL: | http://d.repec.org/n?u=RePEc:wbk:wbrwps:9318&r=all |
| By: | Fernández-Villaverde, Jesús; Sanches, Daniel; Schilling, Linda Marlene; Uhlig, Harald |
| Abstract: | The introduction of a central bank digital currency (CBDC) allows the central bank to engage in large-scale intermediation by competing with private financial intermediaries for deposits. Yet, since a central bank is not an investment expert, it cannot invest in long-term projects itself, but relies on investment banks to do so. We derive an equivalence result that shows that absent a banking panic, the set of allocations achieved with private financial intermediation will also be achieved with a CBDC. During a panic, however, we show that the rigidity of the central bank's contract with the investment banks has the capacity to deter runs. Thus, the central bank is more stable than the commercial banking sector. Depositors internalize this feature ex-ante, and the central bank arises as a deposit monopolist, attracting all deposits away from the commercial banking sector. This monopoly might endangered maturity transformation. |
| Keywords: | bank runs; Central bank digital currency; central banking; intermediation; lender of last resort; maturity transformation |
| JEL: | E58 G21 |
| Date: | 2020–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:14337&r=all |
| By: | Rama Cont; Artur Kotlicki; Laura Valderrama |
| Abstract: | The traditional approach to the stress testing of financial institutions focuses on capital adequacy and solvency. Liquidity stress tests have been applied in parallel to and independently from solvency stress tests, based on scenarios which may not be consistent with those used in solvency stress tests. We propose a structural framework for the joint stress testing of solvency and liquidity: our approach exploits the mechanisms underlying the solvency-liquidity nexus to derive relations between solvency shocks and liquidity shocks. These relations are then used to model liquidity and solvency risk in a coherent framework, involving external shocks to solvency and endogenous liquidity shocks arising from these solvency shocks. We define the concept of ‘Liquidity at Risk’, which quantifies the liquidity resources required for a financial institution facing a stress scenario. Finally, we show that the interaction of liquidity and solvency may lead to the amplification of equity losses due to funding costs which arise from liquidity needs. The approach described in this study provides in particular a clear methodology for quantifying the impact of economic shocks resulting from the ongoing COVID-19 crisis on the solvency and liquidity of financial institutions and may serve as a useful tool for calibrating policy responses. |
| Date: | 2020–06–05 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:20/82&r=all |
| By: | Hasenzagl, Thomas; Reichlin, Lucrezia; Ricco, Giovanni |
| Abstract: | We evaluate the role of financial conditions as predictors of macroeconomic risk first in the quantile regression framework of Adrian et al. (2019b), which allows for non-linearities, and then in a novel linear semi-structural model as proposed by Hasenzagl et al. (2018). We distinguish between price variables such as credit spreads and stock variables such as leverage. We find that (i) although the spreads correlate with the left tail of the conditional distribution of GDP growth, they provide limited advanced information on growth vulnerability; (ii) nonfinancial leverage provides a leading signal for the left quantile of the GDP growth distribution in the 2008 recession; (iii) measures of excess leverage conceptually similar to the Basel gap, but cleaned from business cycle dynamics via the lenses of the semi-structural model, point to two peaks of accumulation of risks - the eighties and the first eight years of the new millennium, with an unstable relationship with business cycle chronology. |
| Keywords: | Business cycle; credit; Downside risk; entropy; financial crises; financial cycle; quantile regressions |
| JEL: | C32 C53 E32 E44 |
| Date: | 2020–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:14322&r=all |
| By: | Revathi Bhuvaneswari; Antonio Segalini |
| Abstract: | There has been an increased need for secondary means of credit evaluation by both traditional banking organizations as well as peer-to-peer lending entities. This is especially important in the present technological era where sticking with strict primary credit histories doesn't help distinguish between a 'good' and a 'bad' borrower, and ends up hurting both the individual borrower as well as the investor as a whole. We utilized machine learning classification and clustering algorithms to accurately predict a borrower's creditworthiness while identifying specific secondary attributes that contribute to this score. While extensive research has been done in predicting when a loan would be fully paid, the area of feature selection for lending is relatively new. We achieved 65% F1 and 73% AUC on the LendingClub data while identifying key secondary attributes. |
