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on Banking |
| By: | Wang, Olivier |
| Abstract: | This paper studies how low interest rates weaken the short-run transmission of monetary policy and contract the long-run supply of bank credit. As U.S. bond rates have fallen, the pass-through of monetary shocks to loan and deposit rates has weakened while the spread on U.S. bank loans has risen. I build a model in which banks earn deposit and loan spreads, deposits compete with money, and banks’ lending capacity depends on their equity. The short-run transmission of monetary policy is dampened at low rates, because deposit spreads act as a better hedge for bank equity against unexpected monetary shocks. In the long run, persistent low rates decrease banks’ “seigniorage” revenue from deposit spreads, hence bank equity and loan supply contract, and loan spreads increase. JEL Classification: E4, E5, G21 |
| Keywords: | deposit spread, financial intermediation, interest rate pass-through, loan spread, low interest rates |
| Date: | 2020–11 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20202492&r=all |
| By: | Gurgone, Andrea; Iori, Giulia |
| Abstract: | To date, macroprudential policy inspired by the Basel III package is applied irrespective of the network characteristics of the banking system. We study how the implementation of macroprudential policy in the form of additional capital requirements conditional to systemic-risk measures of banks should regard the degree of heterogeneity of financial networks. We adopt a multi-agent approach describing an artificial economy with households, firms, and banks in which occasional liquidity crises emerge. We shape the configuration of the financial network to generate two polar worlds: one is characterized by few banks who lend most of the credit to the real sector while borrowing interbank liquidity. The other shows a higher degree of homogeneity. We focus on a capital buffer for SII and two buffers built on measures of systemic impact and vulnerability. The research suggests that the criteria for the identification of systemic-important banks may change with the network heterogeneity. Thus, capital buffers should be calibrated on the heterogeneity of the financial networks to stabilize the system, otherwise they may be ineffective. Therefore, we argue that prudential regulation should account for the characteristics of the banking networks and tune macroprudential tools accordingly. |
| Keywords: | agent-based model,capital requirements,capital buffers,,financial networks,macroprudential policy,systemic-risk |
| JEL: | C63 D85 E44 G01 G21 |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bamber:164&r=all |
| By: | Peydró, José-Luis; Polo, Andrea; Sette, Enrico |
| 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 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:esprep:226219&r=all |
| By: | Nicola Borri (LUISS University); Giorgio Di Giorgio (LUISS University) |
| Abstract: | This paper studies the systemic risk contribution of a set of large publicly traded European banks. Over a sample covering the last twenty years and three different crises, we find that all banks in our sample significantly contribute to systemic risk. Moreover, larger banks and banks with a business model more exposed to trading and financial market volatility, contribute more. In the shorter sample characterized by the Covid-19 shock, sovereign default risks significantly affected the systemic risk contribution of all banks. However, the ECB announcement of the Pandemic Emergency Purchasing Programme restored calm in the European banking sector. |
| Keywords: | CoVaR, systemic risk, Covid-19, banking regulation |
| JEL: | G01 G18 G21 G38 |
| Date: | 2020–10 |
| URL: | http://d.repec.org/n?u=RePEc:lui:casmef:2005&r=all |
| By: | Ivan T. Ivanov; Marco Macchiavelli; Joao A. C. Santos |
| Abstract: | Natural disasters are usually associated with an increase in the demand for credit by both households and companies in the affected regions. However, if capacity constraints preclude banks from meeting the local increase in demand, the banks may reduce lending elsewhere, thus propagating the shock to unaffected areas. In this post, we analyze the corporate loan market and find that banks, particularly those with lower capital, reduce credit provisioning to distant regions unaffected by natural disasters. We also find that shadow banks only partially offset the reduction in bank credit, so borrowers in regions unaffected by natural disasters experience a decline in credit supply. |
| Keywords: | natural disasters; bank lending; shadow banks |
| JEL: | Q54 G21 G23 |
| Date: | 2020–11–18 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednls:89058&r=all |
| By: | Kanishka Dam (Center for Research and Teaching in Economics (CIDE)); Prabal Roy Chowdhury (Indian Statistical Institute, Delhi) |
| Abstract: | The possibility of vertical collusion between an informationally opaque borrower and corruptible loan officers, to whom the task of monitoring is delegated, in bank-loan officer-borrower hierarchies shapes the incentive contracts for the loan officers. Collusive threats exacerbate incentives for overmonitoring, and make monitoring efforts of the banks strategic complements because of a novel ‘race-to-collusion’ effect—a hitherto unexplored effect of multiple-bank lending. Thus, delegation contract solves the free-riding problem in the presence of monitoring duplication, and may lead to higher levels of per-bank monitoring in multiple-bank lending. Moreover, over-monitoring, albeit inefficient relative to the optimal contract in the absence of race-to-collusion, may enhance social welfare. We further show that the collusion-proofness principle may fail to hold under multiple-bank lending. |
