nep-ban New Economics Papers
on Banking
Issue of 2020‒11‒30
nineteen papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Retrenchment of euro area banks and international banking models By Rodriguez-Moreno, Maria; Argimón, Isabel; Ortiz, Elena Fernández
  2. Risk mitigating versus risk shifting: evidence from banks security trading in crises By José-Luis Peydró; Andrea Polo; Enrico Sette
  3. (When) do banks react to anticipated capital reliefs? By Arnould, Guillaume; Guin, Benjamin; Ongena, Steven; Siciliani, Paolo
  4. The Amortization Elasticity of Mortgage Demand By Claes Bäckman; Peter van Santen
  5. Can Fintechs Stabilize the Financial Sector? By Windl, Martin
  6. Has bail-in increased market discipline? An empirical investigation of European banks’ credit spreads By Lindstrom, Ryan; Osborne, Matthew
  7. Liquidity in resolution: estimating possible liquidity gaps for specific banks in resolution and in a systemic crisis By Parisi, Laura; Chalamandaris, Dimitrios; Amamou, Raschid; Torstensson, Pär; Baumann, Andreas
  8. Forecasting Probability of Default for Consumer Loan Management with Gaussian Mixture Models By Hamidreza Arian; Seyed Mohammad Sina Seyfi; Azin Sharifi
  9. The Regulation of Prosocial Lending: Are Loan Ceilings Effective? By Anastasia Cozarenco; Ariane Szafarz
  10. Reversal interest rate and macroprudential policy By Darracq Pariès, Matthieu; Kok, Christoffer; Rottner, Matthias
  11. Fintech Borrowers: Lax-Screening or Cream-Skimming? By Marco Di Maggio; Vincent Yao
  12. Network topography and default contagion in China's financial system By Fittje, Jens; Wagner, Helmut
  13. Leaning against the wind and crisis risk By Moritz Schularick; Lucas ter Steege; Felix Ward
  14. Credit, banking fragility and economic performance By Jérôme Creel; Paul Hubert; Fabien Labondance
  15. Bank credit and short-run economic growth: a dynamic threshold panel model for ASEAN countries. By Sy-Hoa Hoa; Jamel Saadaoui
  16. Contingent Capital with Stock Price Triggers in Interbank Networks By Anne G. Balter; Nikolaus Schweizer; Juan C. Vera
  17. Masters of Illusion: Bank and Regulatory Accounting for Losses in Distressed Banks By Edward J. Kane
  18. Are European cooperative banks more responsible? By Ouafa Ouyahia
  19. Bank capital: excess credit and crisis incidence By Ray Barrell; Karim Dilruba

  1. By: Rodriguez-Moreno, Maria; Argimón, Isabel; Ortiz, Elena Fernández
    Abstract: In this paper, we analyze the importance of international banking models, along the operational and the funding dimensions, for the decline in international positions of European banks since the crisis. Using BIS Consolidated Banking Statistics, we find that the multinational model (higher reliance on local activity) and the decentralized model (higher weight of local funding over local claims) is associated with lower retrenchment. We also find that more business synchronization between the home and the host economy is associated with higher declines in lending after the crisis and that the multinational and decentralized models mitigate such effect. On the other hand, lending to banks is not affected by the correlation of economic cycles between the home and the host country. JEL Classification: F21, F23, G15, G21
    Keywords: cross-border bank lending, financial crisis, global banking, retrenchment
    Date: 2020–11
  2. By: José-Luis Peydró; Andrea Polo; Enrico Sette
    Abstract: We show that risk mitigating incentives dominate risk shifting incentives in fragile banks. Risk shifting could be particularly severe in banking since it is the most opaque industry and banks are one of the most leveraged corporations with very low skin in the game. To analyze this question, we exploit security trading by banks during financial crises, as banks can easily and quickly change their risk exposure within their security portfolio. However, in contrast with the risk shifting hypothesis, we find that less capitalized banks take relatively less risk after financial market stress shocks. We show this using the supervisory ISIN-bank-month level dataset from Italy with all securities for each bank. Our results are over and above capital regulation as we show lower reach-for-yield effects by less capitalized banks within government bonds (with zero risk weights) or within securities with the same rating and maturity in the same month (which determines regulatory capital). Effects are robust to controlling for the covariance with the existence portfolio, and less capitalized banks, if anything, reduce concentration risk. Further, effects are stronger when uncertainty is higher, despite that risk shifting motives may be then higher. Moreover, three separate tests - based on different accounting portfolios (trading book versus held to maturity), the distribution of capital and franchise value - suggest that bank own incentives, instead of supervision, are the main drivers. Results are confirmed if we consider other sources of balance sheet fragility and different measures of risk-taking. Finally, evidence from the recent COVID-19 shock corroborates findings from the Global Financial Crisis and the Euro Area Sovereign Crisis.
