nep-ban New Economics Papers
on Banking
Issue of 2020‒07‒27
twenty papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. The impact of alternative forms of bank consolidation on credit supply and financial stability By Sergio Mayordomo; Nicola Pavanini; Emanuele Tarantino
  2. Bank Heterogeneity and Financial Stability By Itay Goldstein; Alexandr Kopytov; Lin Shen; Haotian Xiang
  3. Loan types and the bank lending channel By Victoria Ivashina; Luc Laeven; Enrique Moral-Benito
  4. Credit Demand versus Supply Channels: Experimental- and Administrative-Based Evidence By Valentina Michelangeli; José-Luis Peydró; Enrico Sette
  5. The effect of Emergency Liquidity Assistance (ELA) on bank lending during the euro area crisis By Heather D. Gibson; Stephen G. Hall; Pavlos Petroulas; Vassilis Spiliotopoulos; George S. Tavlas
  6. Does the Pursuit of Outreach Consistently Stifle the Financial Performance of Microfinance Institutions in sub-Saharan Africa? By Sydney Chikalipah
  7. Internal and External Lending by Nonfinancial Businesses By Kim, Hyonok; Wilcox, James A.; Yasuda, Yukihiro
  8. Bank Liquidity and Exposure to Industry Shocks By Jose Arias; Oleksandr Talavera; Andriy Tsapin
  9. Do Rural Banks Matter That Much? Burgess and Pande (AER, 2005) Reconsidered By Nino Buliskeria; Jaromir Baxa
  10. Why Do Firms Borrow from Foreign Banks? By Umit Yilmaz
  11. Incentives and Performance of Agents in a Microfinance Bank By Surajeet Chakravarty; Sumedh Dalwai; Pradeep Kumar
  12. Expansionary Yet Different: Credit Supply and Real Effects of Negative Interest Rate Policy By Bottero, Margherita; Minoiu, Camelia; Peydro, Jose-Luis; Polo, Andrea; Presbitero, Andrea; Sette, Enrico
  13. Does Going Tough on Banks Make the Going Get Tough? Bank Liquidity Regulations, Capital Requirements, and Sectoral Activity By Deniz O Igan; Ali Mirzaei
  14. What is the tipping point? Low rates and financial stability By Porcellacchia, Davide
  15. Systemic Risk Modeling: How Theory Can Meet Statistics By Raphael A Espinoza; Miguel A. Segoviano; Ji Yan
  16. Determinants of Non-Performing Loans: Can National Asset Management Companies Help to Alleviate the Problems? By Brenda Solis Gonzalez
  17. The Financial Center Leverage Cycle: Does it Spread Around the World? By Graciela Laura Kaminsky; Leandro Medina; Shiyi Wang
  18. Determinants of the credit cycle: a flow analysis of the extensive margin By Cuciniello, Vincenzo; di Iasio, Nicola
  19. How Should Credit Gaps Be Measured? An Application to European Countries By Chikako Baba; Salvatore Dell'Erba; Enrica Detragiache; Olamide Harrison; Aiko Mineshima; Anvar Musayev; Asghar Shahmoradi
  20. Household Debt and House Prices-at-risk: A Tale of Two Countries By Adrian Alter; Elizabeth M. Mahoney

  1. By: Sergio Mayordomo (Banco de España); Nicola Pavanini (Tilburg University and CEPR); Emanuele Tarantino (LUISS, EIEF and CEPR)
    Abstract: Between 2009 and 2011, the Spanish banking system underwent a restructuring process based on consolidation of savings banks. The program’s design allows us to study how alternative forms of consolidation affect credit supply and financial stability. Compared to bank business groups, we find that bank mergers’ market power produces a contraction in credit supply, higher interest rates, but also a reduction in non-performing loans. We then estimate a structural model of credit demand and supply. We show that short-run welfare gains from improved financial stability outweigh losses from reduced credit supply, while small long-run cost efficiencies generate large welfare increases.
