nep-ban New Economics Papers
on Banking
Issue of 2020‒10‒12
twenty-one papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Banks' bail-in and the new banking regulation: an EU event study By Bellia, Mario; Maccaferri, Sara
  2. The bank lendin channel during financial turmoil By Marianna Endrész
  3. Debt holder monitoring and implicit guarantees: did the BRRD improve market discipline? By Cutura, Jannic Alexander
  4. Avoiding Taxes: Banks' Use of Internal Debt By Franz Reiter; Dominika Langenmayr; Svea Holtmann
  5. Do CDS markets care about the G-SIB status? By Bellia, Mario; Heynderickx, Wouter; Maccaferri, Sara; Schich, Sebastian
  6. Did Too-Big-To-Fail Reforms Work Globally? By Asani Sarkar
  7. Disastrous Defaults By Gouriéroux Christian; Monfort Alain; Mouabbi Sarah; Renne Jean-Paul
  8. Fintech and big tech credit: a new database By Giulio Cornelli; Jon Frost; Leonardo Gambacorta; Raghavendra Rau; Robert Wardrop; Tania Ziegler
  9. To securitize or to price credit risk? By Danny McGowan; Huyen Nguyen
  10. Predicting Payment Migration in Canada By Anneke Kosse; Zhentong Lu; Gabriel Xerri
  11. COVID-19 and the Search for Digital Alternatives to Cash By ; Rod Garratt; Michael Junho Lee
  12. The Welfare Implications of Massive Money Injection: The Japanese Experience from 2013 to 2020 By Tsutomu Watanabe
  13. Financial Sector Transparency and Net Interest Margins: Should the Private or Public Sector lead Financial Sector Transparency? By Kusi, Baah; Agbloyor, Elikplimi; Gyeke-Dako, Agyapomaa; Asongu, Simplice
  14. An Economic Perspective on Payments Migration By Anneke Kosse; Zhentong Lu; Gabriel Xerri
  15. Weighing up the Credit-to-GDP Gap: A Cautionary Note By Özer Karagedikli; Ole Rummel
  16. Effects of interest rate caps on microcredit: evidence from a natural experiment in Bolivia By María José Roa; Alejandra Villegas; Ignacio Garrón
  17. Forecasting recovery rates on non-performing loans with machine learning By Bellotti, Anthony; Brigo, Damiano; Gambetti, Paolo; Vrins, Frédéric
  18. Credit supply driven boom-bust cycles By Yavuz Arslan; Bulent Guler; Burhan Kuruscu
  19. A New Financial Stress Index for Ukraine By Vladyslav Filatov; ;
  20. The Contribution of Loans to Economic Activity. By Gianluca Cafiso
  21. The Pandemonics of Informal Credit Markets By Filipe Correia; António Martins

  1. By: Bellia, Mario (European Commission); Maccaferri, Sara (European Commission)
    Abstract: The purpose of the study is to estimate the short term reaction of equity and CDS prices of a sample of European banks to various events and announcements, such as bail-ins, recapitalisations, and the proposal and final agreement of the EU reform package of prudential and resolution rules in banking (“banking package†). This study replicates and expand Schafer et al. (2017) to include more recent EU events, such as the resolution of Banco Popular and the further tightening of EU prudential and resolution rules in 2019. Overall, our analysis shows the most recent events did not seem to trigger abnormal reactions in bank funding markets after bank prudential and resolution reforms were implemented in the EU in 2016. An exception is the 2018 Council agreement on its general approach to the proposed banking package. While the 2016 and 2019 reforms of EU prudential and resolution rules seem to have increased perceived probabilities of
    Keywords: Too-Big-To-Fail, Bail-in, FSB, event study, Credit Default Swap, CDS
    JEL: G21 G28
    Date: 2020–09
  2. By: Marianna Endrész (Magyar Nemzeti Bank (Central Bank of Hungary))
    Abstract: This paper uses a natural experiment to study the impact of a loan supply shock on a Hungarian matched bank-firm dataset. The event studied is a funding shock Hungarian banks faced following the collapse of the Lehman Brothers. Banks were affected via their external funding and positions on the swap market. The existence of firms with multiple bank links is utilized to separate demand and supply, and to find instruments to calculate the impact of the supply shock on lending and firms’ real outcome. According to the results banks with large exposure on the swap market and with heavy reliance on foreign market funding cut their lending more, while foreign group funding provided a buffer. Firms were not able to fully offset the impact of the supply shock by shifting to less exposed banks, their overall lending fell too. The supply shock affected various groups of firms differently: banks reallocated lending towards larger firms. The squeeze on lending in turn had an impact on firms’ real performance, by lowering their net investment. The real impact was more detrimental for small and risky firms.
