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on Banking |
| By: | R. Matthew Darst; Ehraz Refayet; Alexandros Vardoulakis |
| Abstract: | We study how competition between banks and non-banks affects lending standards. Banks have private information about some borrowers and are subject to capital requirements to mitigate risk-taking incentives from deposit insurance. Non-banks are uninformed and market forces determine their capital structure. We show that lending standards monotonically increase in bank capital requirements. Intuitively, higher capital requirements raise banks’ skin in the game and screening out bad projects assures positive expected lending returns. Non-banks enter the market when capital requirements are sufficiently high, but do not cause a deterioration in lending standards. Optimal capital requirements trade-off inefficient lending to bad projects under loose standards with inefficient collateral liquidation under tight standards. |
| Keywords: | Lending standards; Credit cycles; Asymmetric information; Non-banks; Regulation |
| JEL: | G01 G21 G28 |
| Date: | 2020–10–09 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2020-86&r=all |
| By: | Gabriel Chodorow-Reich; Olivier Darmouni; Stephan Luck; Matthew C. Plosser |
| Abstract: | Using loan-level data covering two-thirds of all corporate loans from U.S. banks, we document that SMEs (i) obtain much shorter maturity credit lines than large firms; (ii) have less active maturity management and therefore frequently have expiring credit; (iii) post more collateral on both credit lines and term loans; (iv) have higher utilization rates in normal times; and (v) pay higher spreads, even conditional on other firm characteristics. We present a theory of loan terms that rationalizes these facts as the equilibrium outcome of a trade-off between commitment and discretion. We test the model's prediction that small firms may be unable to access liquidity when large shocks arrive using data on drawdowns in the COVID recession. Consistent with the theory, the increase in bank credit in 2020Q1 and 2020Q2 came almost entirely from drawdowns by large firms on pre-committed lines of credit. Differences in demand for liquidity cannot fully explain the differences in drawdown rates by firm size, as we show that large firms also exhibited much higher sensitivity of drawdowns to industry-level measures of exposure to the COVID recession. Finally, we match the bank data to a list of participants in the Paycheck Protection Program (PPP) and show that SME recipients of PPP loans reduced their non-PPP bank borrowing in 2020Q2 by between 53 and 125 percent of the amount of their PPP funds, suggesting that government-sponsored liquidity can overcome private credit constraints. |
| JEL: | E51 G21 G32 |
| Date: | 2020–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:27945&r=all |
| By: | Aref Mahdavi Ardekani (Centre d'Economie de la Sorbonne) |
| Abstract: | By applying the interbank network simulation, this paper examines whether the causal relationship between capital and liquidity is influenced by bank positions in the interbank network. While existing literature highlights the causal relationship that moves from liquidity to capital, the question of how interbank network characteristics affect this relationship remains unclear. Using a sample of commercial banks from 28 European countries, this paper suggests that bank's interconnectedness within interbank loan and deposit networks affects their decisions to set higher or lower regulatory capital ratios when facing higher iliquidity. This study provides support for the need to implement minimum liquidity ratios to complement capital ratios, as stressed by the Basel Committee on Banking Regulation and Supervision. This paper also highlights the need for regulatory authorities to consider the network characteristics of banks |
| Keywords: | Interbank network topology; Bank regulatory capital; Liquidity risk; Basel III |
| JEL: | G21 G28 L14 |
| Date: | 2020–10 |
| URL: | http://d.repec.org/n?u=RePEc:mse:cesdoc:20022&r=all |
| By: | Todd Keister; Yuliyan Mitkov |
| Abstract: | We study the interaction between a government’s bailout policy and banks’ willingness to impose losses on (or “bail in”) their investors. The government has limited commitment and may choose to bail out banks facing large losses. The anticipation of this bailout undermines a bank’s private incentive to impose a bail-in. In the resulting equilibrium, bail-ins are too small and bailouts are too large. Some banks may also face a run by informed investors, creating further distortions and leading to larger bailouts. We show how a regulator with limited information can raise welfare and improve financial stability by imposing a system-wide, mandatory bail-in at the onset of a crisis. In some situations, allowing banks to choose between meeting a minimum bail-in and opting out can raise welfare further. |
