nep-ban New Economics Papers
on Banking
Issue of 2020‒08‒24
seventeen papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Anomalies of Banking Intermediation and Profit Growth (Study on the 10 Largest Banks in Indonesia) By Herry Achmad Buchory
  2. Rethinking capital regulation: the case for a dividend prudential target By Muñoz, Manuel A.
  3. Bank Stress Test Results and Their Impact on Consumer Credit Markets By Sumit Agarwal; Xudong An; Lawrence R. Cordell; Raluca Roman
  4. Generalists and specialists in the credit market By Fricke, Daniel; Roukny, Tarik
  5. Unequal andunstable: income inequality and bank risk By Yuliyan Mitkov; Ulrich Schüwer
  6. May microcredit lead to inclusion? By Djaffar Lessy; Nahla Dhib; Francine Diener; Marc Diener
  7. The evolution of the banking system and default factors of Russian banks in the period 2013-2018 By Zubarev, Andrey (Зубарев, Андрей); Shilov, Kirill (Шилов, Кирилл); Bekirova, Olga (Бекирова, Ольга)
  8. The impact of the IRB approach on the relationship between the cost of credit for public companies and financial market conditions By Raffaele Gallo
  9. On the Special Role of Deposits for Long-Term Lending By Perazzi, Elena
  10. Banking Reforms and Deposit Money Banks Profitability in Nigeria By Okotori, Tonprebofa; Ayunku, Peter
  11. International banking and transmission of the 1931 financial crisis By Accominotti, Olivier
  12. The Role of Oil and Risk Shocks in the High-Frequency Movements of the Term Structure of Interest Rates of the United States By Rangan Gupta; Syed Jawad Hussain Shahzad; Xin Sheng; Sowmya Subramaniam
  13. Quantitative Easing and Financial Risk Taking: Evidence from Agency Mortgage REITs By W. Scott Frame; Eva Steiner
  14. German Finanzkapitalismus: A narrative of Deutsche Bank and its role in the German financial system By Schmidt, Reinhard H.
  15. U.S. Banks and Global Liquidity By Ricardo Correa; Wenxin Du; Gordon Y. Liao
  16. Bonds and syndicated loans during the Covid-19 crisis: decoupled again? By Tirupam Goel; José María Serena Garralda
  17. How Did Banks Fund C&I Drawdowns at the Onset of the COVID-19 Crisis? By David P. Glancy; Max Gross; Felicia Ionescu

  1. By: Herry Achmad Buchory (Sekolah Tinggi Ilmu Ekonomi Ekuitas, Jln. PHH. Mustopa No. 31, 40124, Bandung, Indonesia Author-2-Name: Author-2-Workplace-Name: Author-3-Name: Author-3-Workplace-Name: Author-4-Name: Author-4-Workplace-Name: Author-5-Name: Author-5-Workplace-Name: Author-6-Name: Author-6-Workplace-Name: Author-7-Name: Author-7-Workplace-Name: Author-8-Name: Author-8-Workplace-Name:)
    Abstract: Objective - One of the bank's main goals is to obtain profit mainly from the intermediation process. The implementation of the Indonesian banking intermediary function in the year 2017 is not optimal, as indicated by credit growth in the year 2017 which only reached 8,35%. This phenomenon also occurs in the 10 largest banks in Indonesia. In 2017 the intermediation function has decreased but profits have increased. The aim of this study is to analyze the influence of banking intermediation on profit growth and whether credit quality and operational efficiency affect profit growth. An indicator of banking intermediation is a loan to deposits ratio (LDR), credit quality with non-performing loans (NPLs), the operating efficiency with the ratio of operating expense to operating income (OEOI) and profit growth is measured by the amount of profit. Methodology – Descriptive and verification methods will be used in this study, with data from the 10 largest banks financial statements in Indonesia for the period 2016-2017 while data analysis uses multiple linear regression. Findings – The findings of this study show that partially LDR has a positive effect although the effect is not significant on Profit; NPLs have a negative effect on Profit and the effect is significant; OEOI has a negative effect even though the effect is not significant on Profit; Simultaneously, the variable LDR, NPLs, OEOI have a significant effect on profit. Novelty – Compared to previous studies, bank profit growth is not only influenced by banking intermediation, but if banks can maintain credit quality and improve operational efficiency, bank profits will grow Type of Paper - Empirical.
