nep-ban New Economics Papers
on Banking
Issue of 2020‒12‒14
fourteen papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. How do banking groups react to macroprudential policies? Cross-border spillover effects of higher capital buffers on lending, risk-taking and internal markets By Cappelletti, Giuseppe; Ponte Marques, Aurea; Salleo, Carmelo; Martín, Diego Vila
  2. Interest rate pass-through and bank risk-taking under negative-rate policies with tiered remuneration of Central Bank Reserves By Christoph Basten; Mike Mariathasan
  3. Screening and loan origination time: lending standards, loan defaults and bank failures By Mikel Bedayo; Gabriel Jiménez; José-Luis Peydró; Raquel Vegas
  4. Zombie lending: how many wondering souls are there? By Cecilia Dassatti; Francesc Rodriguez-Tous; Rodrigo Lluberas
  5. Bank Loan Forbearance: evidence from a million restructured loans By Frederico A. Mourad; Rafael F. Schiozer; Toni R. E. dos Santos
  6. Fixed Rate versus Adjustable Rate Mortgages: Evidence from Euro Area Banks By Ugo Albertazzi; Fulvia Fringuellotti; Steven Ongena
  7. Simultaneous Borrowing and Saving in Microfinance By Dyotona Dasgupta; Prabal Roy Chowdhury
  8. The Impact of Policy Interventions on Systemic Risk across Banks By Simona Nistor; Steven Ongena
  9. Financial Performance Analysis Of Distressed Banks: Exploration Of Financial Ratios And The Z-score By Matey, Juabin
  10. Who truly bares (bank) taxes? Evidence from just shifting statutory incidence By Martínez-Miera, David; Jiménez, Gabriel; Peydró, José-Luis
  11. Financial stability policies and bank lending: quasi-experimental evidence from Federal Reserve interventions in 1920-21 By Rieder, Kilian
  12. Structure and Competition in the Uruguayan Banking Sector By Miguel Mello; Jorge Ponce
  13. Financial Sector Transparency, Financial Crises and Market Power: A Cross-Country Evidence By Baah A. Kusi; Elikplimi K. Agbloyor; Agyapomaa Gyeke-Dako; Simplice A. Asongu
  14. Liquidity in resolution: comparing frameworks for liquidity provision across jurisdictions By Grund, Sebastian; Nomm, Nele; Walch, Florian

  1. By: Cappelletti, Giuseppe; Ponte Marques, Aurea; Salleo, Carmelo; Martín, Diego Vila
    Abstract: We study the impact of macroprudential capital buffers on banking groups' lending and risk-taking decisions, also investigating implications for internal capital markets. For identification, we exploit heterogeneity in buffers applied to other systemically important institutions, using information from three unique confidential datasets, including information on the EBA scoring process. This policy design induces a randomized experiment in the neighborhood of the threshold, which we use to identify the effect of higher capital requirements by comparing the change in the outcome for banks just above and below the cut-off, before and after the introduction of the buffer. The analysis is implemented relying on a fuzzy regression discontinuity and on a difference-in-differences matching design. We find that, when parent banks are constrained with higher buffers, subsidiaries deleverage lending and risk-taking towards non-financial corporations and marginally expanded lending towards households, with negative effects on protability. Also, we find that parents cut down on holdings of debt and equity issued by their subsidiaries. Our findings support the hypothesis that higher capital buffers have a positive disciplinary effect by reducing banks' risk-taking while having a (temporary) adverse impact on the real economy through a decrease in affiliated banks' lending activity. Therefore, to ensure the effectiveness of macroprudential policy, it is essential that policymakers assess their potential cross-border effects. JEL Classification: E44, E51, E58, G21, G28
    Keywords: capital buffers, Internal capital markets, lending, macroprudential policy, risk-taking
    Date: 2020–11
  2. By: Christoph Basten (University of Zurich; Swiss Finance Institute; CESifo); Mike Mariathasan (KU Leuven- Faculty of Economics & Business)
    Abstract: We identify the effects of negative interest rate policies on bank behavior using difference-in differences identification and data on all Swiss banks. First, we find that going negative can interrupt not only the pass-through from policy to deposit rates, but also that to mortgage rates. Second, banks’ ability to offset negative deposit margins with increased mortgage margins is shown to depend on market power. Third, imposing negative rates on all central bank reserves causes banks to replace one sixth with riskier assets, and cut another sixth without replacement, shortening their balance sheets. Together with increased mortgage margins and fee income, the asset replacement preserves profits, but increases financial stability risks. Fourth, mortgage margin increases, balance sheet contractions and risk increases differ from positive rate policy. Fifth, the interruption in pass-through and the risks to financial stability can be reduced by up to 90% through tiered remuneration, charging marginal reserves only.
