nep-ban New Economics Papers
on Banking
Issue of 2020‒11‒02
nineteen papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Determinants of Lending to Small and Medium Enterprises by Commercial Banks in Kenya By David Haritone Shikumo; Mwangi Mirie
  2. The Banking Industry and COVID-19: Lifeline or Life Support? By Madeline Finnegan; Sarah Ngo Hamerling; Beverly Hirtle; Anna Kovner; Stephan Luck; Matthew Plosser
  3. Risky Mortgages and Bank Runs By Nurlan Turdaliev; Yahong Zhang
  4. Recapitalization, bailout, and long-run welfare in a dynamic model of banking By Modena, Andrea
  5. The interaction between macroprudential policy and monetary policy: overview By Bussière, Matthieu; Cao, Jin; de Haan, Jakob; Hills, Robert; Lloyd, Simon; Meunier, Baptiste; Pedrono, Justine; Reinhardt, Dennis; Shina, Sonalika; Sowerbutts, Rhiannon; Styrin, Konstantin
  6. Determinants of Financial Performance of Microfinance Banks in Kenya By King'ori S. Ngumo; Kioko W. Collins; Shikumo H. David
  7. Individualism, formal institutional environment and bank capital decisions By Mohammad Bitar; Amine Tarazi
  8. The Sale of Failed Banks: The Characteristics of Acquirers -as Well as of the Acquired -Matter By Pejman Abedifar; Amine Tarazi; Lawrence White
  9. Assessing the fiscal implications of banking crises By Claudio Borio; Juan Contreras; Fabrizio Zampolli
  10. Bank Capital and Monetary Policy Transmission in India By Muduli, Silu; Behera, Harendra
  11. How Organizational and Geographic Complexity Influence Performance? Evidence from European Banks By Pamen Annick; Alain Sauviat; Amine Tarazi
  12. Synchronization, Concordance and Similarity between Business and Credit Cycles: Evidence from Turkish Banking Sector By Mehmet Selman Colak; Abdullah Kazdal; Muhammed Hasan Yilmaz
  13. Is the relationship between non-performing loans of banks and economic growth asymmetric ? Malaysia’s evidence based on linear and nonlinear ARDL approaches By Khalaf, Tasneem; Masih, Mansur
  14. Community Banks Rise to the Challenge: a speech at "Community Banking in the 21st Century," Research Conference, the Federal Reserve Bank of St. Louis, St. Louis, Missouri (via webcast), September 30, 2020 By Michelle W. Bowman
  15. A Macroeconomic Theory of Banking Oligopoly By Dong, Mei; Huangfu, Stella; Sun, Hongfei
  16. A note on regulatory responses to COVID-19 pandemic: Balancing banks' solvency and contribution to recovery By Mohammad Bitar; Amine Tarazi
  17. The Role of Social Networks in Bank Lending By Oliver Rehbein; Simon Rother
  18. International Fiscal-financial Spillovers: The Effect of Fiscal Shocks on Cross-border Bank Lending By Sangyup Choi; Davide Furceri; Chansik Yoon
  19. Regional Differences in Retail Payment Habits in Italy By Guerino Ardizzi; Elisa Bonifacio; Cristina Demma; Laura Painelli

  1. By: David Haritone Shikumo; Mwangi Mirie
    Abstract: Small and Medium Enterprises (SMEs) access to external finance is an issue of significant research interest to academicians. Commercial banks consider many SMEs not to be credit worthy because of their inability to meet some banking requirements. Hence, the objective of this study was to investigate what determines lending to SMEs by commercial banks in Kenya. To achieve the study objectives, a descriptive research design was employed. The study undertook a census of the 43 commercial banks in Kenya, with full data being obtained for 36 institutions. The study used secondary data from the annual published reports of commercial banks in Kenya for a period of 5 years from 2010-2014. The data collected was analyzed through the multiple linear regression using the Statistical Package for Social Studies version 20.The study established that bank size and liquidity significantly influences (positively and negatively, respectively) lending to SMEs by commercial banks in Kenya while credit risk and interest rates have no significant influence on lending to SMEs by commercial banks in Kenya. The study recommends that lending to SMEs by commercial banks in Kenya be enhanced by adopting policies that grow the commercial banks.
    Date: 2020–10
  2. By: Madeline Finnegan; Sarah Ngo Hamerling; Beverly Hirtle; Anna Kovner; Stephan Luck; Matthew Plosser
    Abstract: By many measures the U.S. banking industry entered 2020 in good health. But the widespread outbreak of the COVID-19 virus and the associated economic disruptions have caused unemployment to skyrocket and many businesses to suspend or significantly reduce operations. In this post, we consider the implications of the pandemic for the stability of the banking sector, including the potential impact of dividend suspensions on bank capital ratios and the use of banks’ regulatory capital buffers.