    Keywords: loan to deposit ratio, non-performing loans, the ratio of operating expenses to operating income, profit growth.
    JEL: G21 G32
    Date: 2020–06–30
  2. By: Muñoz, Manuel A.
    Abstract: Recent empirical studies have documented two remarkable patterns shown by euro area banks in the aftermath of the Great Recession: (i) their tendency to boost capital ratios by shrinking assets (contraction of loans supply), and (ii) their reluctance to cut back on dividends (fall in retained earnings). First, I provide evidence of a potential link between these two trends. When shocks hit their profits, banks tend to adjust retained earnings to smooth dividends. This generates bank equity and credit supply volatility. Then I develop a DSGE model that incorporates this mechanism to study the transmission and effects of a novel macroprudential policy rule - that I shall call Dividend Prudential Target (DPT) - aimed at complementing existing capital regulation by tackling this issue. Welfare-maximizing DPTs are effective (more than the CCyB) in smoothing the financial and the business cycle (by means of less volatile retained earnings) and induce significant welfare gains associated to a Basel III-type of capital regulation through various channels. JEL Classification: E44, E61, G21, G28, G35
    Keywords: capital requirements, countercyclical capital buffer (CCyB), dividend restrictions, DSGE models, macroprudential policy
    Date: 2020–07
  3. By: Sumit Agarwal; Xudong An; Lawrence R. Cordell; Raluca Roman
    Abstract: Using Federal Reserve (Fed) confidential stress test data, we exploit the gap between the Fed and bank capital projections as an exogenous shock to banks and analyze how this shock is transmitted to consumer credit markets. First, we document that banks in the 90th percentile of the capital gap reduce their new supply of risky credit by 13 percent compared with those in the 10th percentile and cut their overall credit card risk exposure on an annual basis. Next, we show that these banks find alternative ways to remain competitive and attract customers by lowering interest rates and offering more rewards and promotions to select groups of borrowers. Finally, we show that consumers at banks with a gap increase their credit card spending and debt payoff and at the same time experience fewer delinquencies. We also show that our results are generalizable to other lending products such as mortgages and home equity. Overall, our results demonstrate a positive feedback loop among credit supply, credit usage, and credit performance due to the stress tests.
    Keywords: bank stress tests; credit supply; cost of credit; credit usage; credit performance; credit cards
    JEL: G21 G28 Z1
    Date: 2020–07–31
  4. By: Fricke, Daniel; Roukny, Tarik
    Abstract: In this paper, we propose a method to analyze the structure of the credit market. Using historical data from Japan, we explore banks’ lending patterns to the real economy. We find that generalist banks (with diversified lending) and specialist banks (with focused lending) coexist, and tend to stick to their strategies over time. Similarly, we also document the coexistence of generalist and specialist industries (based on their borrowing patterns). The observed interaction patterns in the credit market indicate a strong overlap in banks’ loan portfolios, mainly due to specialist banks focusing their investments on the very same generalist industries. A stylized model matches these patterns and allows us to identify economically meaningful sets of generalist banks/industries. Lastly, we find that generalist banks are not necessarily less vulnerable to shocks compared to specialists. In fact, high leverage levels can undo the benefits of diversification.
    Keywords: bank lending; portfolio theory; fire sale; diversification; systemic risk
    JEL: G11 G21 G28 G32
    Date: 2020–03–01
  5. By: Yuliyan Mitkov (Institute for Finance and Statistics, University of Bonn); Ulrich Schüwer (Interim Professor at Goethe University Frankfurt)
    Abstract: We document that the dispersion of failure risk across banks within a given region in the U.S. is greater in regions that have higher income inequality. We explain this pattern with a model based on risk shifting incentives where banks issue insured deposits and choose the riskiness of their portfolios. In equilibrium: (i) some banks endogenously specialize in safe lending, while others engage in risk shifting and (ii) a competition to risk shift emerges whereby loans to subprime borrowers carry negative NPVs. The dispersion of bank risk generated by this sorting is magnified in more unequal regions with greater subprime credit segments.