| Keywords: | Bank bailouts, moral hazard, financial stability, banking regulation |
| JEL: | E61 G18 G28 |
| Date: | 2020–09 |
| URL: | http://d.repec.org/n?u=RePEc:bon:boncrc:crctr224_2020_091&r=all |
| By: | Jérémie BERTRAND (IESEG School of Management, Finance Department 3, rue de la digue, 59000 Lille - France); Pierluigi MURRO (LUISS University, Department of Business and Managemen, Viale Romania, 32 00197 Rome – Italy) |
| Abstract: | We analyze the use of trade credit as a substitute for relationship lending credit when firms cannot otherwise obtain such credit. Using a sample of SMEs from the Survey of Italian Manufacturing Firms, we show that when opaque firms seeking relationship credit encounter transactional banks, they use a greater portion of trade credit. This findings suggest that opaque firms substitute their missing relationship credit with trade credit, because trade creditors are more able to evaluate soft information. The results depend on firm characteristics, the nature of the bank, and the size of the firms’ banking pool. |
| Keywords: | Banks, Lending Technologies, Small Business, Trade Credit |
| JEL: | G21 L14 L22 |
| Date: | 2020–10 |
| URL: | http://d.repec.org/n?u=RePEc:ies:wpaper:f202009&r=all |
| By: | Allen N. Berger; Martien Lamers; Raluca A. Roman; Koen Schoors (-) |
| Abstract: | A key policy issue is whether bank bailouts weaken or strengthen market discipline. We address this by analyzing how bank bailouts influence deposit quantities and prices of recipients versus other banks. Using TARP bailouts, we find both deposit quantities and prices decline, consistent with substantially reduced demand for deposits by bailed-out banks that dominate market discipline supply effects. Main findings are robust to numerous checks and endogeneity tests. However, a deeper dive into depositor heterogeneity suggests nuance. Increases in uninsured deposits, transactions deposits, and deposits in banks that repaid bailout funds early suggest some limited support for weakened market discipline. |
| Keywords: | Bailouts, Banking, Depositor Behavior, Market Discipline, Bank Runs |
| JEL: | G18 G21 G28 |
| Date: | 2020–10 |
| URL: | http://d.repec.org/n?u=RePEc:rug:rugwps:20/1005&r=all |
| By: | Ambrocio, Gene; Gu, Xian; Hasan, Iftekhar; Politsidis, Panagiotis |
| Abstract: | We investigate whether state-to-state political ties with a global superpower affects the pricing of international syndicated bank loans. We find statistically and economically significant effects of stronger state political ties with the United States, arguably the most dominant global superpower of our times, on the pricing of global syndicated loans. A one standard deviation improvement in state political ties between the U.S. and the government of a borrower's home country is associated with 14 basis points lower loan spread. This is equivalent to a cumulative savings in loan interest payments of about 10 million USD for the average loan in our sample. The effect of political ties on loan pricing is also stronger when lead arrangers are U.S. banks, during periods in which the U.S. is engaged in armed conflicts such as in the Afghan, Iraq and Syrian wars, when the U.S. president belongs to the Republican Party, and for borrowers with better balance sheets and prior lending relationships. Notably, we find that not all firms exploit this mechanism, as cross-listed firms and firms in countries with strong institutional quality and ability to attract institutional investors are much less reliant on political ties for lowering their borrowing costs. |
| Keywords: | Global syndicated loans; Political ties; Loan pricing |
| JEL: | F50 G15 G21 G30 |
| Date: | 2020–09–08 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:103249&r=all |
| By: | Xin Sheng (Lord Ashcroft International Business School, Anglia Ruskin University, Chelmsford, CM1 1SQ, United Kingdom); Rangan Gupta (Department of Economics, University of Pretoria, Pretoria, South Africa); Qiang Ji (Institutes of Science and Development, Chinese Academy of Sciences, Beijing 100190, China) |
| Abstract: | Based on a large panel dataset of small commercial banks in the United States, this paper employs a dynamic panel Tobit model to analyze the role of uncertainty in forecasting charge-off rates on loans for credit card (CC) and residential real estate (RRE). When compared to other standard predictors, such as house prices and unemployment rates, we find thatthe effect of uncertainty changes on charge-off rates is more pronounced. Furthermore, it is evident that including heteroskedasticity in the model specification leads to more accurate forecasts. |
