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on Banking |
| By: | Behn, Markus; Schramm, Alexander |
| Abstract: | This paper uses granular data on syndicated loans to analyse the impact of international reforms for Global Systemically Important Banks (G-SIBs) on bank lending behaviour. Using a difference-in-differences estimation strategy, we find no effect of the reforms on overall credit supply, while at the same time documenting a substantial decline in borrower- and loan-specific risk factors for the affected banks. Moreover, we detect a significant decline in the pricing gap between interest rates charged by G-SIBs and other banks, which we interpret as indirect evidence for a reduction in funding cost subsidies. Overall, our results suggest that the G-SIB reforms have helped to mitigate moral hazard problems associated with systemically important banks, while the consequences for the real economy have been limited. JEL Classification: G20, G21, G28 |
| Keywords: | bank lending, bank regulation, systemically important banks |
| Date: | 2020–10 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20202479&r=all |
| By: | Milton Harris; Christian Opp; Marcus Opp |
| Abstract: | We propose a novel conceptual approach to transparently characterizing credit market outcomes in economies with multi-dimensional borrower heterogeneity. Based on characterizations of securities' implicit demand for bank equity capital, we obtain closed-form expressions for the composition of credit, including a sufficient statistic for the provision of bank loans, and a novel cross-sectional asset pricing relation for securities held by regulated levered institutions. Our framework sheds light on the compositional shifts in credit prior to the 07/08 financial crisis and the European debt crisis, and can provide guidance on the allocative effects of shocks affecting both banks and the cross-sectional distribution of borrowers. |
| JEL: | G12 G21 G23 G28 |
| Date: | 2020–09 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:27858&r=all |
| By: | Albertazzi, Ugo; Burlon, Lorenzo; Pavanini, Nicola; Jankauskas, Tomas |
| Abstract: | We quantify the impact that central bank refinancing operations and funding facilities had at reducing the banking sector’s intrinsic fragility in the euro area in 2014-2019. We do so by constructing, estimating and calibrating a micro-structural model of imperfect competition in the banking sector that allows for runs in the form of multiple equilibria, in the spirit of Diamond & Dybvig (1983), banks’ default and contagion, and central bank funding. Our framework incorporates demand and supply for insured and uninsured deposits, and for loans to firms and households, as well as borrowers’ default. The estimation and the calibration are based on confidential granular data for the euro area banking sector, including information on the amount of deposits covered by the deposit guarantee scheme and the borrowing from the European Central Bank (ECB). We document that the quantitative relevance of non-fundamental risk is potentially large in the euro area banking sector, as witnessed by the presence of alternative equilibria with run-type features, but also that central bank interventions exerted a crucial role in containing fundamental as well as non-fundamental risk. Our counterfactuals show that 1 percentage point reduction (increase) in the ECB lending rate of its refinancing operations reduces (increases) the median of banks’ default risk across equilibria by around 50%, with substantial heterogeneity of this pass-through across time, banks and countries. JEL Classification: E44, E52, E58, G01, G21, L13 |
| Keywords: | bank runs, central bank policies, imperfect competition, multiple equilibria, structural estimation |
| Date: | 2020–10 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20202480&r=all |
| By: | Zachary Feinstein; Grzegorz Halaj |
| Abstract: | Interconnectedness is an inherent feature of the modern financial system. While it contributes to efficiency of financial services, it also creates structural vulnerabilities: pernicious shock transmission and amplification impacting banks’ capitalization. This has recently been seen during the Global Financial Crisis. Post-crisis reforms addressed many of the causes of the problems. But contagion effects may not be fully eliminated. One reason for this may be related to financial institutions’ incentives and strategic behaviours. We propose a model to study contagion effects in a banking system, capturing network effects of direct exposures and indirect effects of market behaviour that may impact asset valuation. By doing so, we can embed a well-established fire sale channel into our model. Unlike in related literature, we relax an assumption of an exogenous pecking order of how banks would sell their assets. Instead, banks act rationally in our model; they optimally construct a portfolio subject to budget constraints to raise cash to satisfy creditors (interbank and external). We assume that the guiding principle for banks is to maximize risk-adjusted returns generated by their balance sheets. We parameterize the theoretical model with confidential supervisory data for banks in Canada under the supervision of the Office of the Superintendent of Financial Institutions, which allows us to run simulations of bank valuations and asset prices under a set of stress scenarios. |