    Keywords: Inequality, Financial stability, Agency costs, Composition of credit, Banking competition
    JEL: G11 G21 G28
    Date: 2020–06
  6. By: Djaffar Lessy; Nahla Dhib (Equipe de Probabilité et Statistique - JAD - Laboratoire Jean Alexandre Dieudonné - UNS - Université Nice Sophia Antipolis (... - 2019) - COMUE UCA - COMUE Université Côte d'Azur (2015 - 2019) - CNRS - Centre National de la Recherche Scientifique, Université Côte d'Azur, CNRS, LJAD - Partenaires INRAE); Francine Diener (Equipe de Probabilité et Statistique - JAD - Laboratoire Jean Alexandre Dieudonné - UNS - Université Nice Sophia Antipolis (... - 2019) - COMUE UCA - COMUE Université Côte d'Azur (2015 - 2019) - CNRS - Centre National de la Recherche Scientifique); Marc Diener (Equipe de Probabilité et Statistique - JAD - Laboratoire Jean Alexandre Dieudonné - UNS - Université Nice Sophia Antipolis (... - 2019) - COMUE UCA - COMUE Université Côte d'Azur (2015 - 2019) - CNRS - Centre National de la Recherche Scientifique)
    Abstract: We consider a Markov-Chain model for a Microfinance Institution (MFI) borrower who can be in one of four states: Applicant (A), Beneficiary (B − or B +) of a small or a large loan, or included (I) in the regular banking system. Given the transition matrix we compute the equilibrium and deduce the influence of probability parameters on what is profitable to the borrower within breaking-even constraints of the MFI. We give a general theorem on the total expected actualized income of a Markov Chain with Income (MCI), that we then apply to our model to determine the constrains emerging from Absence of Strategic Default (ASD) requirements. These do not only bound the probabilities from above but sometimes also from below.
    Keywords: Micro-credit,Markov Chain with Income,financial inclusion,Absence of Strategic Default JEL codes: C02,D24,G21,L26
    Date: 2020–08–11
  7. By: Zubarev, Andrey (Зубарев, Андрей) (The Russian Presidential Academy of National Economy and Public Administration); Shilov, Kirill (Шилов, Кирилл) (The Russian Presidential Academy of National Economy and Public Administration); Bekirova, Olga (Бекирова, Ольга) (The Russian Presidential Academy of National Economy and Public Administration)
    Abstract: This study analyzes evolution of the Russian banking system in the period 2013–2018 using monthly balance sheet data. We provide an econometric analysis of main factors that affected banks’ sustainability during that period. We also distinguish factors of bank default in the period from 2013 to 2017, including the crisis of 2014-2015, and afterwards.
    Date: 2020–04
  8. By: Raffaele Gallo (Bank of Italy, Directorate General for Economics, Statistics and Research.)
    Abstract: This paper examines whether the regulatory approach adopted by banks to calculate capital requirements has a different impact on the loan rates for public and private companies when financial market conditions change. Using Italian data for the period 2008-18, the analysis documents that the adoption of the internal ratings-based (IRB) approach has led to a significantly greater sensitivity of the loan rates applied to public companies to financial market conditions, proxied by the VSTOXX index. For credit granted by IRB banks, being public is associated with a significant loan cost advantage when the level of financial instability is low. However, when VSTOXX rises, public companies experience a greater increase in loan rates than private firms; the effect is determined mostly by less capitalized IRB banks. In contrast, for credit granted by banks that adopt the standardized approach (SA), public borrowers do not benefit from a significant loan cost advantage compared with private ones, and a change in financial market conditions has a similar impact on loan rates for both types of companies.
    Keywords: credit risk regulation, public firm, financial stability, interest rates, bank credit
    JEL: G01 G20 G21 G32
    Date: 2020–07
  9. By: Perazzi, Elena
    Abstract: In contrast to narrow banking proposals, I argue that deposits are a special form of financing, that makes banks more suitable to extend long-term loans when confronted with the risks of monetary policy. The synergy between deposit-taking and long-term lending arises because profits on deposits are highest after a contractionary monetary policy shock, precisely when the banks' balance sheets deteriorate due to maturity mismatch, and equity-constrained banks deleverage by cutting their lending. I quantify the impact of this mechanism in a dynamic bank model embedded in general equilibrium, and find that deposits mitigate the contraction of new lending at high interest rates by a factor between 25% and 50%.
