nep-ban New Economics Papers
on Banking
Issue of 2020‒11‒09
twenty-two papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Bank Capital, Loan Liquidity, and Credit Standards since the Global Financial Crisis By Sarah Ngo Hamerling; Donald P. Morgan; John Sporn
  2. Bank Liquidity Provision across the Firm Size Distribution By Gabriel Chodorow-Reich; Olivier M. Darmouni; Stephan Luck; Matthew Plosser
  3. Liquidity, Interbank Network Topology and Bank Capital By Aref Ardekani
  4. The Diplomacy Discount in Global Syndicated Loans By Ambrocio, Gene; Gu, Xian; Hasan, Iftekhar; Politsidis, Panagiotis
  5. Determinants of Banks’ Liquidity: a French Perspective on Interactions between Market and Regulatory Requirements By de Bandt Olivier; Lecarpentier Sandrine; Pouvelle Cyril
  6. Bank lending during the COVID-19 pandemic By Hasan, Iftekhar; Politsidis, Panagiotis; Sharma, Zenu
  7. Bargaining Power and Outside Options in the Interbank Lending Market By Puriya Abbassi; Falk Bräuning; Niels Schulze
  8. Monetary Policy, Prudential Policy, and Bank's Risk-Taking: A Literature Review By Melchisedek Joslem Ngambou Djatche
  9. Countercyclical Liquidity Policy and Credit Cycles: evidence from macroprudential and monetary policy in Brazil By João Barata R. Blanco Barroso; Rodrigo Barbone Gonzalez; José-Luis Peydró; Bernardus F. Nazar Van Doornik
  10. Sovereign risk and bank fragility By Anand, Kartik; Mankart, Jochen
  11. How Has Post-Crisis Banking Regulation Affected Hedge Funds and Prime Brokers? By Nina Boyarchenko; Thomas M. Eisenbach; Pooja Gupta; Or Shachar; Peter Van Tassel
  12. Monetary policy effects in times of negative interest rates: What do bank stock prices tell us? By Joost Bats; Massimo Giuliodori; Aerdt Houben
  13. How Did Depositors Respond to COVID-19? By Ross Levine; Chen Lin; Mingzhu Tai; Wensi Xie
  14. Not all banks are equal. Cooperative banking and income inequality By Raoul Minetti; Pierluigi Murro; Valentina Peruzzi
  15. Bank capital forbearance and serial gambling By Martynova, Natalya; Perotti, Enrico C.; Suárez, Javier
  16. Government Banks, Household Debt, and Economic Downturns: the case of Brazil By Gabriel Garber; Atif Mian; Jacopo Ponticelli; Amir Sufi
  17. Corporate Debt Overhang and Credit Policy By Brunnermeier, Markus; Krishnamurthy, Arvind
  18. Treasury Market Liquidity and Early Lessons from the Pandemic Shock By Lorie Logan
  19. Fire Sales, the LOLR and Bank Runs with Continuous Asset Liquidity By Ulrich Bindseil; Edoardo Lanari
  20. Conditional Systemic Risk Measures By Alessandro Doldi; Marco Frittelli
  21. Externalities as Arbitrage By Benjamin M. Hébert
  22. The strategic response of banks to macroprudential policies: Evidence from mortgage stress tests in Canada By Robert Clark; Shaoteng Li

  1. By: Sarah Ngo Hamerling; Donald P. Morgan; John Sporn
    Abstract: Did the 2007-09 financial crisis or the regulatory reforms that followed alter how banks change their underwriting standards over the course of the business cycle? We provide some simple, “narrative” evidence on that question by studying the reasons banks cite when they report a change in commercial credit standards in the Federal Reserve’s Senior Loan Officer Opinion Survey. We find that the economic outlook, risk tolerance, and other real factors generally drive standards more than financial factors such as bank capital and loan market liquidity. Those financial factors have mattered more since the crisis, however, and their importance increased further as post-crisis reforms were phased in in the middle of the following decade.