    Keywords: Financial crisis, Bank lending, Real effect of credit, Firm-level data, Hungarian economy.
    JEL: E22 E51 G01 G21
    Date: 2020
  3. By: Cutura, Jannic Alexander
    Abstract: This paper argues that the European Unions Banking Recovery and Resolution Directive (BRRD) improved market discipline in the European bank market for unsecured debt. The different impact of the BRRD on bank bonds provides a quasi-natural experiment that allows to study the effect of the BRRD within banks using a difference-in-difference approach. Identification is based on the fact that (otherwise identical) bonds of a given bank maturing before 2016 are explicitly protected from BRRD bail-in. The empirical results are consistent with the hypothesis that debt holders actively monitor banks and that the BRRD diminished bail-out expectations. Bank bonds subject to BRRD bail-in carry a 10 basis points bail-in premium in terms of the yield spread. While there is some evidence that the bail-in premium is more pronounced for non-GSIB banks and banks domiciled in peripheral European countries, weak capitalization is the main driver. JEL Classification: G18, G21, H81
    Keywords: bail-in, banking regulation, BRRD, moral hazard
    Date: 2020–10
  4. By: Franz Reiter; Dominika Langenmayr; Svea Holtmann
    Abstract: This paper investigates how multinational banks use internal debt to shift profits to low-taxed affiliates. Using regulatory data on multinational banks headquartered in Germany, we show that banks use this tax avoidance channel more aggressively than non-financial multinationals do. We find that a ten percentage points higher corporate tax rate increases the internal net debt ratio by 5.7 percentage points, corresponding to a 20% increase at the mean. Our study also takes into account the existence of conduit entities, which simply pass through financial flows. If conduit entities are systematically located in low-tax countries, previous studies may have underestimated the extent of debt shifting.
    Keywords: profit shifting, internal debt, multinational banks, taxation
    JEL: H25 G21 F23
    Date: 2020
  5. By: Bellia, Mario (European Commission); Heynderickx, Wouter (European Commission Single Resolution Board); Maccaferri, Sara (European Commission); Schich, Sebastian (OECD)
    Abstract: "Ending too big to fail" is a declared policy aim and a key element of the globally coordinated financial regulatory reform. An official list of banks considered to be global systemically important (G-SIBs) is published on an annual basis since 2011. The goal of the present paper is to assess to what extent equity and CDS markets care about the official releases of the G-SIB lists and, in particular, whether the inclusion of a bank in the G-SIB list is good or bad news for bank debt and equity holders. The analysis applies both event-studies and panel regressions and relies upon European banks' CDS senior and subordinated quotes and equity prices to evaluate their reactions to the publications of the G-SIB lists. The analysis spans from the first leaked G-SIB list by the Financial Times as of 2009 to the 2017 official publication of the list. Results show that equity and senior/subordinated CDS spreads react differently to the events considered and that reactions evolve over time. During the rst events considered in the analysis, CDS of banks classified as G-SIBs react less than those of other banks. Results for more recent events are more mixed, potentially reflecting that recent releases of G-SIBs lists entail less information. The analysis also devotes special attention to a subset of "intermediate" banks that in principle are eligible to enter in the G-SIBs list, as compared to other banks that will obviously be included/excluded in the list given their size and footprint. This narrowed focus allows us to obtain more efficient results.
    Keywords: Credit Default Swap (CDS), G-SIB, Too Big to Fail, Event Study
    JEL: G18 G28 G32
    Date: 2020–06
  6. By: Asani Sarkar
    Abstract: Once a bank grows beyond a certain size or becomes too complex and interconnected, investors often perceive that it is “too big to fail” (TBTF), meaning that if the bank were to fail, the government would likely bail it out. Following the global financial crisis (GFC) of 2008, the G20 countries agreed on a set of reforms to eliminate the perception of TBTF, as part of a broader package to enhance financial stability. In June 2020, the Financial Stability Board (FSB), a sixty-eight-member international advisory body set up in 2009, published the results of a year-long evaluation of the effectiveness of TBTF reforms. In this post, we discuss the main conclusions of the report—in particular, the finding that implicit funding subsidies to global banks have decreased since the implementation of reforms but remain at levels comparable to the pre-crisis period.