| Keywords: | Financial stability; Financial system regulation and policies; Payment clearing and settlement systems |
| JEL: | C72 G11 |
| Date: | 2020–09 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:20-41&r=all |
| By: | Pierluigi Bologna (Bank of Italy); Wanda Cornacchia (Bank of Italy); Maddalena Galardo (Bank of Italy) |
| Abstract: | We estimate the causal effect of a mortgage supply expansion on house prices by using an exogenous change in prudential regulation: the abolition in 2006 of a banks' maturity transformation limit. After the repeal of the prudential rule, credit increased only for the banks that were previously constrained by the regulation, while it remained unchanged for the other banks. Such differential response rules out demand-based explanations and fully identify the rule abolition as an exogenous shock that we exploit as an instrument for mortgage supply expansion. We estimate the elasticity of house price growth to new mortgage credit to be close to 5 percent. Our results also show that the effect of a mortgage supply expansion on house prices significantly differs across municipalities' and borrowers' characteristics. |
| Keywords: | prudential policy, credit supply, house prices, financial constraints |
| JEL: | G21 G28 R21 R31 |
| Date: | 2020–09 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:wptemi:td_1294_20&r=all |
| By: | Elien Meuleman; Rudi Vander Vennet (-) |
| Abstract: | We investigate the impact of macroprudential policy on the risk and return profile of Eurozone banks between 2008 and 2018, conditioning on the stance of monetary policy. Using local projections, we find that a tightening in macroprudential policy increases financial stability by curbing credit growth and increasing the resilience of the banks. With respect to the policy mix, we show that tight macroprudential and monetary policies reinforce each other. But even when monetary policy is accommodating, macroprudential policy is found to be effective in deterring excessive bank risk taking. However, we also document adverse consequences for bank franchise values. |
| Keywords: | Euro Area banks, macroprudential policy, monetary policy, inverse propensity score matching, local projections, bank risk profile |
| JEL: | C23 E52 E61 G21 G28 |
| Date: | 2020–08 |
| URL: | http://d.repec.org/n?u=RePEc:rug:rugwps:20/1004&r=all |
| By: | Patrick Behr; Lars Norden; Raquel Oliveira |
| Abstract: | We investigate whether and how firms’ number of bank relationships affects labor market outcomes. We base our analysis on more than 5 million observations on matched credit and labor data from Brazilian firms during 2005-2014. We find that firms with more bank relationships employ significantly more workers and pay significantly higher wages. Moreover, increases (decreases) in the number of bank relationships result in positive (negative) effects on employment and wages. These results are robust for strictly exogenous changes in the number of bank relationships due to nationwide bank M&A activity, when using instrumental variable regressions, and are independent of firm size. The effects are due (but not limited) to higher credit availability, lower cost of credit and higher heterogeneity in firms’ bank relationships. Importantly, the firm-level results consistently translate into positive macroeconomic effects at the municipality and state levels. The evidence is novel and suggests positive effects of multiple bank relationships on labor market outcomes in an emerging economy. |
| Date: | 2020–09 |
| URL: | http://d.repec.org/n?u=RePEc:bcb:wpaper:534&r=all |
| By: | Mohamed Belhaj (IMF-Midle East Center for Economics and Finance); Renaud Bourlès (AMSE - Aix-Marseille Sciences Economiques - EHESS - École des hautes études en sciences sociales - ECM - École Centrale de Marseille - CNRS - Centre National de la Recherche Scientifique - AMU - Aix Marseille Université, IUF - Institut Universitaire de France - M.E.N.E.S.R. - Ministère de l'Education nationale, de l’Enseignement supérieur et de la Recherche); Frédéric Deroïan (AMSE - Aix-Marseille Sciences Economiques - EHESS - École des hautes études en sciences sociales - ECM - École Centrale de Marseille - CNRS - Centre National de la Recherche Scientifique - AMU - Aix Marseille Université) |