| Date: | 2020–06 |
| URL: | http://d.repec.org/n?u=RePEc:alo:isipdp:20-05&r=all |
| By: | Barbora Stepankova (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Opletalova 26, 110 00, Prague, Czech Republic) |
| Abstract: | Some financial institutions can use internally developed credit risk models to determine their capital requirements. At the same time, the regulatory framework governing such models allows institutions to implement diverse rating systems with no specified penalty for poor model performance. To what extent the resulting model risk { potential for equivalent models to deliver inconsistent outcomes { is prevalent in the economy is largely unknown. We use a unique dataset of 4.9 million probability of default estimates provided by 28 global IRB banks, covering the January 2016 to June 2020 period, to assess the degree of variance in credit risk estimates provided by multiple banks for a single entity. In line with the prior literature, we find that there is a substantial variance in outcomes and that it decreases with the amount of available information about the assessed entity. However, we further show that the level of variance is highly dependent on the entity type, its industry and locations of the entity and contributing banks; banks report a higher deviation from the mean credit risk for foreign entities. Further, we conclude that a considerable part of the variance is systematic, especially for fund models. Finally, utilising the latest available data, we show the massive impact of the COVID-19 pandemic on dispersion of credit estimates. |
| Keywords: | Banking, Credit Risk, Bank Regulation |
| JEL: | C12 G21 G32 |
| Date: | 2020–11 |
| URL: | http://d.repec.org/n?u=RePEc:fau:wpaper:wp2020_44&r=all |
| By: | Juliane Begenau (Stanford GSB and NBER and CEPR); Saki Bigio (UCLA, Visiting Scholar SF Fed & NBER); Jeremy Majerovitz (MIT); Matias Vieyra (Bank of Canada) |
| 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. |
| Keywords: | Banks, Tobin's Q, Delayed Accounting, Adjustment Costs |
| JEL: | G21 G32 G33 E44 |
| Date: | 2020–11 |
| URL: | http://d.repec.org/n?u=RePEc:apc:wpaper:171&r=all |
| By: | Mirza, Harun; Moccero, Diego; Palligkinis, Spyros; Pancaro, Cosimo |
| Abstract: | The assets under management of investment funds have soared in recent years, triggering a debate on their possible implications for financial stability. We contribute to this debate assessing the asset price impact of fire sales in a novel partial equilibrium model of euro area funds and banks calibrated over the period between 2008 and 2017. An initial shock to yields causes funds to sell assets to address investor redemptions, while both banks and funds sell assets to keep their leverage constant. These fire sales generate second-round price effects. We find that the potential losses due to the price impact of fire sales have decreased over time for the system. The contribution of funds to this impact is lower than that of banks. However, funds’ relative contribution has risen due to their increased assets under management and banks’ lower leverage and rebalancing towards loans. Should this trend continue, funds will become an increasingly important source of systemic risk. JEL Classification: G1, G21, G23 |
| Keywords: | banks, financial contagion, financial stability, fire sales, investment funds, second-round price effects |
| Date: | 2020–11 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20202491&r=all |
| By: | Ghamami, Samim; Glasserman, Paul; Young, Hobart |
| Abstract: | This paper studies the spread of losses and defaults in financial networks with two interrelated features: collateral requirements and alternative contract termination rules. When collateral is committed to a firm’s counterparties, a solvent firm may default if it lacks sufficient liquid assets to meet its payment obligations. Collateral requirements can thus increase defaults and payment shortfalls. Moreover, one firm may benefit from the failure of another if the failure frees collateral committed by the surviving firm, giving it additional resources to make other payments. Contract termination at default may also improve the ability of other firms to meet their obligations through access to collateral. As a consequence of these features, the timing of payments and collateral liquidation must be carefully specified to establish the existence of payments that clear the network. Using this framework, we show that dedicated collateral may lead to more defaults than pooled collateral; we study the consequences of illiquid collateral for the spread of losses through fire sales; we compare networks with and without selective contract termination; and we analyze the impact of alternative resolution and bankruptcy stay rules that limit the seizure of collateral at default. Under an upper bound on derivatives leverage, full termination reduces payment shortfalls compared with selective termination. |
| Keywords: | contagion; OTC markets; financial regulation; network; fire sales; collateral; automatic stays for qualified financial contracts; forthcoming |
| JEL: | J50 |
| Date: | 2020–11–03 |
| URL: | http://d.repec.org/n?u=RePEc:ehl:lserod:107496&r=all |
| By: | World Bank |
| Keywords: | Public Sector Development - Regulatory Regimes Finance and Financial Sector Development - Banks & Banking Reform Finance and Financial Sector Development - Financial Regulation & Supervision Private Sector Development - Competitiveness and Competition Policy |