    Keywords: lending standards; credit cycle crisis; pro-cyclical; banks
    JEL: G21 E5
    Date: 2020–10–21
  2. By: Gabriel Chodorow-Reich; Olivier M. Darmouni; Stephan Luck; Matthew 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 2020:Q1 and 2020:Q2 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 2020:Q2 by between 53 and 125 percent of the amount of their PPP funds, suggesting that government-sponsored liquidity can overcome private credit constraints.
    Keywords: liquidity provision; macro-finance; credit; financial constraints; loan terms; banking; credit lines; COVID-19
    JEL: G00 G20 G30
    Date: 2020–10–01
  3. By: Aref Ardekani (UP1 - Université Panthéon-Sorbonne, CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique, UNILIM - Université de Limoges)
    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 banks' interconnectedness within interbank loan and deposit networks affects their decisions to set higher or lower regulatory capital rations when facing higher illiquidity. 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
    Date: 2020–10
  4. 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
  5. By: de Bandt Olivier; Lecarpentier Sandrine; Pouvelle Cyril
    Abstract: The paper investigates the impact of solvency and liquidity regulation on banks' balance sheet structure. The Covid-19 pandemics shows that periods of sharp increase in risk aversion often result in liquidity strains for banks due to the volatility of long-term funding markets. According to a simple portfolio allocation model banks’ liquidity increases when the regulatory constraint is binding. We provide evidence, using the “liquidity coefficient” implemented in France ahead of Basel III's Liquidity Coverage Ratio, of a positive effect of the solvency ratio on the liquidity coefficient. We also show that in times of crisis, measured by financial variables, French banks actually decreased the liquidity coefficient, with the transmission channel materialising mainly on the liability side.
    Keywords: Bank Capital Regulation, Bank Liquidity Regulation, Basel III, Stress Tests.
    JEL: G28 G21
    Date: 2020
  6. By: Hasan, Iftekhar; Politsidis, Panagiotis; Sharma, Zenu
    Abstract: This paper examines the pricing of global syndicated loans during the COVID-19 pandemic. We find that loan spreads rise by over 11 basis points in response to a one standard deviation increase the lender’s exposure to COVID-19 and over 5 basis points for an equivalent increase in the borrower’s exposure. This renders firms subject to a burden of about USD 5.16 million and USD 2.37 million respectively in additional interest expense for a loan of average size and duration. The aggravating effect of the pandemic is exacerbated with the level of government restrictions to tackle the virus’s spread, with firms’ financial constraints and reliance on debt financing, whereas it is mitigated for relationship borrowers, borrowers listed in multiple exchanges or headquartered in countries that can attract institutional investors.
    Keywords: Syndicated loans, Cost of credit, COVID-19, Pandemic
    JEL: G01 G21 G29 G3
    Date: 2020–10–15
  7. By: Puriya Abbassi; Falk Bräuning; Niels Schulze
    Abstract: We study the role of bargaining power and outside options with respect to the pricing of over-the-counter interbank loans using a bilateral Nash bargaining model, and we test the model predictions with detailed transaction-level data from the euro-area interbank market. We find that lender banks with greater bargaining power over their borrowers charge higher interest rates, while the lack of alternative investment opportunities for lenders lowers bilateral interest rates. Moreover, we find that when lenders that are not eligible to earn interest on excess reserves (IOER) lend funds to borrowers with access to the IOER facility, they do so at rates that are below the IOER rate; in turn, these borrowers put the funds in their reserve accounts to earn the spread. Our findings highlight that this persistent arbitrage opportunity is not merely a result of the lack of alternative outside options for some lenders, but rather it crucially depends on lenders’ limited bilateral bargaining power, leading to a persistent segmentation of prices in the euro-area interbank market. We examine the implications of these findings for the transmission of euro-area monetary policy.