| Abstract: | We analyze risk-taking regulation when financial institutions are linked through shareholdings. We model regulation as an upper bound on institutions' default probability, and pin down the corresponding limits on risk-taking as a function of the shareholding network. We show that these limits depend on an original centrality measure that relies on the cross-shareholding network twice: (i) through a risk-sharing effect coming from complementarities in risk-taking and (ii) through a resource effect that creates heterogeneity among institutions. When risk is large, we find that the risk-sharing effect relies on a simple centrality measure: the ratio between Bonacich and self-loop centralities. More generally, we show that an increase in cross-shareholding increases optimal risk-taking through the risk-sharing effect, but that resource effect can be detrimental to some banks. We show how optimal risk-taking levels can be implemented through cash or capital requirements, and analyze complementary interventions through key-player analyses. We finally illustrate our model using real-world financial data and discuss extensions toward including debt-network, correlated investment portfolios and endogenous networks. |
| Keywords: | prudential Regulation,financial Network,risk-Taking |
| Date: | 2020–09 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:halshs-02950881&r=all |
| By: | Dixit, Shiv; Subramanian, Krishnamurthy |
| Abstract: | We propose a new channel for the transmission of monetary policy shocks, the coordination channel. We develop a New Keynesian model in which bank lending is strategically complementary. Banks do not observe the distribution of loans but infer it using Gaussian signals. Under this paradigm, expectations of tighter credit conditions reduce banks’ lending response to monetary shocks. As a result, lack of coordination and information about other banks’ actions dampen monetary transmission. We test these predictions by constructing a dataset that links the evolution of interest rates to firms’ bank credit relationships in India. Consistent with our model, we find that the cross-sectional mean and dispersion of lending rates, which capture the expected value and the precision of the signals of credit extended by other banks, are significant predictors of monetary transmission. Our quantitative results suggest that lending complementarities reduce monetary transmission to inflation and output by about a third. |
| Keywords: | Monetary policy transmission, India, lending rates |
| JEL: | E43 E52 G21 |
| Date: | 2020–08–10 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:103169&r=all |
| By: | Gulati, Rachita; Kattumuri, Ruth; Kumar, Sunil |
| Abstract: | This paper presents a methodological framework for constructing a non-parametric index of corporate governance for banks. The index is constructed by aggregating six distinct dimensional indices capturing different dimensions of corporate governance, namely board effectiveness, audit function, risk management, remuneration, shareholder rights and information, and disclosure and transparency. For aggregation, a tailored version of data envelopment analysis (DEA) approach which is popularly known as constrained ‘Benefit-of-the-Doubt (BoD)’ model is employed. This approach is unique and distinctive in the sense that it requires no a priori knowledge of weights, and assigns endogenous weights obtained from actual data to individual dimensions of bank governance in order to construct a composite index of corporate governance. This methodological framework has illustrated by applying it for a data set of 40 Indian banks operating in the year 2017. The data set has been compiled using 58 governance regulations as defined by relevant jurisdictions. |
| Keywords: | corporate governance index; data envelopment analysis; benefit-of-the-doubt model; Indian banks; composite indicators |
| JEL: | G21 G30 G38 |
| Date: | 2020–06–01 |
| URL: | http://d.repec.org/n?u=RePEc:ehl:lserod:100449&r=all |
| By: | Mohamed Belhaj (IMF-Midle East Center for Economics and Finance (CEF)); Renaud Bourlès (Aix-Marseille Univ, CNRS, Ecole Centrale, AMSE, Marseille, France); Frédéric Deroïan (Aix-Marseille Univ, CNRS, AMSE, Marseille, France) |
| Abstract: | We analyze risk-taking regulation when financial institutions are linked through shareholdings. We model regulation as an upper bound on institutions' default probability, and pin down the corresponding limits on risk-taking as a function of the shareholding network. We show that these limits depend on an original centrality measure that relies on the cross-shareholding network twice: (i) through a risk-sharing effect coming from complementarities in risk-taking and (ii) through a resource effect that creates heterogeneity among institutions. When risk is large, we find that the risk-sharing effect relies on a simple centrality measure: the ratio between Bonacich and self-loop centralities. More generally, we show that an increase in cross-shareholding increases optimal risk-taking through the risk-sharing effect, but that resource effect can be detrimental to some banks. We show how optimal risk-taking levels can be implemented through cash or capital requirements, and analyze complementary interventions through key-player analyses. We finally illustrate our model using real-world financial data and discuss extensions toward including debt-network, correlated investment portfolios and endogenous networks. |
| Keywords: | financial network, risk-taking, prudential regulation |
| JEL: | C72 D85 |
| Date: | 2020–09 |
| URL: | http://d.repec.org/n?u=RePEc:aim:wpaimx:2030&r=all |
| By: | Maria Karadima; Helen Louri |
