nep-ban New Economics Papers
on Banking
Issue of 2020‒09‒28
nine papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Do Internal Rating Models Mitigate Bank Opacity? Evidence from Analysts’ Forecasts By Brunella Bruno; Immacolata Marino; Giacomo Nocera; Andrea Resti
  2. Does Increasing Access to Formal Credit Reduce Payday Borrowing? By Sarah Miller; Cindy K. Soo
  3. Forward looking loan provisions: Credit supply and risk-taking By Bernardo Morais; Gaizka Ormazabal; José-Luis Peydró; Mónica Roa; Miguel Sarmiento
  4. CEO Incentives and Bank Risk over the Business Cycle By Steven Ongena; Tanseli Savaser; Elif Sisli Ciamarra
  5. Payments Crises and Consequences By Qian Chen; Christoffer Koch; Gary Richardson; Padma Sharma
  6. Exploring BIS credit-to-GDP gap critiques: the Swiss case By Terhi Jokipii; Reto Nyffeler; Stéphane Riederer
  7. Interbank Networks in the Shadows of the Federal Reserve Act By Haelim Anderson; Selman Erol; Guillermo Ordoñez
  8. Systemic Banking Crises: The Relationship Between Concentration and Interbank Connections. By Andrea Calef
  9. The Financial Regulatory Cycle By Joao Rafael Cunha

  1. By: Brunella Bruno (Università Bocconi); Immacolata Marino (Università di Napoli Federico II and CSEF); Giacomo Nocera (Audencia Business School); Andrea Resti (Università Bocconi)
    Abstract: Based on a sample of large European banks, we test whether the usage of internal rating models for regulatory purposes affects bank opacity. We find that a more intensive use of advanced internal rating models is associated with lower forecast error and disagreement across analysts on bank earnings per share. We also find that these models alleviate the negative effect of non-performing loans on bank transparency.
    Keywords: Banks; Opacity; Internal Rating-Based (IRB) approach
    JEL: G20 G21 G28
    Date: 2020–09–10
  2. By: Sarah Miller; Cindy K. Soo
    Abstract: The use of high cost “payday loans” among subprime borrowers has generated substantial concern among policymakers. This paper provides the first evidence of substitution between “alternative” and “traditional” credit by exploiting an unexpected positive shock to traditional credit access among payday loan borrowers: the removal of a Chapter 7 bankruptcy flag. We find that the removal of a bankruptcy flag on a credit report results in a sharp increase in access to traditional credit and raises credit scores, credit card limits, and approval rates. However, despite meaningful increases in access to traditional credit, we find no evidence that borrowers reduce their use of payday loans, and our confidence intervals allow us to rule out even very small reductions in payday borrowing. Furthermore, we find evidence that flag removals increase the use of other alternative credit products such as online subprime installment loans. These results indicate that marginally improving access to less expensive formal credit is insufficient to meaningfully shift borrowers away from high cost subprime products. We discuss likely explanations for this including increased marketing of subprime products associated with the flag removal, the imperfect substitutability between cash and credit for low income borrowers, and an insufficiency in the size of the increase in credit access associated with the flag removal.
    Date: 2020–09
  3. By: Bernardo Morais; Gaizka Ormazabal; José-Luis Peydró; Mónica Roa; Miguel Sarmiento
    Abstract: We show corporate-level real, financial, and (bank) risk-taking effects associated with calculating loan provisions based on expected-rather than incurred-credit losses. For identification, we exploit unique features of a Colombian reform and supervisory, matched loan-level data. The regulatory change induces a dramatic increase in provisions. Banks tighten all new lending conditions, adversely affecting borrowing-firms, with stronger effects for risky-firms. Moreover, to minimize provisioning, more affected (less-capitalized) banks cut credit supply to risky-firms- SMEs with shorter credit history, less tangible assets or more defaulted loans-but engage in "search-for-yield" within regulatory constraints and increase portfolio concentration, thereby decreasing risk diversification.
    Keywords: Loan provisions, IFRS9, ECL, corporate real and credit supply effects of accounting, bank risk-taking
    JEL: E31 G18 G21 G28
    Date: 2020–08
  4. By: Steven Ongena (University of Zurich - Department of Banking and Finance; Swiss Finance Institute; KU Leuven; Centre for Economic Policy Research (CEPR)); Tanseli Savaser (Vassar College - Department of Economics); Elif Sisli Ciamarra (Stonehill College)
    Abstract: We examine whether the relationship between managerial risk-taking incentives and bank risk is sensitive to the underlying macroeconomic conditions. We find that risk-taking incentives provided to bank executives are associated with higher bank riskiness during economic downturns. We attribute this finding to the increase in moral hazard during macroeconomic downturns when the perceived probability of future bailouts and government guarantees rises. This association is particularly strong for larger banks, banks that maintain lower capital ratios and banks that are managed by more powerful CEOs. Our findings highlight the importance of the interaction between managerial incentives and the macroeconomic environment. Boards and regulators may find it useful to consider the countercyclical nature of the relationship between risk-taking incentives and bank riskiness when designing managerial compensation.
