nep-ban New Economics Papers
on Banking
Issue of 2020‒08‒10
thirty papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Has regulatory capital made banks safer? Skin in the game vs moral hazard By Dautović, Ernest
  2. How Do Markets React to Tighter Bank Capital Requirements? By Cyril Couaillier; Dorian Henricot
  3. How Effective is Macroprudential Policy? Evidence from Lending Restriction Measures in EU Countries By Tigran Poghosyan
  4. Bank lending in the knowledge economy By Dell’Ariccia, Giovanni; Minoiu, Camelia; Ratnovski, Lev; Kadyrzhanova, Dalida
  5. Welfare analysis of bank merger with financial instability By Akio Ino; Yusuke Matsuki
  6. Bank capital regulation in a zero interest environment By Döttling, Robin
  7. Bank Risk-Taking and Monetary Policy Transmission: Evidence from China By Xiaoming Li; Zheng Liu; Yuchao Peng; Zhiwei Xu
  8. The Risk-Taking Channel in the US: A GVAR Approach By Alzuabi, Raslan; Caglayan, Mustafa; Mouratidis, Kostas
  9. The Credit Line Channel By Daniel L. Greenwald; John Krainer; Pascal Paul
  10. Identifying indicators of systemic risk By Hartwig, Benny; Meinerding, Christoph; Schüler, Yves
  11. A Theory of Participation in OTC and Centralized Markets By Dugast, Jerome; Uslu, Semih; Weill, Pierre-Olivier
  12. Capital Flows: The Role of Bank and Nonbank Balance Sheets By Yuko Hashimoto; Signe Krogstrup
  13. Global banks' dollar funding needs and central bank swap lines By Iñaki Aldasoro; Torsten Ehlers; Patrick McGuire; Goetz von Peter
  14. Operational Risk Capital By Thomas Conlon; Xing Huan; Steven Ongena
  15. The Banking View of Bond Risk Premia By Haddad, Valentin; Sraer, David
  16. Costs of Sovereign Defaults: Restructuring Strategies, Bank Distress and the Capital Inflow-Credit Channel By Tamon Asonuma; Marcos d Chamon; Aitor Erce; Akira Sasahara
  17. Production and financial networks in interplay: Crisis evidence from supplier-customer and credit registers By Huremovic, Kenan; Jiménez, Gabriel; Moral-Benito, Enrique; Vega-Redondo, Fernando; Peydró, José-Luis
  18. Are Loans Cheaper when Tomorrow seems Further ? By Christophe Godlewski; Laurent Weill
  19. Productivity growth in Indian banking: Who did the gains accrue to? By Rajeswari Sengupta; Harsh Vardhan
  20. Does Excess Bank Liquidity Impact Non-Performing Loan? A Study on Bangladeshi Economy By Amir, Md. Khaled
  21. Taming Financial Development to Reduce Crises By Sami Ben Naceur; Bertrand Candelon; Quentin Lajaunie
  22. Conceptual Issues in Calibrating the Basel III Countercyclical Capital Buffer By Torsten Wezel
  23. Cash Use Across Countries and the Demand for Central Bank Digital Currency By Tanai Khiaonarong; David Humphrey
  24. Cash Flow at Risk Assessment for the Banking Sector of Georgia By Tamar Mdivnishvili; Shalva Mkhatrishvili; Davit Tutberidze
  25. Optimal Forbearance of Bank Resolution By Schilling, Linda Marlene
  26. On the Essentiality of Credit and Banking at the Friedman Rule By Paola Boel; Christopher J. Waller
  27. Systemic Risk: a Network Approach By Jean-Baptiste Hasse
  28. Digging Deeper--Evidence on the Effects of Macroprudential Policies from a New Database By Zohair Alam; Adrian Alter; Jesse Eiseman; R. G Gelos; Heedon Kang; Machiko Narita; Erlend Nier; Naixi Wang
  29. Heterogeneity in Bank Leverage: the Funding Channels of Complexity By Matthieu Bussière; Baptiste Meunier; Justine Pedrono
  30. Bank instability: Interbank linkages and the role of disclosure By König-Kersting, Christian; Trautmann, Stefan T.; Vlahu, Razvan

  1. By: Dautović, Ernest
    Abstract: The paper evaluates the impact of a phased-in introduction of capital requirements on equity, risk-taking, and probability of default for a sample of European systemically important banks. Contrary to the case of a one-off introduction of capital requirements, this study does not find evidence of deleveraging through asset sales. A phased-in tightening promotes adjustment to lower leverage via an increase in equity thereby improving resilience and loss absorption capacity. The higher resilience comes at the cost of a portfolio reallocation towards riskier assets. Consistently with models on agency costs and gambling for resurrection, the risk-taking is driven by large and less profitable banks. The net impact on bank probabilities of default is positive albeit statistically insignificant, suggesting that risk-taking may crowd-out solvency. JEL Classification: E51, G21, G28, O52