    Keywords: COVID-19; crisis; recession; Great Recession; capital loss; banking industry
    JEL: G31 G21 I15
    Date: 2020–10–05
  3. By: Nurlan Turdaliev (Department of Economics, University of Windsor); Yahong Zhang (Department of Economics, University of Windsor)
    Abstract: The collapse of housing prices in the aftermath of the U.S. subprime mortgage crisis of 2008 not only worsened the balance sheet positions of the banking sector but also led to a “bank run” in some cases such as the collapse of Lehman Brothers in September 2008. We develop a theoretical model featuring household debt (mortgages) and banking sector frictions. We show that mortgage risks can potentially lead to a bank run equilibrium. Such an equilibrium exists since mortgage risks reduce the liquidation prices of bank assets. We further show that mortgage market regulations such as loan-to-value requirements reduce the likelihood of bank runs.
    Keywords: bank run, mortgage risk, loan-to-value ratio
    JEL: E32 E44 G01 G21 G33
    Date: 2020–10
  4. By: Modena, Andrea
    Abstract: This paper studies the link between bank recapitalization and welfare in a dynamic production economy. The model features financial frictions because banks benefit of a cost advantage at monitoring firms and face costly equity issuance. The competitive equilibrium outcome is inecient because agents do not internalize the e↵ects banks' capitalization over the allocation of capital, its price and, in turn, firms investments. It follows, individual recapitalizations are sub-optimal and bailout policies may benefit social welfare in the long-run. Bailouts improve capital allocation in states where aggregate banks are poorly capitalized, therefore enhancing their market valuation, fostering investments, and stabilizing the economy recovery path.
    Keywords: banks,bailout,general equilibrium,financial frictions,recapitalization,welfare
    JEL: D51 G21
    Date: 2020
  5. By: Bussière, Matthieu (Banque de France); Cao, Jin (Norges Bank); de Haan, Jakob (De Nederlandsche Bank, University of Groningen and CESifo); Hills, Robert (Bank of England); Lloyd, Simon (Bank of England); Meunier, Baptiste (Banque de France); Pedrono, Justine (Banque de France); Reinhardt, Dennis (Bank of England); Shina, Sonalika (Reserve Bank of India); Sowerbutts, Rhiannon (Bank of England); Styrin, Konstantin (Bank of Russia)
    Abstract: This paper presents the main findings of an International Banking Research Network initiative examining the interaction between monetary policy and macroprudential policy in determining international bank lending. We give an overview on the data, empirical specifications and results of the seven papers from the initiative. The papers are from a range of core and smaller advanced economies, and emerging markets. The main findings are as follows. First, there is evidence that macroprudential policy in recipient countries can partly offset the spillover effects of monetary policy conducted in core countries. Meanwhile, domestic macroprudential policy in core countries can also affect the cross‑border transmission of domestic monetary policy via lending abroad, by limiting the increase in lending by less strongly capitalised banks. Second, the findings highlight that studying heterogeneities across banks provides complementary insights to studies using more aggregate data and focusing on average effects. In particular, we find that individual bank characteristics such as bank size or G‑SIB status play a first‑order role in the transmission of these policies. Finally, the impacts differ considerably across prudential policy instruments, which also suggests the importance of more granular analysis.
    Keywords: Cross-border bank lending; financial intermediation; monetary policy; macroprudential policy; policy interactions; spillovers
    JEL: E52 F21 F30 F42 G21
    Date: 2020–10–09
  6. By: King'ori S. Ngumo; Kioko W. Collins; Shikumo H. David
    Abstract: Microfinance provides strength to boost the economic activities of low-income earners and thus contributes to eradication of poverty. However, microfinance institutions face stringent competition from commercial banks; the growth of microloan activities of commercial banks may confront microfinance institutions with increased competition for borrowers. In Kenya, the micro finance sector has extremely high competition indicated by the shifting market share and profitability. This study sought to examine the determinants of financial performance of Microfinance banks in Kenya. The study adopted a descriptive research design and used secondary data from 7 Microfinance banks for a period of 5 years from 2011 to 2015. The data collected was analyzed using correlation and regression analysis. The study found a positive and statistically significant relationship between operational efficiency, capital adequacy, firm size and financial performance of microfinance banks in Kenya. However, the study found an insignificant negative relationship between liquidity risk, credit risk and financial performance of microfinance banks in Kenya. The study concluded that there is direct relationship between operational efficiency, capital adequacy, firm size and financial performance of microfinance banks in Kenya.