    Keywords: risk shifting, financial crises, securities, bank capital, interbank funding, concentration risk, uncertainty, risk weights, available for sale, held to maturity, trading book, COVID-19
    JEL: G01 G21 G28
    Date: 2020–11
  3. By: Arnould, Guillaume (Bank of England); Guin, Benjamin (Bank of England); Ongena, Steven (University of Zurich); Siciliani, Paolo (Bank of England)
    Abstract: We study how banks react to policy announcements during a representative policy cycle involving consultation and publication using a novel dataset on the population of all mortgage transactions and regulatory risk assessments of banks. We demonstrate that banks likely to benefit from lower capital requirements increase the size of this capital relief by permanently investing into low risk assets after the publication of the policy. In contrast, there is no evidence that they already reacted to the early step of the development of the policy, the publication of the consultation paper. We show how these results can be used to estimate a lower bound on the cost of capital for smaller banks, for which such estimates are typically difficult to obtain.
    Keywords: Bank regulation; mortgage lending; supervisory review process; capital requirements
    JEL: G21
    Date: 2020–11–13
  4. By: Claes Bäckman (Department of Economics and Business Economics, Aarhus University, and Knut Wiksell Center for Financial Studies, Lund University); Peter van Santen (Faculty of Economics and Business, University of Groningen)
    Abstract: We study how amortization payments affect household borrowing exploiting notches in the Swedish amortization requirement. We argue that amortization payments are costly for borrowers under a number of scenarios, and that they therefore affect credit demand. We provide causal evidence that a percentage point increase in amortization payments reduce LTV ratios by 2-3 percentage points, implying a sizable amortization elasticity of mortgage demand. Borrowers who seek to avoid making payments generally have higher debt, higher income and higher debt-to-income ratios. On the aggregate level, credit growth falls sharply after the introduction of the amortization requirement.
    Keywords: Amortization requirements, Macroprudential policy, Household debt
    JEL: G21 E21 E6
    Date: 2020–11–16
  5. By: Windl, Martin
    Abstract: The growing popularity of fintechs has led the Financial Stability Board (FSB) to publish considerations about the effects of this emerging industry on stability and efficiency in the financial sector. Against this background, this paper compares the effects of competition and collaboration between banks and fintechs on stability and efficiency. Using a partial equilibrium model and a general equilibrium model with moral hazard between investors and the financial sector based on Martinez-Miera and Repullo (2017), this paper shows that cooperation between banks and fintechs increases stability and efficiency compared to the case of a competitive equilibrium. The findings are robust to changes in bargaining power within the financial sector but depend critically on contestable loan markets.
    Keywords: fintech,bigtech,financial stability,general equilibrium
    JEL: G21 G23 G28
    Date: 2020
  6. By: Lindstrom, Ryan (Bank of England); Osborne, Matthew (Bank of England)
    Abstract: Following the banking sector stress events of 2008–09 and 2011–12, a new framework for resolving failing banks has been implemented in the European Union which aims to facilitate authorities imposing losses on private creditors. The new framework implements global standards requiring banks to maintain a minimum quantum of loss-absorbing (or ‘bail-in’) bonds. Using data on the credit spreads on large European banks’ bonds between 2010 and 2019, we provide evidence that the risk sensitivity of banks’ credit spreads has increased since the reforms, and that the level and risk sensitivity of spreads on senior bail-in bonds are higher than those of comparable non-bail-in bonds. These findings support the hypothesis that the reforms have increased investors’ perception of the likelihood that they will be bailed in. These results hold for both UK and euro-area banks, though they are somewhat weaker for periphery European banks. We show that the degree of progress a bank has made in issuing bail-in bonds is positively related to the level and risk sensitivity of such bonds. We show that the higher level and risk sensitivity of spreads on bail-in bonds are largely invariant to whether bail-in bonds are contractually subordinated (ie issued as non-preferred senior) or structurally subordinated (ie issued from the holding company), and the effects are also unaffected by whether or not a bank is classified as a global systemically important bank (G-SIB). Finally, we show that the results are robust to changes in the strategy or risk profile of individual banks, via the inclusion of time-varying bank-specific effects.