    Keywords: bank risk; executive compensation; equity-based compensation; macroeconomy
    JEL: G01 G2 G3 M52
    Date: 2020–09
  5. By: Qian Chen; Christoffer Koch; Gary Richardson; Padma Sharma
    Abstract: Banking-system shutdowns during contractions scar economies. Four times in the last forty years, governors suspended payments from state-insured depository institutions. Suspensions of payments in Nebraska (1983), Ohio (1985), and Maryland (1985), which were short and occurred during expansions, had little measurable impact on macroeconomic aggregates. Rhode Island’s payments crisis (1991), which was prolonged and occurred during a recession, lengthened and deepened the downturn. Unemployment increased. Output declined, possibly permanently relative to what might have been. We document these effects using a novel Bayesian method for synthetic control that characterizes the principal types of uncertainty in this form of analysis. Our findings suggest policies that ensure banks continue to process payments during contractions – including the bailouts of financial institutions in 2008 and the unprecedented support of the financial system during the COVID crisis – have substantial value.
    Keywords: Payments crisis; Money and banking; Depository institutions; Bank suspension; Synthetic control; Bayesian inference
    JEL: E51 E52 E58 G18 G21
    Date: 2020–08–18
  6. By: Terhi Jokipii; Reto Nyffeler; Stéphane Riederer
    Abstract: A growing body of literature has highlighted two important caveats to the credit-to-GDP gap as advocated by the Bank for International Settlements (BIS). The first relates to the approach used to normalise credit (i.e., dividing nominal credit by GDP). In this regard, critics have argued that a normalised measure of credit runs the risk of being affected by GDP movements that may or may not be relevant. The second relates to the use of the Hodrick-Prescott (HP) filter to estimate the gap's trend component. In this regard, critics have emphasised several measurement problems associated with using the HP filter. In this paper, we assess the relevance of these critiques for Switzerland. While we find no compelling evidence suggesting a need to deviate from using the BIS gap as a reliable excess credit measure, our findings do emphasise the need to interpret its signal with caution, particularly during long-lasting boom phases and subsequent bust phases. In these situations in particular, authorities should strengthen their decision-making frameworks with additional credit relevant indicators.
    Keywords: BIS gap, credit-to-GDP, macroprudential policy, HP filter
    JEL: E61 E44 E51 G01 G21
    Date: 2020
  7. By: Haelim Anderson; Selman Erol; Guillermo Ordoñez
    Abstract: Central banks provide public liquidity to traditional (regulated) banks with the intention of stabilizing the financial system. Shadow banks are not regulated, yet they indirectly access such liquidity through the interbank system. We build a model that shows how public liquidity provision may change the linkages between traditional and shadow banks, increasing systemic risk through three channels: reducing aggregate liquidity, expanding fragile short-term borrowing, and crowding out of private cross-bank insurance. We show that the creation of the Federal Reserve System and the provision of public liquidity changed the structure and nature of the U.S. interbank network in ways that are consistent with the model and its implications. We provide empirical evidence by constructing unique data on balance sheets and detailed disaggregated information on payments and funding connections in Virginia.
    JEL: D53 D85 E02 E44 G11 G21 G23 N21
    Date: 2020–08
  8. By: Andrea Calef (University of East Anglia)
    Abstract: In this paper I study the extent to which the nexus between concentration and interbank linkages affects financial stability, using data for a sample of 19,689 banks in 69 countries from 1995 to 2014. I find that high levels of interbank exposures decrease the probability of observing a systemic banking crisis, when the banking system is either highly concentrated or fragmented. The relationship between concentration and stability is found to be non-monotonic, as predicted by Martinez-Miera & Repullo (2010), although not U-shaped.
    Keywords: banking crisis, systemic risk, market structure; interbank linkages, network, contagion.
    JEL: G01 G21 G28
    Date: 2020–01–15
  9. By: Joao Rafael Cunha (University of St Andrews)
    Abstract: This paper presents the idea of the financial regulatory cycle in the United States. I show that there have been three long cycles of financial regulation since the independence of the country in 1776. Moreover, there are also smaller cycles within these long regulatory cycles. Contingent capital may be a way to curb the impact of the regulatory cycle.
    Keywords: Financial Regulation; United States Banks; Law and Economics; Financial History
    JEL: G21 G28 K2 N22 N42
    Date: 2020–09–07

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