    Keywords: capital requirements, difference-in-difference, impact evaluation, macroprudential policy, risk-taking
    Date: 2020–07
  2. By: Cyril Couaillier; Dorian Henricot
    Abstract: We use hikes in the countercyclical capital buffer [CCyB] to measure how tighter bank capital requirements affect their solvency and value, according to market participants. Two features of the CCyB in Europe allow for a unique identification strategy of the effect of such requirements. First, national authorities make quarterly announcements of CCyB rates. Second, these hikes affect all European banks proportionally to their exposure to the country of activation. We show that CCyB hikes translate in lower CDS spreads for affected banks, indicating that markets perceive higher solvency. On the other hand, bank valuations do not react. Markets therefore consider that higher capital requirements translate into more stable banks at no material cost for shareholders. We claim that these effects relate to the capital constraint itself, as opposed to the potential signal conveyed on the state of the financial cycle.
    Keywords: Event Studies, Banking, Capital Requirements .
    JEL: G14 G21 G28
    Date: 2020
  3. By: Tigran Poghosyan
    Abstract: This paper assesses the effectiveness of lending restriction measures, such as loan-to-value and debt-service-to-income ratios, in affecting developments in house prices and credit. We use data on 99 lending standard restrictions implemented in 28 EU countries over 1990–2018. The results suggest that lending restriction measures are generally effective in curbing house prices and credit. However, the impact is delayed and reaches its peak only after three years. In addition, the impact is asymmetric, with tightening measures having weaker association with target variables compared to loosening measures. The association is stronger in countries outside of euro area and for legally-binding measures and measures involving sanctions. The results have practical implications for macroprudential authorities.
    Keywords: Monetary policy instruments;Exchange rate policy;Central banks;Monetary policy;Monetary expansion;macroprudential regulation,financial stability,credit,house price,Kleibl,target variable,type of measure,real GDP growth,dependent variable
    Date: 2019–03–01
  4. By: Dell’Ariccia, Giovanni; Minoiu, Camelia; Ratnovski, Lev; Kadyrzhanova, Dalida
    Abstract: We study the composition of bank loan portfolios during the transition of the real sector to a knowledge economy where firms increasingly use intangible capital. Exploiting heterogeneity in bank exposure to the compositional shift from tangible to intangible capital, we show that exposed banks curtail commercial lending and reallocate lending to other assets, such as mortgages. We estimate that the substantial growth in intangible capital since the mid-1980s explains around 30% of the secular decline in the share of commercial lending in banks' loan portfolios. We provide suggestive evidence that this reallocation increased the riskiness of banks' mortgage lending. JEL Classification: E22, E44, G21
    Keywords: bank lending, commercial loans, corporate intangible capital, real estate loans
    Date: 2020–06
  5. By: Akio Ino; Yusuke Matsuki
    Abstract: In this paper, we analyze the effect of a merger between banks by extending a structural model of banking industry with possibility of bank runs developed by Egan et al. (2017). This allows us to evaluate a merger in the banking sector, taking into account the effect on not only the merged bank itself, but also the stability of the entire financial system. We use our framework to analyse if the merger between Wells Fargo and Wachovia was beneficial to the social welfare. When the model is calibrated to the data in 2008, the merger increases the market share of the merged bank and thus allows it to set higher markup, which implies lower deposit interest rates. Through competition, this lowers the default probability of other banks in normal times. When crisis occurs to banks other than the merged bank, the default probability increases as the merged bank responds to crisis sharply. On the other hand, when the bank run occurs at the merged bank, the default probability is lower because it has higher profits. The merger increases the social welfare in normal times and when a bank run occurs at the merged bank, and decreases the social welfare when a bank run occurs at the other banks.