    Keywords: Deposits, Banks, Long-Term Lending, Narrow Banking
    JEL: E5 G21
    Date: 2019–10–25
  10. By: Okotori, Tonprebofa; Ayunku, Peter
    Abstract: The study carried out an investigation into how banking reforms have enhanced or inhibited Deposit Money Banks (DMB’s) profitability in Nigeria. The data set comprising 12 of the 22 banks that have national and international authorisation was annual data that covered the period 2006 to 2018 and were analysed by adopting a dynamic GMM econometric methodology for the derived panel data. The conclusions from the study was that bank credit risk exposure, the inflation rate, and the exchange rate were significant indicators of profitability of DMB’S in Nigeria. The estimated results show that when bank credit risk exposure rise by 10%, the return on equity will drop by about 9%. It further shows that when inflation rises by 10%, return on equity will decrease by about 1.4% and that when the exchange rate appreciates by 10%, return on equity will rise by 0.06%. The result allows us to conclude that the banking reforms may have reduced the credit risk exposure of DMB’s thereby increasing their profitability, whilst enhancing the benefits of recapitalisation of deposit money banks. The reforms seem to have enhanced market concentration as envisaged by the structure conduct performance (SCP) hypothesis as well as efficiency as postulated by the efficiency structural hypotheses .The CBN should intensify efforts at tackling the exposure of DMB’s to exchange rate volatility and spikes in the inflation rate due to increasing national indebtedness, falling foreign reserves and the falling value of the naira due drop in revenue from crude oil sales.
    Keywords: GMM, DMB, Econometric methodology, Profitability, Banking, Reforms
    JEL: A29 G2 G21
    Date: 2020–08–12
  11. By: Accominotti, Olivier
    Abstract: In May to July 1931, a series of financial panics shook central Europe before spreading to the rest of the world. This article explores the role of cross-border banking linkages in propagating the central European crisis to Britain and the US. Using archival bank-level data, the article documents US and British banks’ exposure to central European frozen credits in 1931. Central European lending was mostly done by large and diversified commercial banks in the US and by small and geographically specialized merchant banks/acceptance houses in Britain. Differences in the organization of international bank lending explain why the central European crisis disturbed few US banks but endangered many British financial institutions.
    JEL: N24
    Date: 2019–02–19
  12. By: Rangan Gupta (Department of Economics, University of Pretoria, Pretoria, 0002, South Africa); Syed Jawad Hussain Shahzad (Montpellier Business School, Montpellier, France; South Ural State University, Chelyabinsk, Russian Federation); Xin Sheng (Lord Ashcroft International Business School, Anglia Ruskin University, Chelmsford, CM1 1SQ, United Kingdom); Sowmya Subramaniam (Indian Institute of Management Lucknow, Prabandh Nagar off Sitapur Road, Lucknow, Uttar Pradesh 226013, India)
    Abstract: We use daily data for the period 5 January 2000 to 31 October 2018 to analyse the impact of structural oil supply, oil demand and financial market risk shocks on the level, slope and curvature factors derived from the term structure of interest rates of the United States covering maturities of 1 to 30 years. Linear causality tests detect no evidence of predictability of these shocks on the three latent factors. However, statistical tests performed on the linear model provide evidence of nonlinearity and structural breaks, and hence indicate that the Granger causality test results are based on a misspecified framework, and cannot be relied upon. Given this, we use a nonparametric causality in-quantiles test to reconsider the predictive ability of the three shocks on the three latent factors, with this model being robust to misspecification due to nonlinearity and regime change, as it is a data-driven approach. Moreover, this framework allows us to model the entire conditional distribution of the level, slope and curvature factors, and hence can accommodate, via the lower quantiles, the zero lower bound situation seen in our sample period. Using this robust model, we find overwhelming evidence of causality from the two oil shocks and the risk shock for the entire conditional distribution of the three factors, suggesting the predictability of the entire US term structure based on information contained in oil and financial market innovations. Our results have important implications for academics, investors and policymakers.