    Date: 2020–10
  7. By: Mohammad Bitar (Nottingham University Business School, University of Nottingham, Jubilee Campus, Nottingham NG8 1BB, United Kingdom.); Amine Tarazi (LAPE - Laboratoire d'Analyse et de Prospective Economique - GIO - Gouvernance des Institutions et des Organisations - UNILIM - Université de Limoges)
    Abstract: We examine the effect of informal institutional environment on bank capital decisions worldwide as well as within the United States at the state level. Specifically, we focus on individualism and based on a sample of 7,034 banks in 68 countries, we establish three major findings: First, individualism is negatively and significantly associated with bank regulatory capital, an association which is independent of the influence of formal institutional environment per se. Second, effective legal enforcement magnifies the negative effect of individualism on bank regulatory capital. Finally, focusing on a single country, the United States, we also find that banks in individualistic states hold less regulatory capital than banks in collectivist states and the effect of individualism is magnified with effective legal enforcement at the state level. Our findings suggest that individualism serves as a constraint on regulators, as any given regulatory guidelines or formal institutional factors will operate very differently depending on the informal institutional environment.
    Keywords: Individualism,formal institutional environment,legal enforcement,regulatory capital 2
    Date: 2020–10–12
  8. By: Pejman Abedifar (Tehran Institute for Advanced Studies, Khatam University, Tehran, Iran); Amine Tarazi (LAPE - Laboratoire d'Analyse et de Prospective Economique - GIO - Gouvernance des Institutions et des Organisations - UNILIM - Université de Limoges); Lawrence White (Stern School of Business, New York University, New York, NY 10012-1126, USA)
    Abstract: This paper studies the pricing of assets and the franchise value that is embedded in the core deposits and branches of insolvent banks that are sold under the purchase and assumption resolution method of the Federal Deposit Insurance Corporation (FDIC). We analyze 620 acquisitions of solvent and insolvent U.S. banks between 2007:Q1 and 2016:Q3 and find that acquirers pay higher prices for insolvent banks with more branches. However, acquirers with more employees pay lower premiums for assuming core deposits of insolvent banks. We also compare the financial strength of acquirers of failed banks with that of acquirers of healthy banks in non-assisted takeovers. The results show that being financially strong matters more to acquire a solvent bank than a failed bank. Our findings have important implications for policy makers.
    Keywords: Bank failures,Resolution,FDIC
    Date: 2020–10–12
  9. By: Claudio Borio; Juan Contreras; Fabrizio Zampolli
    Abstract: We propose a method for computing the distribution of the potential fiscal cost of a banking crisis - a key input in assessing the adequacy of a country's fiscal buffers. First, we use a cross-section of banking crises to identify the risk factors that predict the post-crisis increase in public sector debt - a measure of the overall fiscal cost of a crisis. Next, we use these risk factors to compute country-specific distributions of that cost in the event of a crisis. We find that the level and growth of credit to the private non-financial sector, foreign exchange reserves and the ratio of bank capital to assets are relevant predictors. As an illustration, we apply the method to the conditions prevailing in 2018 and find that the potential fiscal costs could be sizeable: with a probability of 95%, public debt could approach 40% of GDP on average across countries. Our illustrative estimates are probably upper bounds: while they indicate that higher bank capital can substantially reduce fiscal costs, they exclude the broader benefits of the wide-ranging reforms after the Great Financial Crisis.
    JEL: E62 G01 H68 H81
    Date: 2020–10
  10. By: Muduli, Silu; Behera, Harendra
    Abstract: This paper examines the role of bank capital in monetary policy transmission in India during the post-global financial crisis period. Empirical results show that banks with higher capital to risk-weighted assets ratio (CRAR) raise funds at a lower cost. Additionally, banks with higher CRAR transmit monetary policy impulses smoothly, while stressed assets in the banking sector hinder transmission. Bank recapitalization to raise CRAR can improve the transmission; however, CRAR above a certain threshold level may not help as the sensitivity of loan growth to monetary policy rate reduces for banks with CRAR above the threshold. Therefore, it can be concluded that monetary policy can influence credit supply of banks depending on their capital position.