| Date: | 2020–06 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2006.13921&r=all |
| By: | Sajjad Taghiyeh; David C Lengacher; Robert B Handfield |
| Abstract: | A major part of the balance sheets of the largest US banks consists of credit card portfolios. Hence, managing the charge-off rates is a vital task for the profitability of the credit card industry. Different macroeconomic conditions affect individuals' behavior in paying down their debts. In this paper, we propose an expert system for loss forecasting in the credit card industry using macroeconomic indicators. We select the indicators based on a thorough review of the literature and experts' opinions covering all aspects of the economy, consumer, business, and government sectors. The state of the art machine learning models are used to develop the proposed expert system framework. We develop two versions of the forecasting expert system, which utilize different approaches to select between the lags added to each indicator. Among 19 macroeconomic indicators that were used as the input, six were used in the model with optimal lags, and seven indicators were selected by the model using all lags. The features that were selected by each of these models covered all three sectors of the economy. Using the charge-off data for the top 100 US banks ranked by assets from the first quarter of 1985 to the second quarter of 2019, we achieve mean squared error values of 1.15E-03 and 1.04E-03 using the model with optimal lags and the model with all lags, respectively. The proposed expert system gives a holistic view of the economy to the practitioners in the credit card industry and helps them to see the impact of different macroeconomic conditions on their future loss. |
| Date: | 2020–06 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2006.07911&r=all |
| By: | Mario Catalan; Alexander W. Hoffmaister |
| Abstract: | In the presence of adverse macroeconomic shocks, simultaneous capital losses in multiple banks can prompt them to contract their balance sheets. These bank responses generate externalities that propagate in the form of macro-financial feedback loops. This paper develops a credit response and externalities analysis model (CREAM) that integrates a disaggregated banking sector into an otherwise standard macroeconomic structural vector autoregressive model. It shows that accounting for macro-financial feedback loops can significantly affect macroeconomic outcomes and bank-specific stress tests results. The heterogeneity in bank lending responses matters: it determines how each bank fares under adverse conditions and the external effects that banks impose on each other and on economic activity. The model can thus be used to assess the contributions of individual banks to systemic risk along the time dimension. |
| Date: | 2020–05–29 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:20/72&r=all |
| By: | Juliana Dutra Araujo; Manasa Patnam; Adina Popescu; Fabian Valencia; Weijia Yao |
| Abstract: | This paper builds a novel database on the effects of macroprudential policy drawing from 58 empirical studies, comprising over 6,000 results on a wide range of instruments and outcome variables. It encompasses information on statistical significance, standardized magnitudes, and other characteristics of the estimates. Using meta-analysis techniques, the paper estimates average effects to find i) statistically significant effects on credit, but with considerable heterogeneity across instruments; ii) weaker and more imprecise effects on house prices; iii) quantitatively stronger effects in emerging markets and among studies using micro-level data; and iii) statistically significant evidence of leakages and spillovers. Other findings include relatively stronger impacts for tightening than loosening actions and negative effects on economic activity in the near term. |
| Keywords: | Systemically important financial institutions;Financial crises;Reserve requirements;Domestic credit;Credit demand;Macroprudential Policy,financial stability,Meta-analysis.,WP,outcome variable,average effect,MPM,micro-level,Claessens |
| Date: | 2020–05–22 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:20/67&r=all |
| By: | Aldasoro, Inaki; Gambacorta, Leonardo; giudici, paolo; Leach, Thomas |
| Abstract: | We use a unique cross-country dataset at the loss event level to document the evolution and characteristics of banks' operational risk. After a spike following the great financial crisis, operational losses have declined in recent years. The spike is largely accounted for by losses due to improper business practices in large banks that occurred in the run-up to the crisis but were recognised only later. Operational value-at-risk can vary substantially - from 6% to 12% of total gross income - depending on the method used. It takes, on average, more than a year for operational losses to be discovered and recognised in the books. However, there is significant heterogeneity across regions and event types. For instance, improper business practices and internal fraud events take longer to be discovered. Operational losses are not independent of macroeconomic conditions and regulatory characteristics. In particular, we show that credit booms and periods of excessively accommodative monetary policy are followed by larger operational losses. Better supervision, on the other hand, is associated with lower operational losses. We provide an estimate of losses due to cyber events, a subset of operational loss events. Cyber losses are a small fraction of total operational losses, but can account for a significant share of total operational value-at-risk. |