    Keywords: too-big-to-fail; global banks; systemic risk; Financial Stability Board
    JEL: G32 G21
    Date: 2020–09–30
  7. By: Gouriéroux Christian; Monfort Alain; Mouabbi Sarah; Renne Jean-Paul
    Abstract: We define a disastrous default as the default of a systemic entity. Such an event is expected to have a negative effect on the economy and to be contagious. Bringing macroeconomic structure to a no-arbitrage asset-pricing framework, we exploit prices of disaster-exposed assets (credit and equity derivatives) to extract information on the expected (i) influence of a disastrous default on consumption and (ii) probability of a financial meltdown. We find that the returns of disaster-exposed assets are consistent with a systemic default being followed by a 3% decrease in consumption. The recessionary influence of disastrous defaults implies that financial instruments whose payoffs are exposed to such credit events carry substantial risk premiums. We also produce systemic risk indicators based on the probability of observing a certain number of systemic defaults or a sharp drop of consumption.
    Keywords: Disaster Risk, Systemic Entities, Default Dependencies, Credit Derivatives, Equilibrium Model.
    JEL: E43 E44 E47 G01 G12
    Date: 2020
  8. By: Giulio Cornelli; Jon Frost; Leonardo Gambacorta; Raghavendra Rau; Robert Wardrop; Tania Ziegler
    Abstract: Fintech and big tech platforms have expanded their lending around the world. We estimate that the flow of these new forms of credit reached USD 223 billion and USD 572 billion in 2019, respectively. China, the United States and the United Kingdom are the largest markets for fintech credit. Big tech credit is growing fast in China, Japan, Korea, Southeast Asia and some countries in Africa and Latin America. Cross-country panel regressions show that such lending is more developed in countries with higher GDP per capita (at a declining rate), where banking sector mark-ups are higher and where banking regulation is less stringent. Fintech credit is larger where there are fewer bank branches per capita. We also find that fintech and big tech credit are more developed where the ease of doing business is greater, and investor protection disclosure and the efficiency of the judicial system are more advanced, the bank creditto- deposit ratio is lower and where bond and equity markets are more developed. Overall, alternative credit seems to complement other forms of credit, rather than substitute for them.
    Keywords: fintech, big tech, credit, data, technology, digital innovation
    Date: 2020–09
  9. By: Danny McGowan (University of Birmingham); Huyen Nguyen (Halle Institute for Economic Research (IWH), and Friedrich Schiller University Jena)
    Abstract: We evaluate if lenders price or securitize mortgages to mitigate credit risk. Exploiting exogenous variation in regional credit risk created by differences in foreclosure law along US state borders, we find that financial institutions respond to the law in heterogeneous ways. In the agency market where Government Sponsored Enterprises (GSEs) provide implicit loan guarantees, lenders transfer credit risk using securitization and do not price credit risk into mortgage contracts. In the non-agency market, where there is no such guarantee, lenders increase interest rates as they are unable to shift credit risk to loan purchasers. The results inform the debate about the design of loan guarantees, the common interest rate policy, and show that underpricing regional credit risk leads to an increase in the GSEs’ debt holdings by $79.5 billion per annum, exposing taxpayers to preventable losses in the housingmarket.
    Keywords: loan pricing, securitization, credit risk, GSEs
    JEL: G21 G28 K11
    Date: 2020–09–11
  10. By: Anneke Kosse; Zhentong Lu; Gabriel Xerri
    Abstract: Canada currently has two core payment systems for processing funds transfers between financial institutions: the Large Value Transfer System (LVTS) and the Automated Clearing Settlement System (ACSS). These systems will be replaced over the next years by three new systems: Lynx, the Settlement Optimization Engine (SOE) and the Real-Time Rail (RTR). We employ historical LVTS and ACSS data to predict the demand for the future systems. The results show that small-value LVTS payments will likely migrate to SOE. Also, in the short run, about CAD 10,000 billion of LVTS and ACSS payments (per year) is anticipated to migrate to the RTR if not subject to maximum transaction values. These migration patterns raise important policy questions, such as whether the future systems should be subject to value caps and/or higher collateral requirements.
    Keywords: Financial institutions; Financial services; Financial stability; Financial system regulation and policies; Payment clearing and settlement systems
    JEL: C3 E4 E42 G1 G2 G28
    Date: 2020–09
  11. By: ; Rod Garratt; Michael Junho Lee
    Abstract: Today, the majority of retail payments in the United States are digital. Practically all digital payments are tracked, collected, and aggregated by financial institutions, payment providers, and vendors. This trend has accelerated during the COVID-19 pandemic as payments that require physical contact, such as cash, have been discouraged. As cash gradually becomes obsolete, consumers are left with fewer alternatives for making private transactions. In this post, we outline some evidence on the impact of COVID-19 on consumer payment behavior and follow up in the second post in this Liberty Street Economics series with a look at the implications of cash obsolescence for privacy.