    Keywords: Banks; bank resolution; financial stability; bail-in
    JEL: G21 G28 G33
    Date: 2020–11–06
  7. By: Parisi, Laura; Chalamandaris, Dimitrios; Amamou, Raschid; Torstensson, Pär; Baumann, Andreas
    Abstract: This paper contributes to the debate on liquidity in resolution by providing a quantitative assessment of liquidity gaps of banks in resolution in the euro area. It estimates possible ranges of liquidity gaps for significant banks under different assumptions and scenarios. The findings suggest that, while the average liquidity gaps in resolution are limited, the averages hide significant outliers. The paper thus shows that, under adverse circumstances, the instruments currently available to provide liquidity support to financial institutions in the euro area would be insufficient JEL Classification: G01, G21, G28, G33, C63
    Keywords: bank runs, contagion, Liquidity, Monte Carlo simulations, resolution, systemic crisis
    Date: 2020–11
  8. By: Hamidreza Arian; Seyed Mohammad Sina Seyfi; Azin Sharifi
    Abstract: Credit scoring is an essential tool used by global financial institutions and credit lenders for financial decision making. In this paper, we introduce a new method based on Gaussian Mixture Model (GMM) to forecast the probability of default for individual loan applicants. Clustering similar customers with each other, our model associates a probability of being healthy to each group. In addition, our GMM-based model probabilistically associates individual samples to clusters, and then estimates the probability of default for each individual based on how it relates to GMM clusters. We provide applications for risk managers and decision makers in banks and non-bank financial institutions to maximize profit and mitigate the expected loss by giving loans to those who have a probability of default below a decision threshold. Our model has a number of advantages. First, it gives a probabilistic view of credit standing for each individual applicant instead of a binary classification and therefore provides more information for financial decision makers. Second, the expected loss on the train set calculated by our GMM-based default probabilities is very close to the actual loss, and third, our approach is computationally efficient.
    Date: 2020–11
  9. By: Anastasia Cozarenco; Ariane Szafarz
    Keywords: Microcredit; microfinance; regulation; loan ceiling; mission drift; altruism
    JEL: G21 L51 G28 O52 L31 I38 C25 M13
    Date: 2020–11–10
  10. By: Darracq Pariès, Matthieu; Kok, Christoffer; Rottner, Matthias
    Abstract: Could a monetary policy loosening entail the opposite effect than the intended expansionary impact in a low interest rate environment? We demonstrate that the risk of hitting the rate at which the effect reverses depends on the capitalization of the banking sector by using a non-linear macroeconomic model calibrated to the euro area economy. The framework suggests that the reversal interest rate is located in negative territory of around −1% per annum. The possibility of the reversal interest rate creates a novel motive for macroprudential policy. We show that macroprudential policy in the form of a countercyclical capital buffer, which prescribes the build-up of buffers in good times, can mitigate substantially the probability of encountering the reversal rate, improves welfare and reduces economic fluctuations. This new motive emphasizes also the strategic complementarities between monetary policy and macroprudential policy. JEL Classification: E32, E44, E52, E58, G21
    Keywords: macroprudential policy, monetary policy, negative interest rates, reversal interest rate, ZLB
    Date: 2020–11
  11. By: Marco Di Maggio; Vincent Yao
    Abstract: We study the personal credit market using unique individual-level data covering fintech and traditional lenders. We show that fintech lenders acquire market share by first lending to higher-risk borrowers and then to safer borrowers, and mainly rely on hard information to make credit decisions. Fintech borrowers are significantly more likely to default than neighbor individuals with the same characteristics borrowing from traditional financial institutions. Furthermore, they tend to experience only a short- lived reduction in the cost of credit, because their indebtedness increases more than non-fintech borrowers a few months after loan origination. However, fintech lenders' pricing strategies are likely to take this into account.
    JEL: G21 G23
    Date: 2020–10
  12. By: Fittje, Jens; Wagner, Helmut
    Abstract: The topography of China's financial network is unique. Is it also uniquely robust to contagion? We explore this question using network theory. We find that networks that are more concentrated are less fragile when connectivity is low. However, they remain vulnerable to the occurrence of large-scale default cascades at higher levels of connectivity than a decentralized network. We implement Chinese characteristics into our model and simulate it numerically. The simulations show, that the large state-controlled banks act as effective stopgaps for contagion, which makes the Chinese network relatively robust. This robustness persists even when a medium sized bank defaults.
    Keywords: Interbank Network,Financial Contagion,China's interbank market,Financial market stability,Complex networks,Network topography
    JEL: E44
    Date: 2020
  13. By: Moritz Schularick (Federal Reserve Bank of New York and Department of Economics, University of Bonn; and CEPR); Lucas ter Steege (Department of Economics, University of Bonn); Felix Ward (Erasmus School of Economics, Erasmus University Rotterdam; and Tinbergen Institute)
    Abstract: Can central banks defuse rising stability risks in financial booms by leaning against the wind with higher interest rates? This paper studies the state-dependent effects of monetary policy on financial crisis risk. Based on the near-universe of advanced economy gonancial cycles since the 19th century, we show that discretionary leaning against the wind policies during credit and asset price booms are more likely to trigger crises than prevent them.