    Keywords: bank consolidation, mergers, business groups, credit supply, financial stability, welfare
    JEL: G21 G28 G32 G34
    Date: 2020–07
  2. By: Itay Goldstein; Alexandr Kopytov; Lin Shen; Haotian Xiang
    Abstract: We study how heterogeneity in banks’ asset holdings affects fragility. In the model, banks face a risk of bank runs and have to liquidate long-term assets in a common market to repay runners. Liquidation prices are depressed when many banks sell their assets at the same time. When banks are homogeneous, their selling behaviors are synchronized, and bank runs are exacerbated. We show that differentiating banks to some extent enhances the stability of all banks, even those whose asset performance ends up being weaker. Our analyses provide new insights about the regulation of banking sector’s architecture and the design of government support during crises.
    JEL: G01 G21 G23
    Date: 2020–06
  3. By: Victoria Ivashina (Harvard Business School, CEPR and NBER); Luc Laeven (European Central Bank and CEPR); Enrique Moral-Benito (Banco de España)
    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 is mostly insensitive to these types of effects.
    Keywords: bank credit, loan types, bank lending channel, credit registry
    JEL: E5 G21
    Date: 2020–07
  4. By: Valentina Michelangeli; José-Luis Peydró; Enrico Sette
    Abstract: This paper identifies and quantifies -for the first time- the relative importance of borrower (credit demand) versus bank (supply) balance-sheet channels. We submit fictitious applications (varying households'characteristics) to the major Italian online-mortgage platform. In this way we ensure that all banks receive exactly the same mortgage applications, and that -for each application- there are other identical ones except for one borrower-level characteristic. We find that: (i) Borrower and bank channels are equally strong in causing (and explaining) loan acceptance (each channel changes acceptance by 50 p.p. for the interquartile range and explains 29% of R-square). (ii) Differently, for pricing, borrower factors are much stronger. (iii) Banks supplying less credit accept riskier borrowers. Finally -exploiting administrative credit register data- we document borrower-lender assortative matching: safer banks have more credit relations with safer firms. Moreover, the measure of credit supply estimated in the experiment (differently from a very similar measure estimated from the observational mortgage data) determines bank credit supply to firms and risk-taking in administrative data.
    Keywords: credit demand, credit supply, bank lending channel, household balance sheet channel, mortgages, SMEs, risk-taking
    JEL: G21 E51 C93
    Date: 2020–07
  5. By: Heather D. Gibson (Bank of Greece); Stephen G. Hall (Bank of Greece); Pavlos Petroulas (Bank of Greece); Vassilis Spiliotopoulos (Bank of Greece); George S. Tavlas (Bank of Greece)
    Abstract: We examine the impact of emergency liquidity assistance (ELA) on bank lending in eleven euro area countries during the financial crisis. With the intensification of the crisis, ELA took on a pivotal role in some countries. However, assessments of the quantitative impact of ELA in the literature are non-existent. We estimate a structural panel model for the determination of bank lending, which includes the amount of ELA received by each bank, allowing us to investigate the direct effect of ELA on lending. Our model corrects a mis-specification found in the prototype model used in the literature. We then undertake a VAR analysis, which allows us to address the effect of ELA on GDP. Finally, we examine spillover effects among banks, indicating that ELA generated positive spillovers to other banks.
    Keywords: euro area financial crisis; emergency liquidity assistance (ELA); European banks; spatial panel model
    JEL: E3 G01 G14 G21
    Date: 2020–01
  6. By: Sydney Chikalipah
    Abstract: We study the relationship between outreach and the financial performance of 479 microfinance institutions (MFIs) in 37 countries of sub-Saharan African (SSA), covering the period 1998 to 2012. This study builds on earlier literature on the relationship between outreach and the financial performance of MFIs across countries. Unlike many prior microfinance studies, we investigate the outreach-financial performance nexus by adopting novel approaches: (i) of linear and non-linear specification, (ii) of solely focusing on SSA, and (iii) of segregating the two-outreach variables into different segments, with the aim of determining the optimal outreach thresholds (or tipping point). By employing the OLS and GMM method, we find evidence indicating a positive and statistically significant relationship between outreach and the financial performance among MFIs in SSA. In addition, providing small microcredits below the USD 600 threshold is associated with lower profitability than larger loans. Equally, we observed that MFIs serving more than 30,000 clients reported a strong financial performance, rather than the MFIs that were serving less than that threshold. The study findings have implications for the managers and stakeholders with a vested interest in the microfinance industry of SSA.