    Keywords: Monetary policy,Bank capital,Bank lending
    JEL: E44 E51 E52
    Date: 2020
  11. By: Pamen Annick (LAPE - Laboratoire d'Analyse et de Prospective Economique - GIO - Gouvernance des Institutions et des Organisations - UNILIM - Université de Limoges); Alain Sauviat (LAPE - Laboratoire d'Analyse et de Prospective Economique - GIO - Gouvernance des Institutions et des Organisations - UNILIM - Université de Limoges); Amine Tarazi (LAPE - Laboratoire d'Analyse et de Prospective Economique - GIO - Gouvernance des Institutions et des Organisations - UNILIM - Université de Limoges)
    Abstract: We empirically investigate how complexity stemming from the type of foreign affiliates and the geographic dispersion of such affiliates affects the parent bank's individual risk and profitability. Our analysis is based on detailed hand-collected data on the worldwide locations of subsidiaries and branches of EU banks. Our results show that being present abroad is beneficial for bank stability as it contributes to lower default risk. Banks that are present abroad through both subsidiaries and branches appear to be more stable than banks that are present under one form only. Being present with branches only is the most effective way to reduce risk-taking. Nevertheless, higher geographic dispersion of affiliates around different world regions is associated with higher volatility of earnings and higher profitability. JEL classification: G21, G28
    Keywords: Internationalization,Organizational complexity,Geographical complexity,Risk,Profitability
    Date: 2020–10–14
  12. By: Mehmet Selman Colak; Abdullah Kazdal; Muhammed Hasan Yilmaz
    Abstract: In this study, we provide a comprehensive quantification of the co-movement between credit and business cycles in the Turkish case for the period 2007-2020. To this end, we construct synchronization, concordance and similarity index, which aim to measure the time-varying degree of coherence between credit and output dynamics. In specific, these indices are designed to capture the location, momentum and size aspects of the cyclical correlation respectively. Our empirical analysis also covers the cyclical association of 13 different loan sub-categories with the course of the output gap by employing disaggregated data. Overall, index results show that credit-output nexus in the Turkish case present heterogeneities across loan types, sample episodes and cyclical characteristics (location, momentum, and size). We also examine the impact of local and global macroeconomic and financial factors on cyclical coherence by utilizing Tobit regressions. The empirical results indicate that movements in local financial conditions, fluctuations in macroeconomic volatilities, and the course of capital flows are influential determinants of cyclical co-movements.
    Keywords: Credit cycle, Business cycle, Synchronization, Filtering, Tobit regression
    JEL: G21 E32 C35 C38
    Date: 2020
  13. By: Khalaf, Tasneem; Masih, Mansur
    Abstract: Banks play an important role as intermediaries between the savers and the borrowers in an economy. One issue, however, that the banks face during the development process is the increase in the non-performing loans (NPL) in the developing economies. In particular, during the financial crisis, many loans become non-performing loans (NPL) and the banks face liquidity crises. It is the focus of this paper to investigate whether (a) the relationship between the non-performing loans of banks and economic growth (GDP) is cointegrated or not i.e., whether they are theoretically related or not in the long term and (b) if they are, whether the relationship is symmetric or asymmetric in the short and long term. We use ARDL and nonlinear ARDL for the analysis. Malaysia is used as a case study. The findings tend to indicate that the NPL and GDP are indeed cointegrated as evidenced in both ARDL and Nonlinear ARDL. As to whether the relationship between the NPL and GDP is symmetric or not, the findings tend to indicate that the relationship is asymmetric in the long run but symmetric in the short run. These findings have important policy implications for the developing countries like Malaysia.
    Keywords: Non-performing loans of banks, GDP, Linear ARDL, Nonlinear ARDL, Malaysia
    JEL: C22 C58 E44 G21
    Date: 2018–12–18
  14. By: Michelle W. Bowman
    Date: 2020–03–30
  15. By: Dong, Mei; Huangfu, Stella; Sun, Hongfei
    Abstract: We study the behavior and macroeconomic impact of oligopolistic banks in a tractable environment with micro-foundations for money and banking. Our model features oligopolistic banks, which resembles the structure of the banking sector observed in most advanced economies. Banks interact strategically where they compete against each other in terms of the volume of loans to make. We find that it is welfare-maximizing to have the banking sector as oligopolistic, i.e., to have a small number of large banks. In addition, moderate inflation improves welfare because it helps to ease congestion in the banking sector.