| Keywords: | loan charge-offs, panel data, Tobit model, forecasting |
| JEL: | C11 C23 C53 G21 |
| Date: | 2020–10 |
| URL: | http://d.repec.org/n?u=RePEc:pre:wpaper:202092&r=all |
| By: | Pelzl, Paul (Dept. of Business and Management Science, Norwegian School of Economics); Valderrama, Maria Teresa (Oesterreichische Nationalbank) |
| Abstract: | Drawdowns on credit commitments by firms reduce a bank’s capital buffer. Exploiting Austrian credit register data and the 2008-09 financial crisis as exogenous shock to bank health, we provide novel evidence that capital-constrained banks manage this concern by substantially cutting partly or fully unused credit commitments. Controlling for a bank’s capital position, we further find that also larger liquidity problems induce banks to cut such commitments. These results show that banks manage both capital and liquidity risk posed by undrawn credit commitments in periods of financial distress, but thereby reduce liquidity insurance to firms exactly when they need it most. |
| Keywords: | Capital Regulations; Credit Commitments; Financial Crisis |
| JEL: | E51 G01 G21 G28 G32 |
| Date: | 2020–10–15 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:nhhfms:2020_012&r=all |
| By: | Whelsy BOUNGOU |
| Abstract: | Does the lending channel of monetary policy operate under a negative interest rate policy (NIRP)? The purpose of this study is to shed light on the existence of a lending channel of monetary policy under NIRP. To do so, we aim to provide an in-depth analysis of the relationship between NIRP and bank-lending behavior. To achieve this, we employ a large panel dataset of 4072 banks operating in 54 countries over the period 2009-2018 and a Difference-in-Differences methodology. We find that banks located in countries affected by negative interest rates have adjusted their bank-lending behavior by increasing lending activities. Our findings suggest that in response to negative interest rates, banks have reduced their lending cost, and increased lending supply, especially for loans longer than 3 months. Finally, we also find that the transmission of monetary policy under negative interest rates to the real economy depends on banks' specific characteristics such as reliance on retail deposits and size. |
| Keywords: | Negative interest rates; Lending cost; Lending supply; Lending maturity; Difference-in-Differences estimation |
| JEL: | E43 E51 E52 F34 G21 |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:grt:bdxewp:2020-16&r=all |
| By: | Juliane Begenau; Saki Bigio; Jeremy Majerovitz; Matias Vieyra |
| Abstract: | We document five facts about banks: (1) market and book leverage diverged during the 2008 crisis, (2) Tobin's Q predicts future profitability, (3) neither book nor market leverage appears constrained, (4) banks maintain a market leverage target that is reached slowly, (5) pre-crisis, leverage was predominantly adjusted by liquidating assets. After the crisis, the adjustment shifted towards retaining earnings. We present a Q-theory where leverage notions differ because book accounting is slow to acknowledge loan losses. We estimate the model and show that it reproduces the facts. We examine counterfactuals: different accounting rules produce a novel policy tradeoff. |
| JEL: | G21 G32 G33 |
| Date: | 2020–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:27935&r=all |
| By: | Marcin BORSUK (European Central Bank, Frankfurt, Germany); Oskar KOWALEWSKI (IESEG School of Management & LEM-CNRS 9221); Jianping QI (Muma College of Business, University of South Florida, Tampa, USA) |
| Abstract: | We examine the consequences of imposing a high tax levy on bank assets. Employing unique supervisory bank-level data, we exploit different channels through which the new tax may impair the stability of the banking sector. We find that following the introduction of the levy, banks increase the cost of loans and decrease their overall availability to the real economy. We also document that changes in banks’ loan portfolios are strongly related to bank-specific profitability and capital adequacy ratios. Furthermore, our evidence supports the view that banks engage in risk shifting by increasing the risk level of their loan portfolios, attempting to recover from the lower return on equity as the tax reduces their overall profits. |
| JEL: | G21 H22 L13 |
| Date: | 2020–08 |
| URL: | http://d.repec.org/n?u=RePEc:ies:wpaper:f202008&r=all |
| By: | Edoardo Palombo (Queen Mary University of London) |