    Keywords: COVID-19; digital payments; cash; privacy
    JEL: D14 E42 I18
    Date: 2020–09–28
  12. By: Tsutomu Watanabe (Graduate School of Economics, University of Tokyo)
    Abstract: This paper derives a money demand function that explicitly takes the costs of storing money into account. This function is then used to examine the consequences of the large-scale money injection conducted by the Bank of Japan since April 2013. The main findings are as follows. First, the opportunity cost of holding money calculated using 1-year government bond yields has been negative since the fourth quarter of 2014, and most recently (2020:Q2) was -0.2%. Second, the marginal cost of storing money, which was 0.3% in the most recent quarter, exceeds the marginal utility of money, which was 0.1%. Third, the optimum quantity of money, measured by the ratio of M1 to nominal GDP, is 1.2. In contrast, the actual money-income ratio in the most recent quarter was 1.8. The welfare loss relative to the maximum welfare obtained under the optimum quantity of money in the most recent quarter was 0.2% of nominal GDP. The findings imply that the Bank of Japan needs to reduce M1 by more than 30%, for example through measures that impose a penalty on holding money.
    Date: 2020–09
  13. By: Kusi, Baah; Agbloyor, Elikplimi; Gyeke-Dako, Agyapomaa; Asongu, Simplice
    Abstract: This study examines the effect of private and public sector led financial sector transparency on bank interest margins across eighty-six economies. Using a two-step dynamic system generalized method of moments, least square dummy variables, fixed effects and bootstrap quantile panel models between 2005 and 2016, the findings of the two-step GMM are reported as follows. First, results reveal that financial sector transparency whether led by private or public sector reduces interest margins. Second, while no statistical evidence was found on which of the two (private or public sector led transparency) is more effective in dealing with bank interest margins, public sector-led financial transparency is found to be more consistent in reducing bank interest margins across many more economies. Third, the study shows that the effect of financial sector transparency is visible at lower and middle levels of bank interest margins implying that economies with lower and moderately high bank interest margin level can benefit more from policies targeted at improving transparency in the financial sector. These findings imply that the sampled countries must enact policies and laws that deepen and expand financial sector transparency in order to potentially reduce bank interest margins for the good of banking market participants and society at large.
    Keywords: Financial Sector Transparency; Net Interest margins; Private Sector; Public Sector
    JEL: G20 G29 O40 O55
    Date: 2020–01
  14. By: Anneke Kosse; Zhentong Lu; Gabriel Xerri
    Abstract: Consumers, businesses and banks make millions of payments each day using a variety of instruments, such as debit cards, cheques and wires. Canada is currently developing three new systems to process these transactions: Lynx, Settlement Optimization Engine (SOE) and Real-Time Rail (RTR).
    Keywords: Financial services; Financial system regulation and policies; Payment clearing and settlement systems
    JEL: E4 E42 G2 G21
    Date: 2020–06
  15. By: Özer Karagedikli (The South East Asian Central Banks (SEACEN) Research and Training Centre); Ole Rummel (The South East Asian Central Banks (SEACEN) Research and Training Centre)
    Abstract: It has been argued that credit-to-GDP gaps (credit gap) are useful early warning indicators for banking crises. In addition, the Basel Committee on Banking Supervision has also advocated using these gaps - estimated using a one-sided Hodrick-Prescott filter with a smoothing parameter of 400,000 - to inform policy on the appropriate counter-cyclical capital buffer. We use the weighted average representation of the same filter and show that it attaches high weights to observations from the past, including the distant past: up to 40 lags (10 years) of past data are used in the calculation of the one-sided trend/permanent component of the credit-to-GDP ratio. We show how past data that belongs to the ‘old-regime’ prior to the crises continue to influence the estimates of the trend for years to come. By using narrative evidence from a number of countries that experienced deep financial crises, we show that this leads to some undesirable influence on the trend estimates that is at odds with the post-crisis environment.
    Keywords: Credit gap, Hodrick-Prescott filter, Trend-cycle decomposition
    JEL: J64
    Date: 2020–02
  16. By: María José Roa (Investigadora del Instituto de Investigaciones Económicas y Sociales Francisco de Vitoria); Alejandra Villegas (Investigadora de Universidad Iberoamericana Ciudad de México); Ignacio Garrón (Consultor indpendiente)
    Abstract: This paper evaluates the imposition of caps on microcredit lending rates through directed credit policies for productive sectors. This financial inclusion intervention provides a unique quasi-experiment, allowing to estimate its causal effect following a difference-in-differences analysis. Our results suggest that the imposition of interest rate ceilings negatively affected the portfolio balance of new microcredits and loans to SMEs granted by MFIs. Particularly, we find robust results indicating that the balance of the microcredit and SME loans portfolio granted by MFIs, relative to the company portfolio granted by banks, decreased by 26.1% for an average MFI for the period 2011-2018.