| Keywords: | cyber risks; financial institutions; Operational risks; time to discovery; Value-At-Risk |
| JEL: | D5 D62 D82 G2 H41 |
| Date: | 2020–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:14418&r=all |
| By: | Mohamed Belkhir; Sami Ben Naceur; Bertrand Candelon; Jean-Charles Wijnandts |
| Abstract: | Using a sample that covers more than 100 countries over the 2000-2017 period, we assess the impact of macroprudential policies on financial stability. In particular, we examine whether the activation of macroprudential policies is conducive to a lower incidence of systemic banking crises. Our empirical setup is designed to account for the potential direct and indirect effects that macroprudential policies can have on banking crises. We find that while macro-prudential policies exert a direct stabilizing effect, they also have an indirect destabilizing effect, which works through the depressing of economic growth. A Generalized Impulse Response Function analysis of a dynamic system composed of the probability of a banking crisis and economic growth reveals, however, that macroprudential policies have a positive net effect on financial stability (lower likelihood of systemic banking crises). |
| Keywords: | Real sector;Financial crises;Macroprudential policies and financial stability;Financial institutions;Financial systems;Macroprudential Policies,Banking crises,Economic Growth,WP,emerge market economy,bank crisis,advanced economy,MPI,basis point |
| Date: | 2020–05–22 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:20/65&r=all |
| By: | Corinne Deléchat; Lama Kiyasseh; Margaux MacDonald; Rui Xu |
| Abstract: | This study analyzes the drivers of the use of formal vs. informal financial services in emerging and developing countries using the 2017 Global FINDEX data. In particular, we investigate whether individuals’ choice of financial services correlates with macro-financial and macro-structural policies and conditions, in addition to individual and country characteristics. We start our analysis on middle and low-income countries, and then zoom in on sub-Saharan Africa, currently the region that most relies on informal financial services, and which has the largest uptake of mobile banking. We find robust evidence of an association between macroprudential policies and individuals’ choice of financial access after controlling for personal and country-level characteristics. In particular, macroprudential policies aimed at controlling credit supply seem to be associated with greater resort to informal financial services compared with formal, bank-based access. This highlights the importance for central bankers and financial sector regulators to consider the potential spillovers of monetary policy and financial stability measures on financial inclusion. |
| Date: | 2020–05–29 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:20/74&r=all |
| By: | Bischof, Jannis; Laux, Christian; Leuz, Christian |
| Abstract: | This paper examines banks' disclosures and loss recognition in the financial crisis and identifies several core issues for the link between accounting and financial stability. Our analysis suggests that, going into the financial crisis, banks' disclosures about relevant risk exposures were relatively sparse. Such disclosures came later after major concerns about banks' exposures had arisen in markets. Similarly, the recognition of loan losses was relatively slow and delayed relative to prevailing market expectations. Among the possible explanations for this evidence, our analysis suggests that banks' reporting incentives played a key role, which has important implications for bank supervision and the new expected loss model for loan accounting. We also provide evidence that shielding regulatory capital from accounting losses through prudential filters can dampen banks' incentives for corrective actions. Overall, our analysis reveals several important challenges if accounting and financial reporting are to contribute to financial stability. |
| Keywords: | Banks,Financial crisis,Financial stability,Disclosure,Loan loss accounting,Expected credit losses,Incurred loss model,Prudential filter,Fair valueaccounting |
| JEL: | G21 G22 G28 G32 G38 K22 M41 M42 M48 |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:safewp:283&r=all |
| By: | Soumajyoti Sarkar; Hamidreza Alvari |