| Date: | 2020–09 |
| URL: | http://d.repec.org/n?u=RePEc:wbk:wboper:34444&r=all |
| By: | Thomas M. Eisenbach (Federal Reserve Bank of New York); Gregory Phelan (Williams College) |
| Abstract: | In standard Walrasian macro-finance models, pecuniary externalities due to fire sales lead to excessive borrowing and insufficient liquidity holdings. We investigate whether imperfect competition (Cournot) improves welfare through internalizing the external- ity and find that this is far from guaranteed. Cournot competition can overcorrect the inefficiently high borrowing in a standard model of levered real investment. In contrast, Cournot competition can exacerbate the inefficiently low liquidity in a standard model of financial portfolio choice. Implications for welfare and regulation are there- fore sector-specific, depending both on the nature of the shocks and the competitive- ness of the industry. |
| Keywords: | liquidity, fire sales, overinvesment, financial regulation, macroprudential regulation |
| JEL: | D43 D62 E44 G18 G21 |
| Date: | 2020–10 |
| URL: | http://d.repec.org/n?u=RePEc:wil:wileco:2020-10&r=all |
| By: | Andrew F. Haughwout; Donghoon Lee; Joelle Scally; Wilbert Van der Klaauw |
| Abstract: | Today, the New York Fed’s Center for Microeconomic Data reported that total household debt balances increased slightly in the third quarter of 2020, according to the latest Quarterly Report on Household Debt and Credit. This increase marked a reversal from the modest decline in the second quarter of 2020, a downturn driven by a sharp contraction in credit card balances. In the third quarter, credit card balances declined again, even as consumer spending recovered somewhat; meanwhile, mortgage originations came in at a robust $1.049 trillion, the highest level since 2003. Many of the efforts to stabilize the economy in response to the COVID-19 crisis have focused on consumer balance sheets, both through direct cash transfers and through forbearances on federally backed debts. Here, we examine the uptake of forbearances on mortgage and auto loans and its impact on their delinquency status and the borrower’s credit score. This analysis, as well as the Quarterly Report on Household Debt and Credit, is based on anonymized Equifax credit report data. |
| Keywords: | household finance; Consumer Credit Panel (CCP); CARES Act; forbearance |
| JEL: | D14 |
| Date: | 2020–11–17 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednls:89057&r=all |
| By: | Laureys, Lien (Bank of England); Meeks, Roland (International Monetary Fund); Wanengkirtyo, Boromeus (Bank of England) |
| Abstract: | We reconsider the design of welfare-optimal monetary policy when financing frictions impair the supply of bank credit, and when the objectives set for monetary policy must be simple enough to be implementable and allow for effective accountability. We show that a flexible inflation targeting approach that places weight on stabilising inflation, a measure of resource utilisation, and a financial variable produces welfare benefits that are almost indistinguishable from fully-optimal Ramsey policy. The macro-financial trade-off in our estimated model of the euro area turns out to be modest, implying that the effects of financial frictions can be ameliorated at little cost in terms of inflation. A range of different financial objectives and policy preferences lead to similar conclusions. |
| Keywords: | Monetary policy; simple loss function; banks; medium-scale DSGE models; euro area economy |
| JEL: | E17 E52 E58 G21 |
| Date: | 2020–11–20 |
| URL: | http://d.repec.org/n?u=RePEc:boe:boeewp:0890&r=all |
| By: | Yuanhua Feng (Paderborn University); Jan Beran (University of Konstanz); Sebastian Letmathe (Paderborn University); Sucharita Ghosh (Swiss Federal Research Institute WSL) |
| Abstract: | Volatility modelling is applied in a wide variety of disciplines, namely finance, en- vironment and societal disciplines, where modelling conditional variability is of in- terest e.g. for incremental data. We introduce a new long memory volatility model, called FI-Log-GARCH. Conditions for stationarity and existence of fourth moments are obtained. It is shown that any power of the squared returns shares the same memory parameter. Asymptotic normality of sample means is proved. The practical performance of the proposal is illustrated by an application to one-day rolling forecasts of the VaR (value at risk) and ES (expected shortfall). Comparisons with FIGARCH, FIEGARCH and FIAPARCH models are made using a criterion based on different traffic light test. The results of this paper indicate that the FI-Log- GARCH often outperforms the other models, and thus provides a useful alternative to existing long memory volatility models. |
| Keywords: | FI-Log-GARCH, stationary solutions, finite fourth moments, covariance structure, rolling forecasting VaR and ES, traffic light test of ES |
| Date: | 2020–11 |
| URL: | http://d.repec.org/n?u=RePEc:pdn:ciepap:137&r=all |
| By: | Kristian S. Blickle; Matteo Crosignani; Fernando M. Duarte; Thomas M. Eisenbach; Fulvia Fringuellotti; Anna Kovner |
| Abstract: | The COVID-19 pandemic has led to significant changes in banks’ balance sheets. To understand how these changes have affected the stability of the U.S. banking system, we provide an update of four analytical models that aim to capture different aspects of banking system vulnerability. |
| Keywords: | COVID-19; financial stability; fire sales; bank runs |
| JEL: | G2 |
| Date: | 2020–11–16 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednls:89056&r=all |