    Keywords: bargaining power; over-the-counter market; monetary policy; money market segmentation
    JEL: E4 E58 G21
    Date: 2020–06–01
  8. By: Melchisedek Joslem Ngambou Djatche (Université Côte d'Azur; GREDEG CNRS)
    Abstract: The pre-crisis low interest rates environment is raising concerns among researchers and policymakers about its impact on the triangle prudential policy - monetary policy - bank's risk-taking. While interest rates is set at low level for inflationary and economic growth reasons, they may lead banks to take more risk, jeopardizing the financial system and impeding the recovery. This paper provides a literature review, on the one hand, on the interaction of monetary and prudential policies through their impacts on bank's risk-taking, and on the other hand, on the issues of their coordination. Monetary policy appears to have ambiguous effects on banks' profitability, and then, on banks' risk-taking behaviour. Despite monetary and prudential policies pursue different objectives, they inevitably interact, raising challenges that face policymakers. Albeit it is argued that monetary policy alone is not sufficient to maintain macroeconomic and financial stability, and that it should be coordinated with prudential policy, the form of this coordination is not clear-cut.
    Keywords: Monetary policy, prudential policy, financial stability, bank's risk-taking
    Date: 2020–10
  9. By: João Barata R. Blanco Barroso; Rodrigo Barbone Gonzalez; José-Luis Peydró; Bernardus F. Nazar Van Doornik
    Abstract: We analyze how countercyclical liquidity policy – via reserve requirements (RRs) – affects the credit cycle. For identification, we exploit supervisory credit register data and changes in RRs in Brazil motivated by monetary and prudential purposes. Credit supply effects are binding for firms and twice as large when policy is eased during credit crunches – crisis – than when policy is tightened during credit booms. Effects are stronger for larger domestic banks. During crunches, more affected banks increase the supply of credit volume due to policy easing, but increase collateral requirements, while more financially constrained banks retrench. During booms, foreign banks bypass policy tightening.
    Date: 2020–10
  10. By: Anand, Kartik; Mankart, Jochen
    Abstract: We develop a model of bank risk-taking with strategic sovereign default risk. Domestic banks invest in real projects and purchase government bonds. While an increase in bond purchases crowds out profitable investments, it improves the government's incentives to repay and therefore lowers its borrowing costs. For low levels of government debt, banks influence their default risks through purchases of bonds. But, for high debt levels, this influence is lost since bank and government default are perfectly correlated. Banks fail to account for how their bond purchases influence the government's default incentives. This leads to socially inefficient levels of bond holdings.
    Keywords: sovereign debt,financial intermediation,financial repression,bank fragility
    JEL: G01 G21 G28
    Date: 2020
  11. By: Nina Boyarchenko; Thomas M. Eisenbach; Pooja Gupta; Or Shachar; Peter Van Tassel
    Abstract: “Arbitrageurs” such as hedge funds play a key role in the efficiency of financial markets. They compare closely related assets, then buy the relatively cheap one and sell the relatively expensive one, thereby driving the prices of the assets closer together. For executing trades and other services, hedge funds rely on prime brokers and broker-dealers. In a previous Liberty Street Economics blog post, we argued that post-crisis changes to regulation and market structure have increased the costs of arbitrage activity, potentially contributing to the persistent deviations in the prices of closely related assets since the 2007–09 financial crisis. In this post, we document how post-crisis changes to bank regulations have affected the relationship between hedge funds and broker-dealers.
    Keywords: post-crisis regulation; hedge funds; prime brokers; basis trades
    JEL: G1 G2
    Date: 2020–10–19
  12. By: Joost Bats; Massimo Giuliodori; Aerdt Houben
    Abstract: Do negative interest rates matter for bank performance? This paper investigates whether monetary policy surprises impact bank stock prices differently in times of positive and negative interest rates. The analysis controls for broad stock market movements and finds that an unanticipated downward shift in the yield curve and a flattening of the shorter-end of the yield curve resulting from monetary policy announcements reduce bank stock prices in a low and especially negative interest rate environment. The effects persist in the days after the monetary policy announcement and are larger for banks relatively dependent on deposit funding. By contrast, a surprise movement in the slope of the longer-end of the yield curve does not impact bank stock prices in a negative interest rate environment. The results indicate that when market interest rates are negative but deposit rates stuck at zero, monetary policy instruments that target the longer-end of the yield curve are less detrimental to bank performance than those that target the shorter-end of the yield curve.