    Keywords: Microfinance, Outreach, Profitability and sub-Saharan Africa
    JEL: C32 G21 O12 O16 O55
    Date: 2020–03
  7. By: Kim, Hyonok; Wilcox, James A.; Yasuda, Yukihiro
    Abstract: We investigated how the large and growing volumes of lending by listed, Japanese, parent companies to their subsidiaries responded to parents’ and to subsidiaries’ sources and uses of funds during 1984-2014. We found that parents lent more to their subsidiaries when (1) parents’ profitability rose relative to that of their subsidiaries and (2) parents’ capital expenditures fell relative to those of their subsidiaries. We also found that the extent of ownership matters. Parents lent more internally when their existing equity investments in their subsidiaries was (1) larger relative to the parents’ total equity and when it was (2) larger relative to the subsidiaries’ total equity. Our results also pointed to important connections of internal capital markets to external lenders, particularly banks. We found that internal lending rose during economic and financial crises in Japan—unless its commercial banks were at the center of the crisis. Internal lending from parents softened the shocks to business groups’ subsidiaries more when Japanese banks were quite strong, such as during the 2008 global financial crisis. In contrast, parents provided much less credit through internal capital markets during the banks were quite strong, but not during the Japanese banking crisis around 2000.
    Keywords: Internal capital markets, parent company, subsidiaries, crises, bank loans
    Date: 2020–07–21
  8. By: Jose Arias (Middlesex University); Oleksandr Talavera (University of Birmingham); Andriy Tsapin (National Bank of Ukraine)
    Abstract: This paper examines the link between bank liquidity and exposure to industry-level shocks. Using a unique dataset of borrower industry affiliations, we propose a new measure of industry-level shocks calculated at bank-level. First, we construct bank-specific loan portfolio weights for each industry. Then, we apply these weights to two industry-level indices – cost-effectiveness and production – to calculate the bank shock exposure. Our estimates reveal the negative link between bank liquidity and industry shocks. This could be explained by precautionary reasons as large negative industry-level shocks are likely to induce banks to hoard liquid assets. The relationship is also channelized through the lending behavior of banks. The sensitivity of liquidity to bank exposure is higher for more liquid, better capitalized and smaller banks, which might be explained by the capability of displacing funds either for precautionary reasons, or for loan financing.
    Keywords: Bank liquidity, industry-level shocks, bank shock exposure, lending behavior
    JEL: G01 G21
    Date: 2020–07
  9. By: Nino Buliskeria (Institute of Economic Studies, Faculty of Social Sciences, Charles University Opletalova 26, 110 00, Prague, Czech Republic); Jaromir Baxa (Institute of Economic Studies, Faculty of Social Sciences, Charles University Opletalova 26, 110 00, Prague, Czech Republic; bThe Czech Academy of Sciences, Institute of Information Theory and Automation, Pod Vodarenskou Vezi 4, 182 00, Prague, Czech Republic)
    Abstract: We replicate Burgess and Pande (2005), who analyze the effects of the state-led expansion of the banking sector on poverty in India from 1961 to 1990. They find that the bank branch expansion in the rural areas decreased poverty due to improved access to credit and saving facilities. However, Burgess and Pande (2005) do not consider other simultaneous policies affecting the financial sector and poverty, in particular, the Integrated Rural Development Program aiming at credit subsidizing for the poor. Therefore, using the methodology by Burgess and Pande (2005), we show that structural shifts in the rural bank branch expansion and rural poverty can be identified for almost any other year between 1970 and 1984. Our results imply that the experiment by Burgess and Pande (2005) does not prove a superior impact of the bank branch expansion on poverty reduction in India.