    Keywords: negative interest rate policy, tiered remuneration, interest rate pass-through, credit risk, interest rate risk
    JEL: E43 E44 E52 E58 G20 G21
    Date: 2020–11
  3. By: Mikel Bedayo (Banco de España); Gabriel Jiménez (Banco de España); José-Luis Peydró (Imperial College London, ICREA-Universitat Pompeu Fabra-CREI-Barcelona GSE, and CEPR); Raquel Vegas (Banco de España)
    Abstract: We show that loan origination time is key for bank lending standards, cycles, defaults and failures. We exploit the credit register from Spain, with the time of a loan application and its granting. When VIX is lower (booms), banks shorten loan origination time, especially to riskier firms. Bank incentives (capital and competition), capacity constraints, and borrower-lender information asymmetries are key mechanisms driving results. Moreover, shorter (loan-level) origination time is associated with higher ex-post defaults, also using variation from holidays. Finally, shorter precrisis origination time —more than other lending conditions— is associated with more bank-level failures in crises, consistent with lower screening.
    Keywords: loan origination time, lending standards, credit cycles, defaults, bank failures, screening
    JEL: G01 G21 G28 E44 E51
    Date: 2020–11
  4. By: Cecilia Dassatti (Banco Central del Uruguay); Francesc Rodriguez-Tous (Cass Business School); Rodrigo Lluberas (Banco Central del Uruguay)
    Abstract: Banks' incentives to implement a policy of forbearance in order to avoid increasing their loan loss reserves leads to loan “evergreening”, through which a bank grants additional credit to a troubled firm. Exploiting granular data of all corporate loans from the Credit Registry in Uruguay, we identify banks' zombie lending strategies. While most papers on zombie lending focus on firms that display low levels of profitability, low productivity or that receive subsidized loans, we analyze zombie lending strategies by looking at changes in loans' repayment schedules granted by banks to firms. This allows us to actually observe the implementation of a zombie lending strategy, instead of inferring it through firms' balance-sheet indicators. After identifying and characterizing zombie lending, we study its effects on credit growth, finding a positive and statistically significant relationship between credit growth and zombie lending.
    Keywords: banks, credit, loan evergreening, regulatory arbitrage, zombie lending
    JEL: G21 G28 E44
    Date: 2020
  5. By: Frederico A. Mourad; Rafael F. Schiozer; Toni R. E. dos Santos
    Abstract: Forbearance is a concession granted by a lending bank to a borrower for reasons of financial difficulty. This paper examines why and when delinquent bank loans are forborne, using a novel dataset with over 13 million delinquent loans to non-financial firms in Brazil, from which 1.1 million are forborne. Our evidence shows that larger loans are more likely to be forborne, and that the greater the difficulty to seize collateral, the larger the probability of forbearance. Previous forbearances to a borrower are also positively associated with the probability of forbearance, which may be an indicative of loan evergreening. We also show that more than 80% of forbearance events occur in less than four months after a loan becomes more than 60 days past due (after which the bank may no longer accrue interest). Finally, we find that a regulatory rule that forces banks to increase provisions of non-delinquent loans when the same borrower also has a delinquent loan creates incentives for banks to forbear delinquent loans. Because loan evergreening may pose macroeconomic resource allocation problems and forbearance may be used to conceal loan losses, decrease provisions and manage earnings and capital, our findings have implications for the design of regulation and supervisory processes.
    Date: 2020–11
  6. By: Ugo Albertazzi (ECB -DG Monetary Policy); Fulvia Fringuellotti (Federal Reserve Banks - Federal Reserve Bank of New York); Steven Ongena (University of Zurich - Department of Banking and Finance; Swiss Finance Institute; KU Leuven; Centre for Economic Policy Research (CEPR))
    Abstract: Why do residential mortgages carry a fixed or an adjustable interest rate? To answer this question we study unique data from 103 banks belonging to 73 different banking groups across twelve countries in the euro area. To explain the large cross-country and time variations observed, we distinguish between household conditions that determine the local demand for credit and the characteristics of banks that supply credit. As bank funding mostly occurs at the group level, we disentangle these two sets of factors by comparing the outcomes observed for the same banking group across the different countries. Local household conditions dominate. In particular we find that the share of new loans with a fixed rate is larger when: (1) the historical volatility of inflation is lower, (2) the correlation between unemployment and the short-term interest rate is higher, (3) households' financial literacy is lower, and (4) the use of local mortgages to back covered bonds and of mortgage-backed securities is more widespread.