| Abstract: | Consolidation in euro area banking has been the major trend post-crisis. Has it been accompanied by more or less competition? Has it led to more or less credit risk? In all or some countries? In this study, we examine the evolution of competition (through market power and concentration) and credit risk (through non-performing loans) in 2005-2017 across all euro area countries (EA-19), as well as core (EA-Co) and periphery (EA-Pe) countries separately. Using Theil inequality and convergence analysis, our results support the continued existence of fragmentation as well as of divergence within and/or between core and periphery with respect to competition and credit risk, especially post-crisis, in spite of some partial reintegration trends. Policy measures supporting faster convergence of our variables would be helpful in establishing a real banking union. |
| Keywords: | Banking competition, credit risk, NPLs, Theil index, convergence analysis |
| Date: | 2020–04 |
| URL: | http://d.repec.org/n?u=RePEc:eiq:eileqs:155&r=all |
| By: | Abbassi, Puriya; Bräuning, Falk |
| Abstract: | When firms trade forward contracts with banks to protect foreign currency cash flows against exchange rate movements, foreign exchange risk migrates to the banking sector. We show how this migrated risk may induce systemic repercussions with severe implications for the real economy. For identification, we exploit the Brexit referendum in June 2016 as a quasi-natural experiment in combination with detailed microdata on forward contracts and the credit register in Germany. Before the referendum, firms substantially increased their use of derivatives in response to the heightened uncertainty; banks, in providing these contracts, did not fully intermediate the risk and retained a large share of it on their own books. The depreciation of the British pound in response to the referendum's outcome posed a shock to the capital of ex-ante exposed banks. Banks, especially weakly capitalized ones, absorbed these losses by cutting back credit to all firms, including those unlikely to have had any exchange rate exposure to begin with. Firms that had ex-ante borrowing relationships with banks facing losses experienced a larger reduction in credit and a greater decline in investment compared with their industry peers, thereby contributing to the aggregate investment contraction. We also find these effects to be more pronounced for small firms, which is consistent with credit market frictions being rooted in asymmetric information problems. |
| Keywords: | Credit Supply,Foreign Exchange Risk,Financial Intermediation,Risk Migration,Financial Stability |
| JEL: | D53 D61 F31 G15 G21 G32 |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubdps:532020&r=all |
| By: | Cláudio Oliveira de Moraes; José Américo Pereira Antunes; Márcio Silva Coutinho |
| Abstract: | This paper analyzes the effect of the banking market on countries' financial development. For this purpose, we use a dynamic panel with annual data, from 2006 to 2015, comprising 89 countries – 28 developed and 61 emerging. The banking market is measured with concentration (total assets of the largest banks in relation to total assets) and competition (Lerner and Boone indexes) metrics. As proxies for measuring the financial development, we use the index developed by Sahay et al. (2015) and Svirydzenka (2016), which covers depth, access, and efficiency, aspects of the financial intermediation provided by banks. The main results suggest that an increase in bank concentration may inhibit the country's financial development and that an increase in competition may increase financial development. In short, an improvement in the banking market (a decrease in concentration or an increase in competition) is relevant to financial development. This result is also verified for emerging countries. |
| Date: | 2020–09 |
| URL: | http://d.repec.org/n?u=RePEc:bcb:wpaper:535&r=all |
| By: | Çağatay Bircan; Saka Orkun |
| Abstract: | We document a strong political cycle in bank credit and industry outcomes in Turkey. In line with theories of tactical redistribution, state-owned banks systematically adjust their lending around local elections compared with private banks in the same province based on electoral competition and political alignment of incumbent mayors. This effect only exists in corporate lending as opposed to consumer loans. It creates credit constraints for firms in opposition areas, which suffer drops in employment and sales but not firm entry. There is substantial misallocation of financial resources as provinces and industries with high initial efficiency suffer the greatest constraints. |
| Keywords: | Bank credit; Electoral cycle; State-owned banks; Credit misallocation |
| Date: | 2018–12 |
| URL: | http://d.repec.org/n?u=RePEc:eiq:eileqs:139&r=all |
| By: | Eichacker, Nina |
