nep-ban New Economics Papers
on Banking
Issue of 2020‒09‒07
thirteen papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Are more productive banks always better? By Rajeswari Sengupta; Harsh Vardhan
  2. Market Power and Cost Efficiency in the African Banking Industry By Asongu, Simplice; Nting, Rexon; Nnanna, Joseph
  3. The Determinants of Net Interest Margins of Commercial Banks: Panel Evidence from China, India and Japan By Md. Shahidul Islam; Shin-Ichi Nishiyama
  4. A Dynamic Theory of Lending Standards By Michael J. Fishman; Jonathan A. Parker; Ludwig Straub
  5. The effect of macroprudential policies on credit developments in Europe 1995-2017 By Budnik, Katarzyna
  6. Bank Syndicates and Liquidity Provision By Joao A. C. Santos; S. Vish Viswanathan
  7. Does FinTech Substitute for Banks? Evidence from the Paycheck Protection Program By Isil Erel; Jack Liebersohn
  8. Bank Complexity, Governance, and Risk By Ricardo Correa; Linda S. Goldberg
  9. The Risk of Being a Fallen Angel and the Corporate Dash for Cash in the Midst of COVID By Viral V. Acharya; Sascha Steffen
  10. Dampening Global Financial Shocks: Can Macroprudential Regulation Help (More than Capital Controls)? By Katharina Bergant; Francesco Grigoli; Niels-Jakob H Hansen; Damiano Sandri
  11. The impact of credit risk mispricing on mortgage lending during the subprime boom By James A Kahn; Benjamin S Kay
  12. Kicking the Can Down the Road: Government Interventions in the European Banking Sector By Viral V. Acharya; Lea Borchert; Maximilian Jager; Sascha Steffen
  13. Card-Sales Response to Merchant Contactless Payment Acceptance By David Bounie; Youssouf Camara

  1. By: Rajeswari Sengupta (Indira Gandhi Institute of Development Research); Harsh Vardhan (SP Jain Institute of Management & Research)
    Abstract: In this paper, we connect productivity growth in the banking sector with the subsequent build up ofstressed assets on the banks balance sheets. In doing so, we highlight the problems of a methodology that measures productivity based on quantity of loans but does not take into account the quality of credit extended by the banks. We quantify the magnitude of efficiency gains in the banking sector in Indiausing the Malmquist Index techniques for a sample of 33 commercial banks during the period 2002-2018. We find that the Indian banking sector experienced steady productivity growth till about 2011-12, and after that efficiency gains stagnated and even got reversed in the more recent years. We show that the phase of productivity growth is followed by high levels of non-performing assets on the banks balance sheets. We conclude that conventional methods of measuring efficiency gains in the banking sector may convey a misleading picture if they do not take into account the risks associated with the business of banking.
    Keywords: Banking, Bank productivity, Malmquist Index, Indian commercial banks, Technical efficiency, Non-performing asset
    JEL: G21 G28 D24 D61
    Date: 2020–08
  2. By: Asongu, Simplice; Nting, Rexon; Nnanna, Joseph
    Abstract: Purpose- In this study, we test the so-called ‘Quiet Life Hypothesis’ (QLH) which postulates that banks with market power are less efficient. Design/methodology/approach- We employ instrumental variable Ordinary Least Squares, Fixed Effects, Tobit and Logistic regressions. The empirical evidence is based on a panel of 162 banks consisting of 42 African countries for the period 2001-2011. There is a two-step analytical procedure. First, we estimate Lerner indices and cost efficiency scores. Then, we regress cost efficiency scores on Lerner indices contingent on bank characteristics, market features and the unobserved heterogeneity. Findings- The empirical evidence does not support the QLH because market power is positively associated with cost efficiency. Originality/value- Owing to data availability constraints, this is one of the few studies to test the QLH in African banking.
    Keywords: Finance; Savings banks; Competition; Efficiency; Quiet life hypothesis
    JEL: E42 E52 E58 G21 G28
    Date: 2019–01
  3. By: Md. Shahidul Islam (Department of Banking and Insurance, University of Dhaka); Shin-Ichi Nishiyama (Graduate School of Economics, Kobe University)
    Abstract: The study examines the determinants of net interest margins of commercial banks of China, India and Japan. Using the cross-country panel data of 418 commercial banks during the period of 2011 to 2017 (practically the post global financial crisis period); we classified the determinants as bank-specific, industry specific and macroeconomic-specific variables. In line of the ‘dealership model of margin determination’ of Ho and Saunders (1981) and its later extensions, we viewed net interest margins or spread as a function of liquidity, profitability, credit risk, risk aversion, size, business growth, regulatory response and off- balance sheet income in the bank-specific cluster whereas the industry concentration in industry specific cluster and call money rate, inflation and GDP growth rate in macroeconomic clusters. We found evidence that liquidity, profitability, risk aversion, required reserve ratio, yield spread and GDP affect interest margins positively but size and rate of inflation negatively. Our empirical findings support the traditional structure-conduct-performance (SCP) hypothesis of Bain (1956) for the banking markets of China, India and Japan for the post global financial crisis (GFC) era.
