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on Banking |
| By: | Hasan, Iftekhar; Kim, Suk-Joong; Politsidis, Panagiotis; Wu, Eliza |
| Abstract: | This paper investigates how lenders react to borrowers’ rating changes under heterogeneous conditions and different regulatory regimes. Our findings suggest that corporate downgrades that increase capital requirements for lending banks under the Basel II framework are associated with increased loan spreads and deteriorating non-price loan terms relative to downgrades that do not affect capital requirements. Ratings exert an asymmetric impact on loan spreads, as these remain unresponsive to rating upgrades, even when the latter are associated with a reduction in risk weights for corporate loans. The increase in firm borrowing costs is mitigated in the presence of previous bank-firm lending relationships and for borrowers with relatively strong performance, high cash flows and low leverage. |
| Keywords: | corporate credit ratings, cost of credit, rating-contingent regulation, capital requirements, Basel II |
| JEL: | G21 G24 G28 G32 |
| Date: | 2020–06 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:102796&r=all |
| By: | Karel Janda; Oleg Kravtsov |
| Abstract: | In this paper, we investigate how the regulatory stress test framework in the European Union affects banks’ investment decisions and portfolio choices. Using the causal inference and event study methodology, we document a substantial impact of EU-wide stress tests in 2011, 2014 and 2016 on the banks’ portfolio strategies. The banks subject to regulatory stress tests tend to structure their portfolios with lower risk assets that is reflected in a decline in risk-weighted assets as compared to the control group. At the same time, the dynamic of realized risk that is measured by the proportion of non-performing exposure in portfolios remains unaffected. The estimates based on two alternative subsamples indicate that the magnitude of such effect rise with the increase in the size of the bank´s assets. |
| Keywords: | regulatory stress test, capital regulation, heterogeneous treatment effect, event study, instrumental variable |
| JEL: | G20 G21 G28 |
| Date: | 2020–08 |
| URL: | http://d.repec.org/n?u=RePEc:een:camaaa:2020-77&r=all |
| By: | Juan Esteban Carranza (Banco de la República de Colombia); Stefany Moreno-Burbano (Banco de la República de Colombia) |
| Abstract: | We study the effect of a credit supply shock on the performance of Colombian firms, induced by an unexpected increase in the liquidity of banks. The increased liquidity was the result of sudden sell-off of Colombian government bonds by banks in response to an unexpected increase in their demand. The shift in demand for these government bonds followed the unexpected increase of its share in the composition of a prominent JP Morgan index. We exploit the variation in liquidity across Banks and their preexisting relationships with firms at the time of the shock to extract from the data the variation in loans that was driven by the exogenous shock. We then connect this variation in loans to the performance of firms. We find that the positive credit shock led to increased sales by firms, based mainly on increases of capital investment. **** RESUMEN: En este documento estudiamos el efecto de un choque a la oferta de crédito en el desempeño de las firmas colombianas, como consecuencia de un incremento inesperado en la liquidez de los bancos. El aumento en la liquidez fue resultado de un aumento súbito en las ventas por parte de los bancos de bonos gubernamentales en respuesta a un incremento inesperado en su demanda. El cambio en la demanda por estos activos fue resultado de un incremento en la participación de estos activos en dos índices de mercados emergentes de J.P.Morgan. Explotamos la heterogeneidad en la tenencia de bonos entre bancos y las relaciones pre-existentes con las firmas en el momento del choque para extraer de los datos la variación en los créditos inducida por el choque exógeno. Luego conectamos esta variación de los créditos con el desempeño de las firmas. Encontramos que el aumento inesperado de la liquidez de los bancos condujo a un aumento en las ventas de las firmas, con base principalmente en aumentos en la inversión en capital fijo. |
| Keywords: | Lending channel, supply shock, firm’ performance, Canal de crédito, choque de oferta, desempeño de las firmas |
| JEL: | G21 G11 L25 |
| Date: | 2020–09 |
| URL: | http://d.repec.org/n?u=RePEc:bdr:borrec:1133&r=all |
| By: | Ricardo Branco (Mazars Portugal and Universidade Católica Portuguesa, Católica Porto Business School); João Pinto (Universidade Católica Portuguesa, Católica Porto Business School and CEGE); Ricardo Ribeiro (Universidade Católica Portuguesa, Católica Porto Business School and CEGE) |