    Keywords: Bank expansion, rural poverty, finance
    JEL: G21 G28 O15 O16
    Date: 2020–05
  10. By: Umit Yilmaz (Swiss Finance Institute at the University of Lugano)
    Abstract: I examine U.S. firms' motives for participating in cross-border syndicated loans with foreign banks. Firms borrowing from foreign lead arrangers pay higher interest rates on their loans compared to firms borrowing from local banks, controlling for firm and loan characteristics and using matched sample analyses. These firms experience an increase in foreign income and international M&A activity after the loan, which suggests that global expansion of operations is an important reason why a firm borrows beyond borders. I also find that loan spreads increase with the geographic and cultural distance between borrowers and foreign lenders, consistent with higher information acquisition and monitoring costs.
    Keywords: Cross-border borrowing, Foreign banks, Syndicated loans, Loan pricing
    JEL: F34 F36 G15 G21 G30
    Date: 2020–06
  11. By: Surajeet Chakravarty (University of Exeter); Sumedh Dalwai (University of Exeter); Pradeep Kumar (University of Exeter)
    Abstract: An important aspect of providing credit to the poor is the mechanism adopted by the credit institutions to do so. Most microfinance banks use field agents to acquire new borrowers, manage the account and collect repayments. How does the supply of credit change with a change in incentives provided to such field agents? Mann Deshi Bank, a microfinance bank in India, changed its remuneration scheme from a pure commission based to a mixed scheme with a combination of a base salary and other incentives. This paper examines the effect it had on the effort and the performance of the agents by using a rich panel data on the bankÕs joint liability lending product. The results show that the change in the contract form with a large flat wage and reduced incentives improved performance of the agents in terms of the quantity (increase in the number of borrowers acquired) and quality (the borrowers acquired had fewer delays in repayments). We find evidence of mixed contract agents exerting significantly more effort than the pure commission agents to ascertain borrower quality.
    Keywords: Micro-finance institutions, joint liability loans, labor contracts, moral hazard
    JEL: G21 O12 J41
    Date: 2020
  12. By: Bottero, Margherita; Minoiu, Camelia; Peydro, Jose-Luis; Polo, Andrea; Presbitero, Andrea; Sette, Enrico
    Abstract: We show that negative interest rate policy (NIRP) has expansionary effects on bank credit supply-and the real economy-through a portfolio rebalancing channel, and that, by shifting down and flattening the yield curve, NIRP differs from rate cuts just above the zero lower bound. For identification, we exploit ECB's NIRP and matched administrative datasets-including the credit register-from Italy, severely hit by the Eurozone crisis. NIRP affects banks with higher ex-ante net short-term interbank positions or, more broadly, more liquid balance-sheets. NIRP-affected banks rebalance their portfolios from liquid assets to lending, especially to ex-ante riskier and smaller firms-without higher ex-post delinquencies-and cut loan rates (even to the same firm), inducing sizable firm-level real effects. By contrast, there is no evidence of a retail deposits channel associated with NIRP.
    Keywords: bank lending channel of monetary policy; eurozone crisis; Liquidity management; Negative Interest Rates; Portfolio rebalancing
    JEL: E52 E58 G01 G21 G28
    Date: 2019–12
  13. By: Deniz O Igan; Ali Mirzaei
    Abstract: Whether and to what extent tougher bank regulation weighs on economic growth is an open empirical question. Using data from 28 manufacturing industries in 50 countries, we explore the extent to which cross-country differences in bank liquidity and capital levels were related to differences in sectoral activity around the period of the global financial crisis. We find that industries which are more dependent on external finance, in countries where banks had higher liquidity and capital ratios, performed relatively better during the crisis, with regard to investment rates and the creation of new enterprises. This relationship, however, exists only for bank-based systems and emerging market economies. In the pre-crisis period, we find only a marginal link to bank capital. These findings survive a battery of robustness checks and provide some solid support for the tighter prudential measures introduced under Basel III.