    Date: 2020–08
  4. By: Michael J. Fishman; Jonathan A. Parker; Ludwig Straub
    Abstract: We develop a tractable dynamic model of credit markets in which lending standards and the quality of potential borrowers are endogenous. Competitive banks privately choose their lending standards: whether to pay a cost to screen out some unprofitable borrowers. Lending standards have negative externalities and are dynamic strategic complements: tighter screening worsens the future pool of borrowers for all banks and increases their incentives to screen in the future. Lending standards can amplify and prolong temporary downturns, affecting lending volume, credit spreads, and default rates. We characterize constrained-optimal policy which can generally be implemented as a government loan insurance program. When markets recover, they may do so only slowly, a phenomenon we call “slow thawing.” Finally, we show that limits on lending such as from capital constraints naturally incentivize tight lending standards, further amplifying shocks to credit markets.
    JEL: D82 E51 G21
    Date: 2020–07
  5. By: Budnik, Katarzyna
    Abstract: The paper inspects the credit impact of policy instruments that are commonly applied to contain systemic risk. It employs detailed information on the use of capital-based, borrower-based and liquidity-based instruments in 28 European Union countries in 1995—2017 and a macroeconomic panel setup. The paper finds a significant impact of capital buffers, profit distribution restrictions, specific and general loan-loss provisioning regulations, sectoral risk weights and exposure limits, borrower-based measures, caps on long-term maturity and exchange rate mismatch, and asset-based capital requirements on credit to the non-financial private sector. Furthermore, the business cycle and monetary policy influence the effectiveness of most of the macroprudential instruments. Therein, capital buffers and sectoral risk weights act countercyclically irrespectively of the prevailing monetary policy stance, while a far richer set of policy instruments can act countercyclically in combination with the appropriate monetary policy stance. JEL Classification: E51, E52, G21
    Keywords: borrower-based instruments, capital requirements, liquidity requirements, macroprudential policy, monetary policy
    Date: 2020–08
  6. By: Joao A. C. Santos; S. Vish Viswanathan
    Abstract: We provide evidence that credit lines offer liquidity insurance to borrowers. Borrowers are able to extensively use their credit lines in recessions and ahead of credit line cuts. In fact drawdowns and changes in drawdowns predict internal credit rating downgrades and credit line cuts, suggesting substantial liquidity access before credit line cuts. Credit line cuts are concentrated on borrowers who do not use credit lines, and when they occur they still leave borrowers with funds to draw down. Building on this evidence, we develop a model where syndicates faced with liquidity shocks continue to support credit line commitments due to the continuation value of their relationship with borrowers. Our model yields a set of predictions that find support in the data, including the substantial increase in the lead bank's retained loan share and in the commitment fees on the credit lines issued during the financial crisis of 2008-09. Consistent with the model, credit lines with higher expected drawdown rates pay higher commitment fees, and lead banks often increase their credit line investments in response to the failure of syndicate members, reducing borrowers' risk exposure to bank failures.
    JEL: G21 G23 G3
    Date: 2020–08
  7. By: Isil Erel; Jack Liebersohn
    Abstract: New technology promises to expand the supply of financial services to borrowers poorly served by the banking system. Does it succeed? We study the response of FinTech to financial services demand created by the introduction of the Paycheck Protection Program (PPP). We find that FinTech is disproportionately used in ZIP codes with fewer bank branches, lower incomes, and a larger minority share of the population, as well as in industries with little ex ante small-business lending. Its role in PPP provision is also greater in counties where the economic effects of the COVID-19 pandemic were more severe. To understand whether these differences arise because certain groups are switching from traditional banks to FinTech or if they are being newly served by FinTech, we study whether FinTech-enabled PPP loans were more widespread in areas with fewer traditional loans. Using the predicted responsiveness of traditional banks to the program as an instrument, we show that borrowers were more likely to get a FinTech-enabled PPP loan if they were located in ZIP codes where local banks were unlikely to originate PPP loans.
    JEL: G00 G01 G2 G21 G23 G28 H12 H2 H3
    Date: 2020–08
  8. 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 profile 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.