    Date: 2020–07
  6. By: Döttling, Robin
    Abstract: How do near-zero interest rates affect optimal bank capital regulation and risk-taking? I study this question in a dynamic model, in which forward-looking banks compete imperfectly for deposit funding, but households do not accept negative deposit rates. When deposit rates are constrained by the zero lower bound (ZLB), tight capital requirements disproportionately hurt franchise values and become less effective in curbing excessive risk-taking. As a result, optimal dynamic capital requirements vary with the level of interest rates if the ZLB binds occasionally. Higher inflation and unconventional monetary policy can alleviate the problem, though their overall welfare effects are ambiguous. JEL Classification: G21, G28, E44, E58
    Keywords: capital regulation, franchise value, search for yield, unconventional monetary policy, zero lower bound
    Date: 2020–06
  7. By: Xiaoming Li; Zheng Liu; Yuchao Peng; Zhiwei Xu
    Abstract: We present evidence that monetary policy easing reduces bank risk-taking but exacerbates capital misallocation in China after implementing the Basel III capital regulationsin2013. Thenewregulationstightenedbankcapitalrequirementsandintroduced a new risk-weighting approach to calculating the capital adequacy ratio (CAR). To meet tightened capital requirements, a bank can boost its effective CAR by raising capital or by increasing the share of lending to low-risk borrowers. Using confidential loan-level data from a large Chinese commercial bank, merged with firm-level data on a large set of manufacturing firms, we document robust evidence that a monetary policy expansion raises the share of new bank loans to state-owned enterprises (SOEs) after 2013, but not before, because SOE loans receive high credit ratings under government guarantees. Since SOEs are on average less productive than private firms, shifts in bank lending toward SOEs exacerbate capital misallocations, reducing aggregate productivity. We construct a two-sector general equilibrium model with bank portfolio choices and show that, under calibrated parameters, an expansionary monetary policy shock raises the share of bank lending to SOEs, leading to persistent declines in total factor productivity that partially offset the expansionary effects of monetary policy.
    Keywords: risk assessment; Monetary policy - China; risk management; china
    JEL: E52 G18 G21 O42
    Date: 2020–08
  8. By: Alzuabi, Raslan; Caglayan, Mustafa; Mouratidis, Kostas
    Abstract: Using a panel of large US banks, we examine banks' risk-taking behaviour in response to monetary policy shocks. Our investigation provides support for the presence of a risk-taking channel: banks' nonperforming loans increase in the medium to long-run following an expansionary monetary policy shock. We also find that banks' capital structure plays an important role in explaining bank's risk-taking appetite. Impulse response analysis shows that shocks emanating from larger banks spillover to the rest of the sector but no such effect is observed for smaller banks. These findings are confirmed for banks' Z-score.
    Keywords: Risk-taking channel: GVAR: Monetary policy shocks; Spillover effects; Impulse response analysis
    JEL: E44 E52 G01
    Date: 2020–06–01
  9. By: Daniel L. Greenwald; John Krainer; Pascal Paul
    Abstract: Aggregate bank lending to firms expands following adverse macroeconomic shocks, such as the outbreak of COVID-19 or a monetary policy tightening, at odds with canonical models. Using loan-level supervisory data, we show that these dynamics are driven by draws on credit lines by large firms. Banks that experience larger drawdowns restrict term lending more — an externality onto smaller firms. Using a structural model, we show that credit lines are necessary to reproduce the flow of credit toward less constrained firms after adverse shocks. While credit lines increase total credit growth, their redistributive effects exacerbate the fall in investment.