| Abstract: | The objective of this paper is to investigate the effectiveness of credit easing policy in mitigating the economic fallout from a financial recession using a model that can account for the observed default and leverage dynamics during the financial crisis of 2007. A general equilibrium model is developed with a financial sector and endogenous asset defaults able to account for the observed default and leverage dynamics. Following an adverse aggregate shock, banks deleverage through two channels: (i) higher non-performing loans provisions, and (ii) lower the marginal return of assets. Credit policy is modelled as an expansion of the central bank’s balance sheet countering the disruption in private financial intermediation. Unconventional monetary policy, namely credit easing policy, is shown to be ineffective in mitigating the effects of a financial crisis due to its crowding out effect on the private asset market. Other non-monetary policy tools such as credit subsidies and their efficacy considered. |
| Keywords: | unconventional monetary policy, credit easing, credit subsidies, financial frictions, default, leverage, financial sector. |
| JEL: | E20 E32 E44 E52 E58 |
| Date: | 2020–06–25 |
| URL: | http://d.repec.org/n?u=RePEc:qmw:qmwecw:910&r=all |
| By: | Mohapatra, Sanket; Purohit, Siddharth M. |
| Abstract: | This paper analyses the impact of economic uncertainty on the composition of bank credit across household and firm loans. Using bank-level data spanning 40 developed and developing countries, we find that higher economic uncertainty is associated with an increase in the relative share of household credit in the loan portfolio of banks. This change in composition of credit may result from banks' efforts to reduce the overall riskiness of their loan portfolios, since corporate loans are generally viewed as riskier than household loans. This shift is more pronounced for weakly-capitalized banks, which may face greater risks during economic shocks, and for larger banks, which may be riskier due to complex business models and more market-based activities. The variation in our main findings by banks' capitalization and size suggests that they arise from changes in bank credit supply in response to greater uncertainty. The baseline results hold for a range of robustness tests. Our study highlights the role of aggregate uncertainty in micro-level outcomes and are relevant for bank capital regulation and the conduct of macroprudential policy. |
| Date: | 2020–10–14 |
| URL: | http://d.repec.org/n?u=RePEc:iim:iimawp:14636&r=all |
| By: | Ray Barrell; Dilruba Karim |
| Abstract: | Policy makers need to know if the structure of competition and the degree of banking market concentration change the incidence of financial crises. Previous studies have not always come to clear conclusions. We use a new dataset of 19 countries where we include capital adequacy and house price growth as factors affecting crisis incidence, and we find a positive role for bank concentration in reducing incidence. In addition, we look at New Industrial Economics indicators of market structure and find that increased market power also reduces crisis incidence. We conclude that attempts to increase competition in banking, although welcome for welfare reasons, should be accompanied by increases in capital standards. |
| Keywords: | Financial Stability, Bank Competition, Banking Crises, Macroprudential Policy |
| JEL: | E44 G01 G18 |
| Date: | 2020–10 |
| URL: | http://d.repec.org/n?u=RePEc:nsr:niesrd:516&r=all |
| By: | Mauricio Ulate |
| Abstract: | In the aftermath of the Great Recession, many countries used low or negative policy rates to stimulate the economy. These policies gave rise to a rapidly growing literature that seeks to understand and quantify their impact. A fundamental step when studying the effectiveness of low and negative policy rates is to understand their transmission to loan and deposit rates. This paper proposes two models of pass-through from policy rates to loan and deposit rates that can match important stylized facts while remaining parsimonious. These models can be used to study the transition between positive and negative policy rates and to quantify the impact of negative rates on banks. |
| Keywords: | Negative Interest Rates; ZLB; Monetary Policy; Bank Profitability |
| JEL: | E32 E44 E52 E58 G21 |
| Date: | 2020–09–09 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedfwp:88826&r=all |
| By: | Christopher M. Gunn; Alok Johri; Marc-Andre Letendre |