| Abstract: | The 2008 Global financial crisis and the subsequent European sovereign debt crisis deteriorated banks funding conditions and lead to a substitution effect among bond instruments. We examine the pricing of straight, covered and securitization bonds issued by European banks in the 2000-2016 period, with a particular focus on the effect of sovereign credit risk and ECB's asset purchase programmes on spreads. We nd that (i) straight, covered and securitization bonds are priced in segmented markets, (ii) the impact of common pricing determinants on spreads differ significantly between non-crisis and crisis periods, (iii) sovereign credit risk is an important determinant of banks' cost of funding, especially in crisis periods, (iv) ECB's asset purchase programmes exhibited mixed effectiveness in improving banks funding conditions, (v) contractual bond characteristics other than credit ratings, macroeconomic factors and bank characteristics are important determinants of spreads, and (vi) there is evidence of heterogeneity across countries. |
| Keywords: | Straight Bonds; Covered Bonds; Securitization Bonds; Bond Pricing; Sovereign Risk; Asset Purchase Programmes |
| JEL: | E52 G01 G12 G21 G32 |
| Date: | 2020–01 |
| URL: | http://d.repec.org/n?u=RePEc:cap:wpaper:012020&r=all |
| By: | Qi Chen; Itay Goldstein; Zeqiong Huang; Rahul Vashishtha |
| Abstract: | This paper provides, for the first time, large-scale evidence that liquidity transformation by banks creates fragility, as their uninsured depositors face an incentive to withdraw their money before others (a so-called panic run). Such fragility manifests itself in stronger sensitivity of deposit flows to bank performance. A deterioration in the aggregate conditions in the banking system makes the fragility within each bank stronger. We run multiple tests to show that depositors’ motives are not driven purely by fundamentals, but rather that the element of panic, leading them to think about what other depositors will do, is important in the data. We analyze the tradeoff banks face when setting their level of liquidity transformation, and show how they use deposit insurance to mitigate some of its negative effects. |
| JEL: | E02 G01 G21 |
| Date: | 2020–09 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:27815&r=all |
| By: | Xuan Wang (Vrije Universiteit Amsterdam) |
| Abstract: | The Basel Committee proposed the Net Stable Funding Ratio (NSFR) to curb excessive maturity mismatch of the banking sector. However, it remains to be ascertained as to what are the financial and real effects of the NSFR on banks' credit quality, investment, and the pass-through of monetary policy. This paper develops a nominal dynamic general equilibrium featuring banks' maturity mismatch and the moral hazard due to costly monitoring. First, I show that a tightening of the NSFR to move loan maturity towards the long-run capital investment cycle would only increase real investment if it sufficiently improves banks' credit quality. Then in the numerical example calibrated with the US data, I show that such tightening of the NSFR can indeed increase real investment and also reduce the aggregate fluctuation of the economy. In the steady states, a 10% tightening in the NSFR can decrease net charge-offs of non-performing loans by about 0.06 pp annually, despite squeezing banks' interest margin. Moreover, the moral hazard stemming from banks' unobserved monitoring effort impairs the pass-through of monetary policy. However, a 10% tightening in the NSFR improves the pass-through of a 20-bp policy rate reduction by around 17% annually. Finally, the model simulates the stochastic dynamic equilibrium path to study the propagation of shocks, demonstrating that the NSFR complements monetary policy in reducing financial frictions. |
| Keywords: | Maturity mismatch, Net Stable Funding Ratio, default, banking, monetary policy, macro-prudential policy |
| JEL: | E44 E51 G18 G21 |
| Date: | 2020–09–22 |
| URL: | http://d.repec.org/n?u=RePEc:tin:wpaper:20200064&r=all |
| By: | Wayne Passmore; Judit Temesvary |
| Abstract: | We construct a model of a bank's optimal funding choice, where the bank negotiates with both safety-driven short-term bondholders and (mostly) risk-taking long-term bondholders. We establish that investor demands for safety create a negative relationship between the bank's capital choices and short-term funding, as well as negative relationships between capital and common measures of bank liquidity. Consistent with our model, our bank-level empirical analysis of these capital-liquidity tradeoffs show (1) that bank liquidity measures have a strong and negative relationship to its capital ratio for both large and small banks, and (2) that this relationship has weakened with the advent of stronger liquidity regulation. Our results suggest that the safety concerns of bank debt investors may underlie capital-liquidity tradeoffs and that a bank's share of collateralized short-term debt may be a more robust measure of bank liquidity. |
| Keywords: | Safe assets; Bank liquidity; Liquidity regulation; Capitalization; Bank balance sheet management |
| JEL: | G11 G18 G21 G23 G28 |