    Keywords: covid-19; Banks; Firms; Credit Lines; Monetary Policy
    JEL: E32 E43 E44 E52 E60 G21 G32
    Date: 2020–07
  10. By: Hartwig, Benny; Meinerding, Christoph; Schüler, Yves
    Abstract: We operationalize the definition of systemic risk provided by the IMF, BIS, and FSB and derive testable hypotheses to identify indicators of systemic risk. We map these hypotheses into a two-stage hierarchical testing framework, combining insights from the early-warning literature on financial crises with recent advances on growth-at-risk. Applying this framework to a set of candidate variables, we find that the Basel III credit-to-GDP gap does not indicate systemic risk coherently across G7 countries. Credit growth and house price growth also do not pass our test in many cases. By contrast, a composite financial cycle signals systemic risk consistently for all countries except Canada. Overall, our results suggest that systemic risk may be consistently measured only once the turning points of indicators have been observed. Therefore, pre-emptive countercyclical macroprudential policy may smooth the financial cycle in boom phases, which then indirectly mitigates the amount of systemic risk in the future.
    Keywords: systemic risk,macroprudential regulation,forecasting,growth-at-risk,financial cycles
    JEL: E37 E44 G17
    Date: 2020
  11. By: Dugast, Jerome; Uslu, Semih; Weill, Pierre-Olivier
    Abstract: Should regulators encourage the migration of trade from over-the-counter (OTC) to centralized markets? To address this question, we consider a model of equilibrium and socially optimal market participation of heterogeneous banks in an OTC market, in a centralized market, or in both markets at the same time. We find that banks have the strongest private incentives to participate in the OTC market if they have the lowest risk-sharing needs and highest ability to take large positions. These banks endogenously assume the role of OTC market dealers. Other banks, with relatively higher risk-sharing needs and lower ability to take large positions, lie at the margin: they are indifferent between the centralized market and the OTC market, where they endogenously assume the role of customers. We show that more customer bank participation in the centralized market can be welfare improving only if banks are mostly heterogeneous in their ability to take large positions in the OTC market, and if participation costs induce banks to trade exclusively in one market. Empirical evidence suggests that these conditions for a welfare improvement are met.
    Date: 2019–12
  12. By: Yuko Hashimoto; Signe Krogstrup
    Abstract: This paper assesses the role of bank and nonbank financial institutions’ balance sheet foreign exposures and risk management practices in driving capital flow responses to global risk. Using a unique and previously unexplored dataset on domestic and cross border balance sheet positions of financial institutions collected by the IMF, we show that the response of overall capital flows to global risk shocks is associated with the on-balance sheet foreign exposures of nonbanks, but not with that of banks. A possible interpretation is that risk-averse and dynamically optimizing nonbanks reduce their foreign risk exposure when global risk perceptions increase, leading to capital flows, while banks tend to be hedged against these risks off balance sheet. In advanced countries, the findings suggest that nonbank portfolio adjustment to changing risk conditions may take place through derivatives transactions with banks, the hedging practices of which trigger bank related capital flows rather than portfolio flows.
    Keywords: Bank credit;Central banks;Private capital flows;Foreign currency exposure;International financial markets;foreign exposure,global factor, risk aversion, global financial crisis,forward contract,capital flow management measures,macro prudential policy,VIX,capital flow,risk condition,foreign asset,Tille
    Date: 2019–04–29
  13. By: Iñaki Aldasoro; Torsten Ehlers; Patrick McGuire; Goetz von Peter
    Abstract: At $13 trillion, the gross dollar liabilities of banks headquartered outside the United States at end-2019 were nearly as high as before the Great Financial Crisis. Most of their dollar funding was booked outside the United States. We measure non-US banks' short-term dollar funding needs by comparing short-term dollar liabilities (including off-balance sheet FX swaps) with holdings of liquid dollar assets. The scale of the central bank swap lines are of similar magnitude to banks' short-term dollar funding needs. Swap line usage peaked in May at $449 billion and has subsided since. However, dollar funding needs of corporates may yet reveal a broader need for dollars outside the banking system.