    Keywords: Interest rate ceilings, financial inclusion, credit access, microcredit loans, small and medium enterprises loans .
    JEL: G18 G28 G38
    Date: 2020–09
  17. By: Bellotti, Anthony; Brigo, Damiano; Gambetti, Paolo; Vrins, Frédéric
    Keywords: loss given default ; credit risk ; defaulted loans ; debt collection ; superior set of models
    Date: 2020–01–01
  18. By: Yavuz Arslan; Bulent Guler; Burhan Kuruscu
    Abstract: Can shifts in the credit supply generate a boom-bust cycle similar to the one observed in the US around 2008? To answer this question, we develop a general equilibrium model that combines a rich heterogeneous agent overlapping-generations structure of households who make housing tenure decisions and borrow through long-term mortgages, firms that finance their working capital through short-term loans from banks, and banks whose ability to intermediate funds depends on their capital. Using a calibrated version of this framework, we find that shocks to banks' leverage can generate sizable boom-bust cycles in the housing market, the banking sector, and the rest of the macroeconomy, which provides strong support for the credit supply channel. The deterioration of bank balance sheets during the bust, the existence of highly leveraged households, and the general equilibrium feedback from the credit supply to household labor income significantly amplify the bust. Moreover, mortgage credit growth across the income distribution is consistent with recent findings that were otherwise argued to be against the credit supply channel. A comparison of the model outcomes across credit supply, house price expectation, and productivity shocks suggests that housing busts accompanied by severe banking crises are more likely to be generated by credit supply shocks.
    Keywords: credit supply, house prices, financial crises, household and bank balance sheets, leverage, foreclosures, mortgage valuations, consumption, and output
    Date: 2020–09
  19. By: Vladyslav Filatov (National Bank of Ukraine); ;
    Abstract: This study improves on the methodology for calculating the financial stress index (FSI) for Ukraine by introducing time-varying correlation into the aggregation of 5 sub-indices (representing the banking sector, households, the corporate sector, government securities, and the foreign exchange (FX) market). The index consists of 20 indicators selected from an initial list of 47 potential candidates. To check the performance of the indicators, sub-indices, and index, we use area under the receiver operating characteristic curve (AUROC) and logit tests. Each sub-index is assigned a weight that reflects the impact of each market on the financial system. This new FSI peaks during periods of crisis that are in line with the consensus of financial experts and performs better than the previous FSI, which makes it more attractive for policy decisions. In particular, the new FSI can be used as a monitoring tool for the macroprudential policy of the National Bank of Ukraine.
    Keywords: financial stability, financial stress index, indicator performance
    JEL: E44 G01 G18
    Date: 2020–09–22
  20. By: Gianluca Cafiso
    Abstract: We study the contribution of loans, granted to different borrower groups, to economic activity in the USA over the period 1971q1-2018q4. Significant economic recessions occurred along the period considered, we center our discussion around the recent Global Financial Crisis. Results are delivered through a historical decomposition analysis based on the estimation of a large VAR through Bayesian techniques. Loans to households emerge as the most important driver of economic activity when compared to other groups, mortgages contribute the most with respect to other typologies. The analysis shows that loan shocks have truly undermined economic activity during the Global Financial Crisis.
    Keywords: loans, economic activity, households, corporate business, non-corporate business, Bayesian VAR, historical decomposition
    JEL: E44 E51 G20 G21 C11
    Date: 2020
  21. By: Filipe Correia; António Martins
    Abstract: Credit markets are at the core of any economic crisis, and informal loans are largely under studied. We collect a dataset on an online informal lending community to study the impact that the 2020 pandemic crisis had on informal credit markets. We find that these informal loans are short duration, expensive and that borrowers and lenders exhibit some sense of community. Our results suggest that the financial hardship imposed by stay athome orders is perceived as persistent, and borrowers expect lower future income, hencereducing loan demand. Moreover, loans directly associated with the pandemic are more likely to be transacted by newcomers to this market, and mentioning the pandemic in a loan request lowers the chance that it originates a loan. The absence of an increase of violations ofcommunity rules and the reduction in promised repayment time highlights the importance of informal credit communities in hard times.
    Keywords: informal credit, online lending, pandemic, non-pharmaceutical interventions
    JEL: G21
    Date: 2020–09

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