    Keywords: financial stability, monetary policy, local projections
    JEL: E44 E50 G01 G15 N10
    Date: 2020–11
  14. By: Jérôme Creel (Observatoire français des conjonctures économiques); Paul Hubert (Observatoire français des conjonctures économiques); Fabien Labondance (Observatoire français des conjonctures économiques)
    Abstract: Drawing on European Union data, this paper investigates the hypothesis that private credit and banking sector fragility may affect economic growth. We capture banking sector fragility both with the ratio of bank capital to assets and non-performing loans. We assess the effect of these three variables on the growth rate of GDP per capita, using the Solow growth model as a guiding framework. We observe that credit has no effect on economic performance in the EU when banking fragilities are high. However, the potential fragility of the banking sector measured by the non-performing loans decreases GDP per capita.
    Keywords: Private credit; Capital to assets ratio; Non-performing loans
    JEL: G10 G21 O40
    Date: 2020
  15. By: Sy-Hoa Hoa; Jamel Saadaoui
    Abstract: We investigate short-run nonlinear impacts of bank credit on economic growth in ASEAN countries. We find an inverted L-shaped relationship and a statistically significant threshold of 96.5%. Positive effects of bank credit expansion on short-run economic growth fade away after this threshold.
    Keywords: Bank credit, Economic growth, Dynamic threshold estimation, ASEAN.
    JEL: C23 E51 G21 O41
    Date: 2020
  16. By: Anne G. Balter; Nikolaus Schweizer; Juan C. Vera
    Abstract: This paper studies existence and uniqueness of equilibrium prices in a model of the banking sector in which banks trade contingent convertible bonds with stock price triggers among each other. This type of financial product was proposed as an instrument for stabilizing the global banking system after the financial crisis. Yet it was recognized early on that these products may create circularity problems in the definition of stock prices - even in the absence of trade. We find that if conversion thresholds are such that bond holders are indifferent about marginal conversions, there exists a unique equilibrium irrespective of the network structure. When thresholds are lower, existence of equilibrium breaks down while higher thresholds may lead to multiplicity of equilibria. Moreover, there are complex network effects. One bank's conversion may trigger further conversions - or prevent them, depending on the constellations of asset values and conversion triggers.
    Date: 2020–11
  17. By: Edward J. Kane (Boston College)
    Abstract: This essay is part of a larger work on the history of Federal Reserve policymaking entitled Banking on Bull. The study seeks to explain why the instruments of central banking inevitably break down over time. A big part of the explanation is that policymakers want accounting measures of bank net worth to be flexible enough to allow bankers and regulators to slow the release of adverse information about distressed banks, particularly very large ones. Modern regulatory frameworks focus on maintaining what can be described as the adequacy of accounting capital. But this framework is bull, because in tough times, bank accountants know how to make losses disappear.
    Keywords: capital requirements, too big to fail, loss recognition, income-distribution effects
    JEL: E58 G21 G32
    Date: 2020–08–27
  18. By: Ouafa Ouyahia
    Abstract: The objective of this paper is to establish a comparison between European cooperative banks and non-cooperative banks in terms of Corporate Social Responsibility (CSR). One of the main limitations of existing studies is their inability to measure and verify the concrete application of the banks' speeches and communications in their actual practices. To remedy this problem, we try in this study to, first, evaluate the banks’ communication, and in a second step, measure the implication of the European banking sector in CSR practices. We also think that it is interesting to see the impact of the recent financial crisis on the practices of banks in terms of CSR. For this, we will consider the years 2008 and 2015. Our data are collected, for the most part, from the annual reports of banks. We have also exported some data from Fitch Connect database. Globally, banks are becoming more transparent. They provide more information in 2015 compared to 2008. Taking into account all the criteria selected, cooperative banks are better rated on average. However, some differences emerge depending on the type of information analyzed (their communications or practices), hence the importance of analyzing the practice of banks to judge their CSR, something that is not done yet in the literature.
    Keywords: Corporate Social Responsibility (CSR); cooperative banks; European banks
    JEL: G21 P13
    Date: 2020
  19. By: Ray Barrell (Research Centre of the National Institute of Economic and Social Research); Karim Dilruba
    Abstract: There are large and long-lasting negative effects on output from recurrent financial crises in market economies. Policy makers need to know if these financial crises are endogenous and subject to policy interventions or are exogenous events like earthquakes. We survey the literature about the links between credit growth and crises over the last 130 years. We then go on to look at the determinants of financial crises both narrowly and broadly defined in market economies, stressing the roles of bank capital, available on book liquidity, property price bubbles and current account deficits. We look at the role of credit growth, which is often seen as the main link between the macroeconomy and crises, and stress that it is largely absent. We look at the role of the core factors discussed above in market economies from 1980 to 2017. We suggest that crises are largely unrelated to credit developments but are influenced by banking sector behaviour. We conclude that policy makers need to contain banking excesses, not constrain the macroeconomy by directly reducing bank lending.
    Keywords: Financial stability; Banking crises; Macroprudential policy
    Date: 2020–09

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