    Date: 2020–07–16
  14. By: Thomas Conlon (University College Dublin); Xing Huan (University of Warwick - Accounting Group); Steven Ongena (University of Zurich - Department of Banking and Finance; Swiss Finance Institute; KU Leuven; Centre for Economic Policy Research (CEPR))
    Abstract: We study the response of banks to the introduction of a new capital requirement relating to operational risk. To isolate the effect of this new regulation on realized operational risk losses, we take advantage of the partial US implementation relative to full European adoption. Operational risk losses are reduced in treated banks. The extent of loss reduction depends upon the measurement approach used to calibrate operational risk capital requirements. Banks with low institutional ownership and those without binding regulatory capital constraints also present significant loss reduction. We link these findings to incentives for improved risk management and governance post treatment.
    Keywords: Bank Regulation, Basel II, Measurement Approach, Monitoring, Operational Risk
    Date: 2020–07
  15. By: Haddad, Valentin; Sraer, David
    Abstract: Banks' balance-sheet exposure to fluctuations in interest rates strongly forecasts excess Treasury bond returns. This result is consistent with optimal risk management, a banking counterpart to the household Euler equation. In equilibrium, the bond risk premium compensates banks for bearing fluctuations in interest rates. When banks' exposure to interest rate risk increases, the price of this risk simultaneously rises. We present a collection of empirical observations supporting this view, but also discuss several challenges to this interpretation.
    Date: 2019–12
  16. By: Tamon Asonuma; Marcos d Chamon; Aitor Erce; Akira Sasahara
    Abstract: Sovereign debt restructurings are associated with declines in GDP, investment, bank credit, and capital flows. The transmission channels and associated output and banking sector costs depend on whether the restructuring takes place preemptively, without missing payments to creditors, or whether it takes place after a default has occurred. Post-default restructurings are associated with larger declines in bank credit, an increase in lending interest rates, and a higher likelihood of triggering a banking crisis than pre-emptive restructurings. Our local projection estimates show large declines in GDP, investment, and credit amplified by severe sudden stops and transmitted through a “capital inflow-credit channel”.
    Keywords: Sovereign debt restructuring;Business cycles;Capital inflows;Domestic debt;Current account deficits;Sovereign Debt,Sovereign Defaults,Sovereign Debt Restructurings,GDP Growth,Investment,Banking Crisis,Local Projection,debt restructure,bank crisis,restructure,haircut,inflow
    Date: 2019–03–25
  17. By: Huremovic, Kenan; Jiménez, Gabriel; Moral-Benito, Enrique; Vega-Redondo, Fernando; Peydró, José-Luis
    Abstract: We show that bank shocks originating in the fi nancial sector propagate upstream and downstream along the production network and triple the impact of direct bank shocks. Our identi fication relies on the universe of both supplier-customer transactions and bank loans in Spain, a standard operationalization of credit-supply shocks during the 2008-09 global crisis, and the proposed theoretical framework. The impact on real effects is strong, and similarly so, when considering: (i) direct bank shocks to firms versus fi rst-order inter firm contagion; (ii) first-order versus higher-order network effects; (iii) downstream versus upstream propagation; (iv) firm-speci fic versus economy-wide shocks. Market concentration ampli fies these effects.
    Keywords: networks,supply chains,shock propagation,credit supply,real effects of finance
    JEL: D85 E44 E51 G01 G21
    Date: 2020
  18. By: Christophe Godlewski (LARGE - Laboratoire de Recherche en Gestion et Economie - UNISTRA - Université de Strasbourg); Laurent Weill (LARGE - Laboratoire de Recherche en Gestion et Economie - UNISTRA - Université de Strasbourg)
    Abstract: This paper studies how future tense marking affects the terms of bank loans. We predict that languages that grammatically mark the future affect speakers' intertemporal preferences and thereby reduce the perception of the risks associated with loan issuance. We test this hypothesis on a sample of 977 bank loans from 17 European countries. We observe that the use of a language with future tense marking is associated with lower loan spreads and lower collateral use in loan contracts. The results corroborate Chen (American Economic Review, 2013)'s hypothesis that future tense marking makes the future more distant than the present. They suggest that linguistic structure affects terms of loan contracts. JEL Codes: D83, G20, G41, Z13.