| Abstract: | This paper asks why Landesbanks, public banks designed to provide credit to German firms in regions underserved by private banks, embraced risky asset and liability balances in the years before the Global Financial Crisis, and subsequently lost billions of dollars in write-downs after the US subprime mortgage bubble burst in 2007. It argues that the German government’s decisions to eliminate protections for Landesbanks increased competitive pressure for public banks, increased the propensity for those banks to adopt risky strategies in order to maximize profits. These actions by Landesbanks and large private banks exposed German households and firms to greater risk and financial vulnerability, and indirectly exposed European financial systems to subprime mortgage risk. It uses balance sheet analysis for different sectors of German finance to show that Landesbanks and Germany’s large private banks adopted higher risk asset and liabilities, engaged in more international activity, and shifted from lending to security acquisition while competing for profits, while Sparkassen, small public savings banks, did not adopt such risky strategies, and successfully shielded German households and small businesses from credit market spillovers following the Global Financial Crisis. The paper contributes nuance to debates about whether public banks are beneficial institutions to promote, and shows that Landesbanks’ failures stemmed from external pressures for them to increase their profits, which increased financial and economic instability in Germany and beyond. |
| Date: | 2020–09–24 |
| URL: | http://d.repec.org/n?u=RePEc:osf:socarx:jkp5u&r=all |
| By: | Emerson Erik Schmitz; Thiago Christiano Silva |
| Abstract: | This paper investigates a potential non-homogeneous relation between financial intermediation and economic growth by levels of human capital development. We focus on a period of exceptional growth of the credit market in Brazil, from 2004 to 2016, and investigate the overall correlation between credit and economic growth. In addition, we examine whether this association is different according to the following factors: bank ownership, type of credit, credit purpose, and type of borrower. We find that credit has positive and relevant connection with economic growth, which is noticeable in regions with intermediate levels of human capital development. This pattern is also observed in the credit provided by private banks, non-earmarked credit lines, credit to specific purposes, and personal credit. These findings may have important implications for policymakers who intend to promote economic growth with the support of financial intermediation. |
| Date: | 2020–09 |
| URL: | http://d.repec.org/n?u=RePEc:bcb:wpaper:533&r=all |
| By: | Jan Keil (Humboldt University of Berlin); Steven Ongena (University of Zurich - Department of Banking and Finance; Swiss Finance Institute; KU Leuven; Centre for Economic Policy Research (CEPR)) |
| Abstract: | Banks are closing branches at an unprecedented rate. In some OECD countries, four out of five branches have been or will be closed, while in the US more than 10,000 branches representing eleven percent of its stock in 2009 have been closed by now. To understand the drivers of this fundamental transformation, we study a 15-year panel covering 36 OECD countries and 40 years of county and branch level data from the US. We find that technological progression corresponds to branch closure across countries, but plays less of a discernible local or branch-specific role. In contrast, bank fragility and especially consolidation through mergers and acquisitions robustly explain the de-branching we observe at all levels. |
| Keywords: | branches, banking, technology, bank health, mergers |
| JEL: | G21 |
| Date: | 2020–09 |
| URL: | http://d.repec.org/n?u=RePEc:chf:rpseri:rp2083&r=all |
| By: | Vincent Glode; Christian Opp |
| Abstract: | We develop a tractable model of strategic debt renegotiation in which businesses are sequentially interconnected through their liabilities. This financing structure, which we refer to as a debt chain, gives rise to externalities as a lender’s willingness to provide concessions to his privately-informed borrower depends on how this lender’s own liabilities are expected to be renegotiated. Our analysis reveals how targeted government subsidies and debt reductions as well as incentives for early renegotiation following large economic shocks such as COVID-19 or a financial crisis can prevent default waves. |
| JEL: | G21 G32 G33 G38 |
| Date: | 2020–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:27883&r=all |
| By: | Hirschbühl, Dominik; Krustev, Georgi; Stoevsky, Grigor |
| Abstract: | We estimate a modified version of the “Financial Business Cycles” model originally developed by Iacoviello (2015) in order to investigate the role played by financial factors in driving the business cycle in the euro area. In the model, financial shocks such as borrower defaults, collateral shocks and credit supply effects amplify economic downturns by reducing the flow of credit from banks to the real sector. In this novel application to the euro area, we introduce capital reallocation inefficiency, an innovation to the original set-up which allows for more realistic effects of entrepreneur defaults on economic activity. Our results suggest that financial factors, as captured by this model, played a smaller role in the euro area throughout the double-dip recession than in the United States during the 2008-09 global financial crisis. In a scenario on second-round effects implied by potential NFC loan losses due to the COVID-19 pandemic, we find large financial amplification risks to real economic activity. JEL Classification: E32, E44, E47 |