    JEL: G21 G28 G32
    Date: 2020–07
  9. By: Viral V. Acharya; Sascha Steffen
    Abstract: Data on firm-loan-level daily credit line drawdowns in the United States expose a corporate “dash for cash” induced by the COVID-19 pandemic. In the first phase of the crisis, which was characterized by extreme precaution and heightened aggregate risk, all firms drew down bank credit lines and raised cash levels. In the second phase, which followed the adoption of stabilization policies, only the highest-rated firms switched to capital markets to raise cash. Consistent with the risk of becoming a fallen angel, the lowest-quality BBB-rated firms behaved more similarly to non-investment grade firms. The observed corporate behavior reveals the significant impact of credit risk on corporate cash holdings.
    JEL: G01 G14 G32 G35
    Date: 2020–07
  10. By: Katharina Bergant; Francesco Grigoli; Niels-Jakob H Hansen; Damiano Sandri
    Abstract: We show that macroprudential regulation can considerably dampen the impact of global financial shocks on emerging markets. More specifically, a tighter level of regulation reduces the sensitivity of GDP growth to VIX movements and capital flow shocks. A broad set of macroprudential tools contribute to this result, including measures targeting bank capital and liquidity, foreign currency mismatches, and risky forms of credit. We also find that tighter macroprudential regulation allows monetary policy to respond more countercyclically to global financial shocks. This could be an important channel through which macroprudential regulation enhances macroeconomic stability. These findings on the benefits of macroprudential regulation are particularly notable since we do not find evidence that stricter capital controls provide similar gains.
    Date: 2020–06–26
  11. By: James A Kahn; Benjamin S Kay
    Abstract: We provide new evidence that credit supply shifts contributed to the U.S. subprime mortgage boom and bust. We collect original data on both government and private mortgage insurance premiums from 1999-2016, and document that prior to 2008, premiums did not vary across loans with widely different observable characteristics that we show were predictors of default risk. Then, using a set of post-crisis insurance premiums to fit a model of default behavior, and allowing for time-varying expectations about house price appreciation, we quantify the mispricing of default risk in premiums prior to 2008. We show that the flat premium structure, which necessarily resulted in safer mortgages cross-subsidizing riskier ones, produced substantial adverse selection. Government insurance maintained a flatter premium structure even post-crisis, and consequently also suffered from adverse selection. But after 2008 the government reduced its exposure to default risk through a combination of higher premiums and rationing at the extensive margin.
    Keywords: financial crisis, mortgage insurance, housing finance, default risk
    JEL: G21 E44 E32
    Date: 2020–08
  12. By: Viral V. Acharya; Lea Borchert; Maximilian Jager; Sascha Steffen
    Abstract: We analyze the determinants and the long-run consequences of government interventions in the eurozone banking sector during the 2008/09 financial crisis. Using a novel and comprehensive dataset, we document that fiscally constrained governments “kicked the can down the road” by providing banks with guarantees instead of full-fledged recapitalizations. We adopt an econometric approach that addresses the endogeneity associated with governmental bailout decisions in identifying their consequences. We find that forbearance caused undercapitalized banks to shift their assets from loans to risky sovereign debt and engage in zombie lending, resulting in weaker credit supply, elevated risk in the banking sector, and, eventually, greater reliance on liquidity support from the European Central Bank.
    JEL: E44 G21 G28 G32 G34
    Date: 2020–07
  13. By: David Bounie (SES - Département Sciences Economiques et Sociales - Télécom ParisTech, ECOGE - Economie Gestion - I3, une unité mixte de recherche CNRS (UMR 9217) - Institut interdisciplinaire de l’innovation - X - École polytechnique - Télécom ParisTech - MINES ParisTech - École nationale supérieure des mines de Paris - CNRS - Centre National de la Recherche Scientifique); Youssouf Camara (IP Paris - Institut Polytechnique de Paris)
    Abstract: Disruptive innovations in digital payments are happening in a large number of countries around the world. In this paper, we investigate how merchants' acceptance of a contactless card technology affects card sales. Using score matching and difference-in-difference techniques on a unique sample of about 275,580 merchants in France, we find that accepting contactless payments in 2018 increases the card-sales amount by 15.3 percent on average (and by 17.1 percent the card-sales count) compared to merchants who do not accept contactless payments. We also find evidence that accepting contactless payments exerts a positive spillover of about 1.3 percent in the amount of contact card sales, and thus significantly increases the average annual card-sales amount and count for small merchants and new entrepreneurs
    Keywords: difference-in-difference,card acceptance,contactless cards,digital payments
    Date: 2020

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