    Keywords: loans,bank,language
    Date: 2020–03
  19. By: Rajeswari Sengupta (Indira Gandhi Institute of Development Research); Harsh Vardhan (S.P. Jain Institute of Management and Research)
    Abstract: In this paper we analyse the beneficiaries of productivity gains in the Indian banking sector during the period from 1992 to 2019. We document the relative efficiency of different groups of banks by ownership. We find that the Indian banking sector, particularly the public sector banks experienced steady productivity growth from the mid 1990s till about 2010. We conduct a detailed descriptive analysis to examine the various stakeholders that the productivity gains have accrued to, over the years and across bank groups. We conclude that most of the gains may have accrued to the shareholders which for the public sector banks would mean the government. These gains presumably helped reduce the burden on the government of capitalising the public sector banks, especially during the 1997-2002 period of sharp rise in non performing assets.
    Keywords: Banking sector, Bank productivity, Beneficiaries, Efficiency gains
    JEL: G21 G28 D24 D61
    Date: 2020–06
  20. By: Amir, Md. Khaled
    Abstract: This study endeavored to find out the impact of excess bank liquidity on non-performing loans (NPL) by using both technical and empirical analysis. The paper found that explanatory variable (excess bank liquidity) has moderate influence on the dependent variable (NPL), suggesting some other hypothetical and psychological aspects such as the intention to fraud, immoral lending, lack of loan monitoring, capital injection and nepotism, etc. which may affect the current economic and banking system in Bangladesh. The study conducts simple linear regression analysis where the beta coefficient of excess bank liquidity is -0.435 clearly indicates, the inverse movement of both the variables which supports the real banking system. The model equation supports an economical relation between excess bank liquidity and non-performing loan (NPL) because loan recovery is the meaning of reducing non-performing loan (NPL) amount and boosts up the bank liquidity of any bank again.
    Keywords: Bank Liquidity, Bank Run, Inflation, Investment, OLS, Interest Rates, Loanable Funds.
    JEL: A1 E5 L6
    Date: 2019–04–06
  21. By: Sami Ben Naceur; Bertrand Candelon; Quentin Lajaunie
    Abstract: This paper assesses whether and how financial development triggers the occurrence of banking crises. It builds on a database that includes financial development as well as financial access, depth and efficiency for almost 100 countries. Through estimation of a dynamic logit panel model, it appears that financial development, from an institutional dimension and to a lesser extent from a market dimension, triggers financial instability within a one- to two-year horizon. Additionally, whereas financial access is destabilizing for advanced countries, it is stabilizing for emerging and low income ones. Both results have important implications for macroprudential policies and financial regulations.
    Keywords: Real interest rates;Negative interest rates;Financial safety nets;Exchange markets;Interest rate increases;financial Development,Banking crises,Regulation,bank crisis,logit,logit model,sub-indices
    Date: 2019–05–06
  22. By: Torsten Wezel
    Abstract: This paper discusses issues in calibrating the countercyclical capital buffer (CCB) based on a sample of EU countries. It argues that the main indicator for buffer decisions under the Basel III framework, the credit-to-GDP gap, does not always work best in terms of covering bank loan losses that go beyond what could be expected from economic downturns. Instead, in the case of countries with short financial cycles and/or low financial deepening such as transition and developing economies, the Basel gap is shown to work best when computed with a low, smoothing factor and adjusted for the degree of financial deepening. The paper also analyzes issues in calibrating an appropriate size of the CCB and, using a loss function approach, points to a tradeoff between stability of the buffer size and cost efficiency considerations.