| Date: | 2020–09–18 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2020-79&r=all |
| By: | Colin Weiss |
| Abstract: | Financial intermediary balance sheets matter for asset returns even when these intermediaries do not directly participate in the relevant asset markets. During the National Banking Era, liquidity conditions for the New York Clearinghouse (NYCH) banks forecast excess returns for stocks, bonds, and currencies. The NYCH banks had little to no direct participation in these markets; their main link to these markets was through securities financing. Liquidity conditions affect asset prices through the credit growth of the NYCH banks, which shapes marginal investors' discount rates. I use institutional features of this era to provide evidence in favor of this mechanism. |
| Keywords: | Liquidity management; Margin loans; Intermediary asset pricing; National banks |
| JEL: | G12 G21 E51 N21 |
| Date: | 2020–09–18 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgif:1302&r=all |
| By: | Budnik, Katarzyna; Balatti, Mirco; Dimitrov, Ivan; Groß, Johannes; Kleemann, Michael; Reichenbachas, Tomas; Sanna, Francesco; Sarychev, Andrei; Siņenko, Nadežda; Volk, Matjaz |
| Abstract: | The Banking Euro Area Stress Test (BEAST) is a large scale semi-structural model developed to assess the resilience of the euro area banking system from a macroprudential perspective. The model combines the dynamics of a high number of euro area banks with that of the euro area economies. It reflects banks’ heterogeneity by replicating the structure of their balance sheets and profit and loss accounts. In the model, banks adjust their assets, interest rates, and profit distribution in line with the economic conditions they face. Bank responses feed back to the macroeconomic environment affecting credit supply conditions. When applied to a stress test of the euro area banking system, the model reveals higher system-wide capital depletion than the analogous constant balance sheet exercise. JEL Classification: E37, E58, G21, G28 |
| Keywords: | banking sector deleveraging, macroprudential policy, macro stress test, real economy-financial sector feedback loop |
| Date: | 2020–09 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20202469&r=all |
| By: | Alvaro Garcia-Marin; Santiago Justel; Tim Schmidt-Eisenlohr |
| Abstract: | Trade credit is the most important form of short-term finance for firms. In 2019, U.S. non-financial firms had about $4.5 trillion in trade credit outstanding equaling 21 percent of U.S. GDP. This paper documents two striking facts about trade credit use. First, firms with higher markups supply more trade credit. Second, trade credit use increases in relationship length, as firms often switch from cash in advance to trade credit but rarely away from trade credit. These two facts can be rationalized in a model where firms learn about their trading partners, sellers charge markups over production costs, and financial intermediation is costly. The model also shows that saving on financial intermediation costs provides a strong rationale for the dominance of trade credit. Using Chilean data at the firm-product-level and the trade-transaction level, we find support for all predictions of the model. |
| Keywords: | Trade credit; Markups; Financial intermediation; Learning |
| JEL: | F12 F14 G21 G32 |
| Date: | 2020–09–18 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgif:1303&r=all |
| By: | Giovanni Pellegrino; Efrem Castelnuovo; Giovanni Caggiano |
| Abstract: | How damaging are uncertainty shocks during extreme events such as the great recession and the Covid-19 outbreak? Can monetary policy limit output losses in such situations? We use a nonlinear VAR framework to document the large response of real activity to a financial uncertainty shock during the great recession. We replicate this evidence with an estimated DSGE framework featuring a concept of uncertainty comparable to that in our VAR. We employ the DSGE model to quantify the impact on real activity of an uncertainty shock under different Taylor rules estimated with normal times vs. great recession data (the latter associated with a stronger response to output). We find that the uncertainty shock-induced output loss experienced during the 2007-09 recession could have been twice as large if policymakers had not responded aggressively to the abrupt drop in output in 2008Q3. Finally, we use our estimated DSGE framework to simulate different paths of uncertainty associated to different hypothesis on the evolution of the coronavirus pandemic. We find that: i) Covid-19-induced uncertainty could lead to an output loss twice as large as that of the great recession; ii) aggressive monetary policy moves could reduce such loss by about 50%. |
| Keywords: | Uncertainty shock, nonlinear IVAR, nonlinear DSGE framework, minimum-distance estimation, great recession, Covid-19 |
| JEL: | C22 E32 E52 |
| Date: | 2020–09 |
| URL: | http://d.repec.org/n?u=RePEc:een:camaaa:2020-80&r=all |