| Abstract: | Over the last couple of decades in the lending industry, financial disintermediation has occurred on a global scale. Traditionally, even for small supply of funds, banks would act as the conduit between the funds and the borrowers. It has now been possible to overcome some of the obstacles associated with such supply of funds with the advent of online platforms like Kiva, Prosper, LendingClub. Kiva for example, works with Micro Finance Institutions (MFIs) in developing countries to build Internet profiles of borrowers with a brief biography, loan requested, loan term, and purpose. Kiva, in particular, allows lenders to fund projects in different sectors through group or individual funding. Traditional research studies have investigated various factors behind lender preferences purely from the perspective of loan attributes and only until recently have some cross-country cultural preferences been investigated. In this paper, we investigate lender perceptions of economic factors of the borrower countries in relation to their preferences towards loans associated with different sectors. We find that the influence from economic factors and loan attributes can have substantially different roles to play for different sectors in achieving faster funding. We formally investigate and quantify the hidden biases prevalent in different loan sectors using recent tools from causal inference and regression models that rely on Bayesian variable selection methods. We then extend these models to incorporate fairness constraints based on our empirical analysis and find that such models can still achieve near comparable results with respect to baseline regression models. |
| Date: | 2020–06 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2006.12995&r=all |
| By: | Anne-Laure Delatte (CEPII, CNRS, and CEPR); Adrien Matray (Princeton University); Noemie Pinardon-Touati (HEC Paris) |
| Abstract: | Formally independent private banks change their supply of credit tothe corporate sector for the constituencies of contested political incum-bents 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: | France, politics and banking; moral suasion; local government financing |
| JEL: | G21 G30 H74 H81 |
| Date: | 2020–01 |
| URL: | http://d.repec.org/n?u=RePEc:pri:cepsud:262&r=all |
| By: | Philip Protter; Alejandra Quintos |
| Abstract: | This paper uses a mathematical model with appropriate assumptions, to model and to determine the optimal group size for microfinance loans. An optimal size is defined to be the size which maximizes the probability of no default of the group |
| Date: | 2020–06 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2006.06035&r=all |
| By: | Delatte, Anne-Laure; Matray, Adrien; Pinardon-Touati, Noémie |
| 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: | local government financing; moral suasion; politics and banking |
| JEL: | G21 G30 H74 H81 |
| Date: | 2020–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:14409&r=all |
| By: | Ronald Heijmans; Froukelien Wendt |
| Abstract: | Banks and financial market infrastructures (FMIs) that are not able to fulfill their payment obligations can be a source of financial instability. This paper develops a composite risk indicator to evaluate the criticality of participants in a large value payment system network, combining liquidity risk and interconnections in one approach, and applying this to the TARGET2 payment system. Findings suggest that the most critical participants in TARGET2 are other payment systems, because of the size of underlying payment flows. Some banks may be critical, but this is mainly due to their interconnectedness with other TARGET2 participants. Central counterparties and central securities depositories are less critical. These findings can be used in financial stability analysis, and feed into central bank policies on payment system access, oversight, and crisis management. |
| Date: | 2020–06–05 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:20/81&r=all |
| By: | Colliard, Jean-Edouard; Georg, Co-Pierre |
| Abstract: | Despite a heated debate on the perceived increasing complexity of financial regulation, there is no available measure of regulatory complexity other than the mere length of regulatory documents. To fill this gap, we propose to apply simple measures from the computer science literature by treating regulation like an algorithm: a fixed set of rules that determine how an input (e.g., a bank balance sheet) leads to an output (a regulatory decision). We apply our measures to the regulation of a bank in a theoretical model, to an algorithm computing capital requirements based on Basel I, and to actual regulatory texts. Our measures capture dimensions of complexity beyond the mere length of a regulation. In particular, shorter regulations are not necessarily less complex, as they can also use more "high-level" language and concepts. Finally, we propose an experimental protocol to validate measures of regulatory complexity. |
| Keywords: | Basel Accords; Capital regulation; financial regulation; Regulatory Complexity |
| JEL: | G18 |
| Date: | 2020–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:14377&r=all |