    Keywords: Monetary policy; bank stock prices; negative interest rates
    JEL: E43 E44 E52 G12 G21
    Date: 2020–10
  13. By: Ross Levine; Chen Lin; Mingzhu Tai; Wensi Xie
    Abstract: Why did banks experience massive deposit inflows during the first months of the pandemic? Using weekly branch-level data on interest rates and county-level data on COVID-19 cases, we discover that interest rates at bank branches in counties with higher COVID-19 infection rates fell by more than rates at other branches—even branches of the same bank in different counties. When differentiating weeks by the degree of stock market distress and counties by the likely impact of COVID-19 cases on economic anxiety, the evidence suggests that the deposit inflows were triggered by a surge in the supply of precautionary savings.
    JEL: D14 G21
    Date: 2020–10
  14. By: Raoul Minetti (Michigan State University); Pierluigi Murro (LUISS University); Valentina Peruzzi (LUISS University)
    Abstract: The re-regulation wave following the global financial crisis is putting pressure on local community and cooperative banks. In this paper, we show that cooperative banking can play a pivotal role in reducing income inequalities in local communities. By analyzing Italian local (provincial) credit markets over the 2001-2011 period, we find that cooperative banks mitigate income inequality more than their commercial counterparts. The results also suggest that it is the specific nature and orientation of cooperative banks, more than their relationship lending technologies, that improve income distribution. The impact of cooperative banking on inequality appears however to be partly channeled by a reduced dynamism of local economies, especially lower migratory flows and business turnover.
    Keywords: Cooperative banks, income inequality, financial development.
    JEL: G21 G38 O15
    Date: 2019–10
  15. By: Martynova, Natalya; Perotti, Enrico C.; Suárez, Javier
    Abstract: We analyze the strategic interaction between undercapitalized banks and a supervisor who may intervene by preventive recapitalization. Supervisory forbearance emerges because political and fiscal costs undermine supervisors' commitment to intervene. When supervisors have lower credibility, banks' incentives to voluntary recapitalize are lower and supervisors may end up intervening more. Importantly, when intervention capacity is constrained (e.g. for fiscal reasons), private recapitalization decisions become strategic complements, producing equilibria with extremely high forbearance and high systemic costs. Anticipating forbearance in response to diffuse undercapitalization, banks may ex ante choose more correlated risks, a form of "serial gambling" undermining the supervisory response.
    Keywords: bank supervision,bank recapitalization,forbearance
    JEL: G21 G28
    Date: 2020
  16. By: Gabriel Garber; Atif Mian; Jacopo Ponticelli; Amir Sufi
    Abstract: After the global financial crisis, government banks in Brazil boosted credit provision to households, generating a sharp increase in household debt, which was followed by the most severe re-cession in recent Brazilian history in 2015-2016. Using a novel individual-level data set including matched credit registry and employer-employee information, we show that individuals with higher debt-to-income growth during the boom experienced lower subsequent credit card expenditure during the recession. To identify the credit-supply effect, we exploit individuals borrowing from both government-controlled and private banks. We show that, during the late stages of the boom period, government banks increased their lending more than private banks to the same individual. To study the effect of this credit supply shock on individual consumption, we exploit variation in the sector of employment of each borrower. Individuals employed by the public sector were disproportionately targeted by payroll loans offered by government banks and experienced larger decline in credit card spending during the subsequent recession.
    Date: 2020–10
  17. By: Brunnermeier, Markus (Princeton U); Krishnamurthy, Arvind (Stanford U)
    Abstract: Many business sectors and households face an unprecedented loss of income in the current COVID recession, triggering financial distress, separations, and bankruptcy. Rather than stimulating demand, government policy's main aim should be to provide insurance to firms and workers to avoid undue scarring that will hamper a recovery, once the pandemic is past. We develop a corporate finance framework to guide interventions in credit markets to avoid such scarring. We emphasize three main results. First, policy should inject liquidity into small and medium sized firms that are liquidity constrained and for which social costs of bankruptcy are high. Second, large firms for whom solvency is the dominant issue require a more nuanced approach. Debt overhang creates a distortion leading these firms to fire workers, forgo expenditures that maintain enterprise value, and delay filing for a Chapter 11 bankruptcy longer than is socially efficient. Government resources toward reducing the legal and financial costs of bankruptcy are unambiguously beneficial. Policies that reduce funding costs are only socially desirable if the pandemic is expected to be short-lived and if bankruptcy costs are high. Last, transfers necessary to avoid bankruptcy allow borrowers to continue paying their mortgages or credit card bills and ultimately benefit owners of assets such as real estate or credit card receivables. Taxes to fund transfers should be raised from these asset owners.