    Keywords: banking; oligopoly; liquidity; market frictions
    Date: 2020–10
  16. By: Mohammad Bitar (Nottingham University Business School, University of Nottingham, Jubilee Campus, Nottingham NG8 1BB, United Kingdom.); Amine Tarazi (LAPE - Laboratoire d'Analyse et de Prospective Economique - GIO - Gouvernance des Institutions et des Organisations - UNILIM - Université de Limoges)
    Abstract: We see spikes in unemployment rates and turbulence in the securities markets during the COVID-19 pandemic. Governments are responding with aggressive monetary expansions and large-scale economic relief plans. We discuss the implications on banks and the economy of prudential regulatory intervention to soften the treatment of non-performing loans and ease bank capital buffers. We apply these easing measures on a sample of Globally Systemically Important Banks (G-SIBs) and show that these banks can play a constructive role in sustaining economic growth during the COVID-19 pandemic. However, softening the treatment of non-performing loans along with easing capital buffers should not undermine banks' solvency in the recovery period. Banks should maintain usable buffer in the medium-term horizon to absorb future losses, as the effect of COVID-19 on the economy might take time to fully materialise.
    Keywords: COVID-19,non-performing loans,capital buffers,solvency,G-SIBs
    Date: 2020–10–12
  17. By: Oliver Rehbein (University of Bonn, Institute for Finance & Statistics); Simon Rother (University of Bonn, Institute for Finance & Statistics)
    Abstract: This paper analyzes social connectedness as an information channel in bank lending. We move beyond the inefficient lending between peers in exclusive networks by exploiting Facebook data that reflect social ties within the U.S. population. After accounting for physical and cultural distances, social connectedness increases cross-county lending, especially when lending requires more information and screening incentives are intact. On average, a standard-deviation increase in social connectedness increases cross-county lending by 24.5%, which offsets the lending barrier posed by 600 miles between borrower and lender. While the ex-ante risk of a loan is unrelated to social connectedness, borrowers from well-connected counties cause smaller losses if they default. Borrowers' counties tend to profit from their social proximity to bank lending, as GDP growth and employment increase with social proximity. Our results reveal the important role of social connectedness in bank lending, partly explain the large effects of physical distance, and suggest implications for antitrust policies.
    Keywords: bank lending, social networks, information frictions, distance, culture
    JEL: D82 D83 G21 O16 L14 Z13
    Date: 2020–10
  18. By: Sangyup Choi (Yonsei Univ); Davide Furceri (IMF); Chansik Yoon (Princeton Univerisity)
    Abstract: This paper sheds new light on the degree of international fiscal-financial spillovers by investigating the effect of domestic fiscal policies on cross-border bank lending. By estimating the dynamic response of U.S. cross-border bank lending towards 45 recipient countries to exogenous domestic fiscal shocks (both measured by spending and revenue) between 1990Q1 and 2012Q4, we find that expansionary domestic fiscal shocks lead to a statistically significant increase in cross-border bank lending and the size of the effect is comparable to an exogenous decline in the federal funds rate by about 25bp (50bp) for spending (revenue) shocks. The fiscal-financial spillovers we find are independent of changes in monetary policy or financial conditions measured by the VIX. The effects also depend on the sign of the fiscal shocks and the underlying economic conditions of a source country. While capital controls seem to play some moderating role, we do not find systematic and statistically significant differences in the spillover effects across recipient countries, depending on their exchange rate regime. The extension of the analysis to fiscal shocks for a panel of 16 small open economies largely confirms the U.S. economy’s findings.
    Keywords: Fiscal-financial spillovers; Cross-border banking flows; Local projections; Nonlinear effects; Trilemma
    JEL: E62 F21 F32 F42
    Date: 2020–10
  19. By: Guerino Ardizzi (Bank of Italy); Elisa Bonifacio (Bank of Italy); Cristina Demma (Bank of Italy); Laura Painelli (Bank of Italy)
    Abstract: Economic operators have a number of different procedures and instruments for regulating their cashless monetary transactions safely and quickly. Nevertheless, divergences in the use of non-cash payment instruments persist among European countries and, in Italy, between the Centre and North and the southern regions. In this paper, we study which factors are associated with the backwardness of South and Islands in the use of non-cash payment instruments. We focus on the period 2013-18, when there was a widespread increase in non-cash transactions among the main advanced economies, spurred by technological innovation and the new legal framework supporting security, efficiency and transparency in digital payments. We find that the main factors associated with a lower demand for cash are technological innovation in payments and the population’s digital skills and education levels; criminality and tax evasion are also significantly and positively correlated to the use of cash, but their correlations with the observed heterogeneity among Italian provinces are not predominant.
    Keywords: payment instruments, cash demand, retail payments, technological innovation
    JEL: E41 E42 G21 G23
    Date: 2020–09

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