| Keywords: | Bayesian estimation, DSGE, financial frictions, housing |
| Date: | 2020–10 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20202475&r=all |
| By: | Mathias Hoffmann; Lilia Ruslanova |
| Abstract: | U.S. state-level banking deregulation during the 1980’s mitigated the impact of the China trade shock (CTS) on local economies (states and commuting zones) a decade later, in the 1990s. Local economies, where local banking markets opened up earlier, were also effectively financially more integrated by the 1990’s and saw smaller declines in house prices, wages, and income following the CTS. We explain this pattern in a theoretical model that emphasizes the stabilizing effect of financial integration on demand for housing and on housing prices: faced with an adverse shock to their region’s terms-of-trade (i.e. the CTS), households in more open states can more easily access credit to smooth consumption. This stabilizes consumer demand for housing, keeps the relative price of housing up, stabilizes wages in the non-tradable sector and thus facilitates the sectoral reallocation of labor away from import-exposed manufacturing towards the housing sector. This in turn stabilizes income and consumption. We corroborate these predictions of our model in state- and commuting zone level data. Then, using granular bank-county-level data, we show that household consumption smoothing in response to the CTS was easier in financially open areas, because geographically diversified banks were more elastic in their lending response to household’s increased demand for credit. Our findings highlight the importance of household access to finance in the adjustment to asymmetric terms-of-trade shocks in monetary unions. |
| Keywords: | Banking deregulation, China trade shock, sectoral reallocation, house prices, consumer access to finance |
| JEL: | F16 F41 G18 G21 J20 |
| Date: | 2020–09 |
| URL: | http://d.repec.org/n?u=RePEc:zur:econwp:365&r=all |
| By: | Bhattacharya, Joydeep; Bishnu, Monisankar; Wang, Min |
| Abstract: | This paper studies the welfare of time-inconsistent, partially sophisticated agents living under two different regimes, one with complete, unfettered credit markets (CM) and the other with endogenous borrowing constraints (EBC) where the borrowing limits are set to make agents indifferent between defaulting and paying back their unsecured loans. The CM regime cannot deliver the first best because partially sophisticated agents would undo plans laid out by previous selves and borrow too much. Somewhat counterintuitively, in some cases, the EBC regime may deliver higher welfare than the CM regime. These results speak to the academic debate surrounding the creation and functioning of the CFPB (Consumer Financial Protection Bureau) in the U.S. and its implementation of the ability-to-repay rule on lenders after the 2007-8 crisis. Such institutions generate commitment publicly and may help time-inconsistent agents economize on the costs of private commitment provision. |
| Date: | 2020–04–03 |
| URL: | http://d.repec.org/n?u=RePEc:isu:genstf:202004030700001100&r=all |
| By: | Demary, Markus; Voigtländer, Michael |
| Abstract: | The new bank regulations generally summarised as Basel IV include the introduction of an out-put floor. This means that banks are allowed less deviation from standard approaches when using internal models. This change will have far-reaching consequences. According to estimates by the European Banking Authority (EBA), German banks alone will have to increase their minimum capital requirements by around 20 percent; overall, Basel IV will increase capital requirements by 38 percent in Germany and by an average of 26 percent across the EU.Banks are therefore facing major challenges. Due to the difficult economic situation, they cannot realise capital increases simply by withholding profits or through obtaining increased capital from investors. It is therefore likely that they will become more involved in government financing, since this does not require equity investment, and similarly likely that they will use their remaining equity primarily where they can achieve the highest margins,i.e. with relatively risky financing. In addition, securitisation and cooperation with credit funds are also becoming more likely, which means less transparency, along with more risk being shifted to the shadow banking sector. For borrowers, the reforms could go hand in hand with higher interest rates.These high costs are not offset by social advantages, since lending in the countries particularly affected by the reformsis relatively prudential. Overall, it is therefore advisable not only to postpone the reformsin their current conception, but to fundamentally reconsider them. |
| JEL: | E44 E51 G21 |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:iwkpps:182020&r=all |