    Date: 2020–11
  7. By: Dyotona Dasgupta (Center for Development Economics, Delhi School of Economics); Prabal Roy Chowdhury (Indian Statistical Institute, Delhi)
    Abstract: This paper studies dynamic incentives provided by the microfinance institutions (MFIs) to ensure repayment. MFIs provide collateral-free loans, and yet observe near perfect repayment rate. In this paper, we provide an explanation of two widely practised mechanisms by MFIs – progressive lending i.e. increasing loan size over time and deposit collection. In our model, the MFI provides both credit and savings services. These help a strategic, poor borrower to accumulate a lumpsum amount and “graduate†to an improved lifetime utility which is not achievable when only credit is provided. These savings also act as an incentive device for repayment. We find that the optimal loan scheme is weakly progressive. It is “progressive with a cap†when the increase in utility from graduation is “modestly positive†. Further, we show that, since the MFI is benevolent, an improvement in the borrower’s outside option lengthens the time required to graduate which in turn reduces her welfare.
    Keywords: dynamic incentives, progressive lending, deposit collection, collateral substitute, graduation
    JEL: O12 O16 D86 G21
    Date: 2020–11
  8. By: Simona Nistor (Babes-Bolyai University - Department of Finance); Steven Ongena (University of Zurich - Department of Banking and Finance; Swiss Finance Institute; KU Leuven; Centre for Economic Policy Research (CEPR))
    Abstract: What is the impact of policy interventions on the systemic risk of banks? To answer this question, we analyze a comprehensive sample that combines bank-specific bailout events with balance sheets of key affected and non-affected European banks between 2008 and 2014. We find that guarantees reduce the systemic risk contribution made by small banks in the short run and by small or less liquid banks in the long run. Recapitalizations immediately decrease banks’ systemic importance, but the effect is also short-lived. Liquidity injections may even significantly increase systemic risk especially when administered to the less capitalized or highly profitable banks.
    Keywords: systemic risk, policy interventions, risk profile, Conditional Value at Risk, G-SIBs
    JEL: E58 G01 G21 G28 H81
    Date: 2020–12
  9. By: Matey, Juabin
    Abstract: A robust bank industry is a major player in the stability of an economy, and therefore the macroeconomic decisions of most countries revolve around the bank-based financial sector. The Ghana financial industry witnessed a cleanup exercise in 2017 due to the impaired conditions under which it operated in the past. This study used financial ratios aided by the Z-score to analyse the financial performance of UT Bank prior to the 2017 bank industry health check in Ghana. Annual financials over a ten-year period (2007-2016) were used. It was realised that debt management practices of UT Bank were quite unsatisfactory and unimpressive. This was observed in the poor leverage and risk management variable ratios. Considering the results, UT Bank clearly had difficulty obliging to customers’ maturing debts. The average mean values of debt-to-equity and debt-to asset of 7.6 and 0.90 respectively pointed to a case of distress. The entire bank sector stands to benefit if credit management practices of banks, especially UT Bank and all other banks that suffered the same fate, are improved on. As a policy recommendation, the regulator of the bank industry should tighten up its supervisory and monitoring powers to help in detecting early signs of non-performing banks. The study further recommends that statutory lending limits of banks be re-enforced to uphold the threshold of 10 percent for unsecured loans and 25 percent for secured loans of net owned funds of banks.
    Keywords: Debt, Distress, Performance, Credit Management Practice, Z-score
    JEL: G2 G21 G28 G3 G32 G33 G34 G38
    Date: 2019–11–12
  10. By: Martínez-Miera, David; Jiménez, Gabriel; Peydró, José-Luis
    Abstract: We show strong overall and heterogeneous economic incidence effects, as well as distortionary effects, of only shifting statutory incidence (i.e., the agent on which taxes are levied), without any tax rate change. For identification, we exploit a tax change and administrative data from the credit market: (i) a policy change in 2018 in Spain shifting an existing mortgage tax from being levied on borrowers to being levied on banks; (ii) some areas, for historical reasons, were exempt from paying this tax (or have different tax rates); and (iii) an exhaustive matched credit register. We find the following robust results: First, after the policy change, the average mortgage rate increases consistently with a strong – but not complete – tax pass-through. Second, there is a large heterogeneity in such pass-through: larger for borrowers with lower income, a smaller number of lending relationships, not working for the lender, or facing less banks in their zip-code, thereby suggesting a bargaining power mechanism at work. Third, despite no variation in the tax rate, and consistent with the non-full tax pass-through, the tax shift increases banks’ risk-taking. More affected banks reduce costly mortgage insurance in case of loan default (especially so if banks have weaker ex-ante balance sheets) and expand into non-affected but (much) ex-ante riskier consumer lending, experiencing even higher ex-post defaults within consumer loans.