    Date: 2020–06
  18. By: Lorie Logan
    Abstract: Remarks at Brookings-Chicago Booth Task Force on Financial Stability (TFFS) meeting, panel on market liquidity (delivered via videoconference).
    Keywords: treasury market; securities; liquidity; trading desk; dealers; finance; intermediation; participants; The Desk; Federal Reserve
    Date: 2020–10–23
  19. By: Ulrich Bindseil; Edoardo Lanari
    Abstract: Bank's asset fire sales and recourse to central bank credit are modelled with continuous asset liquidity, allowing to derive the liability structure of a bank. Both asset sales liquidity and the central bank collateral framework are modeled as power functions within the unit interval. Funding stability is captured as a strategic bank run game in pure strategies between depositors. Fire sale liquidity and the central bank collateral framework determine jointly the ability of the banking system to deliver maturity transformation without endangering financial stability. The model also explains why banks tend to use the least liquid eligible collateral with the central bank and why a sudden non-anticipated reduction of asset liquidity, or a tightening of the collateral framework, can trigger a bank run. The model also shows that the collateral framework can be understood, beyond its aim to protect the central bank, as financial stability and non-conventional monetary policy instrument.
    Date: 2020–10
  20. By: Alessandro Doldi; Marco Frittelli
    Abstract: We investigate to which extent the relevant features of (static) systemic risk measures can be extended to a conditional setting. After providing a general dual representation result, we analyze in greater detail Conditional Shortfall Systemic Risk Measures. In the particular case of exponential preferences, we provide explicit formulas that also allow us to show a time consistency property. Finally, we provide an interpretation of the allocations associated to Conditional Shortfall Systemic Risk Measures as suitably defined equilibria. Conceptually, the generalization from static to conditional systemic risk measures can be achieved in a natural way, even though the proofs become more technical than in the unconditional framework.
    Date: 2020–10
  21. By: Benjamin M. Hébert
    Abstract: How can we assess whether macro-prudential regulations are having their intended effects? If these regulations are optimal, their marginal benefit of addressing externalities should equal their marginal cost of distorting risk-sharing. These risk-sharing distortions will manifest as trading opportunities that constrained intermediaries are unable to exploit. Focusing in particular on arbitrage opportunities, I construct an “externality-mimicking portfolio” whose returns track the externalities that would rationalize existing regulations as optimal. I conduct a revealed-preference exercise using this portfolio and test whether the recovered externalities are sensible. I find that the signs of existing CIP violations are inconsistent with optimal macro-prudential policy.
    JEL: E61 F31 G28
    Date: 2020–10
  22. By: Robert Clark (Queen's University); Shaoteng Li
    Abstract: Following the crisis, macroprudential regulations targeting mortgage-market vulnerabilities were widely adopted, their success often depending on intermediaries' responses. We show that Canadian banks behaved strategically to limit the potency of recently implemented mortgage stress tests, requiring borrower qualification based on the mode of 5-year rates posted by the Big 6 banks rather than transaction rates. The government aimed to cool credit markets, but since many mortgages are government-insured, Big 6 interests were not aligned. Using DiD comparing changes in 5-year spreads with 3-year spreads, unaffected by the policy, we find rates were lowered encouraging continued borrowing, muting the tests' impact.
    Keywords: macroprudential regulation, credit supply, mortgage market, mortgage stress tests, rate-benchmark manipulation
    Date: 2020–10

This nep-ban issue is ©2020 by Christian Calmès. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.