    Keywords: Credit booms;Developing countries;Bank credit;Credit;Bank capital;Macroprudential Policy,Procyclicality,Basel III,CCB,RWA,buffer size,transition economy,regression
    Date: 2019–05–01
  23. By: Tanai Khiaonarong; David Humphrey
    Abstract: The level and trend in cash use in a country will influence the demand for central bank digital currency (CBDC). While access to digital currency will be more convenient than traveling to an ATM, it only makes CBDC like a bank debit card—not better. Demand for digital currency will thus be weak in countries where cash use is already very low, due to a preference for cash substitutes (cards, electronic money, mobile phone payments). Where cash use is very high, demand should be stronger, due to a lack of cash substitutes. As the demand for CBDC is tied to the current level of cash use, we estimate the level and trend in cash use for 11 countries using four different measures. A tentative forecast of cash use is also made. After showing that declining cash use is largely associated with demographic change, we tie the level of cash use to the likely demand for CBDC in different countries. In this process, we suggest that one measure of cash use is more useful than the others. If cash is important for monetary policy, payment instrument competition, or as an alternative payment instrument in the event of operational problems with privately supplied payment methods, the introduction of CBDC may best be introduced before cash substitutes become so ubiquitous that the viability of CBDC could be in doubt.
    Keywords: Bank credit;Central banks;Central bank policy;Central bank accounting;Bank accounting;digital cash,e-money,physical cash,non-cash,giro
    Date: 2019–03–01
  24. By: Tamar Mdivnishvili (Macroeconomic Research Division, National Bank of Georgia); Shalva Mkhatrishvili (Macroeconomic Research Division, National Bank of Georgia); Davit Tutberidze (Macroeconomic Research Division, National Bank of Georgia)
    Abstract: The aim of our study is to estimate the distribution of the profitability of the Georgian banking sector, in order to determine liquidity risk, for which we use Cash Flow at Risk (CFaR). In our estimation, we took into account possible nonlinear impact of monetary policy on banks' profit, which allows us also to estimate the neutral interest rate. According to our results, the relationship between bank profits on the one hand and short- and long-term interest rates on another is nonlinear indeed. In addition to median estimates, we also use quantile regression, which allows us to estimate tail risks. According to the results in a "normal" (median) situation, when interest rates are below neutral rate, decreasing policy rate reduces banks' profits, while if banks suffer from low liquidity (on a lower percentile), reduction of policy rate increases banks' profits. According to the quantile regression output, the relationship between bank profitability and yield curve is asymmetric. The results also show the dependence of bank liquidity risk on other macro variables. Estimates are made for the entire banking sector as well as for the two largest banks in Georgia.
    Keywords: Quantile regression, Forecasting, Monetary policy, Bank profitability, CFaR
    JEL: C21 C53 E52 G21
    Date: 2020–07
  25. By: Schilling, Linda Marlene
    Abstract: We analyze optimal strategic delay of bank resolution ('grq forbearance') and deposit insurance coverage. After bad news on the bank's assets, depositors fear for the uninsured part of their deposit and withdraw while the regulator observes withdrawals and needs to decide when to intervene. Optimal policy maximizes the joint value of the demand deposit contract and the insurance fund to avoid inefficient risk-shifting towards the fund while also preventing inefficient runs. Under low insurance coverage, the optimal intervention policy is never to intervene (laissez-faire). Optimal deposit insurance coverage is always interior. The paper sheds light on the differences between the U.S. and the European Monetary Union concerning their bank resolution policies.
    Keywords: bank resolution; bank run; deposit freeze; deposit insurance; Forbearance; global games; mandatory stay; Recovery Rates; suspension of convertibility
    JEL: D8 E6 G21 G28 G33
    Date: 2019–12
  26. By: Paola Boel; Christopher J. Waller
    Abstract: We investigate the essentiality of credit and banking in a microfounded monetary model in which agents face heterogeneous idiosyncratic time preference shocks. Three main results arise from our analysis. First, the constrained-efficient allocation is unattainable without banks. Second, financial intermediation can improve the equilibrium allocation even at the Friedman rule because it relaxes the liquidity constraints of impatient borrowers. Third, changes in credit conditions are not necessarily neutral in a monetary equilibrium at the Friedman rule. If the debt limit is sufficiently low, money and credit are perfect substitutes and tightening the debt limit is neutral. As the debt limit increases, however, patient agents always hold money but impatient agents prefer not to since it is costly for them to do so given they are facing a positive shadow rate. Borrowing instead is costless when interest rates are zero and increasing the debt limit improves the allocation.