    Date: 2020–06–19
  14. By: Porcellacchia, Davide
    Abstract: To study the effect on financial stability of persistent changes in the interest rate, this paper develops a recursive model of liquidity creation based on Diamond and Dybvig (1983). The model features two stable balanced growth paths: a good one with a healthy banking system and a bad one with a failed banking system. The paper’s main result is that a critical interest-rate level exists, below which a financial crisis takes place and the economy transitions from the good to the bad BGP. At this tipping point for the economy, banks’ franchise value of deposits goes down, since their net interest margins are compressed. This leads to a fall in bank equity, which gives depositors an incentive to run. The tipping point is not necessarily negative or zero. It is an increasing function of the persistence of the change in the interest rate. Since a persistent fall in the interest rate compresses the net interest margin further in the future, it damages the franchise value of deposits more for any given interest-rate cut. JEL Classification: E43, E50, G21
    Keywords: franchise value of deposits, liquidity, lower bound
    Date: 2020–07
  15. By: Raphael A Espinoza; Miguel A. Segoviano; Ji Yan
    Abstract: We propose a framework to link empirical models of systemic risk to theoretical network/ general equilibrium models used to understand the channels of transmission of systemic risk. The theoretical model allows for systemic risk due to interbank counterparty risk, common asset exposures/fire sales, and a “Minsky" cycle of optimism. The empirical model uses stock market and CDS spreads data to estimate a multivariate density of equity returns and to compute the expected equity return for each bank, conditional on a bad macro-outcome. Theses “cross-sectional" moments are used to re-calibrate the theoretical model and estimate the importance of the Minsky cycle of optimism in driving systemic risk.
    Keywords: Financial crises;Bank credit;Financial markets;Financial institutions;Macroprudential policies and financial stability;Systemic risk,Minsky effect,CIMDO,Default,WP,interbank,repayment rate,expected shortfall,time t,Minsky
    Date: 2020–03–13
  16. By: Brenda Solis Gonzalez (Institute of Economic Studies, Faculty of Social Sciences, Charles University Opletalova 26, 110 00, Prague, Czech Republic)
    Abstract: Using a novel dataset I examine to what extent the introduction of national Asset Management Companies (AMCs) impacts the effects of bank-specific and macroeconomic determinants of the NPLs ratio for European countries. This study provides evidence on how national AMCs help to alleviate the level of the NPL ratio in countries with high level of non-viable exposures. The results of the dynamic panel data models show that the NPL ratio is lower and less persistent for banks in countries with national AMC since banks are able to clean their balance sheet with lower losses when market prices of NPL are depressed. For countries with national AMC in general the influence of bank-specific factors is lower than during normal conditions. In the case of macroeconomic factors, the results on the size and direction of the impact are mixed. However, these factors remain the key determinants with the unemployment and the lending rate being the leading indicators.
    Keywords: Non-performing loans, Asset Management Companies, credit risk, macroeconomic determinants, bank-specific determinants, dynamic panel data
    JEL: G21 G28 G32 C23
    Date: 2020–06
  17. By: Graciela Laura Kaminsky (George Washington University and NBER); Leandro Medina (Strategy Policy and Review Department, International Monetary Fund); Shiyi Wang (George Washington University)
    Abstract: With a novel database, we examine the evolution of capital flows to the periphery since the collapse of the Bretton Woods System in the early 1970s. We decompose capital flows into global, regional, and idiosyncratic factors. In contrast to previous findings, which mostly use data from the 2000s, we find that booms and busts in capital flows are mainly explained by regional factors and not the global factor. We then ask, what drives these regional factors. Is it the leverage cycle in the financial center? What triggers the leverage cycle in the financial center? Is it a change in global investors’ risk appetite? Or, is it a change in the demand for capital in the periphery? We link leverage in the financial center to regional capital flows and the cost of borrowing in international capital markets to answer these questions. Our estimations indicate that regional capital flows are driven by supply shocks. Interestingly, we find that the leverage in the financial center has a time-varying behavior, with a movement away from lending to the emerging periphery in the 1970s to the 1990s towards lending to the advanced periphery in the 2000s.