    Keywords: Yield Curve Factors, Oil Supply and Demand Shocks, Risk Shock, Causality-in-Quantiles Test
    JEL: E43 C22 C32 G12 Q41
    Date: 2020–07
  13. By: W. Scott Frame; Eva Steiner
    Abstract: An emerging literature documents a link between central bank quantitative easing (QE) and financial institution credit risk-taking. This paper tests the complementary hypothesis that QE may also affect financial risk-taking. We study Agency MREITs – levered shadow banks that invest in guaranteed U.S. Agency mortgage-backed securities (MBS) principally funded with repo debt. We show that Agency MREIT growth is inversely related to the Federal Reserve’s Agency MBS purchases, reflecting investor portfolio rebalancing. We also find that these institutions increased leverage during the later stages of QE, consistent with “reaching for yield” behavior. Agency MREITs seem to concurrently adjust their liquidity and interest rate risk profiles.
    Keywords: Quantitative Easing; Risk Taking; GSEs; Mortgages; Agency MBS
    JEL: E58 G21 G23 G28
    Date: 2020–06–30
  14. By: Schmidt, Reinhard H.
    Abstract: This paper provides an account of the history of Deutsche Bank in the style of a narrative. Since more than 120 years, Deutsche Bank has been the most important German bank. Its history has been shaped by crises and efforts to overcome them. Moreover, throughout its history, the development of Deutsche Bank has been closely related to that of the German financial system, and as the paper tries to demonstrate, Deutsche Bank had a stronger influence on the character of that system than any other German institution. The paper focuses on three additional aspects of the bank's history, which have repeatedly changed over time: (1) its degree of internationalization, (2) the extent to which Deutsche Bank has focused on investment banking (as opposed to commercial banking) and (3) the consistency of its business model.
    JEL: G21 N24
    Date: 2020
  15. By: Ricardo Correa; Wenxin Du; Gordon Y. Liao
    Abstract: We characterize how U.S. global systemically important banks (GSIBs) supply short-term dollar liquidity in repo and foreign exchange swap markets in the post-Global Financial Crisis regulatory environment and serve as the "lenders-of-second-to-last-resort". Using daily supervisory bank balance sheet information, we find that U.S. GSIBs modestly increase their dollar liquidity provision in response to dollar funding shortages, particularly at period-ends, when the U.S. Treasury General Account balance increases, and during the balance sheet taper of the Federal Reserve. The increase in the dollar liquidity provision is mainly financed by reducing excess reserve balances at the Federal Reserve. Intra-firm transfers between depository institutions and broker-dealer subsidiaries within the same bank holding company are crucial to this type of "reserve-draining" intermediation. Finally, we discuss factors that contributed to the repo spike in September 2019 and the subseque nt response of U.S. GSIBs to recent policy interventions by the Federal Reserve.
    Keywords: Liquidity; Global banks; Repos; Reserves; Covered interest rate parity
    JEL: G20 F30 E40
    Date: 2020–07–08
  16. By: Tirupam Goel; José María Serena Garralda
    Abstract: Borrowing by non-financial firms in global debt markets surged following the Covid-19 shock. Bond issuance boomed, while syndicated loan originations trailed. Led by easier access to bond markets, large firms significantly increased their borrowing. The rest of the firms faced bottlenecks due to their reliance on a strained syndicated loan market and hurdles in switching to bond markets. Large firms, which had lower cash buffers pre-crisis than smaller firms, used part of the fresh credit to raise their buffers in addition to meeting liquidity shortfalls.
    Date: 2020–08–14
  17. By: David P. Glancy; Max Gross; Felicia Ionescu
    Abstract: Banks experienced significant balance sheet expansions in March 2020 due to unprecedented increases in commercial and industrial (C&I) loans and deposit funding. According to the Federal Reserve's H.8 data, "Assets and Liabilities of Commercial Banks in the U.S.", C&I loans increased by nearly $480 billion in March—the largest monthly increase in the history of this series, surpassing the nearly $90 billion increase in C&I loans in the six weeks following Lehman Brothers' collapse in 2008.
    Date: 2020–07–31

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