    Keywords: Money; Credit; Banking; Heterogeneity; Friedman rule
    JEL: E40 E50
    Date: 2020–07
  27. By: Jean-Baptiste Hasse (Aix-Marseille Univ, CNRS, EHESS, Ecole Centrale, AMSE, Marseille, France)
    Abstract: We propose a new measure of systemic risk based on interconnectedness, defined as the level of direct and indirect links between financial institutions in a correlation-based network. Deriving interconnectedness in terms of risk, we empirically show that within a financial network, indirect links are strengthened during systemic events. The relevance of our measure is illustrated at both local and global levels. Our framework offers policymakers a useful toolbox for exploring the real-time topology of the complex structure of dependencies in financial systems and for measuring the consequences of regulatory decisions.
    Keywords: financial networks, interconnectedness, systemic risk, spillover
    JEL: G01 G15 G21
    Date: 2020–07
  28. By: Zohair Alam; Adrian Alter; Jesse Eiseman; R. G Gelos; Heedon Kang; Machiko Narita; Erlend Nier; Naixi Wang
    Abstract: This paper introduces a new comprehensive database of macroprudential policies, which combines information from various sources and covers 134 countries from January 1990 to December 2016. Using these data, we first confirm that loan-targeted instruments have a significant impact on household credit, and a milder, dampening effect on consumption. Next, we exploit novel numerical information on loan-to-value (LTV) limits using a propensity-score-based method to address endogeneity concerns. The results point to economically significant and nonlinear effects, with a declining impact for larger tightening measures. Moreover, the initial LTV level appears to matter; when LTV limits are already tight, the effects of additional tightening on credit is dampened while those on consumption are strengthened.
    Keywords: Mortgages;Exchange rate policy;Reserve requirements;Household credit;Credit booms;Macroprudential policy,loan-to-value ratios,propensity score,LTV,policy action,reverse causality,endogeneity,appendix IV
    Date: 2019–03–22
  29. By: Matthieu Bussière; Baptiste Meunier; Justine Pedrono
    Abstract: This paper assesses the net impact of complexity on leverage, at the Bank Holding Companies (BHCs) level using unique French supervisory data from 2010 to 2017. Geographical and structural complexity introduce diversification benefits and agency problems that affect the risk of BHCs. Whether investors price this risk or not is decisive for the cost of equity and finally leverage. Our results show a negative impact of complexity on leverage. To explain this result, we then focus on the funding channels of complexity. We find that complexity goes hand in hand with additional capital surplus and increasing cost of equity. As a second major finding, our results show that the impact of complexity on leverage and the funding channels of complexity are heterogeneous across BHCs and depend on their systemic status. In fact, size, complexity and systemic status complement each other. Omitting one of these dimensions leads to misleading conclusions on bank stability.
    Keywords: bank, complexity, risk, capital structure, leverage, cost of equity, funding cost, capital requirements .
    JEL: F33 F36 F65 G15 G21
    Date: 2020
  30. By: König-Kersting, Christian; Trautmann, Stefan T.; Vlahu, Razvan
    Abstract: We study the impact of disclosure about bank fundamentals on depositors’ behavior in the presence (and absence) of economic linkages between financial institutions. Using a controlled laboratory environment, we identify under which conditions disclosure is conducive to bank stability. We find that bank deposits are sensitive to perceived bank performance. While banks with strong fundamentals benefit from more precise disclosure, an opposing effect is present for solvent banks with weaker fundamentals. Depositors take information about economic linkages into account and correctly identify when disclosure about one institution conveys meaningful information for others. Our findings highlight both the costs and benefits of bank transparency and suggest that disclosure is not always stability enhancing.
    JEL: D81 G21 G28
    Date: 2020–07–14

This nep-ban issue is ©2020 by Christian Calmès. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.