    Keywords: International Borrowing Cycles, Global and Regional Factors, Push and Pull Factors of Capital Flows, Financial Center Leverage Cycles
    JEL: F30 F34 F65
    Date: 2020–02
  18. By: Cuciniello, Vincenzo; di Iasio, Nicola
    Abstract: We use monthly data on individual loans from the Italian Credit Register over the period from 1997 to 2019 and show that bank credit expansions in the non-financial private sector are mostly explained by variations in the extensive margin calculated either in credit flows or headcount of new borrowers. We then build on a flow approach to decompose changes in the net creation of borrowers into gross flows across three states: (i) borrowers, (ii) applicants and (iii) others (neither debtors nor applicants). The paper investigates the macroeconomic dimension of these gross flows and documents three key cyclical facts. First, entries in the credit market by new obligors (“inflows”) account for the bulk of volatility in the net creation of borrowers. Second, the volatility of borrower inflows is two times as large as the volatility of obligors exiting from the credit market (“outflows”). Third, borrower inflows are highly pro-cyclical, lead the economic cycle, and their fluctuations are mainly driven by the probability of getting a loan from new banks. We read these results in light of the macrofinance literature on search frictions and on competition with lender-lender informational asymmetries. Overall, our findings support theoretical predictions of these models, but search frictions seem to play a major role in shaping movements along the extensive margin. JEL Classification: E51, E32, E44
    Keywords: applicant, borrower, business cycle, credit cycle, gross flows
    Date: 2020–07
  19. By: Chikako Baba; Salvatore Dell'Erba; Enrica Detragiache; Olamide Harrison; Aiko Mineshima; Anvar Musayev; Asghar Shahmoradi
    Abstract: Assessing when credit is excessive is important to understand macro-financial vulnerabilities and guide macroprudential policy. The Basel Credit Gap (BCG) – the deviation of the credit-to-GDP ratio from its long-term trend estimated with a one-sided Hodrick-Prescott (HP) filter—is the indicator preferred by the Basel Committee because of its good performance as an early warning of banking crises. However, for a number of European countries this indicator implausibly suggests that credit should go back to its level at the peak of the boom after the credit cycle turns, resulting in large negative gaps that might delay the activation of macroprudential policies. We explore two different approaches—a multivariate filter based on economic theory and a fundamentals-based panel regression. Each approach has pros and cons, but they both provide a useful complement to the BCG in assessing macro-financial vulnerabilities in Europe.
    Keywords: Real interest rates;Interest rate policy;Credit booms;Credit expansion;Credit aggregates;Credit Cycle,Credit Gap,Countercyclical Capital Buffer,Macroprudential Policies,WP,BCG,real interest rate,output gap,fundamental variable
    Date: 2020–01–17
  20. By: Adrian Alter; Elizabeth M. Mahoney
    Abstract: To identify and quantify downside risks to housing markets, we apply the house price-at-risk methodology to a sample of 37 cities across the United States and Canada using quarterly data from 1983 to 2018. This paper finds that downside risks to housing markets in the United States have seemingly fallen over the past decade, while having increased in Canada. Supply-side drivers, valuation, household debt, and financial conditions jointly play a key role in forecasting house price risks. In addition, capital flows are found to be significantly associated with future downside risks to major housing markets, but the net effect depends on the type of flows and varies across cities and forecast horizons. Using micro-level data, we identify households vulnerable to potential housing shocks and assess the riskiness of household debt.
    Keywords: Economic conditions;Price indexes;National income;Financial crises;Economic growth;Housing,Household Indebtedness,United States,Canada,Quantile Regressions,WP,household debt,capital flow,GFC,house market,overvaluation
    Date: 2020–02–28

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