| Abstract: | We uncover new facts: U.S. banks countercyclically vary the ratio of charge-offs to defaulted loans (COD). The variance of this ratio is roughly 15 times larger than that of GDP. Canonical financial accelerator models cannot explain this variance. We develop an expression for the wedge between charge-offs and defaults in the model and show that introducing stochastic default costs as in Gunn and Johri (2013a) and stochastic risk as in Christiano et al. (2014) into the canonical theoretical model can potentially resolve the discrepancy since both shocks have the ability to move this wedge. Estimating the augmented model using Bayesian techniques reveals that default cost shocks account for most of the variance of COD, while risk shocks account for most of the credit spread. Both shocks also matter for standard U.S. business cycle variables, with the anticipated components of each being most important. |
| Keywords: | Charge-offs and defaults; default cost shocks; news shocks; risk shocks; financial accelerator models; business cycles |
| JEL: | E3 E44 |
| Date: | 2020–10 |
| URL: | http://d.repec.org/n?u=RePEc:mcm:deptwp:2020-17&r=all |
| By: | Walter Farkas (University of Zurich - Department of Banking and Finance; Swiss Finance Institute; ETH Zürich); Fulvia Fringuellotti (Federal Reserve Banks - Federal Reserve Bank of New York); Radu Tunaru (University of Sussex) |
| Abstract: | Capital adequacy is the key microprudential and macroprudential tool of banking regulation. Financial models of capital adequacy are subject to errors, which may prevent from estimating a sufficient capital base to absorb bank losses during economic downturns. In this paper, we propose a general method to account for model risk in capital requirements calculus related to market risk. We then evaluate and compare our capital requirements values with those obtained under Basel 2.5 and the new Basel 4 regulation. Capital requirements adjusted for model risk perform well in containing losses generates in normal and stressed times. In addition, they are as conservative as Basel 4 capital requirements, but they exhibit less fluctuations over time. |
| Keywords: | Basel framework, capital requirements, cost-benefit analysis, model risk |
| JEL: | D81 G17 G18 |
| Date: | 2020–10 |
| URL: | http://d.repec.org/n?u=RePEc:chf:rpseri:rp2086&r=all |
| By: | Puriya Abbassi; Falk Bräuning |
| 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: | 2020–07–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedbwp:88883&r=all |
| By: | Hasan, Iftekhar; Kim, Suk-Joong; Politsidis, Panagiotis; Wu, Eliza |
| Abstract: | We examine the effect of firm credit rating downgrades on the pricing and structure of syndicated bank loans following rating downgrades in the firms’ countries of domicile. We find that the sovereign ceiling policies used by credit rating agencies create a disproportionally adverse impact on the bounded firms’ borrowing costs relative to other domestic firms following their sovereign’s rating downgrade. Moreover, the loans extended tend to be more concentrated and funded by fewer lead arrangers. Forming borrowing relationships with local- as well as foreign-banks and maintaining financial strength ameliorates bounded firms’ bank financing costs. |
| Keywords: | Credit ratings, Sovereign ceiling, Bank credit, Relationship lending, Foreign-currency lending, Firm credit constraints |
| JEL: | F34 G21 G24 G28 G32 H63 |
| Date: | 2020–07 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:102941&r=all |
| By: | Oliver Rehbein; Simon Rother |
| Abstract: | This paper provides empirical evidence that banks leverage social connections as an information channel. Using county-to-county friendship-link data from Facebook, we find that strong social ties increase loan volumes, especially if screening incentives are large. This effect is distinct from physical and cultural distances. Physical distance becomes significantly less relevant when accounting for social connections. Moreover, sufficiently strong social ties prevent cultural differences from constituting a lending barrier. The effect of social connectedness is more supply-side driven for small banks but demand-side driven for large banks. To bolster identification, we exploit highway connections, historical travel costs, and the quasi-random staggered introduction of Facebook as instruments. Our results reveal the important role of social connectedness as an information channel, speak to the nature of borrowing constraints, and point toward implications for bank-lending strategies and anti-trust policies. |
| Keywords: | bank lending, social networks, information frictions, culture, distance |
| JEL: | D82 D83 G21 O16 L14 Z13 |
| Date: | 2020–03 |
| URL: | http://d.repec.org/n?u=RePEc:bon:boncrc:crctr224_2020_162v1&r=all |