    Keywords: taxes,incidence,banks,inequality,risk-taking,mortgages
    JEL: E51 G21 G28 G51 H22
    Date: 2020
  11. By: Rieder, Kilian
    Abstract: I estimate the comparative causal effects of monetary policy \leaning against the wind" (LAW) and macroprudential policy on bank-level lending and leverage by drawing on a single natural experiment. In 1920, when U.S. monetary policy was still decentralized, four Federal Reserve Banks implemented a conventional rate hike to address financial stability concerns. Another four Reserve Banks resorted to macroprudential policy with the same goal. Using sharp geographic regression discontinuities, I exploit the resulting policy borders with the remaining four Federal Reserve districts which did not change policy stance. Macroprudential policy caused both bank-level lending and leverage to fall significantly (by 11%-14%), whereas LAW had only weak and, in some areas, even perverse effects on these bank-level outcomes. I show that the macroprudential tool reined in over-extended banks more effectively than LAW because it allowed Federal Reserve Banks to use price discrimination when lending to highly leveraged counterparties. The perverse effects of the rate hike in some areas ensued because LAW lifted a pre-existing credit supply friction by incentivizing regulatory arbitrage. My results highlight the importance of context, design and financial infrastructure for the effectiveness of financial stability policies. JEL Classification: E44, E51, E52, E58, G21, N12, N22
    Keywords: bank lending, credit boom, Federal Reserve System, financial crisis, leaning against the wind, leverage, macroprudential policy, monetary policy, progressive discount rate, recession of 1920/1921
    Date: 2020–12
  12. By: Miguel Mello (Banco Central del Uruguay); Jorge Ponce (Banco Central del Uruguay)
    Abstract: Using a quarterly data set for 14 banks in Uruguay between 2004 and 2018, we find that this sector is a concentrated oligopoly that exhibits global economies of scale. Specific product economies of scale are only significant in loans to households. Likewise, we find statistically significant economies of scope between loans to households in foreign and in local currency, as well as between loans to firms and deposits in local currency. The credit market to households is the less competitive, behaving like a monopoly or under implicit collusion. The credit market to firms exhibits greater competition than that suggested by the structure of the market, specially in local currency. Overall, the results suggest that there exists room for the development and increasing competition of the Uruguayan banking sector.
    Keywords: Cost function, economies of scale and scope, market structure, competition, banks, Uruguay
    JEL: G21 L10
    Date: 2019
  13. By: Baah A. Kusi (University of Ghana Business School, Ghana); Elikplimi K. Agbloyor (University of Ghana Business School, Ghana); Agyapomaa Gyeke-Dako (University of Ghana Business School, Ghana); Simplice A. Asongu (Yaoundé, Cameroon)
    Abstract: The study investigates how financial sector transparency moderates the influence of financial crises on bank market power across seventy-five economies between 2004 and 2014. Employing two-step dynamic system generalized method of moments the study shows that while public sector-led financial sector transparency reduces bank market power, private sector-led financial sector transparency promotes bank market power given that private sector-led transparency gives financial cost advantage to financially sound banks to solidify the market power and dominance. Similarly, while financial crises reduce the market power of banks implying that during financial crises banks lose their market power, financial sector transparency promotes the negative effect of financial crises on bank market power. This implies that during financial crises, financial sector transparency whether enforced through private or public sector, boosts the weakening effect of financial crises on bank market power. These findings imply that regulators can rely on financial transparency to tame bank market power to enhance banking competitiveness. The findings and results are consistent even when country, time and continental effects are controlled for.
    Keywords: Market Power; Bank; Financial Sector Transparency; Private Sector; Public Sector
    Date: 2020–01
  14. By: Grund, Sebastian; Nomm, Nele; Walch, Florian
    Abstract: As a response to the global financial crisis that started in 2008, many countries established dedicated resolution regimes that seek to limit the use of taxpayer money while maintaining the functions of failing banks that are critical for financial stability. This paper extends the existing research by zooming in on the specific topic of liquidity provision to banks in resolution. It examines the provision of liquidity in the United States, the United Kingdom, Japan, Canada and the banking union of the European Union (thereafter: the “banking union”). The paper observes the differences and commonalities of policy choices across jurisdictions with regard to both the relationship between private prefunding and temporary public liquidity provision and the roles of the public budget and the central bank. The comparison also reveals that the role of fiscal authorities is strong and that guarantees from a public budget are a common feature. The framework for the provision of liquidity in the banking union is not yet complete as the construction of a public sector backstop of sufficient size and speed is comparatively more complex in the banking union than in other jurisdictions. Therefore, the idea of establishing a European-level guarantee framework – which would allow access to Eurosystem liquidity for banks coming out of resolution with limited collateral – is being further investigated. JEL Classification: G01, G21, G28, G33, E58
    Keywords: banking union, European Central Bank, liquidity, resolution
    Date: 2020–12

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